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RenaissanceRe Holdings Ltd.
Renaissance House
8 -12 East Broadway
P.O. Box HM2527
Hamilton HMGX, Bermuda
Tel: 441 295 4513
Fax: 441 292 9453
Web site: www.renre.com
2001 Annual Report
Company Overview
RenaissanceRe Holdings Ltd. (“RenaissanceRe”)
provides reinsurance and insurance coverage
that is subject to the risk of natural and man-
made catastrophes. We are a leader in using
sophisticated computer models to construct a
superior portfolio of these coverages.
Our principal business is property catastrophe
reinsurance. Our
subsidiary, Renaissance
Reinsurance Ltd. (“Renaissance Reinsurance”), is
one of the leading providers of this coverage in
the world. We provide reinsurance to insurance
companies and other reinsurers primarily on
an excess of loss basis. This means that we begin
paying when our customers’ claims from a
catastrophe exceed a certain retained amount.
Through these coverages we are subject to claims
arising from large natural catastrophes, such as
earthquakes and hurricanes, although we are also
exposed to claims arising from other natural and
man-made catastrophes such as winter storms,
freezes, floods, fires, tornadoes and explosions.
We also write property catastrophe reinsurance
on behalf of
joint ventures, Top Layer
Reinsurance Ltd. (“Top Layer Re”), and DaVinci
Reinsurance Ltd. (“DaVinci”). We act as the
exclusive underwriting manager for these joint
ventures in return for management fees and
a profit participation.
In addition to catastrophe reinsurance, we expect
to increase our reinsurance of certain specialty
lines including aviation, catastrophe exposed
workers compensation coverage, satellite and
finite. We also expect to increase our primary
insurance business where we will focus on writing
commercial property insurance on an excess and
surplus lines basis. To a lesser extent, we also
provide homeowners insurance in various areas
of the United States, concentrating on business
exposed to natural catastrophes.
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RenaissanceRe Holdings Ltd. | Annual Report 2001
RenaissanceRe Holdings Ltd. | Annual Report 2001
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Table of Contents
Financial Highlights
Letter to Shareholders
Underwriting Review
Finance
What is the Risk of a Large Catastrophe?
Selected Financial Data
Management’s Discussion and Analysis
Management’s Responsibility for Financial Statements
Report of Independent Auditors
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Directors and Officers
Financial and Investor Information
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RenaissanceRe Holdings Ltd. | Annual Report 2001
Financial Highlights
(amounts in thousands, except per share data)
2001
2000
1999
1998
1997
Gross premiums written
$501,321
$433,002
$351,305
$270,460
$228,287
Operating income available to common shareholders* 146,270
Net income available to common shareholders
164,366
134,379
127,228
119,961
104,241
121,547
74,577
142,144
139,249
Per Common Share Amounts
Operating income* - diluted
Net income - diluted
Book value
Dividends declared
Operating return on average common
shareholders’ equity
Operating Ratios
Claims and claim expense ratio*
Underwriting expense ratio
Combined ratio
$ 7.03
$ 6.86
$ 5.82
$ 5.42
$ 6.19
7.90
47.50
1.60
6.50
35.72
1.50
5.05
30.50
1.40
3.33
28.28
1.20
6.06
26.68
1.00
17.8%
21.0%
19.8%
19.2%
25.0%
45.0%
25.2%
70.2%
40.6%
28.5%
69.1%
34.9%
28.1%
63.0%
33.1%
29.3%
62.4%
23.7%
23.8%
47.5%
* Operating income excludes net realized gains (losses) on investments. Operating income and operating ratios exclude 1998 fourth quarter after tax charge of
$40.1 million relating to Stonington.
Operating Return on Average Common Equity
Book Value per Common Share
25.0%25.0%
19.2%19.2%
19.8%19.8%
21.0%21.0%
17.8%17.8%
$47.50
$47.50
$35.72
$35.72
$26.68
$26.68
$28.28
$28.28
$30.50
$30.50
1997
1997
1998
1998
1999
1999
2000
2000
2001
2001
1997
1997
1998
1998
1999
1999
2000
2000
2001
2001
Managed Cat Premium*
Operating Earnings per Common Share - Diluted
$442
$442
$397
$397
$6.19
$6.19
$5.42
$5.42
$5.82
$5.82
$6.86
$6.86
$7.03
$7.03
$284
$284
$212
$212
$198
$198
1997
1997
1998
1998
1999
1999
2000
2000
2001
2001
1997
1997
1998
1998
1999
1999
2000
2000
2001
2001
* The total gross catastrophe reinsurance premium written by Renaissance Reinsurance and joint ventures. Amounts in millions.
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RenaissanceRe Holdings Ltd. | Annual Report 2001
Letter to Shareholders
James N. Stanard
Chairman of the Board
and Chief Executive Officer
Dear Fellow Shareholder,
2001 was a year unlike any other. The concerns we
had prior to September 11 - both business and personal
- seem like distant memories. RenaissanceRe was very
fortunate that we were not more heavily impacted
by the tragedy. None of our employees or family
like
members suffered casualties, although we,
everyone else, lost some friends.
Financially, our conservative risk management
allowed us to turn in another very profitable year,
in spite of
losses from the terrorist attack. Our
operating return on equity of 18% led our peer
group for the ninth straight year. We grew our
top line and laid the groundwork for additional
growth in 2002 by providing stability of pricing,
security and capacity to our clients. And, we continue
to have one of the strongest balance sheets in the
business (relative to our size). All in all, in 2001 I
believe we turned in our best performance yet, in the
face of some severe market challenges.
Market Turmoil
Worldwide insurance markets were already in turmoil
from growing underwriting losses due to years of
inadequate pricing, when September 11 threw them
into chaos. Many well-regarded firms sustained
losses many times what they anticipated from such
an event, which caused them to reassess their
risk management procedures.
Insureds wondered
whether their reinsurance carriers were strong
enough to pay the next big loss, which heightened the
importance of security. Concerns increased about a
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RenaissanceRe Holdings Ltd. | Annual Report 2001
possible “chain reaction” of insolvencies if one major
company failed to pay reinsurance claims. Although
the industry missed a potential major hurricane loss
in November when Michelle, a category 4 storm,
skirted past south Florida and the Florida Keys, the
collapse of one of the largest aviation pools in the
world (Fortress Re), billions of dollars of insured
losses from the Enron bankruptcy, and large charges
for prior loss reserve inadequacies, made the fourth
quarter miserable for most of the industry.
Flight to Quality
The torrent of red ink accelerated upward pricing
pressures that already existed in the reinsurance
markets. However, this hard market cycle differs
from the hard markets of 1985 and 1993 in one
important respect:
there is sufficient capacity
available for most types of business - as long as the
In fact,
insured is willing to pay the market price.
programs from quality clients that were perceived as
well priced were substantially oversubscribed.
This allowed the buyers to be choosy about the
security of the reinsurers that they would accept.
As a result of this “flight to quality”, highly rated,
well established companies were the first choice of
the clients; lower rated reinsurers who were smaller
or who suffered ratings downgrades were heavily
selected against.
Left to Right: Bill Riker, Dave Eklund, John Lummis, Jim Stanard
Executive Management Team
Providing Stable Capacity
New capital came rushing into the market, some of
it expecting to capitalize on a capacity crisis that
did not materialize. Certainly some of
the new
companies have well-conceived business plans,
quality management teams and a good chance of
the rush of capital
being successful. However,
supporting organizations regardless of prior track
record began to seem like a smaller scale repeat of the
dot.com frenzy.
RenaissanceRe’s Competitive Advantages
The competitive advantages that led to our success
in past years will continue to be our platform for
success into 2002 and beyond. While we discussed
these in past annual reports, they are worth repeating
as they are the key drivers of our strong performance
and long-term growth:
In the wake of September 11, we responded quickly
and decisively to meet the market’s demand for high
quality capacity. RenaissanceRe raised $233 million
in net proceeds from a common stock offering and
$145 million from a preferred stock offering - to
increase our ability to do business, not to pay losses.
We created DaVinci Re, the second new Bermuda
start-up announced and the first one funded and
operational, with $500 million of surplus. We added
$135 million of capital to our primary company,
Glencoe, in the fourth quarter, bringing surplus to
over $200 million. Finally, in the first quarter of
2002, we increased our reinsurance company surplus
by $200 million to $1 billion. Other than September
11 itself, there was never a day that we were not
completely open for business, quoting reinsurance
for immediate binding as well as multiyear options -
just as we do every day.
1. Management: Our senior executives are highly
experienced and have worked together for years.
Based on the nine-year track record that we have
compiled, it is reasonable to claim that our team
is the best in the business.
2. Underwriting Technology: Our proprietary
REMS© computer system is the most sophisticated
catastrophe exposure management system in the
world.
3. Franchise: As one of the largest cat writers in the
world, we have a tremendous base of high quality
clients and the means to further expand our
market share.
While we are always wary of excess capital, we made
a decision based on extraordinary market conditions
that it was better to take the risk of having too much
capital than too little. In retrospect, this was the
right decision and I am comfortable that in these
market conditions we will be able to deploy the new
capital while maintaining our ROE.
Nevertheless, while we continue to be aggressive in
seizing opportunities, we realize there is a limit to
what we can effectively manage while maintaining
our standards of excellence. In order to assure that
we continue to deliver the returns our shareholders
expect and the stability our customers demand, we
are committed to focusing our efforts on the
following three areas:
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RenaissanceRe Holdings Ltd. | Annual Report 2001
Letter to Shareholders
‘we have a tremendous base of high quality
clients and the means to further expand our
market share’
1. Substantially growing our market share in
catastrophe reinsurance, by providing pricing
consistency to our clients.
We have, today, the staff, management, vehicles and
client relationships in place to move quickly and
smoothly to build our base of businesses.
2. Building a meaningful specialty reinsurance
portfolio (in addition to property cat). Market
turmoil has finally presented opportunities at
attractive pricing that we have been patiently
awaiting over the past several years. We expect
to write over $100 million of premium in 2002
from aviation, catastrophe exposed workers
compensation coverage, property risk, satellite
and finite reinsurance, among other lines.
Although our past premium volume has been
small, our track record has been consistently
good with a loss ratio of 68% since inception.
3. Building our primary property catastrophe
business. The market in which Glencoe operates is
the one in which the most severe capacity shortage
exists. We have increased Glencoe’s capital to $200
million, and have received a ratings upgrade to “A”
from A.M. Best. As a result, we expect to write
more than $100 million of premium in 2002,
compared to $13 million in 2001.
Diversification
The World Trade Center and other losses have shown
that “diversification” is not a panacea for controlling
risk. Being diversified can simply mean that when
there are losses, you get them from all directions.
We have never sought diversification for its own sake.
Rather, we have looked broadly for opportunities
outside of the cat business where we believed that we
had, or could develop, a competitive advantage.
The right time to diversify is in a market like the current
one,
in which competitors are shedding business
in order to get back to their core competencies.
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RenaissanceRe Holdings Ltd. | Annual Report 2001
We expect that 2002 will be the first year in which
our specialty reinsurance business and our primary
business
through Glencoe will contribute a
meaningful amount to our earnings per share.
While these are cyclical markets and thus our top line
will inevitably rise and fall, our goal is for these
businesses to become permanent franchises,
like
our cat reinsurance business, rather than just short
term cycle plays.
Challenges for 2002
2001 was a great year for our Company, in which we
succeeded in all our initiatives. We strengthened our
position as the premier cat reinsurance writer in
the world; successfully executed our joint ventures to
grow fee income; and grew specialty reinsurance
and Glencoe. Our goals for 2002 will be to maintain
our management focus on building competitive
advantages in a limited number of new areas of
business and to continue to grow our traditional
business. With our strong track record, impeccable
financial position, management talent and focus we
bring to our business, I believe we are well positioned
for continued success.
James N. Stanard
Chairman of the Board
Chief Executive Officer
RenaissanceRe Holdings Ltd.
Underwriting Review
U.S. Underwriting
International Underwriting and Specialty Reinsurance
Standing Left to Right: Jon Paradine, Russell Smith
Left to Right: Mike Cash, Kevin O’Donnell, Alex Reck, Ross
Sitting Left to Right: Rebecca Roberts, James Burnett-Herkes
Curtis
Reinsurance
Catastrophe Business
Our core property catastrophe reinsurance business
again drove our success. Judged on an absolute basis,
our 2001 performance was impressive: our combined
ratio of 69% in our reinsurance business is a result
that would please virtually any reinsurer. On a
relative basis, the performance is truly exceptional:
we had an underwriting profit in 2001, while
virtually all of our competitors posted underwriting
losses. We believe that our unique market position,
the market and strong client
understanding of
relationships will continue
to enhance our
performance in 2002.
The context for our 2001 performance was a year of
record - and tragic - losses. In total, insurance industry
catastrophe losses for the year are now estimated to be
between $45 billion and $93 billion; the range is wide
because of differing views regarding the World Trade
Center tragedy. We reported $48 million of net losses
from the World Trade Center in the third quarter,
but were still able to report a profit in the quarter.
the World Trade Center
The relative impact of
tragedy on RenaissanceRe versus the industry
demonstrates the importance of the discipline and
skill we bring to the underwriting process. We had
for many years believed that books of commercial
insurance and reinsurance tended to be underpriced,
and we were very selective in only assuming
reasonably priced business. While we did not foresee
the risk of a terrorist attack, we did model the risk of
northeastern hurricanes and New York earthquakes
in a more pessimistic light than others, leading us to
reject much of the available business and to have a
relatively low market share for these types of risks.
Over 75% of our losses from the World Trade Center
tragedy arose from retrocessional coverage that
we assumed from other reinsurers, but even here
our performance was noteworthy: we had a 1% to
2% share of the retrocessional market loss, but had a
10% to 15% share of assumed premium in this
market at that time. The retrocessional market is
the most inefficient market segment, with wide
variations between the best and worst contracts.
RenaissanceRe’s proprietary technology allows us to
analyze a reinsurers’ potential exposures, and assume
only those risks that are adequately priced and that
fit our portfolio. Since risks tend to be very broad
based in terms of both territory and their scope
of coverage, a very disciplined process is required to
avoid excessive exposures in this market.
Total managed catastrophe premium, which
represents the premium we write on behalf
of Renaissance Reinsurance and our joint ventures,
grew by 11% to $442 million in 2001 from
$397 million in 2000. From 1998, the bottom of the
last soft market, through to 2001, our managed
catastrophe premium grew at a compounded annual
growth rate of 30%. Our estimated catastrophe
reinsurance market share grew from approximately
5% at December 31, 1998 to approximately 10% at
January 1, 2002.
We believe this rate of growth is faster than any other
large writers of catastrophe business. We did not
however seek growth for its own sake: we grew
premium when our clients required our capacity to
support their business and the pricing provided us
reasonable returns for the risk assumed. We believe
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RenaissanceRe Holdings Ltd. | Annual Report 2001
Underwriting Review
RenaissanceRe of Europe
Structured Products
Left to Right: John Gill, Deirdre Doyle, Robin Lang, Ian Branagan
Left to Right: Laurie Orchard, Larry Richardson,
Gene Chiaramonte, Jay Nichols
Structured Products
two areas: managing our
Our Structured Products Group is focused primarily
on
joint venture
relationships, and developing and executing highly
structured reinsurance transactions to assume
or cede risk. Our Structured Products professionals
have experience across a range of disciplines:
accounting, investment banking, and law, as well as
insurance and reinsurance.
Seeking to leverage our catastrophe underwriting
expertise and market-leading position, we have
embarked on a strategy to underwrite and manage
portfolios of catastrophe reinsurance on behalf of
other companies in exchange for a management fee
this
and profit participation. By all measures,
strategy has been a success: we increased joint venture
managed premium by over 23% to $99 million in
2001, and project substantial growth again in 2002.
large
Our joint venture business, conducted through our
wholly-owned subsidiary Renaissance Underwriting
Managers, Ltd., began in January 1999 with the
formation of Top Layer Re, which was created to
focus on high-layer,
international
business, with State Farm as our partner. Next, in
November 1999, OPCat was formed to assume a
portfolio of cat reinsurance equivalent to that of
Renaissance Reinsurance, with Overseas Partners
In both cases, our partners
Limited as our partner.
viewed property catastrophe reinsurance as an
attractive and diversifying risk class if underwritten
appropriately. For our partners, the execution of
limit
our growth demonstrates the scalability of our
business; our infrastructure was readily able to
manage the expansion of our business, as evidenced
by our continuing profitability.
Just as importantly,
we produced growth by virtue of being a preferred
provider to many clients in light of the service that we
provide. In addition to writing reinsurance contracts,
we actively consult with many clients on their
catastrophe risk management issues and help devise
practical solutions, either in the form of alternative
reinsurance structures, or recommended adjustments
to their underlying portfolios of insurance.
The quality of the business that we write is more
important to us than volume. Even in the current hard
market environment, skillful underwriting remains
critical. For business in force at January 1, 2002,
we estimate that as much as half was priced to
produce low or negative returns. By contrast, virtually
all of the premium that we write is priced to produce
reasonable returns.
In 2002, we are poised for managed catastrophe
premium growth at a rate substantially above the 11%
we achieved in 2001. The hard market environment
will enhance opportunities for many companies, but
ultimately we possess a unique position relative to
competitors. Our deep client relationships, coupled
with our strong capital position, should allow us to
produce growth in excess of the market’s growth rate.
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RenaissanceRe Holdings Ltd. | Annual Report 2001
Business
Ownership
Ratings
Top Layer Reinsurance Ltd.
DaVinci Reinsurance Ltd.
Renaissance Reinsurance Ltd.
High Layer Non-U.S.,
Property Cat including
Retro
Property Cat including
Retro and other short-
tail lines
Property Cat including
Retro and other short-
tail lines
50% State Farm
Mutual Automobile
Insurance Company,
50% RenaissanceRe
Holdings Ltd.
50% State Farm,
25% RenaissanceRe,
12.5% Max Re,
12.5% other investors
100% RenaissanceRe
Holdings Ltd.
S&P “AAA”
A.M. Best “A++”
Capital at
December 31, 2001
$122 million (plus
$3.9 billion stop-
loss protection from
State Farm)
S&P “A”
A.M. Best “A”
$500 million
S&P “A+”
A.M. Best “A+”
Moody’s “A1”
$800 million
these strategies required significantly less manpower,
start-up time and risk and higher expected value if
pursued as a joint venture with us. Top Layer Re
has been loss-free since inception and OPCat’s
performance has been very good, consistent with
RenaissanceRe’s, since the commencement of our
partnership. We project substantial growth in 2002
for Top Layer Re.
In 2001, we continued to expand this segment of our
business by adding another joint venture vehicle -
DaVinci Reinsurance Ltd. DaVinci was formed
in October 2001, and was immediately successful
in the January 1, 2002 renewal season. Like the
OPCat structure, DaVinci writes “companion” lines
with Renaissance Reinsurance with a view to having
a portfolio similar to that of Renaissance. DaVinci,
which is consolidated in our financial statements, has
an initial capital base of $500 million from its initial
investors, State Farm, RenaissanceRe, Max Re, and
smaller investments from other investors, and it is
rated “A” by both Standard & Poor’s and A.M. Best.
Importantly, DaVinci is able to leverage upon
Renaisssance’s disciplined approach to underwriting
and risk management.
In a recent development, the Board of Directors of
Overseas Partners Limited decided to put its Bermuda
insurance operations into run-off, and as an outcome
of
that decision, has decided to wind-up its
participation in the OPCat venture. While OPCat was
very successful, and its profitability exceeded original
expectations, business considerations outside of the
OPCat venture led the Board of Directors of Overseas
Partners to this decision. Our strong working
relationship with Overseas Partners, combined with
the flexibility that we have in our capital base, allows
us to provide a smooth transition to clients through
the assumption of the in-force OPCat portfolio into
RenaissanceRe and DaVinci - and this change,
therefore, does not affect our expectations for total
2002 managed catastrophe premium.
In addition to managing joint venture relationships,
the Structured Products Group also works on a
range of other highly-structured transactions.
