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RenaissanceRe Holdings Ltd.
Renaissance House
8 -12 East Broadway
P.O. Box HM 2527
Hamilton HMGX, Bermuda
Tel: 441 295 4513
Fax: 441 292 9453
Web site: www.renre.com
2002 ANNUAL REPORT
Company Overview
RenaissanceRe Holdings Ltd. was established in
1993 to write catastrophe reinsurance. This form
of reinsurance requires us to indemnify our
customers (other insurance and reinsurance
companies) for their losses from catastrophes,
subject to specified limits.
its
Since
formation, RenaissanceRe has
consistently generated market leading returns,
representing the value we deliver to our
shareholders. We have become one of the largest
writers of catastrophe reinsurance, reflecting
the value we deliver to our customers. The
market recognizes RenaissanceRe as a leader in
using sophisticated computer models that
simulate the impact of catastrophes on insurance
companies. We use our models to construct a
superior portfolio of reinsurance, and to advise
customers about their catastrophe risks.
there have been
Over the past two years,
significant dislocations across the worldwide
insurance and reinsurance markets - and a
substantial increase in the amount of premium
that meets our hurdle rate. In response, we
substantially increased our premium levels in
catastrophe reinsurance, and also in other lines.
Gross Managed Premium
(In millions)
$1,400
1,200
1,000
800
600
400
200
0
1998
1998
1999
1999
2000
2000
2001
2001
2002
2002
Today, our business consists of four components:
1. Catastrophe reinsurance written for our own
account. This is our traditional core business.
2. Catastrophe reinsurance written
the
account of joint ventures. We have established
joint ventures to expand our access to capital
and leverage our catastrophe underwriting
skill to produce fee income.
for
3. Specialty reinsurance. We write reinsurance
that covers certain classes of business where
we believe we have a sound basis for
understanding and pricing the risk that
we assume; examples include catastrophe
exposed workers’ compensation and personal
accident, aviation, property per risk, surety,
finite and terrorism.
4. Individual risk business. This business includes
both primary insurance and quota share
reinsurance - with the common characteristic
being the detailed analysis that we perform of
each underlying insurance policy; most of this
business is catastrophe exposed.
Specialty Reinsurance Premium
Individual Risk Premium
Joint Venture Cat Premium
Renaissance Reinsurance Cat Premium
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RenaissanceRe Holdings Ltd. | Annual Report 2002
3
4
8
16
20
21
40
40
41
45
60
63
64
Table of Contents
Financial Highlights
Letter to Shareholders
Underwriting Review
Finance
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
Glossary
Directors and Officers
Financial and Investor Information
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RenaissanceRe Holdings Ltd. | Annual Report 2002
Financial Highlights
(In thousands, except per share data)
Gross premiums written
2002
2001
2000
1999
1998
$1,173,049
$501,321
$433,002
$351,305
$270,460
Operating income available to common shareholders*
Net income available to common shareholders
365,236
364,814
146,270
164,366
134,379
127,228
119,961
104,241
121,547
74,577
Per Common Share Amounts
Operating income* - diluted
Net income - diluted
Book value
Dividends declared
Operating Ratios
Operating return on average common
shareholders’ equity*
Claims and claim expense ratio*
Underwriting expense ratio
Combined ratio
$
5.20
5.20
21.39
0.57
$ 2.34
$ 2.29
$ 1.94
$ 1.81
2.63
15.83
0.53
2.17
11.91
0.50
1.68
10.17
0.47
1.11
9.43
0.40
29.0%
17.8%
21.0%
19.8%
19.2%
38.1%
19.0
57.1%
45.0%
25.2
70.2%
40.6%
28.5
69.1%
34.9%
28.1
63.0%
33.1%
29.3
62.4%
* Operating income excludes net realized gains (losses) on investments. Operating income and operating ratios also exclude cumulative effect of a change in accounting
principle relating to goodwill in 2002, and exclude fourth quarter after-tax charge of $40.1 million relating to Stonington in 1998. (See page 21, Management’s Discussion
and Analysis for discussion of non-GAAP measures.)
Operating Return on Average Common Equity
Book Value per Common Share
29.0%29.0%
19.2%19.2%
19.8%19.8%
21.0%21.0%
17.8%17.8%
$21.39
$21.39
$15.83
$15.83
$9.43
$9.43
$10.17
$10.17
$11.91
$11.91
1998
1998
1999
1999
2000
2000
2001
2001
2002
2002
1998
1998
1999
1999
2000
2000
2001
2001
2002
2002
Managed Cat Premium*
Operating Earnings per Common Share - Diluted
$739
$739
$5.20
$5.20
$397
$397
$442
$442
$284
$284
$198
$198
$1.81
$1.81
$1.94
$1.94
$2.29
$2.29
$2.34
$2.34
1998
1998
1999
1999
2000
2000
2001
2001
2002
2002
1998
1998
1999
1999
2000
2000
2001
2001
2002
2002
* The total gross catastrophe reinsurance premium written by Renaissance Reinsurance and joint ventures. Amounts in millions.
3
RenaissanceRe Holdings Ltd. | Annual Report 2002
Letter to Shareholders
James N. Stanard
Chairman of the Board
and Chief Executive Officer
Dear Fellow Shareholder,
2002 was an outstanding year for RenaissanceRe
by almost any measure. We continued to expand
our leadership in our core property catastrophe
reinsurance business and
took advantage of
opportunities in new areas where our risk management
expertise could be leveraged. We more than doubled
our managed gross written premiums to over $1.2
billion, and achieved 150% growth in operating profits
from the prior year. Our 29% operating return on
equity led the industry by a wide margin for the tenth
consecutive year.