We have been an active participant in the market
for catastrophe-linked securities, which are generally
issued by insurers as an alternative to purchasing
reinsurance coverage. With our proprietary REMS©
system, we can evaluate these risks and confidently
determine which bonds have favorable risk/return
profiles. We have also
created proprietary
products through which we cede participations in
the performance of our catastrophe reinsurance
portfolio. While the basics of a proportionate
participation in another company’s portfolio (known
as a “quota share”) have been long-standing features
of the reinsurance market, our proprietary structured
products contain a number of customized terms
designed to better meet our partners’ needs, as well
as our own risk management goals.
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RenaissanceRe Holdings Ltd. | Annual Report 2001
Underwriting Review
Underwriting Support
Marketing and Operations
Back Row Left to Right: Georgina Trott, Patricia Hendrickson,
Left to Right: Vanessa Pereira, Bob Hykes,
Josephine Smith, Sandra Rebello
Front Row Left to Right: Stephanie Slayton,
Tina Caton, Keith Tacklyn
Fawn Burgess, Michelle Johnson
Specialty Business
In 2001, we wrote $77 million of
specialty
reinsurance premium (which excludes catastrophe
reinsurance). The business we wrote included
accident and health, property per risk, satellite and
finite risk. We believe an important measure of
our underwriting skill is that our specialty lines did
not produce significant losses from the World Trade
Center tragedy. Our inception-to-date loss ratio in
this class of business is 68%, which we believe is
among the best levels of performance in our industry.
Much of the business that we saw since our 1993
inception was inadequately priced, and accordingly,
we had written only $219 million of premium since
that time through 2001 and have not aggressively
grown this business.
In the aftermath of September 11, the reinsurance
market is hardening across many lines, presenting
significant opportunities for us to move into new
lines of specialty reinsurance. We will continue to
target short tail lines, typically with a low frequency,
high severity profile, similar to catastrophe business,
where we can rigorously analyze the risk profile of the
deal to arrive at a reasonable assessment of expected
returns and capital at risk. We will focus our efforts
on lines where we can create long-term businesses,
which will likely entail complex risks in which our
sophisticated modeling capabilities will be a critical
advantage. Specifically, we are targeting aviation,
specialty property lines, and workers compensation
to
and personal accident business exposed
catastrophe risks, mindful of the correlations with
our property catastrophe reinsurance portfolio.
Our profile in personal accident business has already
grown significantly, and we are now seen as a market
leader. We expect strong growth in our specialty
reinsurance operations in 2002, driven by an
improving pricing environment.
Operational Support
Until just a few years ago, the opportunities for
reinsurers to distinguish themselves were limited: a
reinsurer would be “in the game” by meeting its
customers’ minimal requirements - adequate credit
quality, rudimentary accounting, and very basic risk
management. In today’s environment, the standards
for success are much higher, and the requisite
intellectual capital to achieve these standards is
much greater.
Clients are ever more demanding of solutions that
precisely fit their needs and risk profile - creating
opportunities for reinsurers who can demonstrate a
detailed understanding of their risk, and the ability
not just to reinsure, but to improve their clients’
portfolios.
In addition, speed is a requirement in
many situations and it is a competitive advantage to
be able to confidently make good - and rapid -
underwriting decisions. This creates the need for
very effective processing and a real time, desktop
underwriting system. The required tools of our
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RenaissanceRe Holdings Ltd. | Annual Report 2001
Information Technology
Standing Left to Right: Dion Tucker, Suzanne Carrell, Dale Woods
Sitting Left to Right: Lloyd Holder, John Wineinger
Just as important, we are focused on the basics of our
customer relationships. When requested by brokers
or clients, we seek to respond to requests for firm
quotes within 24 hours. When we receive a notice of
loss from a client, we target a 48 hour turnaround.
We bring a range of disciplines to bear on our
operations: accounting, administration, information
technology and quantitative risk analysis. The value
of the Renaissance franchise - and our success in
reinsurance underwriting - can be attributed to all of
these skill sets.
business now include: probabilistic models of all
business written that captures correlations; devices to
track actual performance relative to the expected; and
systems to monitor credit risks.
Against this more challenging environment, we
believe that the operational support teams at
Renaissance have responded superbly - and have been
leaders in raising standards across our industry.
Our modeling function continues to advance on a
variety of fronts:
• improved understanding of catastrophe risk by
increasing resolution on European and Japanese
models, characterizing correlation between the U.S.
and Caribbean, and simulating more years in the
catastrophe distribution;
• new systems that examine insurance portfolios to
help clients identify underperforming segments of
their portfolio;
• new systems to enable us to better identify
reinsurance contracts that are not performing
consistently with modeled expectations;
• risk models that capture various classes of risk:
various types of insurance risk (in addition to
catastrophe), counterparty credit risk on ceded
retrocessions and investment risk;
• the ability to assess risk across multiple entities
(including our various joint ventures) and across
different components of our capital structure.
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RenaissanceRe Holdings Ltd. | Annual Report 2001
Underwriting Review
Primary Insurance
Standing Left to Right: Melissa Dotzel, Bill Ashley,
Nancy Spurling, Maggie Situ
Sitting Left to Right: Craig Tillman, Nikki Riker
Primary Insurance
Commercial Insurance
Following September 11, the commercial insurance
market entered a stage of real turmoil. Many insurers
decided to cut back significantly on the size of lines
available to this market, as they developed a greater
appreciation of the potential for catastrophic loss in
this segment, as well as correlations across contracts
and lines of business.
Against this backdrop, our subsidiary Glencoe saw a
sharp increase in demand for its core product of
catastrophe exposed commercial insurance. The
pricing environment moved from being one of thin,
or even negative margins, to an environment where
we believe reasonable returns are now available in
certain areas.
The increased demand for Glencoe’s business took
the form of a direct increase in our core customer
universe - middle market businesses - but it also
came from important insurance companies seeking
to partner with Glencoe to manage books of
commercial insurance business.
Under these partnership relationships, Glencoe is
writing property quota share reinsurance
in
circumstances where we can add value by helping to
define appropriate underwriting criteria, as well as
portfolio risk tolerances. Our partners are market
participants who can quickly access property
business that is undergoing price corrections.
In addition to its property business, Glencoe is also
prepared to write limited amounts of specialty risks,
and to this end wrote a quota share of aviation
insurance. All told, we expect Glencoe to grow
substantially in 2002.
12
RenaissanceRe Holdings Ltd. | Annual Report 2001
To handle the increased flow of business, we have
built out the Glencoe operating platform in several
ways: increasing staff to 6 professionals, bringing on
William Ashley, a well respected executive to serve as
Chief Operating Officer; and increasing capital by
$135 million. As a result, Glencoe has been upgraded
to an “A” rating by A.M. Best.
We believe that Glencoe is readily scalable since we have
already built a sophisticated underwriting and risk
management system that has been in use for over 6
years. We write business where exposure information
is good and we are able to quantify the risks involved.
Homeowners Insurance
Our focus in the homeowners insurance market
continues to be on catastrophe-exposed business,
where our catastrophe risk management skills can be
leveraged. The fundamental challenge that we have
seen is that pricing levels are generally below what we
believe to be necessary to adequately compensate the
capital put at risk. Accordingly, we wrote only $11
million of premium in 2001, and believe premium
levels will remain modest in 2002. We continue to
develop our infrastructure, since our homeowners
insurance business helps us to better understand the
needs of reinsurance clients. The homeowners unit has
been instrumental in developing a primary insurance
portfolio tool, which is being used by reinsurance
company clients to optimize their portfolios.
Finance
Capital Management
RenaissanceRe is committed to efficiently using its
capital resources. We seek to maintain a capital
position that is clearly sufficient to support the risks
that we assume, but not so conservative as to impair
the returns to our shareholders. In prior years, we
often generated more capital than we could profitably
deploy in our business. Accordingly, from 1995
through 2000, we had returned over $273 million in
capital through share repurchases. During 2001,
our capital strategy shifted as we saw a hardening
market environment
that presented us with
significant opportunities.
In the environment following September 11, we made
a conscious decision to substantially build our capital
base anticipating greater demand not only for our
core catastrophe reinsurance product but also for
specialty reinsurance and commercial insurance. We
decided to raise this capital ahead of specific,
identified needs, based on our judgment that capital
could be effectively utilized.
Renaissance was the first company in the insurance or
reinsurance sectors to raise equity capital after
September 11.
In all, we raised $827 million in net
proceeds from our capital transactions in 2002:
• $233 million of common equity in October
• $145 million from a perpetual preferred equity
offering in November
• $149 million from a debt offering in July
• $300 million in equity capital raised for DaVinci
from outside investors
Finance
Standing Left to Right: Helen James, Penny Perry,
Todd Fonner, Alana Smith
Sitting Left to Right: Susan Holland, Marty Merritt,
Diana Petty, Preston Hutchings
We also added $132 million to retained earnings.
(The capital that we raised was not to replace capital
lost in the events of 2001.)
While we retain significant capacity for further
growth, much of this capital has already been well
deployed:
• Renaissance Reinsurance, our principal operating
company, has increased its surplus by $200 million
to $1 billion and is substantially increasing the
volume of catastrophe and specialty reinsurance
that it writes.
• Glencoe increased its surplus by $135 million
to over $200 million and is increasing the
commercial insurance premium that it writes.
• DaVinci received $100 million of permanent equity
capital from Renaissance, in addition to $100
million of bridge financing. DaVinci’s total capital
of $500 million (including the $300 million from
third parties as noted above) is expected to be
substantially deployed over the course of 2002.
Looking forward, we see the potential for additional
opportunities in the insurance and reinsurance
markets, which may require further capital.
The significant industry underwriting losses of 2001,
coupled with Enron’s bankruptcy, have heightened
sensitivities to credit quality and capital adequacy.
Over the past year, our process of evaluating
capital adequacy rose to an even higher level of
sophistication, as we systematized our evaluation to
capture more classes of risk and to look at various
components of our capital structure. As discussed in
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RenaissanceRe Holdings Ltd. | Annual Report 2001
Finance
Cash and Investments by Category
December 31, 2001
the operations review, over the past year we have
developed our risk management system so that it
captures not only catastrophe risk, but also other
classes of insurance risk, credit risk, and investment
risk. This system permits us to develop a consolidated
profit and loss distribution and to evaluate the level of
risk associated with each component of our capital
structure, both in terms of probability of default and
expected loss. Our goal is to ensure that creditors are
subject only to an appropriate level of risk.
Recognizing our financial strength and operating
success, Renaissance Reinsurance received ratings
upgrades and a new rating from the major rating
agencies:
Financial Strength Ratings
December 31,
A.M. Best Company
Moody’s Investors Service
Standard & Poor’s
Investments
2000
A
-
A
2001
A+
A1
A+
In 2001, RenaissanceRe's fixed maturity investment
portfolio returned 8.9%, bringing its average annual
return for the past three years to 7.2% - roughly 1%
above the average annual return of a comparable
duration Treasury portfolio. The portfolio continues
to be comprised primarily of very high credit quality
securities (Aaa/Aa), with a short average duration.
At year end, 5% of the portfolio consists of securities
rated below investment grade, split almost evenly
between U.S. high yield and emerging market debt. A
smaller portion, 2%, of the portfolio was invested in
hedge funds and several private equity funds.
Although our target portfolio duration is between
2.75 - 3.00 years, the duration at December 31 was
much shorter - slightly less than 2 years. This
reduction in duration occurred because, after
September 11, we were reluctant to invest the cash
raised by our financing activities in fixed income
securities trading at rates which, at the front of
the yield curve, reached historic lows. Consequently,
in expectation of more
investment
opportunities, we permitted the cash position to
expand. As 2002 progresses, we expect to deploy
that cash and return the portfolio’s duration to
normal levels.
favorable
In addition to being positioned to earn an attractive
risk-adjusted return, the portfolio is structured so as
to limit the potential correlation between its returns
and catastrophic events likely to cause loss to
RenaissanceRe. Last September's 1.1% return was
particularly informative about the structure and
quality of our portfolio because the events of
September 11 likely affected financial markets more
severely than would a natural catastrophe of a similar
economic magnitude.
In addition to the economic
damage sustained by New York City, and the United
States broadly, the tragedy: (i) forced the New York
Stock Exchange to close for a longer stretch than any
since World War I (ii) destroyed the offices of several
inter-dealer bond brokers and killed many of their
employees, and (iii) damaged the premises of the
Bank of New York, one of the largest clearing firms
for U.S. Government securities trades, straining the
payment mechanisms upon which the fixed income
market rests. As a result, markets confronted a
degree of uncertainty and illiquidity unlikely to
accompany a Florida hurricane or a California
earthquake. In contrast to the RenaissanceRe portfolio,
more credit-oriented portfolios performed poorly
during September: the Lehman U.S. Credit Index
returned -0.2% and the Merrill Lynch High Yield
index returned -6.9%.
Looking forward to 2002, RenaissanceRe intends to
modestly expand its allocation to alternative assets.
To assist us in this regard, we have engaged
Cambridge Associates LLC to advise in structuring
our investments in hedge funds and private equity
funds. We also intend to further integrate our
investment risk management system with our
corporate risk management system.
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RenaissanceRe Holdings Ltd. | Annual Report 2001
Industry Analysis
What is the risk of a large catastrophe?
Introduction
Over the past 10 years, the insurance sector has
catastrophes that are
experienced a series of
sometimes described as “large” and “unusual”: at least
$30 billion in losses from the World Trade Center
tragedy; $17 billion from the Northridge earthquake
in 1994; and $20 billion from Hurricane Andrew in
1992 (all these amounts being expressed as estimates
of insured losses, in 2001 dollars).
In addition, in
1999, there was a relatively large number of smaller
events, each less than $10 billion, which together
produced losses of $33 billion for the year.
Since various insurance companies have experienced
financial difficulties following the losses of 2001, as
well as prior years, it is important for the industry to
assess the magnitude of potential losses that may
occur in the future. In our view, insurance companies
should be prepared for much larger losses than those
experienced in 2001.
What is a catastrophe?
The dictionary definition of catastrophe refers to
a “great disaster or misfortune”. Catastrophes cause
human losses - death and personal injury, as well
as economic losses - property damage and lost
losses and uninsured
opportunities. Human
economic losses may dwarf
the insured losses.
However, given our focus on the insurance business,
this analysis considers only insured losses.
in property
The United States insurance industry,
through
Property Claims Services (“PCS”), defines a
“catastrophe” as an event that produces more than
insurance
$25 million
companies. Outside the United States, there is no
single definition widely adopted by the insurance
industry, but the concept is generally similar to the
U.S. definition: the accumulation of losses from a
single event.
losses
to
While the insurance industry often looks at the
magnitude of catastrophes in the context of losses
arising from property insurance, the World Trade
Center tragedy reveals the risk that some events
can cause large losses across a range of insurance
lines: not only property, but also aviation, event
insurance, workers’
cancellation,
compensation and other lines. For the World Trade
Center tragedy, the property line is estimated to have
at least $20 billion of
losses (including property
damage and business interruption), and other lines
insurance are estimated to have at least an
of
additional $10 billion of
(There are also
much higher estimates.)
liability,
losses.
life
Contractual definitions of a catastrophe are another
dimension of
the analysis. For example, most
property catastrophe reinsurance contracts have an
“occurrence” clause to identify and limit the losses
that accumulate from a single event for purposes
of the contract. A catastrophe event is usually defined
to include both natural disasters (a hurricane,
an earthquake, a flood) and also “man-made”
catastrophes (a terrorist attack, a riot, a fire); however,
contractual terms can be negotiated to include only
specified perils, e.g. hurricanes. Losses that can be
included in the contractual definition of the event
must all be “connected” to the peril that caused them
to occur, and there can be various issues in defining
whether a loss is sufficiently connected to an event for
purposes of a contract. Reinsurance contracts specify
the period of time in which losses must occur in order
to receive coverage, normally expressed as a number
of consecutive hours. Common examples are 168
hours for earthquakes, and 72 hours for hurricanes.
15
RenaissanceRe Holdings Ltd. | Annual Report 2001
Industry Analysis
What is large?
Using the PCS definition of a catastrophe, in the
United States, there were 20 catastrophes in 2001.
Several of the events were on the front page of
newspapers and put some insurers and reinsurers
under real financial strain, but most received little or
no attention in the press, and did not cause any
significant strain to the insurance companies that
responded to the losses.
What is unusual?
We need to do more than compare to the average loss
levels in order to understand what is truly large.
Accordingly, we examine the important question
of
the probability of more extreme losses. The
following table shows our current estimation of the
probabilities of various annual aggregate property
loss levels viewed on a worldwide basis, and also for
the United States alone.
U.S. property catastrophe losses were $4.6 billion in
2000, a very low loss year, consuming 4% of U.S.
property premium in 2000 (the last year for which
complete data is currently available); for the prior
ten years (1991 to 2000), property catastrophe
losses represented 10% of the property premium
on average, with a high of 29% and a low of 3%.
U.S. property catastrophe losses should also be
compared to total capital, which stood at $321 billion for
U.S. property/casualty companies at December 31, 2000.
Viewing over $100 billion in U.S. property insurance
premium and over $300 billion of capital in the U.S.
property/casualty industry, it is clear that a single
“catastrophe” at the minimum $25 million threshold
would not be in any way catastrophic for the
industry as a whole. Taking the simple-minded
approach of looking at the average annual losses
(expressed in nominal dollars) over the past ten
years, some observers might see $10 billion as
“normal” for the United States. However, looking at
the losses for the industry as produced by our
simulation models, we estimate an average annual
aggregate loss of $19 billion for the industry in
the United States and $33 billion worldwide.
The average from our models is considerably higher
than the PCS ten-year average because we are
modeling events much larger than those that have
actually occurred over the past ten years.
Probability
Worldwide
United States
20%
10%
5%
1%
$42 billion
$57 billion
$76 billion
$130 billion
$24 billion
$35 billion
$46 billion
$85 billion
This table indicates that the insurance industry
should expect to see $42 billion or more of annual
aggregate property catastrophe losses once every
5 years - or, said another way, there is a 20% chance
that, next year, there will be aggregate insured
property catastrophe losses for the whole world of at
least $42 billion. Likewise, the table indicates the
industry should expect $57 billion or more of such
losses once every 10 years - a 10% chance of those
loss levels next year, $76 billion or more once every 20
years, and so on. Confining the sample to a smaller
geographic universe (the United States above)
reduces the loss level associated with any given
probability level.
It should be underscored that the estimates above
look at annual aggregate losses; our simulation
includes years where the loss total is driven by one
large event, as well years of multiple large events.
Also our simulation only reflects property and
business interruption losses and so fails to capture
losses arising from other lines.
16
RenaissanceRe Holdings Ltd. | Annual Report 2001
‘In our view, insurance companies should be
prepared for much larger losses than those
experienced in 2001’
Given the foregoing analysis, we determine that
property catastrophe losses of the levels seen in 2001
should be expected at least once every 5 years - in
other words, there is a greater than 20% chance
that losses of such a magnitude might occur in
any given year. While the losses of 2001 were driven
by an unexpected terrorist attack, the magnitude of
the property loss should not be seen as “unusual.”
We believe it would be a mistake for a company or
a market to view the financial impact of the World
Trade Center tragedy as a worst case scenario;
regrettably, it is not even close to that.
There is one common point of confusion as the
probability of catastrophic events is discussed: lack of
clarity about the geographic universe against which
the probability is being judged. For example, the
1999 French storm Lothar produced approximately
$6 billion of industry losses and has been described as
a 1/100 year event. Looking at the probability of an
event of $6 billion occurring somewhere in the world,
it is quite clear that events of this magnitude are
much more likely than 1/100. An event producing $6
billion or more of losses somewhere in the world
should be expected almost every year. Focusing on
the probability of such a loss occurring within
France, it is at least plausible to consider a 1/100
probability (though we estimate the probability to be
more likely than that).
Conclusion
Too often, we hear industry observers excluding
catastrophes from insurance company results as
if
these events won’t be repeated. The insurance
industry is in the business of protecting our
customers from their losses arising from catastrophes;
over time large catastrophes will occur, and should be
seen as part of the normal course of business.
When the industry looks at pricing, it is clear that the
loss exposures should be considered across all
possible years, meaning that the frequent lower loss
years need to be averaged with the infrequent, large
loss years. We believe that pricing below average cost
continues in our industry because some companies
only look at the low loss years in computing average
costs and do not have sufficient understanding of the
magnitude and frequency of the large loss years.
Even more importantly, when the industry looks at
risk management, there is a tendency to look at the
last large loss as the principal data point. Instead, we
believe that a robust risk management process should
include simulated events that go well beyond recent
history, and evaluate the impact of truly large losses.
17
RenaissanceRe Holdings Ltd. | Annual Report 2001
Sub Contents to Financial Information
Selected Financial Data
Management’s Discussion & Analysis
Management’s Responsibility for Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Directors and Officers
Financial and Investor Information
20
21
39
39
40
41
42
43
44
59
60
18
RenaissanceRe Holdings Ltd. | Annual Report 2001
Financial Information
RenaissanceRe Holdings Ltd. and Subsidiaries
19
RenaissanceRe Holdings Ltd. | Annual Report 2001
Selected Financial Data
(amounts in thousands, except per share data)
2001
2000
1999
1998
1997
Income Statement Data
Gross premiums written
Net premiums written
Net premiums earned
Net investment income
Claims and claim expenses incurred
Acquisition costs
Operational expenses
Pre-tax income
Net income available to common shareholders
Earnings per common share - diluted
Dividends per common share
$ 501,321
$ 433,002
$ 351,305
$ 270,460
$ 228,287
339,547
333,065
75,156
149,917
45,359
38,603
180,046
164,366
7.90
1.60
293,303
267,681
77,868
108,604
38,530
37,954
131,876
127,228
6.50
1.50
213,513
221,117
60,334
77,141
25,500
36,768
102,716
104,241
5.05
1.40
195,019
204,947
52,834
112,752
26,506
34,525
54,102
74,577
3.33
1.20
195,752
211,490
49,573
50,015
25,227
25,131
139,249
139,249
6.06
1.00
Weighted average common shares outstanding
20,797
19,576
20,628
22,428
22,967
(amounts in thousands, except per share data)
2001
2000
1999
1998
1997
At December 31,
Balance Sheet Data
Total investments and cash
Total assets
Reserve for claims and claim expenses
Reserve for unearned premiums
Debt
Capital securities (3)
Minority interest - DaVinci (4)
Total shareholders’ equity
Total shareholders’ equity attributable
to common shareholders
Common shares outstanding
$ 2,194,430
$1,082,046
$ 1,059,790
$ 942,309
$ 859,467
2,643,652
1,468,989
1,617,243
1,356,164
572,877
125,053
183,500
87,630
274,951
403,611
112,541
50,000
87,630
-
478,601
98,386
250,000
89,630
-
298,829
94,466
100,000
100,000
-
960,749
110,037
57,008
50,000
100,000
-
1,225,024
700,818
600,329
612,232
598,703
1,075,024
22,631
700,818
19,621
600,329
19,686
612,232
21,646
598,703
22,441
(amounts in thousands, except per share data)
2001
2000
1999
1998(2)
1997
Operating Ratios and other non-GAAP measures
Operating income to common shareholders (1)
$ 146,270
$ 134,379
$ 119,961
$ 121,547
$ 142,144
Operating earnings per common share - diluted
7.03
6.86
5.82
5.42
6.19
Operating return on average common
shareholders’ equity
Claims and claim expense ratio
Underwriting expense ratio
Combined ratio
17.8%
45.0%
25.2
70.2%
21.0%
40.6%
28.5
69.1%
19.8%
34.9%
28.1
63.0%
19.2%
33.1%
29.3
62.4%
25.0%
23.7%
23.8
47.5%
Book value per common share
$
47.50
$ 35.72
$
30.50
$
28.28
$
26.68
(1)
(2)
(3)
(4)
Operating income excludes net realized gains or losses on investments.
For 1998, operating income available to common shareholders, operating earnings per common share - diluted, the claims and claim expense ratio, the
underwriting expense ratio, the combined ratio and the operating return on average shareholders’ equity also exclude the impact of an after tax charge of $40.1
million taken in the fourth quarter of 1998 related to our subsidiary, Stonington. Including the charge related to Stonington for 1998, operating income available to
common shareholders, operating earnings per common share - diluted, the claims and claim expense ratio, the underwriting expense ratio, the combined ratio
and the operating return on average shareholders’ equity would have been $81.5 million, $3.63, 55.0%, 29.8%, 84.8% and 12.9%, respectively.
Company obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of RenaissanceRe.
Interests of external parties in respect of net income and shareholders’ equity of DaVinciRe Holdings Ltd.
20
RenaissanceRe Holdings Ltd. | Annual Report 2001
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Following is a discussion and analysis of our operations, which should be read in conjunction with the audited consolidated
financial statements and related notes included in this annual report. This annual report contains forward-looking
statements that involve risks and uncertainties. Actual results may differ materially from the results described or implied by
these forward-looking statements. See our Note on Forward Looking Statements on page 38 of this Annual Report.
In addition, we refer you to our Risk Factors included in other filings made with the Securities and Exchange Commission
from time to time.
Overview
Founded in 1993, RenaissanceRe is one of the leading providers of property catastrophe reinsurance coverage in the
world. We believe that we are a provider of first choice for many insurers and reinsurers due to our modeling and
technical expertise and our industry-leading performance. We principally provide property catastrophe reinsurance to
insurers and reinsurers, with exposures worldwide, on an excess of loss basis. Property catastrophe reinsurance generally
provides protection from claims arising from large catastrophes, such as earthquakes, hurricanes, winter storms, freezes,
floods, tornadoes, fires, explosions and other man-made or natural disasters. Accordingly, our results depend to a large
extent on the frequency and severity of catastrophic events, and the coverage offered to clients impacted by these events.
We are a leader in utilizing sophisticated computer models to construct a superior portfolio of these property catastrophe
coverages. We believe that a combination of several factors - our disciplined underwriting approach, the experience of
our underwriters, as well as our sophisticated risk models - have enabled us to significantly outperform the majority of
our competitors. This was especially evident during 2001 when we achieved an 18% operating return on equity even
though industry insurance losses were at an all time high.
For the years ended December 31, 2001 and December 31, 2000, our gross premiums written were $501.3 million and
$433.0 million, respectively, our net premiums written were $339.5 million and $293.3 million, respectively, our operating
income available to common shareholders, which excludes realised gains and losses on investments, was $146.3 million
(or $7.03 per common share) and $134.4 million (or $6.86 per common share), respectively, and our net income available
to common shareholders was $164.4 million (or $7.90 per common share) and $127.2 million (or $6.50 per common
share), respectively. At December 31, 2001, we had total assets of $2.6 billion and total shareholders’ equity of $1.2 billion.
At December 31, 2001, total shareholders’ equity attributable to common shareholders was $1.075 billion and our book
value per common share was $47.50, compared with $700.8 million and $35.72 per share at December 31, 2000.
Our principal subsidiary is Renaissance Reinsurance, a Bermuda domiciled company. In 2001, Renaissance Reinsurance
wrote $451.4 million of gross written premiums, compared to $382.8 million in 2000. Of these premiums, $373.9 million
were derived from property catastrophe reinsurance coverage, compared to $345.0 million in 2000.
In recent years, we have formed certain joint ventures whereby we write property catastrophe reinsurance for the joint
ventures in return for management fees and a profit participation.
• In January 1999, we formed Top Layer Re with State Farm to provide high layer coverage for non-U.S. risks.
Renaissance Reinsurance and State Farm each own 50% of Top Layer Re.
• In October 2001, we formed DaVinci Reinsurance Ltd. with State Farm and other private investors. DaVinci
writes property catastrophe reinsurance side-by-side with Renaissance Reinsurance and is consolidated in our
financial statements.
• In 1999, we were also appointed underwriting managers of OPCat, a wholly owned subsidiary of Overseas Partners
Partners Limited (“Overseas Partners”). OPCat, like DaVinci, was formed to write property catastrophe reinsurance
side-by-side with Renaissance Reinsurance. In February 2002, Overseas Partners decided to exit the reinsurance
business. In conjunction with this decision, Renaissance Reinsurance has agreed to assume OPCat’s business.
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RenaissanceRe Holdings Ltd. | Annual Report 2001
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
In November 1999, RenaissanceRe incorporated Renaissance Underwriting Managers to act as underwriting manager to
these joint ventures. Together, these joint ventures wrote $98.9 million of premium in 2001, compared to $80.2 million
in 2000. In total, Top Layer Re and DaVinci had access to approximately $4.3 billion of capital as of December 31, 2001.
We believe that our position as a leading property catastrophe reinsurance underwriter is reflected by the continued
growth in the property catastrophe premiums written by Renaissance Reinsurance and these joint ventures (which, when
combined, we refer to as “managed catastrophe premiums”). The total managed catastrophe premiums written on behalf
of Renaissance Reinsurance and the joint ventures increased to $441.8 million on a gross basis for the year ended
December 31, 2001 (2000 - $397.0 million), including $98.9 million written on behalf of our joint ventures (2000 - $80.2
million). Subsequent to the World Trade Center tragedy, demand and prices of property catastrophe reinsurance have
increased and we currently expect total managed catastrophe premiums to grow substantially in 2002.
In addition to catastrophe reinsurance, we also write certain other lines of reinsurance through Renaissance Reinsurance
including aviation, finite, satellite and catastrophe exposed workers compensation coverages. We refer to this business as our
“Specialty Reinsurance” business.
In 2001, we wrote gross written premiums of $77.5 million of specialty reinsurance,
compared with $37.7 million written in 2000.
We also write primary insurance through our four subsidiaries Glencoe Insurance Ltd., DeSoto Insurance Company,
DeSoto Prime Insurance Company and Stonington Insurance Company, formerly known as Nobel Insurance Company.
Glencoe, the largest of these subsidiaries, primarily provides catastrophe exposed primary property coverage on an excess
and surplus lines basis. During 2001, Glencoe’s gross written premiums were $12.9 million, compared to $5.3 million
in 2000.
DeSoto and DeSoto Prime are active in the Florida homeowners market. During 2001, DeSoto and DeSoto Prime wrote
$11.2 million of primary homeowners insurance coverage, compared to $12.7 million in 2000.
Stonington, a Texas-domiciled insurance company is licensed to operate in all 50 states of the U.S.
Because we focus on writing reinsurance and insurance which provides protection from damages relating to natural and
man-made catastrophes, our results depend to a large extent on the frequency and severity of such catastrophic events,
and the coverage we offer to clients impacted by these events.
In addition to the reinsurance and insurance coverages discussed above, from time to time, we 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, we seek an attractive return on equity, the ability to develop or
capitalize on a competitive advantage, and opportunities that will not detract from our core reinsurance operations.
Accordingly, we regularly review strategic opportunities and periodically engage in discussions regarding possible
transactions, although there can be no assurance that we will complete any such transactions or that any such transaction
would contribute materially to our results of operations or financial condition.
Summary of Critical Accounting Policies and Estimates
For most insurance and reinsurance companies, the most significant judgment made by management is the estimation
of the claims and claim expense reserves. Because of the variability and uncertainty associated with loss estimation, it is
possible that our individual case reserves for each catastrophic event are incorrect, possibly materially. The period of
time from the reporting of a loss to us through the settlement of our liability may be several years. During this period,
additional facts and trends will be revealed and as these factors become apparent, reserves will be adjusted. Therefore,
changes to our prior year loss reserves can impact our current underwriting results by 1) improving our results if the
prior year reserves prove to be redundant, or 2) reducing our results if the prior year reserves prove to be insufficient.
The impact on net income from changes in prior years loss reserves was an increase of $16.0 million during 2001,
a decrease of $8.4 million during 2000 and an increase of $34.6 million in 1999.
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RenaissanceRe Holdings Ltd. | Annual Report 2001
To reduce the potential impact from prior period reserve adjustments, we estimate our claims and claim expense reserves
based on 1) claims reports from insureds, 2) our underwriters’ experience in setting claims reserves, 3) the use of computer
models where applicable and 4) historical industry claims experience. Where necessary we will also use statistical and
actuarial methods to estimate ultimate expected claims and claim expenses. We review our reserves on a regular basis.
Other material judgments made by us are the estimates of potential impairments in asset valuations, particularly:
1) Potential uncollectable reinsurance recoverables; and
2) impairments in our deferred tax asset
To estimate reinsurance recoverables which might be uncollectable, our senior managers evaluate the financial condition
of our reinsurers, on a reinsurer by reinsurer basis, both before purchasing the reinsurance protection from them and after
the occurrence of a significant catastrophic event. We believe that our process is effective, and to date we have not written
off any significant reinsurance recoveries. As of December 31, 2001, we have recorded a valuation allowance of $8 million
relating to reinsurance recoverables, based on specific facts and circumstances evaluated by management.
In estimating impairments to our deferred tax asset, we analyze the businesses which generated the deferred tax asset, and
the businesses that will potentially utilize the deferred tax asset. Our deferred tax asset relates primarily to net operating
loss carryforwards that are available to offset future taxes payable of our U.S. operating subsidiaries. However, due to the
limited opportunities in the U.S. primary insurance market, the U.S. insurance operations have not generated taxable
income in the last few years. This calls into question the recoverability of the deferred tax asset. Although we retain the
benefit of this asset through 2020, during 2001 and 2000 we recorded valuation allowances of $14.0 million and $8.2
million, respectively. As of December 31, 2001, the net balance of the deferred tax asset was $4.2 million.
Summary of Results of Operations for 2001 and 2000
A summary of the significant components of our revenues and expenses are as follows:
Year ended December 31,
(In thousands)
Net underwriting income - Reinsurance (1)
Net underwriting income (loss) - Primary (1)
Other income
Investment income
Interest and fixed charges
Corporate expenses
Taxes
Other
Net operating income available to
common shareholders (2)
Net realized gains (losses)
Net income
2001
2000
1999
$ 100,655
(1,469)
16,244
75,156
(16,151)
(11,485)
(14,262)
(2,418)
146,270
18,096
$ 164,366
$ 85,532
(2,939)
10,959
77,868
(24,749)
(8,022)
(4,648)
378
$ 81,502
206
4,915
60,334
(18,222)
(9,888)
1,525
(411)
134,379
(7,151)
$ 127,228
119,961
(15,720)
$ 104,241
Operating income per common share
$ 7.03
$ 6.86
$ 5.82
Net income per common share
$
7.90
$ 6.50
$ 5.05
(1)
(2)
Net underwriting income consists of net premiums earned less claims and claim expenses incurred, acquisition costs and operational expenses.
Net operating income excludes realized gains and losses on investments.
23
RenaissanceRe Holdings Ltd. | Annual Report 2001
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The $11.9 million increase in operating income in 2001, compared to 2000, was primarily the result of the following items:
• a $15.1 million increase in underwriting income from our reinsurance operations due primarily to an increase in net
premiums earned of $64.1 million, in part offset by a $ 46.8 million increase in claims, plus
• an increase in fee income from our joint ventures of $8.2 million, primarily as a result of fees earned in 2001 on
premiums written on behalf of our joint ventures in 2000, plus
• a reduction in interest and fixed charges of $8.6 million resulting primarily from the repayment of $200 million of
outstanding bank loans in the fourth quarter of 2000, less
• an increase in tax expense during 2001 as a result of a $14.0 million increase to our valuation allowance on our deferred
tax asset as a result of further reductions of our U.S. based insurance operations (after this adjustment the net deferred
tax asset on our balance sheet is $4.2 million), less
• an increase in corporate expenses of $3.5 million primarily due to costs related to research and development initiatives
conducted by us in 2001, less
• a decrease in investment income of $2.7 million primarily as a result of declining interest rates.
The $14.4 million increase in operating income in 2000, compared to 1999, was primarily the result of the following items:
• a $17.5 million increase in investment income primarily due to an increase in interest rates and an increase in the level
of assets held during the majority of 2000, plus
• an increase in fee income from our joint ventures of $7.9 million as a result of an increase in premiums written on
behalf of our joint ventures to $80.2 million in 2000 compared with $4.3 million in 1999, less
• an increase of $7.2 million in interest expense as a result of an increase in outstanding bank loans during the majority
of 2000, less
• a $6.2 million increase in tax expense during the year, primarily as a result of an $8.2 million increase to our valuation
allowance on our deferred tax asset, as a result of a decrease in our U.S. based insurance operations.
Results of Operations for 2001 and 2000
The following is a discussion and analysis of our results of operations for the year ended December 31, 2001, compared to
each of the years ended December 31, 2000, and 1999, and a discussion of our financial condition at December 31, 2001.
Premiums
Gross Written Premiums
Year ended December 31,
(In thousands)
Property Catastrophe Reinsurance
Specialty Reinsurance
Total Reinsurance
Insurance premiums Glencoe
Insurance premiums other
Total insurance premiums
Total gross written premiums
2001
2000
1999
$ 373,896
77,468
$ 451,364
12,858
37,099
49,957
$ 501,321
$ 345,086
37,730
$ 382,816
5,273
44,913
50,186
$ 433,002
$ 279,605
2,740
$ 282,345
4,986
63,974
68,960
$ 351,305
24
RenaissanceRe Holdings Ltd. | Annual Report 2001
The increase in our property catastrophe premiums over the past two years is primarily due to an improving market
following the worldwide level of losses occurring in 1999. During 1999, insured losses from natural catastrophes and
man-made disasters are estimated to be over $33 billion which, before the World Trade Center disaster in 2001, was the
second-highest claims total ever for insurers. During 1999, nine significant worldwide catastrophic events occurred: the
hail storms in Sydney, Australia in April; the Oklahoma tornados in May; Hurricane Floyd which struck in September;
Typhoon Bart which struck Japan in September; Turkish and Taiwanese earthquakes in August and September,
respectively; and the Danish windstorm, Anatol, and the French windstorms, Lothar and Martin, in December. Six of
these events each resulted in over $1 billion of insured damages.
Because of these events, as with many large losses, two things occurred 1) many reinsurers recorded significant losses and
were forced to, or chose to, withdraw their underwriting capacity from these regions, and 2) these losses raised the
awareness of the severity of the losses which could impact these geographic locations. As a result of these factors, prices
for reinsurance coverages in these and other geographic locations increased, in some cases significantly. Accordingly, our
reinsurance premiums also increased, first from the increased prices on renewing policies and secondly by enabling us to
write new business which was previously priced at an uneconomical rate of return.
Our property catastrophe premiums also increased as a result of reinstatement premiums we received relating to these
large losses. Per contractual terms, we record reinstatement premiums after an insured notifies us of a claim.
Reinstatement premiums allow an insured to purchase, or reinstate, the limit of their reinsurance policy for the remainder
of the policy period. Because of the increased level of claims from the 1999 events, and more recently from the 2001
World Trade Center disaster, our reinstatement and adjustment premiums for the years ended December 31, 2001, 2000
and 1999 were $35.3 million, $20.3 million and $6.8 million, respectively.
Because of improving market conditions, we have increased our premiums in the Specialty Reinsurance market, which we
define as reinsurance coverages that are not specifically property catastrophe coverages.
In evaluating specialty
reinsurance opportunities, we focus on those coverages which, like property catastrophe reinsurance, produce losses that
are infrequent in nature, but could be severe if they occur. Examples include aviation, satellite, finite and catastrophe
exposed workers compensation coverages.
Over the past couple of years, we have reduced the amount of insurance premiums written by our other primary
insurance companies because of the limited profitable opportunities in the U.S. primary insurance markets. During 2001,
Stonington accounted for the majority of the premiums written, $25.9 million, the substantial majority of which was
reinsured.
Ceded Reinsurance Premiums
Ceded Premiums
Year ended December 31,
(In thousands)
Reinsurance
Primary
Total
2001
2000
1999
$ 124,684
37,090
$ 161,774
$ 94,875
44,824
$ 139,699
$ 77,153
60,639
$ 137,792
25
RenaissanceRe Holdings Ltd. | Annual Report 2001
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Because of the potential volatility of the property catastrophe reinsurance business, we purchase reinsurance to reduce
our exposure to large losses. We utilize our REMS© modeling system to evaluate how each purchase interacts with our
portfolio of reinsurance contracts we write, and with the other ceded reinsurance contracts we purchase. During 2001
and 2000, we increased our purchases of reinsurance because we received a number of new opportunities to purchase
reinsurance at economical rates of return.
Although we would remain liable to the extent that any of our reinsurers fails to pay our claims, before placing
reinsurance we evaluate the financial condition of our reinsurers. We believe that our process is effective and, to date, we
have not written off any significant reinsurance recoveries. As of December 31, 2001, the majority of the $217.6 million
of losses recoverable relates to outstanding claims reserves on our books, and accordingly they cannot be collected by us
until we first pay our losses. We expect to fully collect on all of this recorded reinsurance balance recoverable.
Also, we have recently begun buying quota share protection of our property catastrophe reinsurance business. These
policies are similar to our joint venture activities, where we receive an override and a profit commission on these cessions.
Approximately 50% of the limits under our reinsurance coverage have been purchased on a multi-year basis, which will
result in relatively stable costs on those policies for fiscal years 2002 and 2003. To the extent that appropriately priced
coverage is available, we anticipate continued use of reinsurance to reduce the potential volatility of our results.
Gross Premiums Written by Geographic Region
Year ended December 31,
(In thousands)
United States and Caribbean
Worldwide
Worldwide (excluding U.S.) (1)
Europe
Other
Australia and New Zealand
Specialty reinsurance (2)
Total reinsurance
United States - primary
Total gross premiums written
2001
2000
1999
$ 180,305
93,474
45,111
20,414
22,433
12,159
77,468
451,364
49,957
$ 501,321
$ 145,871
98,923
60,382
22,071
9,559
8,280
37,730
382,816
50,186
$ 433,002
$ 173,598
46,712
27,276
26,437
2,370
3,212
2,740
282,345
68,960
$ 351,305
(1) The category “Worldwide (excluding U.S.)” consists of contracts that cover more than one geographic region (other than the U.S.). The exposure in this category for
gross premiums written to date is predominantly from Europe and Japan.
(2) The category “Specialty Reinsurance” includes coverages related to non-catastrophe reinsurance risks assumed by us. These coverages primarily include exposure
to claims from accident and health, aviation, finite and satellite risks assumed by us.
Underwriting Results
The underwriting results of an insurance or reinsurance company are discussed frequently by reference to its loss ratio,
expense ratio, and combined ratio. The loss ratio is the result of dividing claims and claim expenses incurred by net
premiums earned. The expense ratio is the result of dividing underwriting expenses (acquisition and operational
expenses) by net premiums earned. The combined ratio is the sum of the loss ratio and the expense ratio.
26
RenaissanceRe Holdings Ltd. | Annual Report 2001
The table below sets forth our net premiums earned, claims and claim expenses and underwriting expenses by segment
and their corresponding loss, expense and combined ratios:
Year ended December 31,
(in thousands)
2001
2000
1999
Reinsurance net earned premiums - property catastrophe
Reinsurance net earned premiums - specialty reinsurance
Total reinsurance net earned premiums
Primary net earned premiums
Total net earned premiums
$ 261,054
64,169
325,223
7,842
333,065
$ 225,907
35,260
261,167
6,514
267,681
$ 192,278
4,531
196,809
24,308
221,117
Reinsurance claims and claim expenses
Primary claims and claim expenses
Total claims and claim expenses
Reinsurance underwriting expenses
Primary underwriting expenses
Total underwriting expenses
Reinsurance net underwriting profit
Primary net underwriting profit (loss)
Net underwriting profit - total
Reinsurance claims and claim expense ratio
Primary claims and claim expense ratio
Total claims and claim expense ratio
Reinsurance expense ratio
Primary expense ratio
Total expense ratio
Reinsurance combined ratio
Primary combined ratio
Total combined ratio
152,341
( 2,424 )
149,917
72,227
11,735
83,962
100,655
( 1,469 )
$ 99,186
$
105,542
3,062
108,604
70,093
6,391
76,484
85,532
( 2,939 )
82,593
64,441
12,700
77,141
51,828
10,440
62,268
80,540
1,168
$ 81,708
46.8 %
( 30.9 )
45.0 %
22.2 %
149.6
25.2 %
69.0 %
118.7
70.2 %
40.4 %
47.0
40.6 %
26.8 %
98.1
28.5 %
67.2 %
145.1
69.1 %
32.7 %
52.2
34.9 %
26.3 %
42.9
28.1 %
59.0 %
95.1
63.0 %
Our claims and claim expenses, claims and claim expenses ratio, and our combined ratio for the reinsurance operations
have increased primarily as a result of an increase in our specialty reinsurance premiums, which normally will produce
a higher claims and claim expense and combined ratio than our principal product, property catastrophe reinsurance.
Our claims and claim expenses for 2001 also increased as a result of our claims and claim expenses from the World Trade
Center tragedy.
Although industry wide insurance losses were the highest in history during 2001 and were the third highest in history
in 1999, we recorded increases in net income, cash flows from operations, earnings per share and book value per share.
We attribute this outstanding performance to our disciplined underwriting approach, the experience of our underwriters, as
well as our sophisticated risk models.
27
RenaissanceRe Holdings Ltd. | Annual Report 2001
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
In the normal course of business, we also purchase reinsurance protection (see discussion of Ceded Reinsurance Premiums
above). Our underwriting results benefited from our purchase of reinsurance protection as we recorded reinsurance
recoveries of $160.4 million, $52.0 million and $255.3 million during fiscal years 2001, 2000 and 1999, respectively. Although
there can be no assurance that our underwriting results will continue to benefit from the purchase of reinsurance, we will
continue to purchase reinsurance protection to the extent that appropriately priced coverage is available.
Our underwriting expenses consist of operational expenses and acquisition costs. Operational expenses consist of salaries
and other general and administrative expenses. Acquisition costs consist of costs to acquire premiums and are principally
made up of broker commissions and excise taxes. Our reinsurance business operates with a limited number of employees
and we are able to grow our book of business without substantially increasing our operating costs. Acquisition costs are
driven by contract terms and are normally a set percentage of premiums. Therefore, as our premiums increase, we expect
that our operating costs will tend to remain relatively stable. Since our acquisition costs are based on a percentage of the
premiums written, these costs will fluctuate in line with the fluctuation in premiums. Therefore, in total, as our premiums
increase, we would expect that our expense ratio would decrease, as was the case in 2001. Other factors may also affect the
expense ratios, including business mix, the receipt of ceding commissions or similar payments that may offset expenses.
Acquisition costs and operational expenses for the year ended December 31, 2001 were $84.0 million, or 25.2%, compared
to $76.5 million, or 28.5% of net premiums earned for the year ended December 31, 2000. As discussed above, the primary
reason for the decrease in the underwriting expense ratio was the increase in net premiums earned and the limited growth
in the operational expenses of our reinsurance business.
Acquisition costs and operational expenses for the year ended December 31, 2000 were $76.5 million, or 28.5% of net
premiums earned, compared to $62.3 million, or 28.1% of net premiums earned, for the year ended December 31, 1999. The
primary contributor to the increase in the underwriting expense ratio was the increase in gross premiums earned by
Renaissance Reinsurance with respect to noncatastrophe reinsurance products, which typically produce a higher
underwriting expense ratio than our principal product, property catastrophe reinsurance.
For our primary operations, the majority of the premiums written are currently ceded to other reinsurers and as a result, net
earned premiums from the primary operations were relatively minor during 2001, 2000 and 1999. Based on this reduced
level of net earned premiums, relatively modest one-time adjustments to net written premiums, claims and claim expenses
incurred, acquisition expenses or operating expenses can cause, and did cause, unusual fluctuations in the claims and claim
expense ratio and the underwriting expense ratio of the primary operations. Because of its small scale, our primary
insurance business does not materially affect the ratios of our consolidated operations. As can be seen by the net
underwriting losses of the primary operations during 2001 and 2000, the primary operations are not a significant
contributor to our consolidated operations. Subsequent to the World Trade Center disaster, and the resulting insurance
market turmoil, we currently expect that Glencoe, our Bermuda primary operation, will experience considerable growth in
2002. We also expect that the U.S. primary operations of DeSoto, DeSoto Prime and Stonington will continue to be limited,
and therefore we do not expect these entities to contribute significantly to our consolidated operations during 2002,
although these operations may grow if market conditions allow.
Net Investment Income
Year ended December 31,
(in thousands)
2001
$ 75,156
2000
$ 77,868
1999
$ 60,334
28
RenaissanceRe Holdings Ltd. | Annual Report 2001
Because we primarily provide reinsurance coverage for damages resulting from natural and man-made catastrophes, it is
possible that we could become liable for a significant amount of losses on a short-term notice. Accordingly we have
structured our investment portfolio to preserve capital and provide us with a high level of liquidity, which means that the
large majority of our investment portfolio contains investments in fixed income securities, such as U.S. Government bonds,
corporate bonds and mortgage backed and asset backed securities.
As a result of the declining interest rate environment during 2001, the average yield on our portfolio fell from 6.8% as of
December 31, 2000 to 4.2% as of December 31, 2001. Accordingly, as yields on our portfolio decrease, our interest income
will also decrease, as was the case during 2001. Partially offsetting this decrease was the significant growth in assets during
the year, which was primarily due to our capital raising activities of issuing $150 million of Senior Notes in July 2001, issuing
2.5 million Common Shares for $233 million in net proceeds in October 2001 and issuing, $150 million of Series A Preference
Shares in November 2001. At December 31, 2001, we had an unusually large allocation to cash, which resulted from our
decision to wait to invest the proceeds of these capital transactions until we perceived more favorable market conditions. In
the short term this large cash allocation has depressed our investment returns.
During 2000, the increase in investment income resulted primarily from an increase in interest rates, together with an
increase in the investment base during the year. Although invested assets at December 31, 2001 only reflected an increase of
$22.3 million from the prior year end, we had an additional $200.0 million in bank loans during most of 2000, which was
repaid during the fourth quarter of 2000.
Other Income
Year ended December 31,
(in thousands)
2001
$ 16,244
2000
$ 10,959
1999
$ 4,915
As discussed previously, in 1999 we began to manage property catastrophe books of business for the Top Layer Re and OPCat
joint ventures. We record our profit and/or equity participation from these joint ventures as other income. During 2001,
2000 and 1999 other income included $18.0 million, $9.8 million and $1.9 million of profits, respectively, from these two
ventures. The remainder of our other income relates to net results from small non-underwriting portions of our operations,
as well as minor activities with catastrophe and derivative instruments under which losses could be triggered by an industry
loss index or geological or physical variables. In 2001, other income included approximately $2.4 million from our primary
operations and $2.7 million from our investments in non-indemnity catastrophe index contracts. In 2000, contributions to
other income from our primary operations and from trading in catastrophe linked index transactions were immaterial. In
1999, we reported $2.5 million in other income relating to recoveries on catastrophe linked index transactions and $1.4
million relating to other income from our primary operations.
During 2001, we formed a third joint venture, DaVinci, in which we own 25% of the equity. Due to the voting and
governance structures of DaVinci, our income from this joint venture is not reflected in other income, but is instead
consolidated in our financial statements. Our profit participation and equity participation in DaVinci will therefore be
reflected primarily through underwriting income and investment income, partially offset by an increase in minority interest
for the 75% of DaVinci owned by third parties.
Also, as discussed previously, since OPCat has decided to cease its operations, and since we have decided to assume this book
of business, our portion of the earnings from this book of business will, in the future, be reflected in our consolidated
underwriting results and investment income instead of other income.
29
RenaissanceRe Holdings Ltd. | Annual Report 2001
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Corporate Expenses
Year ended December 31,
(in thousands)
2001
$ 11,485
2000
$ 8,022
1999
$ 9,888
Corporate expenses are incurred by us in running our non-underwriting operations include expenses related to legal and
certain consulting expenses, costs for research and development, and other miscellaneous costs associated with operating as
a publicly traded company. The majority of the increase in corporate expenses during 2001 primarily related to costs related
to research and development initiatives conducted by us in 2001.
Fixed Charges
Year ended December 31,
(in thousands)
2001
2000
1999
Interest - Revolving Credit Facilities
Interest - $150 million 7% Senior Notes
Interest - $87.6 million Capital Securities
Dividends - $150 million 8.1% Preference Shares
Total Fixed Charges
$ 2,378
4,871
7,484
1,418
$ 16,151
$ 17,167
-
7,582
-
$ 24,749
$ 9,934
-
8,288
-
$ 18,222
Due to our financial strength, we have had the ability to access the capital markets for various forms of capital.
It is
advantageous to have access to various forms of capital, as we therefore do not become dependant on any one source of
capital. Furthermore, the cost and flexibility of each form of capital can help us to improve our return to common
shareholders and at the same time, maintain a level of capital that allows us to grow our operations.
During 2001, our total fixed charges decreased as a result of our repayment of $200 million of borrowings under our
revolving credit and term loan agreement in the fourth quarter of 2000. Since the majority of these funds were borrowed in
August 1999, and due to the rising interest rates during 1999 and 2000, this caused interest expense on our debt to increase
in 2000 over interest expense in 1999.
As a result of our issuance during 2001 of the Senior Notes and the Preference Shares, we expect our fixed charges to increase
in 2002 compared to 2001.
Income Tax Expense (Benefit)
Year ended December 31,
(in thousands)
2001
$ 14,262
2000
$ 4,648
1999
( $1,525)
In 1998, in conjunction with charges we recorded relating to our purchase and subsequent decision to significantly reduce
the operations of Stonington, we recorded a deferred tax asset of $22 million. This deferred tax asset relates primarily to net
operating loss carryforwards that are available to offset future taxes payable of our U.S. operating subsidiaries. However, due
to the limited opportunities in the U.S. primary insurance market, the U.S. insurance operations have not generated taxable
income in the last few years. This calls into question the recoverability of the deferred tax asset. Although we retain the
benefit of this asset through 2020, during 2001 and during 2000 we recorded increases in our valuation allowances of $14.0
million and $8.2 million, respectively. As of December 31, 2001, the net balance of the deferred tax asset was $4.2 million.
30
RenaissanceRe Holdings Ltd. | Annual Report 2001
Should our current U.S. operations begin to generate taxable income, or should additional opportunities arise to conduct
business in the U.S., the valuation allowance could be eliminated as profits are recorded, and we could possibly earn profits
without a corresponding reduction for taxes.
Realized Gains/(Losses)
Year ended December 31,
(in thousands)
2001
$ 18,096
2000
( $ 7,151 )
1999
( $ 15,720 )
During 2001, net realized gains on sales of investments were $18.1 million, compared to net realized losses of $7.2 million in
2000. As noted above, because our portfolio is structured to preserve capital and provide us with a high level of liquidity, our
gains and losses on investments will be highly correlated to fluctuations in interest rates. Accordingly as interest rates decline,
we will tend to have realized gains from the turnover of our portfolio, and as interest rates increase, we will tend to have
realized losses from the turnover of our portfolio.
Financial Condition
As a holding company, we rely on dividends from our subsidiaries and investment income to make principal and interest
payments on our debt and capital securities, and to make dividend payments to our preference shareholders and common
shareholders.
The payment of dividends by our subsidiaries is, under certain circumstances, limited under U.S. statutory regulations and
Bermuda insurance law. U.S. statutory regulations and The Bermuda Insurance Act 1978, amendments thereto and related
regulations of Bermuda, require our Bermuda insurance subsidiaries to maintain certain measures of solvency and liquidity.
At December 31, 2001, the statutory capital and surplus of our Bermuda insurance subsidiaries was $1,490.3 million, and the
amount required to be maintained by the Act was $259.7 million. Our U.S. subsidiaries are also required to maintain certain
measures of solvency and liquidity. At December 31, 2001, the statutory capital and surplus of our U.S. subsidiaries was $32.6
million and the amount required to be maintained was $24.3 million. During 2001, Renaissance Reinsurance declared
aggregate cash dividends of $147.1 million, compared with $95.6 million in 2000.
Our operating subsidiaries have historically produced sufficient cash flows to meet their own expected claims payments and
operational expenses and to provide dividend payments to us. Our subsidiaries also maintain a concentration of investments
in high quality liquid securities, which management believes will provide sufficient liquidity to meet extraordinary claims
payments should the need arise. Additionally, we maintain a $310.0 million credit facility to meet additional capital
requirements, if necessary.
Cash Flows
Cash flows from operating activities for 2001 were $341.5 million, which principally consisted of net income of $166 million,
plus $119 million for losses incurred but not paid as of December 31, 2001, plus $58 million of collections on losses
recoverable. The 2001 cash flows from operations were primarily utilized to reinvest in fixed income securities.
We have generated cash flows from operations in 2001 and in 2000 significantly in excess of our operating commitments.
To the extent that capital is not utilized in our reinsurance business, we will consider using such capital to invest in
new opportunities.
Because of the nature of the coverages we provide, which typically can produce losses of high severity and low frequency, it
is not possible to accurately predict our future cash flows from operating activities. As a consequence, cash flows from
operating activities may fluctuate, perhaps significantly, between individual quarters and years.
31
RenaissanceRe Holdings Ltd. | Annual Report 2001
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Reserve for Claims and Claim Expenses
For most insurance and reinsurance companies, the most significant judgment made by management is the estimation of the
claims and claim expense reserves. Because of the variability and uncertainty associated with loss estimation, it is possible
that our individual case reserves for each catastrophic event are incorrect, possibly materially. The period of time from the
reporting of a loss to us through the settlement of our liability may be several years. During this period, additional facts and
trends will be revealed and as these factors become apparent, reserves will be adjusted. Therefore, changes to our prior year
loss reserves can impact our current underwriting results by 1) improving our results if the prior year reserves prove to be
redundant, or 2) reducing our results if the prior year reserves prove to be insufficient. The impact on net income from
changes in prior years loss reserves was an increase of $16.0 million during 2001, a decrease of $8.4 million during 2000 and
an increase of $34.6 million in 1999.
For our insurance and reinsurance operations, our estimates of claims reserves are based on 1) claims reports from insureds,
2) our underwriters’ experience in setting claims reserves, 3) the use of computer models where applicable and 4) historical
industry claims experience. Where necessary we will also use statistical and actuarial methods to estimate ultimate expected
claims and claim expenses. We review our reserves on a regular basis.
Our principal business is property catastrophe reinsurance, which subjects us to potential losses that are generally infrequent,
but can be significant, such as losses from hurricanes and earthquakes. Because the loss events to which we are exposed are
generally characterized by low frequency but high severity, our claims and claim expense reserves will normally fluctuate,
sometimes materially, based upon the occurrence of a significant natural or man-made catastrophic loss for which we provide
reinsurance. Our reserves will also fluctuate based on the payments we make for these large loss events. As we pay losses
related to these large events, if no other events have occurred, our loss reserves would normally tend to decrease.
The table below sets forth our gross and net claims and claim expense reserves for the previous eight years, compared with the
balance of our shareholders’ equity.
At December 31,
Gross
Reserves
Net
Reserves
Shareholders’
Equity
Percentage
of Equity
1994
1995
1996
1997
1998
1999
2000
2001
$ 63.3
100.4
105.4
110.0
298.8
478.6
403.6
572.9
$ 63.3
100.4
105.4
110.0
197.5
174.9
237.0
355.3
$ 265.2
486.3
546.2
598.7
612.2
600.3
700.8
1,225.0
Gross
23.9%
20.6
19.3
18.4
48.8
79.7
57.6
46.8
Net
23.9%
20.6
19.3
18.4
32.3
29.1
33.8
29.0
The above information further reflects how our gross reserves, as a percentage of equity, can fluctuate based on the occurrence
of significant loss events. For instance in 1999, our gross reserves, and our gross reserves as a percentage of equity increased
sharply, due to the nine significant loss events occurring in 1999, many of which occurred in the last four months of the year
(see discussion of Premiums above for a discussion of these events). However, as also can be seen from the data above, because
of our ability to purchase reasonably priced reinsurance, historically our net reserves as a percentage of equity have shown
much less variation from year to year.
We generally expect that the majority of our losses from large catastrophic events will be paid in a two to four year time frame.
However, the event causing the loss, the locations of the loss, and whether our losses are from policies with insurers or
reinsurers, can affect the time period in which our claims will be paid. For instance, losses occurring in the U.S., tend to pay
more quickly than those losses occurring in other parts of the world. This trend is reflected in the current balance of our
reserves, whereby seven of the nine events occurring in 1999, occurred outside of the U.S., and accordingly, our claim
payments on these losses have tended to pay slower than those on events occurring in the U.S. Also, the 1999 events impacted
claims payments in 2000 and 2001 to a greater extent than normal because most of the 1999 events occurred late in the year,
including the most severe events, which were the European storms in December.
32
RenaissanceRe Holdings Ltd. | Annual Report 2001
For illustrative purposes, the table below sets forth our claim payments and claim developments for the 1999 accident year for
our Reinsurance segment through December 31, 2001:
1999 Accident Year - Reinsurance Segment
Incurred reserve
Claim payments in 1999
Reserves as of December 31, 1999
Claim payments in 2000
Reserve additions in 2000
Reserves as of December 31, 2000
Claim payments in 2001
Reserve additions in 2001
Reserves as of December 31, 2001
Gross
Reserves
282.7
(26.8)
$255.9
(110.5)
6.1
151.5
(37.8)
10.4
$124.1
Ceded
Reserves
185.0
-
$185.0
(124.8)
(0.6)
59.6
(54.1)
29.4
$ 34.9
Net
Reserves
$ 97.7
(26.8)
$ 70.9
14.3
6.7
91.9
16.3
(19.0)
$ 89.2
At December 31, 2001, 2000 and 1999, the claims and claim expense reserves of the Reinsurance segment were $500.1 million,
$296.4 million and $361.9 million, respectively, of the total reserves of the Company. Also, as of December 31, 2001, 2000 and
1999, of the total reserves of the Reinsurance segment, 86%, 88% and 91% of the reserves, respectively, related to claims and
claim expense reserves of the three most recent accident years. As of December 31, 2001, 2000 and 1999, included in our claims
and claim expense reserves were reserves for incurred but not reported claims (“IBNR”) of $286.7 million, $228.8 million, and
$293.2 million, respectively.
During 2001, our claims and claim expense reserves, our claims recoveries and our net reserves all increased as a result of losses
we incurred from the World Trade Center tragedy. During 2002, as we pay losses related to the World Trade Center tragedy
and other currently known loss events, if no additional significant loss events occur, we would expect the balance of our claims
and claim expense reserves to decrease.
Capital Resources
Our total capital resources at December 31, 2001 and 2000 were as follows:
At December 31,
(In thousands)
Common shareholders’ equity
Series A preference shares
Total shareholders’ equity
7.00% senior notes
8.54% capital securities
Revolving credit facility - unborrowed
Revolving credit facility - borrowed
Term and revolving loan facility
2001
2000
$ 1,075,024
150,000
1,225,024
$ 700,818
-
700,818
150,000
87,630
310,000
-
33,500
-
87,630
302,000
8,000
42,000
Total capital resources
$ 1,806,154
$ 1,140,448
33
RenaissanceRe Holdings Ltd. | Annual Report 2001
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
As is customary in our industry, a portion of our reinsurance policies provide our clients with the right to cancel or not renew
our policies in the event our claims paying ratings are downgraded. In some instances the downgrade must be to a rating
several levels below our current rating; in others, the trigger level is somewhat higher; and in others it is only one or two levels
below our current rating. Many of our policies do not contain a provision of this type. Moreover, we cannot precisely estimate
the amount of premium that is at risk, as this amount depends on the particular facts and circumstances at the time, including
the degree of the downgrade, the time elapsed on the impacted in-force policies, and the effects of any related catastrophic
event on the industry generally. In the event any of these provisions are triggered, we will vigorously seek to retain our clients
and do not anticipate that a material amount of premium would be cancelled or nonrenewed. However, we can not assure
that our premiums would not decline, perhaps materially, following a ratings downgrade.
During 2001, as a result of the World Trade Center tragedy, two results occurred in the reinsurance market. First, reinsurers
recorded significant losses and were forced to, or chose to, withdraw their underwriting capacity for certain lines of
reinsurance. Second, these losses raised the awareness of the severity of the losses which could occur. These factors caused an
imbalance in the supply of and demand for reinsurance and, as a result, prices escalated for many segments of the reinsurance
market. These imbalances provided us with an opportunity to increase our penetration of the property catastrophe
reinsurance market, as well as provided us with opportunities to grow other areas of our operations, specifically our Specialty
Reinsurance operations and our commercial property insurance operations written through Glencoe Insurance.
With these increased opportunities to grow our businesses, we also decided to materially increase our capital resources
through the following activities:
1. In October 2001, we issued 2.5 million of Common Shares for net proceeds of $233 million.
2. In November 2001, we raised $145 million in net proceeds through the issuance of 6,000,000 $1.00 par value Series A
Preference Shares at $25.00 per share. The shares are non-convertible and may be redeemed at $25.00 per share on or after
November 19, 2006. Dividends are cumulative from the date of original issuance and are payable quarterly in arrears at
8.10% when, if, and as, declared by our Board of Directors. Under certain circumstances, such as amalgamations and
changes to Bermuda law requiring approval of the holders of our preference shares to vote as a single class, we may redeem
the shares prior to November 19, 2006 at $26.00 per share. The preference shares have no stated maturity and are not
convertible into any of our other securities.
3. In July we issued $150 million of 7% Senior Notes due July 2008. We used a portion of the proceeds to repay $16.5 million
of outstanding amounts under our $310 million revolving credit and term loan agreement. We can redeem the notes prior
to maturity subject to payment of a “make-whole” premium; however, we currently have no intentions of calling the notes.
The notes, which are senior obligations, pay interest semi-annually and contain various covenants, including limitations
on mergers and consolidations, restriction as to the disposition of stock of designated subsidiaries and limitations on
liens on the stock of designated subsidiaries.
We also formed DaVinci, our third joint venture, in October 2001. To form DaVinci, we raised $300 million of outside
capital ($275 million as of December 31, 2001) and we utilized $200 million of our capital when we contributed $100 million
as equity and provided $100 million as bridge financing. In the first half of 2002, we expect DaVinci to replace our $100
million of bridge financing with bank debt which, because we are consolidating DaVinci, will increase the outstanding debt
on our consolidated balance sheet.
Also, in conjunction with market opportunities following the World Trade Center tragedy, we contributed an additional $135
million of capital to Glencoe, thereby increasing its total capital to greater than $200 million.
We continue to maintain a revolving credit and term loan agreement with a syndicate of commercial banks. During the third
quarter of 2001, we repaid borrowings of $16.5 million on this facility and as of December 31, 2001 no amounts were
outstanding. In the fourth quarter of 2000 we repaid $200.0 million of the then outstanding balance. Interest rates on the
facility are based on a spread above LIBOR and averaged 5.45% during 2001, compared to 7.03% in 2000. Our revolving
credit agreement contains certain financial covenants including requirements that consolidated debt to capital does not
exceed a ratio of 0.35:1; consolidated net worth must exceed the greater of $100.0 million or 125% of consolidated debt; and
80% of invested assets must be rated BBB- or better. We were in compliance with all the covenants of this revolving credit
and term loan agreement at December 31, 2001.
34
RenaissanceRe Holdings Ltd. | Annual Report 2001
Renaissance U.S. has a $18.5 million term loan and $15.0 million revolving loan facility with a syndicate of commercial
banks, each of which is guaranteed by RenaissanceRe. Interest rates on the facility are based upon a spread above LIBOR, and
averaged 4.71% during 2001, compared to 6.98% in 2000. The related agreements contain certain financial covenants,
including a covenant that RenaissanceRe, as principal guarantor, maintain a ratio of liquid assets to debt service of 4:1. The
term loan has mandatory repayment provisions approximating $9 million per year in each of years 2002 and 2003. The loan
facility of $15 million is repayable in 2003. During 2001, Renaissance U.S. repaid approximately $8.5 million of this facility.
We were in compliance with all the covenants of this term loan and revolving loan facility at December 31, 2001.
Our subsidiary, RenaissanceRe Capital Trust has issued capital securities which pay cumulative cash distributions at an
annual rate of 8.54%, payable semi-annually. During 2000, we purchased $2.0 million of these capital securities recognizing
a gain of $0.5 million which has been reflected in shareholders’ equity. No securities were purchased during 2001. The sole
asset of the Trust consists of our junior subordinated debentures in an amount equal to the outstanding capital securities.
The Indenture relating to these junior subordinated debentures contains certain covenants, including a covenant prohibiting
us from the payment of dividends if we are in default under the Indenture. We were in compliance with all of the covenants
of the Indenture at December 31, 2001. The capital trust securities mature on March 1, 2027. Generally Accepted
Accounting Principles do not allow these securities to be classified as a component of shareholders’ equity, therefore, they
are reflected as minority interest.
Under the terms of certain reinsurance contracts, we may be required to provide letters of credit to reinsureds in respect of
reported claims and/or unearned premiums. Our letters of credit are secured by a lien on a portion of our investment
portfolio. At December 31, 2001, we had outstanding letters of credit aggregating $125.8 million, compared to $44.9 million
in 2000. This increase is primarily related to the losses emanating from the World Trade Center tragedy. Also, in connection
with our Top Layer Re joint venture we have committed $37.5 million of collateral to support a letter of credit.
In order to encourage employee ownership of common shares, we have guaranteed certain loan and pledge agreements
between certain employees and Bank of America, Illinois (“BofA”). Pursuant to the terms of this employee credit facility, BofA
has agreed to loan the participating employees up to an aggregate of $25.0 million. The balance outstanding at December 31,
2001 was $24.1 million, compared to $24.8 million in 2000. Each loan under this employee credit facility is required to be
initially collateralized by the respective participating employee with common shares or other collateral acceptable to BofA. If
the value of the collateral provided by a participating employee subsequently decreases, the participating employee is required
to contribute additional collateral in the amount of such deficiency, failing which BofA can accelerate the loan and liquidate
the remaining collateral. Loans under this employee credit facility are otherwise non-recourse to the participating employees.
Given the level of collateral, we do not presently anticipate that we will be required to honor any guarantees under the
employee credit facility, although there can be no assurance that we will not be so required in the future.
Shareholders’ Equity
During 2001, shareholders’ equity increased by $524.2 million, from $700.8 million at December 31, 2000 to $1.2 billion at
December 31, 2001. The significant components of the change in shareholders’ equity included net income from continuing
operations of $164.4 million, $145 million received from the issuance of 6 million Series A Preference Shares, and $233
million received from the issuance of 2.5 million common shares, offset by the payment of dividends of $32.8 million.
At December 31, 2001, shareholders’ equity attributable to common shareholders was $1.075 billion.
From time to time, we have returned capital to our shareholders through share repurchase programs. As at December 31,
2001, we had $27.1 million remaining under our existing program. During 2000, we purchased 671,900 common shares for
an aggregate value of $25.1 million. During 1999, we repurchased 2,226,700 common shares for an aggregate value of $80.1
million. No shares were repurchased during 2001.
Investments
At December 31, 2001, we held cash and investments totaling $2.2 billion, compared to $1.1 billion in 2000, with net
unrealized appreciation of $16.3 million, compared to unrealized appreciation of $6.8 million in 2000.
35
RenaissanceRe Holdings Ltd. | Annual Report 2001
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Because we primarily provide coverage for damages resulting from natural and man-made catastrophes, we may become
liable for substantial claim payments on short-term notice. Accordingly, our investment portfolio is structured to preserve
capital and provide a high level of liquidity which means that the large majority of our investment portfolio contains
investments in fixed income securities, such as U.S. Government bonds, corporate bonds and mortgage backed and asset
backed securities.
The table below shows the aggregate amounts of investments available for sale, other investments and cash and cash
equivalents comprising our portfolio of invested assets:
At December 31,
(In thousands)
Investments available for sale, at fair value
Other investments
Cash, cash equivalents and short term investments
Total invested assets
2001
2000
$ 1,282,483
38,307
873,640
$ 2,194,430
$ 928,102
22,443
124,331
$ 1,074,876
The growth in our portfolio of invested assets for the year ended December 31, 2001 resulted primarily from net cash
provided by operating activities of $326 million, $233 million raised from the issuance of 2.5 million common shares, $145
million received from the issuance of 6 million Series A Preference Shares, $150 million raised from the issuance of 7% senior
notes and $275 million of third party investment in our most recent joint venture, DaVinci Reinsurance. At year end, we
had an unusually large allocation to cash, which resulted from our decision to wait to invest the proceeds of these capital
transactions until we perceived more favorable market conditions; in the short term, this large cash allocation has depressed
our investment returns. Over time, we expect our cash position to return to historical levels.
Our 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 December 31, 2001, our invested asset portfolio
had a dollar weighted average rating of AA, an average duration of 1.9 years and an average yield to maturity of 3.8%.
Catastrophe Linked Instruments
We have assumed risk through catastrophe and derivative instruments under which losses could be triggered by an industry
loss index or geological or physical variables. During 2001, 2000 and 1999 we recorded recoveries on non-indemnity
catastrophe index transactions of $2.7 million, nil, and $2.5 million, respectively. We report these recoveries in other income.
We cannot assure that this performance will continue.
Market Sensitive Instruments
Our investment portfolio includes investments which are subject to changes in market values with changes in interest rates.
The aggregate hypothetical loss generated from an immediate adverse parallel shift in the treasury yield curve of 100 basis
points would cause a decrease in total return of 1.9%, which equated to a decrease in market value of approximately $41.0
million on a portfolio valued at $2,156.1 million at December 31, 2001. At December 31, 2000, the decrease in total return
would have been 2.7%, which equated to a decrease in market value of approximately $28.4 million on a portfolio valued at
$1,052.4 million. The foregoing reflects the use of an immediate time horizon, since this presents the worst-case scenario.
Credit spreads are assumed to remain constant in these hypothetical examples.
Currency
Our functional currency is the U.S. dollar. We write a substantial portion of our business in currencies other than U.S. dollars
and may, from time to time, experience exchange gains and losses and incur underwriting losses in currencies other than U.S.
dollars, which will in turn affect our consolidated financial statements.
36
RenaissanceRe Holdings Ltd. | Annual Report 2001
Our current foreign currency policy is to hold foreign currency assets, including cash and receivables, that approximate the
net monetary foreign currency liabilities, including claims and claim expense reserves and reinsurance balances payable. All
changes in the exchange rates are recognized currently in our statement of income. When necessary we will seek to hedge
our exposure to foreign currency transactions through the use of options, swaps and/or forward contracts. As of December
31, 2001, we did not have any outstanding options, swaps or forward contracts related to foreign currency exposure.
Effects of Inflation
The potential exists, after a catastrophe loss, for the development of inflationary pressures in a local economy. The
anticipated effects on us are considered in our catastrophe loss models. The effects of inflation are also considered in pricing
and in estimating reserves for unpaid claims and claim expenses. The actual effects of inflation on our results cannot be
accurately known until claims are ultimately settled.
Off Balance Sheet and Special Purpose Entity Arrangements
As of December 31, 2001, we have not entered into any guarantees, or guaranteed the liabilities of any non-consolidated
affiliates or subsidiaries or other non-related parties.
New Accounting Pronouncement
Effective January 1, 2002 we implemented SFAS No. 142, “Goodwill and Other Intangible Assets.” In accordance with SFAS
133, goodwill and other intangible assets are no longer being amortized but are reviewed periodically for impairment. The
adoption of SFAS 142 had no significant impact on our consolidated financial statements.
Current Outlook
The World Trade Center tragedy has caused significant changes to the market environment. Many insurance and reinsurance
companies are seeking and receiving higher prices for the risks that they assume and have substantially reduced their
exposures, including various exclusions for acts of terrorism and acts of war. These actions are being taken as a result of an
increased perception of risk for the industry in general, as well as an improved understanding of the correlation between,
and within, various classes of business that were previously believed to be independent by other companies. In addition,
there is a heightened sensitivity to credit quality as a number of other insurance companies have experienced downgrades in
their credit ratings.
Because RenaissanceRe experienced relatively limited losses from the World Trade Center tragedy, and continues to have
stable, high credit ratings, we believe we are well positioned to significantly increase our managed catastrophe premiums.
In addition, we are anticipating that we will expand our presence in the specialty reinsurance coverages, which by our
definition are coverages that are not specifically property catastrophe reinsurance coverages. In evaluating opportunities in
the specialty reinsurance market, we focus on those coverages which, like property catastrophe reinsurance, produce losses
that are infrequent in nature, but could be severe if they occur. Examples include aviation, satellite, finite and catastrophe
exposed workers compensation coverages.
We also anticipate that we will increase the premiums written by our Bermuda based primary insurance company, Glencoe.
Glencoe, which primarily provides catastrophe exposed primary property coverage on an excess and surplus lines basis,
wrote $12.9 million of gross written premiums in 2001.
As a result of the World Trade Center tragedy, we expect the cost of reinsurance protection to increase during 2002. If prices
rise to levels whereby we believe the purchase of reinsurance protection would become uneconomical, we may retain a
greater level of net risk in certain geographic regions. In order to obtain longer-term retrocessional capacity, we have entered
into multi-year contracts with respect to a portion of our portfolio.
The World Trade Center tragedy has caused insurers and reinsurers to seek to limit their potential exposures to losses from
terrorism attacks. We often exlcude terrorism in the reinsurance and insurance that we write, but do have potential exposures
to this risk. We are monitoring our aggregate exposures to terrorist attacks.
37
RenaissanceRe Holdings Ltd. | Annual Report 2001
Subsequent to the World Trade Center tragedy, a substantial amount of capital has entered the insurance and reinsurance
markets both through investments in established companies and through start-up ventures. The addition of new capital in
the marketplace may cause a reduction in prices of reinsurance contracts, or could shorten the time horizon of the price
increases for reinsurance contracts. Currently, however, we do not believe that the new capital has resulted in adverse
changes to the prevailing pricing structure in the property catastrophe reinsurance market. To the extent that the newly-
formed companies or established companies were to reduce the pricing of their products, this could force us to reduce our
future underwriting premiums.
Note on Forward Looking Statements
This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Act of 1934. Forward-looking statements are necessarily based on estimates and assumptions
that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which,
with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results
and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on
behalf of, us.
In particular, statements using words such as “may,” “should,” “estimate,” “expect,” “anticipate,” “intend,” “believe,” “predict,”
“potential,” or words of similar import generally involve forward-looking statements. For example, we have included certain
forward looking statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations"
with regard to trends in results, prices, volumes, operations, investment results, margins, overall market trends, risk
management and exchange rates. This Annual Report also contains forward looking statements with respect to our business
and industry, such as those relating to our strategy and management objectives, trends in market conditions, prices, market
standing and product volumes, investment results and pricing conditions in the reinsurance and insurance industries.
In light of the risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements in this
report should not be considered as a representation by us or any other person that our objectives or plans will be achieved.
Numerous factors could cause our actual results to differ materially from those in the forward-looking statements, including
the following:
(1) the occurrence of natural or man-made catastrophic events with a frequency or severity exceeding our estimates;
(2) a decrease in the level of demand for our reinsurance or insurance business, or increased competition in the industry;
(3) the lowering or loss of one of the financial or claims-paying ratings of ours or one or more of our subsidiaries;
(4) acts of terrorism or acts of war;
(5) risks associated with implementing our business strategies and our initiatives for organic growth, including risks relating
to managing that growth;
(6) slower than anticipated growth in our fee-based operations;
(7) changes in economic conditions, including interest and currency rate and other conditions which could affect our
investment portfolio;
(8) uncertainties in our reserving process;
(9) the ability of our reinsurers to honor their obligations;
(10) extraordinary events affecting our clients, such as bankruptcies and liquidations;
(11) loss of services of any one of our key executive officers;
(12) the passage of federal or state legislation subjecting Renaissance Reinsurance to supervision or regulation, including
additional tax regulation, in the United States or other jurisdictions in which we operate;
(13) challenges by insurance regulators in the United States to Renaissance Reinsurance’s claim of exemption from insurance
regulation under the current laws;
(14) a contention by the United States Internal Revenue Service that our Bermuda subsidiaries, including Renaissance
Reinsurance, are subject to U.S. taxation; and
(15) actions of competitors, including industry consolidation, the launch of new entrants and the development of competing
financial products.
The factors listed above should not be construed as exhaustive. Certain of these factors are described in more detail in our
filings with the Securities and Exchange Commission, including in our Annual Report on Form 10-K for the year ended
December 31, 2001, under the caption “Risk Factors.” We undertake no obligation to release publicly the results of any future
revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
38
RenaissanceRe Holdings Ltd. | Annual Report 2001
Management’s Responsibility for Financial Statements
M anagement is responsible for the integrity of the
consolidated financial statements and other financial
information presented in this Annual Report.
The
accompanying consolidated financial statements were
prepared in accordance with accounting principles generally
accepted in the United States, applying certain estimates and
judgements as required.
The Company’s internal controls are designed so that
transactions are authorized and executed in accordance with
management’s authorization,
to provide reasonable
assurance as to the integrity and reliability of the financial
statements and to adequately safeguard the assets against
unauthorized use or disposition. Such controls are based on
established policies and procedures and are implemented by
qualified personnel with an appropriate segregation of
duties.
Ernst & Young, independent auditors, are retained to audit
the Company’s consolidated financial statements and
express their opinion thereon. Their accompanying report
is based on audits conducted in accordance with auditing
standards generally accepted in the United States, which
the Company’s internal
includes the consideration of
controls and an examination, on a test basis, of evidence
supporting the amounts and disclosures in the financial
statements. These procedures enable them to obtain a
reasonable assurance about whether
financial
statements are free of material misstatement and provide a
reasonable basis for their opinion.
the
The Board of Directors exercises its responsibility for these
financial statements through its Audit Committee. The
Audit Committee meets periodically with the independent
auditors, both privately and with management present, to
review accounting, auditing, internal controls and financial
reporting matters.
James N. Stanard
Chairman and
Chief Executive Officer
John M. Lummis
Executive Vice President and
Chief Financial Officer
Report of Independent Auditors
To The Board of Directors and Shareholders of RenaissanceRe Holdings Ltd. and Subsidiaries.
W e have audited the accompanying consolidated
balance sheets of RenaissanceRe Holdings Ltd. and
Subsidiaries as of December 31, 2001 and 2000 and the
related consolidated statements of
income, changes in
shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2001. These
the
financial statements are the responsibility of
Company's management. Our responsibility is to express
an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with auditing
standards generally accepted in the United States. Those
standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles
used and significant estimates made by management, as
well as evaluating the overall financial statement
presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of RenaissanceRe Holdings
Ltd. and Subsidiaries as of December 31, 2001 and 2000,
and the consolidated results of their operations and their
cash flows for each of the three years in the period ended
in conformity with accounting
December 31, 2001,
principles generally accepted in the United States.
Hamilton, Bermuda
January 23, 2002
39
RenaissanceRe Holdings Ltd. | Annual Report 2001
Consolidated Balance Sheets
At December 31,
(in thousands of United States dollars, except per share amounts)
Assets
Investments and cash
2001
2000
Fixed maturity investments available for sale, at fair value
$ 1,282,483
$ 928,102
(Amortized cost $1,266,188 and $921,750 at December 31, 2001
and 2000, respectively) (Note 3)
Short term investments, at cost
Other investments
Cash and cash equivalents
Total investments and cash
Reinsurance premiums receivable
Ceded reinsurance balances
Losses and premiums recoverable (Note 4)
Accrued investment income
Deferred acquisition costs
Other assets
Total Assets
7,372
38,307
866,268
2,194,430
102,202
41,690
217,556
17,696
12,814
57,264
13,760
22,443
110,571
1,074,876
95,423
37,520
167,604
15,034
8,599
69,933
$ 2,643,652
$ 1,468,989
Liabilities, Minority Interests and Shareholders’ Equity
Liabilities
Reserve for claims and claim expenses (Note 5)
$ 572,877
$ 403,611
Reserve for unearned premiums
Debt (Note 6)
Reinsurance balances payable
Other liabilities
Total Liabilities
Minority interest - Company obligated, mandatorily redeemable capital
securities of a subsidiary trust holding solely junior subordinated
debentures of RenaissanceRe (Note 7)
Minority interest - DaVinci (Note 7)
125,053
183,500
115,967
58,650
1,056,047
87,630
274,951
Shareholders’ Equity (Note 8)
Series A preference shares: $1.00 par value - 6,000,000 shares authorized,
issued and outstanding at December 31, 2001 (2000 - nil).
150,000
Common shares and additional paid-in capital: $1.00 par value - authorized
225,000,000 shares; issued and outstanding at December 31, 2001
22,630,883 shares (2000 - 19,621,267 shares)
Unearned stock grant compensation (Note 15)
Accumulated other comprehensive income
Retained earnings
Total Shareholders’ Equity
264,623
( 20,163 )
16,295
814,269
1,225,024
112,541
50,000
50,779
63,610
680,541
87,630
-
-
22,999
(11,716 )
6,831
682,704
700,818
Total Liabilities, Minority Interests and Shareholders’ Equity
$ 2,643,652
$ 1,468,989
See accompanying notes to the consolidated financial statements.
40
RenaissanceRe Holdings Ltd. | Annual Report 2001
Consolidated Statements of Income
Years Ended December 31,
2001
2000
1999
(in thousands of United States dollars, except per share amounts)
Revenues
Gross premiums written
$ 501,321
$ 433,002
$ 351,305
Net premiums written
Decrease (increase) in unearned premiums
$ 339,547
$ 293,303
$ 213,513
( 6,482 )
(25,622 )
7,604
Net premiums earned
Net investment income (Note 3)
Net foreign exchange gains (losses)
Other income
Net realized gains (losses) on investments (Note 3)
Total Revenues
Expenses
Claims and claim expenses incurred (Note 5)
Acquisition costs
Operational expenses
Corporate expenses
Interest expense
Total Expenses
333,065
75,156
( 1,667 )
16,244
18,096
267,681
77,868
378
10,959
(7,151 )
221,117
60,334
(411 )
4,915
(15,720 )
440,894
349,735
270,235
149,917
45,359
38,603
11,485
7,249
108,604
38,530
37,954
8,022
17,167
77,141
25,500
36,768
9,888
9,934
252,613
210,277
159,231
Income before minority interests and taxes
188,281
139,458
111,004
Minority interest - Company obligated, mandatorily redeemable
capital securities of a subsidiary trust holding solely junior
subordinated debentures of RenaissanceRe (Note 7)
Minority interest - DaVinci (Note 7)
Income before taxes
Income tax benefit (expense) (Note 12)
Net income
Dividends on Series A preference shares
( 7,484 )
( 751 )
180,046
( 14,262 )
165,784
( 1,418 )
(7,582 )
-
131,876
(4,648 )
(8,288 )
-
102,716
1,525
127,228
104,241
-
-
Net income available to common shareholders
$ 164,366
$ 127,228
$ 104,241
Earnings per common share - basic
Earnings per common share - diluted
$
$
8.29
7.90
$ 6.68
$ 6.50
$
5.10
$ 5.05
See accompanying notes to the consolidated financial statements.
41
RenaissanceRe Holdings Ltd. | Annual Report 2001
Consolidated Statements of Changes in Shareholders’ Equity
Years Ended December 31,
( in thousands of United States dollars, except per share amounts )
2001
2000
1999
Series A preference shares
Issuance of shares
Balance - December 31
Common shares & additional paid-in capital
Balance - January 1
Issuance of common shares
Exercise of stock options & restricted share awards
Repurchase of shares
Issuance costs of preference shares and other
Balance - December 31
Unearned stock grant compensation
Balance - January 1
Stock grants awarded
Amortization
Balance - December 31
Accumulated other comprehensive income
Balance - January 1
Net unrealized gains (losses) on investments,
net of adjustment (see disclosure below)
Balance - December 31
Retained earnings
Balance - January 1
Net income
Dividends on common shares
Dividends on preference shares
Repurchase of shares
Other
Balance - December 31
$ 150,000
$
150,000
$
-
-
-
-
22,999
232,525
14,652
-
( 5,553 )
264,623
( 11,716 )
( 15,653 )
7,206
( 20,163 )
19,686
-
3,495
(672 )
490
22,999
(10,026 )
(7,215 )
5,525
(11,716 )
39,035
-
6,461
(26,695)
885
19,686
(8,183)
(5,382)
3,539
(10,026)
6,831
(18,470 )
(5,144)
9,464
16,295
25,301
6,831
(13,326)
(18,470)
682,704
165,784
( 32,801 )
( 1,418 )
-
-
609,139
127,228
(29,228 )
-
(24,435 )
-
814,269
682,704
586,524
104,241
(28,885)
-
(53,403)
662
609,139
Total Shareholders’ Equity
$ 1,225,024
$ 700,818
$ 600,329
Comprehensive Income
Net income
Other comprehensive income (loss)
Comprehensive Income
$ 165,784
$ 127,228
$ 104,241
9,464
25,301
(13,326)
$ 175,248
$ 152,529
$ 90,915
Disclosure Regarding Net Unrealized Gains (Losses)
Net unrealized holding gains (losses) arising during period
$ 27,560
$ 18,150
$
(29,046)
Net realized losses (gains) included in net income
( 18,096 )
7,151
15,720
Net unrealized gains (losses) on investments
$
9,464
$ 25,301
$
(13,326)
See accompanying notes to the consolidated financial statements.
42
RenaissanceRe Holdings Ltd. | Annual Report 2001
Consolidated Statements of Cash Flows
Years Ended December 31,
( in thousands of United States dollars )
Cash Flows Provided by Operating Activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Net realized losses (gains) on investments
Reinsurance balances, net
Ceded reinsurance balances
Accrued investment income
Reserve for unearned premiums
Reserve for claims and claim expenses, net
Other, net
Net cash provided by operating activities
Cash Flows Applied to Investing Activities:
Proceeds from maturities and sales of investments
Purchase of investments available for sale
Net sales (purchases) of short term and other investments
Net cash applied to investing activities
Cash Flows Provided by (Applied to) Financing Activities:
Sale (purchase) of common shares
Net proceeds from (repayment of) bank loan
Sale of preference shares
Issuance of senior debt
Minority interests
Dividends paid
Purchase of capital securities
Net cash provided by (applied to) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year
See accompanying notes to the consolidated financial statements.
2001
2000
1999
$ 165,784
$ 127,228
$ 104,241
3,190
( 18,096 )
58,408
( 4,169 )
( 2,661 )
12,513
119,314
7,199
341,482
315
7,151
(14,346 )
12,717
(1,578 )
14,155
86,033
19,153
250,828
9,810
15,720
(27,595 )
(8,867 )
(3,488 )
3,920
51,524
(14,960 )
130,305
3,290,264
2,171,484
( 3,633,332 )
( 2,187,007 )
6,384
( 336,684 )
( 1,001 )
( 16,524 )
1,986,498
(2,146,361 )
13,543
(146,320 )
232,525
( 16,500 )
145,275
148,868
274,951
( 34,220 )
-
750,899
755,697
110,571
( 25,107 )
( 200,000 )
(80,098 )
150,000
-
-
-
( 29,228 )
( 1,510 )
( 255,845 )
( 21,541 )
132,112
-
-
-
(28,885 )
(8,591 )
32,426
16,411
115,701
$ 866,268
$ 110,571
$ 132,112
43
RenaissanceRe Holdings Ltd. | Annual Report 2001
Notes to Consolidated Financial Statements
December 31, 2001 (amounts in tables expressed in thousands of United States dollars, except per share amounts)
Note 1. Organization
RenaissanceRe Holdings Ltd. ("RenaissanceRe", or the “Company”), was formed under the laws of Bermuda on June 7,
1993. Through its subsidiaries it provides reinsurance and insurance coverage where the risk of natural and man-made
catastrophes represents a significant component of the overall exposure.
• Renaissance Reinsurance Ltd. ("Renaissance Reinsurance") is the Company's principal subsidiary and provides
property catastrophe reinsurance coverage to insurers and reinsurers on a worldwide basis. To a lesser extent,
Renaissance Reinsurance also writes non-catastrophe reinsurance in certain specialty lines.
• The Company also manages property catastrophe reinsurance written on behalf of joint ventures, including Top
Layer Reinsurance Ltd. ("Top Layer Re"), Overseas Partners Cat Ltd. ("Opcat") and DaVinci Reinsurance Ltd.
(“DaVinci”). DaVinci was formed in October 2001 with other equity investors and is consolidated in the
Company’s financial statements. The Company acts as exclusive underwriting manager for these joint ventures in
return for fee-based income and profit participation.
• The Company's primary operations include Glencoe Insurance Ltd. ("Glencoe"), DeSoto Insurance Company
("DeSoto"), DeSoto Prime Insurance Company ("DeSoto Prime") and Stonington Insurance Company
(“Stonington”, formerly Nobel Insurance Company). Glencoe provides catastrophe exposed property coverage
on an insurance and reinsurance basis and DeSoto and DeSoto Prime operate in the U.S. homeowners market.
Stonington is licensed to operate in 50 states in the U.S.
Note 2. Significant Accounting Policies
Basis of presentation
The consolidated financial statements have been prepared on the basis of United States generally accepted
accounting principles (“GAAP”) and include the accounts of RenaissanceRe and its wholly-owned and
majority-owned subsidiaries and DaVinci, which are collectively referred to herein as the “Company”. All intercompany
transactions and balances have been eliminated on consolidation. Minority interests represent the interests of external
parties in respect of net income and shareholders’ equity of RenaissanceRe Capital Trust (the “Trust”) and DaVinciRe
Holdings Ltd. (Note 7). The Company has also established a wholly-owned subsidiary, RenaissanceRe Capital Trust II,
which is a financing subsidiary available to issue certain types of securities on behalf of the Company. As of December
31, 2001, no such securities had been issued. Certain comparative information has been reclassified to conform with the
current year presentation.
Use of estimates in financial statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported and disclosed amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ materially from those estimates. The significant estimates reflected in the
Company’s financial statements include, but are not limited to, the reserves for claims and claim expenses and the related
losses and premiums recoverable.
Premiums and related expenses
Premiums are recognized as income, net of any applicable retrocessional coverage, over the terms of the related contracts
and policies. Premiums written are based on policy and contract terms and include estimates based on information
received from both insureds and ceding companies. Subsequent differences arising on such estimates are recorded in the
period in which they are determined. Reserve for unearned premiums represents the portion of premiums written that
relate to the unexpired terms of contracts and policies in force. Such reserves are computed by pro-rata methods based
on statistical data or reports received from ceding companies.
Acquisition costs, consisting principally of commissions and brokerage expenses incurred at the time a contract or policy
is issued, are deferred and amortized over the period in which the related premiums are earned. Deferred policy
acquisition costs are limited to their estimated realizable value based on the related unearned premiums. Anticipated
claims and claim expenses, based on historical and current experience, and anticipated investment income related to those
premiums are considered in determining the recoverability of deferred acquisition costs.
44
RenaissanceRe Holdings Ltd. | Annual Report 2001
Reinsurance
Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the
reinsured policies. The Company evaluates the financial condition of its reinsurers through internal evaluation by senior
management. For retroactive reinsurance contracts, the amount by which liabilities associated with the reinsured policies
exceed the amount paid for reinsurance coverage is deferred and amortized into income using the recovery method.
Claims and claim expenses
The reserve for claims and claim expenses includes estimates for unpaid claims and claim expenses on reported losses as
well as an estimate of losses incurred but not reported. The reserve is based on individual claims, case reserves and other
reserve estimates reported by insureds and ceding companies as well as management estimates of ultimate losses.
Inherent in the estimates of ultimate losses are expected trends in claim severity and frequency and other factors which
could vary significantly as claims are settled. Accordingly, ultimate losses may vary materially from the amounts provided
in the consolidated financial statements. These estimates are reviewed regularly and, as experience develops and new
information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are reflected in the
consolidated statement of income in the period in which they become known and are accounted for as changes in
estimates.
Investments and cash
Investments are considered available for sale and are reported at fair value. The net unrealized appreciation or
depreciation on investments is included in accumulated other comprehensive income.
Investment transactions are
recorded on the trade date with balances pending settlement reflected in the balance sheet as a component of other assets
or other liabilities.
Realized gains or losses on the sale of investments are determined on the basis of the specific identification method and
include adjustments to the net realizable value of investments for declines in value that are considered to be other-than-
temporary. Net investment income includes interest and dividend income together with amortization of market
premiums and discounts and is net of investment management and custody fees. The amortization of premium and
accretion of discount for fixed maturity securities is computed utilizing the interest method. The effective yield utilized
in the interest method is adjusted when sufficient information exists to estimate the probability and timing of
prepayments. Fair values of investments are based on quoted market prices, or when such prices are not available, by
reference to broker or underwriter bid indications.
Short term investments, which have a maturity of one year or less when purchased, are carried at cost which approximates
fair value. Cash equivalents include money market instruments with a maturity of ninety days or less when purchased.
Goodwill
The Company amortizes goodwill on a straight-line basis over the expected recovery period, principally twenty years.
Goodwill is periodically reviewed for impairment and amounts deemed unrecoverable are adjusted accordingly. Goodwill
is included in other assets on the consolidated balance sheet and is expensed through corporate expenses in the
consolidated statement of income. The Financial Accounting Standards Board (“FASB”) has recently issued Statement of
Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” As a result, the Company’s
goodwill existing at December 31, 2001 will cease to be amortized effective January 1, 2002, and will, thereafter, be subject
to an annual impairment review. The adoption of SFAS 142 will have no significant impact on the Company’s financial
statements.
Earnings per share
Basic earnings per share is based on weighted average Common Shares and excludes any dilutive effects of options and
restricted stock. Diluted earnings per share assumes the exercise of all dilutive stock options and restricted stock grants.
Foreign exchange
The Company’s functional currency is the United States dollar. Revenues and expenses denominated in foreign currencies
are translated at the prevailing exchange rate at the transaction date. Monetary assets and liabilities denominated in
foreign currencies are translated at exchange rates in effect at the balance sheet date, which may result in the recognition
of exchange gains or losses which are included in the determination of net income.
45
RenaissanceRe Holdings Ltd. | Annual Report 2001
Notes to Consolidated Financial Statements
Stock incentive compensation plans
The Company has elected to follow Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued
to Employees” (“APB 25”) and related interpretations in accounting for its employee stock options. The alternative fair
value accounting provided for under SFAS No. 123, “Accounting for Stock Based Compensation”, requires the use of
option valuation models that were not necessarily developed for use in valuing employee stock options. It is the opinion
of management that disclosure of the pro-forma impact of fair values provides a more relevant and informative
presentation of the impact of stock options issued to employees than financial statement recognition of such amounts.
Taxation
The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred income
taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A valuation allowance against the deferred tax asset
is provided for if and when the Company believes that a portion of the deferred tax asset may not be realized in the near
term.
Note 3. Investments
The amortized cost, fair value and related unrealized gains and losses on fixed maturity investments are as follows:
At December 31, 2001
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
U.S. asset backed securities
$
292,175
$
3,804
$
(1,188)
$
294,791
U.S. corporate bonds
U.S. Government bonds
U.S. mortgage backed securities
Non-U.S. government bonds
Non-U.S. corporate bonds
At December 31, 2000
275,265
272,698
201,209
160,732
64,109
4,861
3,972
3,196
5,399
2,673
(2,885)
(774)
(689)
(760)
(1,314)
277,241
275,896
203,716
165,371
65,468
$ 1,266,188
$ 23,905
$
(7,610)
$ 1,282,483
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
U.S. asset backed securities
$
201,828
$
3,628
$
(17)
$
205,439
U.S. corporate bonds
U.S. Government bonds
U.S. mortgage backed securities
Non-U.S. government bonds
Non-U.S. corporate bonds
229,466
264,183
100,651
107,312
18,310
4,394
3,725
2,276
4,010
257
(8,587)
(14)
(213)
(1,100)
(2,007)
225,273
267,894
102,714
110,222
16,560
$
921,750
$ 18,290
$ (11,938)
$
928,102
46
RenaissanceRe Holdings Ltd. | Annual Report 2001
Contractual maturities of fixed maturity securities are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
At December 31, 2001
Due within one year
Due after one through five years
Due after five through ten years
Due after ten years
U.S. asset backed securities
U.S. mortgage backed securities
Amortized
Cost
Fair
Value
$
10,589
487,302
184,747
90,166
292,175
201,209
$1,266,188
$
$
10,797
494,286
185,473
93,420
294,791
203,716
1,282,483
The following table summarizes the composition of the fair value of the fixed maturity portfolio by ratings assigned by
rating agencies (e.g. Standard & Poor’s Corporation) or, with respect to non-rated issues, as estimated by the Company’s
investment managers.
AAA
AA
A
BBB
BB
B
CCC
CC
D
NR
At December 31,
2001
2000
69.9%
7.6
6.3
7.3
2.7
4.4
0.6
0.2
0.1
0.9
100.0%
69.1%
9.4
5.5
5.1
2.9
5.5
0.3
0.1
-
2.1
100.0%
Investment income
The components of net investment income are as follows:
Fixed maturities and other investments
Short term investments
Cash and cash equivalents
Investment expenses
Net investment income
2001
66,123
7,785
3,285
77,193
2,037
75,156
$
$
Year Ended December 31,
2000
1999
$
$
62,588
6,213
10,858
79,659
1,791
77,868
$
$
52,470
6,200
2,898
61,568
1,234
60,334
The analysis of realized gains (losses) and the change in unrealized gains (losses) on investments is as follows:
Gross realized gains
Gross realized losses
Net realized gains (losses) on investments
Unrealized gains (losses)
Total realized and unrealized gains (losses)
on investments
$
2001
78,247
(60,151)
18,096
9,464
Year Ended December 31,
$
$
2000
11,173
(18,324)
(7,151)
25,301
1999
4,619
(20,339)
(15,720)
(13,326)
$ 27,560
$
18,150
$
(29,046)
47
RenaissanceRe Holdings Ltd. | Annual Report 2001
Notes to Consolidated Financial Statements
At December 31, 2001 approximately $12.1 million (2000 - $15.0 million) of cash and investments at fair value were on
deposit with various regulatory authorities as required by law.
Alternative investments
Included in other investments are investments in hedge funds and a fund holding bank loans of $28.4 million
(2000 - $15.5 million) and private equity investments of $4.9 million (2000 - $1.7 million). The Company has committed
capital to its private equity partnerships of $25.0 million, of which $5.0 million has been contributed at December 31, 2001.
Catastrophe linked instruments
The Company has assumed and ceded risk through catastrophe linked securities and derivative instruments under which
losses or recoveries are triggered by an industry loss index or geological or physical variables. During 2001, 2000 and
1999, the Company recognized gains on these contracts of $2.7 million, $nil, and $2.5 million, respectively, which are
included in other income. The fair value of these contracts at December 31, 2001 is a loss of $1.0 million, which is
reflected in other income. Also included in other income are payments of $7.3 million for derivative type contracts to
protect the Company’s property catastrophe reinsurance business.
Note 4. Ceded Reinsurance
The Company utilizes reinsurance to reduce its exposure to large losses. The Company currently has in place contracts
that provide for recovery of a portion of certain claims and claim expenses from reinsurers in excess of various retentions
and loss warranties. The Company would remain liable to the extent that any reinsurance company fails to meet its
obligations. The earned reinsurance premiums ceded were $155.7 million, $149.8 million and $128.1 million for 2001,
2000 and 1999, respectively.
Other than loss recoveries, certain of the Company's ceded reinsurance contracts also provide for recoveries of additional
premiums, reinstatement premiums and lost no claims bonuses which are incurred when losses are ceded to reinsurance
contracts. Total recoveries netted against premiums and claims and claim expenses incurred were $160.4 million, $52.0
million and $255.3 million for 2001, 2000 and 1999, respectively. As of December 31, 2001, the Company has recorded a
$7.5 million valuation allowance against these recoveries.
Included in losses and premiums recoverable as of December 31, 2001, are recoverables of $14.4 million (2000 - $23.2
million) which relate to a retroactive reinsurance contract entered into by Stonington. SFAS No. 113, “Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts”, requires that adverse development of the
reserves covered by this contract be reflected in the Company’s statement of income when the adverse development
becomes known. However, the offsetting recovery under the contract is required to be deferred and recognized into
income, as a reduction to claims and claim expenses as payments are received from the reinsurer. The balance of the
deferred recovery as of December 31, 2001 and 2000 was $8.4 million and $13.9 million, respectively.
Note 5. Reserve for Claims and Claim Expenses
For the Company’s reinsurance operations, estimates of claims and claim expenses are based in part upon the estimation
of claims resulting from catastrophic events. Estimation by the Company of claims resulting from catastrophic events
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.
For both the Company's reinsurance and primary operations, the Company uses statistical and actuarial methods to
estimate ultimate expected claims and claim expenses. The period of time from the reporting of a loss to the Company
and the settlement of the Company's liability may be several years. During this period, additional facts and trends will be
revealed. As these factors become apparent, case reserves will be adjusted, sometimes requiring an increase in the overall
reserves of the Company, and at other times requiring a reallocation of incurred but not reported (“IBNR”) reserves to
specific case reserves. These estimates are reviewed regularly, and such adjustments, if any, are reflected in results of
operations in the period in which they become known and are accounted for as changes in estimates.
48
RenaissanceRe Holdings Ltd. | Annual Report 2001
Activity in the liability for unpaid claims and claim expenses is summarized as follows:
Net reserves as of January 1
Net incurred related to:
Current year
Prior years
Total net incurred
Net paid related to:
Current year
Prior years
Total net paid
Total net reserves as of December 31
Losses recoverable as of December 31
Total gross reserves as of December 31
2001
Year Ended December 31,
2000
1999
$ 237,014
$ 174,913
$ 197,512
165,914
(15,997)
149,917
20,470
11,140
31,610
355,321
217,556
$ 572,877
100,168
8,436
108,604
111,720
(34,579)
77,141
12,545
33,958
46,503
237,014
166,597
$ 403,611
44,701
55,039
99,740
174,913
303,688
$ 478,601
The prior year development in 2001 was due primarily to net additional recoveries on 1999 property catastrophe loss
events. The prior year development in 2000 was due primarily to development on the 1999 losses related to the European
storms. During 1999, the prior year development was due primarily to favorable development on property catastrophe
reserves for 1998 and prior. The Company’s total gross reserve for incurred but not reported claims was $286.7 million
as of December 31, 2001 (2000 - $228.8 million).
Note 6. Debt
The Company has a $310 million committed revolving credit and term loan agreement with a syndicate of commercial banks.
During the third quarter of 2001, the Company repaid its borrowings of $16.5 million on this facility. As of December 31, 2001
there was no outstanding balance, compared to $8.0 million outstanding at December 31, 2000. Interest rates on the facility are
based on a spread above LIBOR and averaged 5.45 percent during 2001 (7.03 percent in 2000). The credit agreement contains
certain financial covenants including requirements that consolidated debt to capital does not exceed a ratio of 0.35:1;
consolidated net worth must exceed the greater of $100 million or 125 percent of consolidated debt; and 80 percent of invested
assets must be rated BBB- by S&P or Baa3 by Moody’s Investor Service or better. The Company was in compliance with all the
covenants of this revolving credit and term loan agreement as at December 31, 2001. The fair value of the borrowings
approximate the carrying value because such loans reprice frequently.
In July 2001, the Company issued $150 million of 7% Senior Notes due July 2008. The Company used a portion of the proceeds
to repay $16.5 million of outstanding amounts under the $310 million revolving credit and term loan agreement. Interest on
the notes is payable on January 15 and July 15 of each year. The notes can be redeemed by the Company prior to maturity subject
to payment of a “make-whole” premium; however, the Company has no current intentions of calling the notes. The notes, which
are senior obligations of the Company, contain various covenants, including limitations on mergers and consolidations,
restriction as to the disposition of stock of designated subsidiaries and limitations on liens on the stock of designated
subsidiaries. As of December 31, 2001 the fair value of the notes is $151.1 million.
Renaissance U.S. has an $18.5 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 4.71 percent during 2001 (6.98 percent in
2000). As of December 31, 2001 the balance outstanding was $33.5 million (2000 - $42 million). The credit agreement contains
certain financial covenants, the primary one being that, RenaissanceRe, be its principal guarantor, maintain a ratio of liquid
assets to debt service of 4:1. The term loan has mandatory repayment provisions approximating $9 million per year in each of
years 2002 and 2003. The loan facility of $15 million is repayable in 2003. During 2001, the Company repaid the second
installment of $8.5 million in accordance with the terms of the loan. The Company was in compliance with all the covenants
of this term loan and revolving loan facility as at December 31, 2001. The fair value of the borrowings approximate the carrying
values because such loans reprice frequently.
Interest payments on the above debt totaled $7.3 million, $17.2 million and $8.3 million for the years ended December 31, 2001,
2000 and 1999, respectively.
49
RenaissanceRe Holdings Ltd. | Annual Report 2001
Notes to Consolidated Financial Statements
Note 7. Minority Interests
Capital Securities
On March 7, 1997 the Company issued $100 million of Company obligated, mandatorily redeemable capital securities of
a subsidiary trust holding solely $103,092,783 of the Company’s 8.54 percent junior subordinated debentures due March
1, 2027 (“Capital Securities”) issued by the Trust. The capital securities pay cumulative cash distributions at an annual
rate of 8.54 percent, payable semi-annually. The Trust is a wholly owned subsidiary of the Company and is consolidated
into the Company’s consolidated financial statements. The capital securities and the related dividends, are reflected in the
consolidated financial statements as a minority interest.
During 2000 and 1999 the Company repurchased $2.0 million and $10.4 million of the capital securities, respectively,
recognizing gains of $0.5 million and $1.8 million, respectively, which are reflected as a change in shareholders’ equity.
No capital securities were repurchased in 2001.
DaVinci
In October 2001, the Company formed DaVinci with other equity investors. The Company currently owns a minority
economic interest but controls a majority of the outstanding voting rights. The results of DaVinci are reflected in the
consolidated financial statements of the Company. The portion of DaVinci’s operations that relate to the minority
shareholders is reflected in the consolidated financial statements as minority interest.
Note 8. Shareholders’ Equity
The aggregate authorized capital of the Company is 325,000,000 shares consisting of 225,000,000 common shares and
100,000,000 preference shares. The Company’s 225,000,000 authorized $1.00 par value common shares consist of three
separate series with differing voting rights as follows:
Full Voting Common Shares
(includes all shares registered and available to the public)
Diluted Voting Class I Common Shares
Diluted Voting Class II Common Shares
At December 31, 2001
Remaining Authorized
Outstanding
175,738,949
12,590,585
185,532
188,515,066
21,447,683
1,183,200
-
22,630,883
On October 15, 2001, the Company issued 2.5 million common shares for proceeds, net of fees, discounts and
commissions, of approximately $232.5 million. Costs associated with the sale of the shares, totaling approximately $3.2
million, were deducted from the related proceeds. The net amount received in excess of common share par value was
recorded in additional paid-in capital.
In November 2001, the Company issued 6,000,000 $1.00 par value Series A preference shares at $25.00 per share. The
shares may be redeemed at $25.00 per share at the Company’s option on or after November 19, 2006. Dividends are
cumulative from the date of original issuance and are payable quarterly in arrears at 8.10% when, if, and as declared by
the Board of Directors. If the Company submits a proposal to our shareholders concerning an amalgamation or submits
any proposal that, as a result of any changes to Bermuda law, requires approval of the holders of our preference shares to
vote as a single class, the Company may redeem the shares prior to November 19, 2006 at $26.00 per share. The preference
shares have no stated maturity and are not convertible into any other securities of the Company.
The Diluted Voting I Shares and the Diluted Voting II Shares (together the Diluted Voting Shares) were authorized at a
special general meeting of shareholders on December 23, 1996. Subsequent to the authorization, affiliates and other parties
related to General Electric Investment Corporation (“GEI”) exchanged 5.7 million common shares for 4.2 million Diluted
Voting I Shares and 1.5 million Diluted Voting II Shares, and as such are the sole holders of such diluted voting securities.
50
RenaissanceRe Holdings Ltd. | Annual Report 2001
The Diluted Voting shareholders vote together with the common shareholders. The Diluted Voting I Shares are limited
to a fixed voting interest in the Company of up to 9.9 percent on most corporate matters. The Diluted Voting shareholders
are entitled to the same rights, including receipt of dividends and the right to vote on certain significant corporate
matters, and are subject to the same restrictions as the common shareholders. The Company currently does not intend
to register or list the Diluted Voting Shares on the New York Stock Exchange.
In February and May of 2000, the Board authorized share repurchase programs of $25.0 million each. The value of the
remaining shares authorized under the repurchase programs is $27.1 million. For the year ended December 31, 2000 the
Company repurchased 671,900 common shares at an aggregate price of $25.1 million. During 1999 the Company
repurchased a total of 2,226,700 common shares at an aggregate price of $80.1 million. No shares were repurchased
during 2001. Common shares repurchased by the Company are normally cancelled and retired.
During 2001 and 2000, GEI completed the sale of 0.3 million and 1.0 million Diluted Voting I Shares, respectively,
pursuant to shelf registrations on Form S-3. The Diluted Voting I shares sold by GEI were subsequently converted into
common shares.
On November 17, 1999, the Company purchased and cancelled 700,000 common shares at $38.00 per share for an
aggregate purchase price of $26.6 million from one of the Company’s founding institutional shareholders.
Note 9. Earnings Per Share
The Company utilizes SFAS No. 128, “Earnings per Share” to account for its weighted average shares. The numerator in
both the Company’s basic and diluted earnings per share calculations is identical. The following table sets forth the
reconciliation of the denominator from basic to diluted weighted average shares outstanding (in thousands of per share
amounts):
Weighted average shares - basic
Per share equivalents of employee
stock options and restricted shares
Weighted average shares - diluted
2001
19,830
967
20,797
Year Ended December 31,
2000
1999
19,034
20,444
542
19,576
184
20,628
Note 10. Related Party Transactions and Major Customers
Other assets include the Company’s investment in Top Layer Re of $23.4 million. Top Layer Re, which is 50% owned by
Renaissance Reinsurance, is carried using the equity method. The Company’s earnings from Top Layer Re and the
Company’s performance-based fee from OPCat totaled $18.0 million for the year ended December 31, 2001 (2000 - $9.8
million) and are included in other income. During 2001 and 2000, the Company also received distributions from Top
Layer Re of $7.5 million and $1.2 million, respectively.
During the years ended December 31, 2001, 2000 and 1999, the Company received 76.9%, 78.3%, and 78.8%, respectively,
of its premium assumed from its four largest reinsurance brokers. Subsidiaries and affiliates of the Benfield Group PLC,
Marsh Inc., Willis Faber and AON Re Group accounted for approximately 28.0%, 23.0%, 14.0% and 11.9%, respectively,
of the Company’s premiums written in 2001.
51
RenaissanceRe Holdings Ltd. | Annual Report 2001
Notes to Consolidated Financial Statements
Note 11. Dividends
During 2001, four regular quarterly dividends of $0.40 per share were paid to shareholders of record as of February 20,
May 18, August 14, and November 22. During 2000, four regular quarterly dividends of $0.375 per share were paid to
shareholders of record as of February 17, May 18, August 17, and November 16. During 1999, four regular quarterly
dividends of $0.35 per share were paid to shareholders of record as of February 18, May 28, August 19, and November 18.
The total amount of dividends paid to holders of the Common Shares during 2001, 2000 and 1999 was $32.8 million,
$29.2 million and $28.9 million, respectively.
Note 12. Taxation
Under current Bermuda law, the Company is not required to pay taxes in Bermuda on either income or capital gains.
Income from the Company’s U.S.-based subsidiaries is subject to taxes imposed by U.S. authorities. Renaissance
Reinsurance of Europe is subject to the taxation laws of Ireland.
Income tax expense consists of:
U.S. federal
U.S. state and local
At December 31, 2001
Current
Deferred
Total
$
$
2,369
21
2,390
$
$
11,872
-
11,872
$
$
14,241
21
14,262
The tax effects of temporary differences that give rise to significant portions of the deferred taxes assets and deferred tax
liabilities are presented below:
Deferred tax assets:
Allowance for doubtful accounts
Claims reserves, principally due to discounting for tax
Retroactive reinsurance gain
Net operating loss carryforwards
Others
Deferred tax liabilities:
Other
Net deferred tax asset before valuation allowance
Valuation allowance
Net deferred tax asset
At December 31,
2001
2000
$
1,627
1,071
2,861
19,710
1,614
26,883
( 480 )
26,403
( 22,155 )
4,248
$
$
$
583
1,726
4,716
16,980
3,649
27,654
( 883 )
26,771
( 8,218 )
18,553
The net deferred tax asset is included in other assets on the consolidated balance sheet. The net operating loss
carryforward of $58.5 million (2000 - $49.9 million) is available to offset regular taxable U.S. income during the
carryforward period (through 2020).
During 2001, the Company recorded additions to the valuation allowance of $14.0 million against the net deferred tax
asset. Although the net operating losses which gave rise to a deferred tax asset have a carryforward period through 2020,
the Company’s U.S. operations did not generate significant taxable income during the years ended December 31, 2001 and
2000. Accordingly, under the circumstances, and until the Company’s U.S. operations begin to generate significant taxable
income, the Company believes that it is necessary to establish and maintain a valuation allowance against a significant
portion of the net deferred tax asset.
52
RenaissanceRe Holdings Ltd. | Annual Report 2001
Note 13. Geographic Information
Financial information relating to gross premiums by geographic region is as follows:
United States and Caribbean
Worldwide
Worldwide (excluding U.S.) (1)
Other
Europe
Australia and New Zealand
Specialty reinsurance premium (2)
Total reinsurance
United States-primary
Total gross written premium
2001
180,305
93,474
45,111
22,433
20,414
12,159
77,468
451,364
49,957
501,321
$
$
Year Ended December 31,
2000
1999
$
$
145,871
98,923
60,382
9,559
22,071
8,280
37,730
382,816
50,186
433,002
$
$
173,598
46,712
27,276
2,370
26,437
3,212
2,740
282,345
68,960
351,305
(1) The category “Worldwide (excluding U.S.)” reflects contracts that cover more than one geographic region (other than the U.S.). The Company’s exposure in this
category for gross premiums written to date is predominantly from Europe and Japan.
(2) The category “Specialty reinsurance” includes coverages related to non-catastrophe reinsurance risks assumed by us. These coverages primarily include exposure
to claims from accident and health, aviation, finite and satellite risks assumed by us.
Note 14. Segment Reporting
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 auto and aviation
coverages written by Stonington, which have been substantially reinsured.
The activities of the Company’s Bermuda and U.S. holding companies are the primary contributors to the results reflected
outside of the reinsurance and primary segments. The pre-tax loss of the holding companies 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 companies and, for 2001, income related
to the Company’s index based contracts.
53
RenaissanceRe Holdings Ltd. | Annual Report 2001
Notes to Consolidated Financial Statements
Data for the years ended December 31, 2001, 2000 and 1999 was as follows:
Year Ended December 31, 2001
Reinsurance
Primary
Other
Total
Gross premiums written
Net premiums written
Total revenues
Income (loss) before taxes
$ 451,364
326,680
417,518
192,602
$ 49,957
12,867
17,467
2,673
$ -
-
5,909
(15,229)
$ 501,321
339,547
440,894
180,046
Assets
2,062,547
348,796
232,309
2,643,652
Claims and claim expense ratio
Underwriting expense ratio
Combined ratio
46.8%
22.2
69.0%
(30.9%)
149.6
118.7%
-
-
-
45.0%
25.2
70.2%
Year Ended December 31, 2000
Reinsurance
Primary
Other
Total
Gross premiums written
Net premiums written
Total revenues
Income (loss) before taxes
$ 382,816
287,941
325,637
150,003
$ 50,186
5,362
13,280
(4,406)
$ -
-
10,818
(13,721)
$ 433,002
293,303
349,735
131,876
Assets
1,169,568
251,740
47,681
1,468,989
Claims and claim expense ratio
Underwriting expense ratio
Combined ratio
40.4%
26.8
67.2%
47.0%
98.1
145.1%
-
-
-
40.6%
28.5
69.1%
Year Ended December 31, 1999
Reinsurance
Primary
Other
Total
Gross premiums written
Net premiums written
Total revenues
Income (loss) before taxes
$ 282,345
205,192
232,715
117,408
$ 68,960
8,321
31,377
8,926
$ -
-
6,143
(23,618)
$ 351,305
213,513
270,235
102,716
Assets
1,112,692
274,401
230,150
1,617,243
Claims and claim expense ratio
Underwriting expense ratio
Combined ratio
32.7%
26.3
59.0%
52.2%
42.9
95.1%
-
-
-
34.9%
28.1
63.0%
54
RenaissanceRe Holdings Ltd. | Annual Report 2001
Note 15. Stock Incentive Compensation and Employee Benefit Plans
The Company has a stock incentive plan under which all employees of the Company and its subsidiaries may be granted
stock options and restricted stock awards. A stock option award under the Company’s stock incentive plan allows for the
purchase of the Company’s common shares at a price that is generally equal to the five day average closing price of the
common shares immediately prior to the date of grant. Options to purchase common shares are granted periodically by
the Board of Directors, generally vest over four years and generally expire ten years from the date of grant.
The Company adopted the disclosure-only method under SFAS No. 123, as of December 31, 1996, and continues to
account for stock-based compensation plans under Accounting Principles Board Opinion No. 25.
In accordance with
SFAS No. 123, the fair value of option grants is estimated on the date of grant using the Black-Scholes option pricing
model for pro-forma footnote purposes with the following weighted average assumptions used for grants in 2001, 2000
and 1999, respectively; dividend yield of 1.7, 1.9 and 3.4 percent, expected option life of five years for all years, and
expected volatility of 30.99, 28.51 and 27.41 percent. The risk-free interest rate was assumed to be 4.8 percent in 2001, 5.0
percent in 2000 and 6.3 percent in 1999. If the compensation cost had been determined based upon the fair value method
recommended in SFAS No. 123, the Company’s net income would have been $153.2 million, $109.4 million and $100.9
million for each of 2001, 2000 and 1999, respectively, and the Company’s earnings per share on a diluted basis would have
been $7.37, $5.59 and $4.89 for each of 2001, 2000 and 1999, respectively.
The following is a table of the changes in options outstanding for 2001, 2000 and 1999, respectively:
Awards
available for
grant
Options
outstanding
Weighted
average exercise
price
Fair value of
options
Range of
exercise prices
Balance, December 31, 1998
1,414,542
1,619,770
$ 35.62
Options granted
Options forfeited
Options exercised
Shares turned in or withheld
Restricted stock issued
Restricted stock forfeited
( 363,139 )
247,537
-
82,811
( 186,625 )
16,335
363,139
( 247,537 )
( 148,504 )
$ 36.42
$ 38.46
$ 16.41
$ 12.24
$ 33.19 - $ 41.29
Balance, December 31, 1999
1,211,461
1,586,868
$ 37.22
Options granted
Options forfeited
Options exercised
Shares turned in or withheld
Restricted stock issued
Restricted stock forfeited
( 1,590,118 )
75,560
-
729,360
( 236,879 )
8,970
1,590,118
(75,560 )
( 1,078,575 )
$ 49.02
$ 43.44
$ 38.73
$ 13.51
$ 34.00 - $74.45
Balance, December 31, 2000
198,354
2,022,851
$ 46.50
Authorized
Options granted
Options forfeited
Options exercised
Shares turned in or withheld
Restricted stock issued
Restricted stock forfeited
950,000
( 500,289 )
32,556
-
448,726
( 238,916 )
15,798
500,289
( 32,556 )
( 731,679 )
$ 92.43
$ 54.81
$ 55.33
$ 25.69
$ 64.06 - 101.55
Balance, December 31, 2001
906,229
1,758,905
$ 56.92
Total options exercisable at December 31, 2001
857,983
55
RenaissanceRe Holdings Ltd. | Annual Report 2001
Notes to Consolidated Financial Statements
Under the Company’s 2001 Stock Incentive Plan the total number of shares available for distribution as of December 31,
2001 was 906,229 shares. The Plan also allows for the issuance of share-based awards, the issuance of restricted common
shares, the issuance of reload options for shares tendered in connection with option exercises and a provision in the
calculation of shares available for issuance thereunder by deeming the number of shares tendered to or withheld by the
Company in connection with certain option exercises to be so available.
The Company has also established a Non-Employee Director Stock Incentive Plan to issue stock options and shares of
restricted stock. Under the plan, the total number of shares available for distribution as of December 31, 2001 was 73,944
shares. As of December 31, 2001, the number of options issued to directors and unexercised was 114,000. In 2001, no
options to purchase common shares were granted and 1,872 restricted common shares were granted. In 2000, 70,000
In 1999, 12,000 options to
options to purchase common shares and 3,328 restricted common shares were granted.
purchase common shares and 1,665 restricted common shares were granted. The options and restricted common shares
vest ratably over three years.
The Company has also established an employee stock bonus plan. Under the plan, eligible employees may elect to receive
a grant of common shares of up to 50 percent of their bonus in lieu of cash, with an associated grant from the Company
of an equal number of restricted shares. The restricted common shares vest ratably over a four year period. During the
restricted period, the employee receives dividends and votes the restricted common shares, but the restricted shares may
not be sold, transferred or assigned. In 2001, 2000 and 1999 the Company issued 50,220, 77,342 and 56,430 shares under
this plan, respectively, with fair values of $3.2 million, $2.9 million and $2.0 million, respectively. Additionally, in 2001,
2000 and 1999 the Board of Directors granted 188,696, 159,537 and 130,195 restricted shares with a value of $14.0
million, $6.3 million, and $4.6 million to certain employees. The shares granted to these employees vest ratably over a
four to five year period. At the time of grant, the market value of the shares awarded under these plans is recorded as
unearned stock grant compensation and is presented as a separate component of shareholders’ equity. The unearned
compensation is charged to operations over the vesting period. Compensation expense related to these plans was $7.2
million, $5.5 million, and $3.4 million in 2001, 2000 and 1999, respectively.
In 2000, the Company granted a special option grant to all of its directors and officers equal to three times the normal
annual grant. As a result of this special grant, annual option grants were not granted in 2001 and it is not currently
anticipated that annual option grants will be granted in 2002. However, during 2001, the Board issued certain special
option grants as it deemed appropriate to attract or retain personnel and also retains the right to issue other special grants
in the future. The majority of the options granted in 2001 related to options granted to new employees and options issued
with respect to shares tendered in connection with option exercises, in accordance with the reload provisions of the
Company’s Stock Incentive Plan.
All of the Company’s employees are eligible for defined contribution pension plans. Contributions are primarily based
upon a percentage of eligible compensation.
Note 16. Statutory Requirements
Under the Insurance Act 1978, amendments thereto and Related Regulations of Bermuda (“the Act”), certain subsidiaries
of the Company are required to prepare statutory financial statements and to file in Bermuda a statutory financial return.
The Act also requires these subsidiaries of the Company to maintain certain measures of solvency and liquidity during the
period. As at December 31, 2001, the statutory capital and surplus of the Bermuda subsidiaries was $1,490.3 million and
the amount required to be maintained under Bermuda law was $259.7 million.
Under the Act, Renaissance Reinsurance and DaVinci are classified as Class 4 insurers, and are, therefore, restricted as to
the payment of dividends in the amount of 25 percent of the prior year’s statutory capital and surplus, unless at least two
members of the Board of Directors attest that a dividend in excess of this amount would not cause the company to fail to
meet their relevant margins. During 2001, Renaissance Reinsurance and DaVinci paid aggregate cash dividends of $141.9
million and $0.7 million, respectively.
56
RenaissanceRe Holdings Ltd. | Annual Report 2001
Glencoe is also eligible as an excess and surplus lines insurer in a number of states in America. There are various capital
and surplus requirements in these states. Glencoe, as DeSoto’s parent company, is required to maintain a minimum of
$50 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.
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 $32.6 million at December 31, 2001 and the amount
required to be maintained was $24.3 million.
Codification of statutory accounting in the U.S. was generally effective January 1, 2001. Codification did not have a
significant impact on the statutory surplus of the Company’s U.S. insurance subsidiaries
Note 17. Commitments and Contingencies
Concentration of credit risk
Financial instruments which potentially subject the Company to concentration of credit risk consist principally of
investments, cash and reinsurance balances. The Company limits the amount of credit exposure to any one financial
institution and, except for U.S. Government bonds, none of the Company’s investments exceeded 10 percent of
shareholders’ equity at December 31, 2001. Concentrations of credit risk with respect to reinsurance balances are limited
due to their dispersion across various companies and geographies.
Financial instruments with off-balance sheet risk
The Company’s investment guidelines permit, subject to specific approval, investments in derivative instruments such as
futures, options and foreign currency forward contracts for purposes other than trading. The Company anticipates that
any such investments would be limited to yield enhancement, duration management, foreign currency exposure
management or to obtain an exposure to a particular financial market.
Letters of credit
As of December 31, 2001, the Company’s bankers have issued letters of credit of approximately $125.8 million in favor of
certain ceding companies. Also, in connection with the Top Layer Re joint venture, the Company has committed $37.5
million of collateral in the form of a letter of credit. The letters of credit are secured by cash and investments of similar
amounts.
Employment agreements
The Board of Directors has authorized the execution of employment agreements between the Company and certain
officers. These agreements provide for severance payments under certain circumstances, as well as accelerated vesting of
options and restricted stock grants, under a change in control, as defined therein and by the Company’s Stock Option
Plan.
Employee Credit Facility
In June of 1997, the Company executed a credit facility in order to encourage direct, long-term ownership of the
Company’s shares, and to facilitate purchases of the Company’s shares by officers of the Company. Under the terms of
the facility, the purchases are financed by personal loans to the officers from the bank. Such loans are collateralized by
the shares purchased. The Company guarantees the loans, but has recourse to the collateral if it incurs a loss under the
guarantee. At December 31, 2001, the bank loans guaranteed by the Company totaled $24.1 million. At December 31,
2001, the common shares that collateralizes the loans had a fair value of $59.2 million.
Litigation
The Company is party to various lawsuits arising in the normal course of business. The Company does not believe that
any of its pending litigation will have a material impact on its consolidated financial statements.
57
RenaissanceRe Holdings Ltd. | Annual Report 2001
Notes to Consolidated Financial Statements
Note 18. Quarterly Financial Results (Unaudited)
(amounts in tables expressed in thousands of United States dollars, except per share amounts)
Quarter Ended
March 31,
Quarter Ended
June 30,
Quarter Ended
September 30,
Quarter Ended
December 31,
2001
2000
2001
2000
2001
2000
2001
2000
Gross premiums written
Net premiums written
$ 198,208 $ 160,471
$ 122,012
$ 97,650
$ 123,571 $ 122,470
$ 57,530
$ 52,411
$ 121,232 $ 103,364
$ 92,946
$ 64,765
$ 79,030 $ 85,564
$ 46,339
$ 39,610
Net premiums earned
$ 83,900 $ 52,765
$ 75,531
$ 62,519
$ 79,933 $ 73,284
$ 93,701
$ 79,113
Net investment income
17,884
18,467
18,270
19,240
18,738
21,236
20,264
19,205
Net foreign exchange
gains (losses)
Other income
Net realized investment
gains (losses)
Total revenues
Claims and claim
expenses incurred
Acquisition costs
Operational expenses
Corporate expenses
Interest expense
Total expenses
Income before minority interest
and taxes
Minority interest -
capital securities
( 295 )
( 137 )
3,869
1,402
233
3,901
( 169 )
( 1,051 )
1,709
1,070
447
2,960
( 554 )
7,404
237
4,607
7,615
( 6,787 )
2,881
( 3,594 )
4,978
112,973
65,710
100,816
79,705
103,668
1,482
99,409
2,622
1,748
123,437
104,910
41,895
12,545
8,512
1,528
864
17,713
7,242
7,807
2,342
4,252
32,315
10,608
9,894
4,780
683
24,878
7,602
9,065
2,532
4,358
46,986
11,461
9,408
1,366
2,699
29,953
11,074
11,050
196
4,639
28,721
10,745
10,789
3,811
3,003
36,060
12,612
10,032
2,952
3,918
65,344
39,356
58,280
48,435
71,920
56,912
57,069
65,574
47,629
26,354
42,536
31,270
31,748
42,497
66,368
39,336
Minority interest - DaVinci
-
-
-
-
-
-
1,847
1,859
1,895
1,938
1,823
1,866
1,919
751
1,919
-
Income before taxes
45,782
24,495
40,641
29,332
29,925
40,631
63,698
37,417
Income tax benefit (expense)
( 876 )
( 420 )
( 302 )
388
3
( 4,986 )
( 13,087 )
370
Net income
44,906
24,075
40,339
29,720
29,928
35,645
Dividends on preference shares
-
-
-
-
-
-
50,611
1,418
37,787
-
Net income to common
shareholders
$ 44,906 $ 24,075
$ 40,339
$ 29,720
$ 29,928 $ 35,645
$ 49,193
$ 37,787
Earnings per common
share - basic
$ 2.34 $ 1.25
$ 2.09
$ 1.58
$ 1.54 $ 1.89
$ 2.29
$ 1.97
Earnings per common
share - diluted
Weighted average
shares-basic
Weighted average
shares-diluted
$ 2.22 $ 1.24
$ 2.00
$ 1.55
$ 1.48 $ 1.83
$ 2.18
$ 1.87
19,227
19,266
19,279
18,851
19,377
18,877
21,439
19,141
20,230
19,475
20,151
19,147
20,288
19,520
22,518
20,163
Claims and claim expense ratio
49.9 %
33.6 %
42.8 %
39.8 %
58.8 %
40.9 %
30.7 %
45.6 %
Underwriting expense ratio
Combined ratio
25.1
28.5
27.1
26.7
26.1
30.2
23.0
28.6
75.0 %
62.1 %
69.9 %
66.5 %
84.9 %
71.1 %
53.7 %
74.2 %
58
RenaissanceRe Holdings Ltd. | Annual Report 2001
Directors and Officers
RenaissanceRe Holdings Ltd. and Subsidiaries
(as of March 1, 2002)
Board of Directors
James N. Stanard (4)
Chairman of the Board
Chief Executive Officer
Arthur S. Bahr (2)
Retired
General Electric Investment
Corporation
Thomas A. Cooper (2)(4)
TAC Associates
Edmund B. Greene (1)
Retired
General Electric Company
Brian R. Hall (1)
Retired
Johnson & Higgins
William F. Hecht (2)
Chairman
PPL Corporation
W. James MacGinnitie (3)(4)
Independent Consultant
Scott E. Pardee (1)(3)
Alan R. Holmes Professor of
Monetary Economics
Middlebury College
William I. Riker (3)
President
Chief Operating Officer
Committees of the Board: 1 - Audit 2 - Compensation 3 - Investment 4 - Transaction
Officers of RenaissanceRe Holdings Ltd. and Subsidiaries
James N. Stanard
Chairman of the Board
Chief Executive Officer
RenaissanceRe Holdings Ltd.
William I. Riker
President
Chief Operating Officer
RenaissanceRe Holdings Ltd.
David A. Eklund
President
Chief Underwriting Officer
Renaissance Reinsurance Ltd.
John M. Lummis
Executive Vice President
Chief Financial Officer
RenaissanceRe Holdings Ltd.
John D. Nichols, Jr.
Senior Vice President
RenaissanceRe Holdings Ltd.
W. Preston Hutchings
Senior Vice President
Chief Investment Officer
RenaissanceRe Holdings Ltd.
Robert E. Hykes
Senior Vice President
Renaissance Services Ltd.
Kevin J. O’Donnell
Senior Vice President
Renaissance Reinsurance Ltd.
Russell M. Smith
Senior Vice President
Renaissance Reinsurance Ltd.
Michael W. Cash
Vice President
Renaissance Reinsurance Ltd.
Todd R. Fonner
Vice President
Treasurer
RenaissanceRe Holdings Ltd.
Martin J. Merritt
Vice President
Controller
RenaissanceRe Holdings Ltd.
Laurence B. Richardson II
Vice President
Renaissance Underwriting
Managers Ltd.
Stephen H. Weinstein
Vice President
General Counsel
Corporate Secretary
RenaissanceRe Holdings Ltd.
John R. Wineinger
Vice President
Renaissance Services Ltd.
Gene Chiaramonte
Assistant Vice President
Renaissance Reinsurance Ltd.
Ross A. Curtis
Assistant Vice President
Renaissance Reinsurance Ltd.
Jonathan D. Paradine
Assistant Vice President
Renaissance Reinsurance Ltd.
Diana R. Petty
Assistant Vice President
Assistant Controller
RenaissanceRe Holdings Ltd.
William B. Ashley
Chief Operating Officer
Glencoe Insurance Ltd.
Craig W. Tillman
Chief Underwriting Officer
Glencoe Insurance Ltd.
Thomas H. Friedberg
President
Stonington Insurance Company
Ian D. Branagan
Managing Director
Renaissance Reinsurance of Europe
59
RenaissanceRe Holdings Ltd. | Annual Report 2001
Financial and Investor Information
RenaissanceRe Holdings Ltd. and Subsidiaries
For copies of the Company’s Annual Report, press releases, Forms 10-K and
10-Q or other filings, please visit our website: www.renre.com or contact:
Kekst and Company
437 Madison Avenue
New York, NY 10022
Tel. 212-521-4800
For general information about the Company contact:
Martin J. Merritt
Vice President
Tel. 441-299-7230
Email: mjm@renre.com
Stock Information
The Company’s stock is listed on The New York Stock Exchange under the
symbol RNR.
The following table sets forth, for the periods indicated, the high and low
closing prices per share of our common shares as reported in composite
New York Stock Exchange trading.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2001 Price Range
2000 Price Range
High
Low
High
Low
$ 83.85
$ 63.55
$ 41.13
$ 35.88
75.70
88.91
103.70
62.50
68.60
91.40
44.13
64.88
81.50
36.13
42.50
58.13
Independent Auditors
Ernst & Young
Hamilton, Bermuda
Transfer Agent
Mellon Investor Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
USA
Tel. 1-800-756-3353
www.melloninvestor.com
Additional requests can be directed to:
The Company Secretary
RenaissanceRe Holdings Ltd.
Renaissance House
8-12 East Broadway
P.O. Box HM2527
Hamilton HMGX, Bermuda
Tel. 441-295-4513
Fax. 441-292-9453
60
RenaissanceRe Holdings Ltd. | Annual Report 2001
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RenaissanceRe Holdings Ltd.
Renaissance House
8 -12 East Broadway
P.O. Box HM2527
Hamilton HMGX, Bermuda
Tel: 441 295 4513
Fax: 441 292 9453
Web site: www.renre.com
2001 Annual Report