We attribute this performance to the consistent
execution of our strategy and the stability and talent
of our management team, together with a little help
from the weather, which contributed to an unusually
low level of catastrophe losses.
As we enter our tenth year - our eighth as a public
company - I am pleased to say we are better
positioned than ever. We are the largest and most
profitable catastrophe excess reinsurer in the world.
We are generating meaningful profits from our
individual risk and specialty reinsurance businesses.
Our balance sheet remains one of the strongest in the
industry (relative to our size), and provides us with a
competitive advantage as the “flight to quality”
continues in the worldwide reinsurance market.
Finally, our reputation for stability, innovation and
speed in serving our clients is well established.
Business Environment – Severe Turmoil in the
Insurance Markets
The past 18 months have been the most tumultuous
for the worldwide insurance industry in my 30 years
in the business.
In last year’s letter to shareholders,
I discussed the effects of the September 11th tragedy,
corporate scandals and bankruptcies, and adverse
loss development that affected the worldwide
4
RenaissanceRe Holdings Ltd. | Annual Report 2002
insurance industry. Since then, continued adverse
development on loss reserves, credit issues and steep
declines in worldwide equity markets have severely
eroded the capital base of many insurers.
Because of our disciplined risk management,
RenaissanceRe was not significantly affected by these
industry problems, and we are well positioned to grow.
By contrast, poor results have forced many competitors
to re-evaluate strategies that have proven unsuccessful,
resulting in organizational changes, new underwriting
standards and exits from various lines of business.
In this current market environment, we see many
opportunities, and our key challenge is to focus our
energies on a few of the best prospects.
Diversification – Leveraging Our Strengths to
Create Powerful New Franchises
The makeup of our business has changed
significantly over the past several years as a
reaction to opportunities presented by the insurance
and reinsurance markets. Previously, our superior
financial performance was driven almost exclusively
by our leadership position in property catastrophe
reinsurance. Now, three additional areas are making
meaningful contributions to the bottom line:
• We have drawn on our underwriting skill to
establish joint ventures from which we generate fee
income by managing third party capital in the
reinsurance market.
• We have made further use of our knowledge of
catastrophe risk by building our individual risk
business - which principally assumes commercial
insurance exposures that are catastrophe exposed.
• We have grown our specialty reinsurance business to
the point where we are seen as a clear market leader
in certain classes of business, and have a growing
reputation as a “first call” market in these lines.
As a result of this evolution in our business model,
we estimate that less than 50% of our 2002 operating
profit came from property catastrophe reinsurance
underwriting, compared with over 80% in 1997.
Our development of
joint ventures that assume
reinsurance is a major extension of our franchise.
We have gone from managing just over $99 million of
premium for joint ventures in 2001 to managing
$261 million in 2002. The growth in 2002 was driven
by our success in establishing DaVinci Re Holdings -
which was formed in October 2001 and wrote
$188 million of premium in 2002. The fee income we
generate from managing our joint ventures and
other fee producing activities now totals $54 million.
Fee income, although it is variable, cannot be
negative and therefore does not require any capital to
support this business, which is an important factor in
our high returns on equity.
In another important development in 2002, the hard
market presented us with an ideal window of
opportunity to continue to transform our specialty
reinsurance and individual risk businesses from small
“proof of concept” activities to established market
leaders in their respective areas, which contribute
meaningfully to our bottom line.
Why should we expand into these new areas when
“refocusing on the core business” is the mantra for
many competitors? We have been making an
underwriting profit in these businesses almost as long
as we have written catastrophe reinsurance - specialty
reinsurance since 1993 and Glencoe’s individual risk
operations since 1996. Our rapid growth is not a
radical change in our strategy, but rather a reaction to
market opportunity.
Standing Left to Right: Bill Riker, John Lummis,
Sitting Left to Right: Dave Eklund, Jim Stanard, Jay Nichols
Operating Committee
Corporate Governance
Over the course of our history, we have worked
hard to develop a tradition of excellence throughout
our business, and that has included excellence
in representing our shareholders’
interests. Over
the last several years, RenaissanceRe’s Board was
transformed from one led primarily by the private
equity investors who helped found our Company
(and whose influence was very beneficial to our
growth and development), to a fully “mature” Board
that reflects our status as a broadly held public
entity. During the course of this transformation,
RenaissanceRe has already put in place most of the
practices that are now being mandated by the
regulators in their efforts to enhance practices
throughout the business community.
During 2002, our Board of Directors conducted a
review of our corporate governance policies and
procedures. The Board retained Tillinghast - Towers
Perrin and outside counsel to assist it in this review.
Partly as a result of this review, we implemented
various changes over the course of the year:
• We expanded the mandate of our corporate
comprised solely of
governance committee,
independent directors, to assume responsibility for
the nomination of
additional directors at
appropriate times, and monitor and manage the
effectiveness of our Board of Directors.
summarizes our
• We adopted a written corporate governance
policy, which
governance
procedures, structures and policies, and outlines
the responsibilities of each of our committees.
Among other things, the policy formalized our
practice of scheduling executive sessions of our
non-management directors at each Board meeting.
5
RenaissanceRe Holdings Ltd. | Annual Report 2002
Letter to Shareholders
‘we have a tremendous base of high quality
“In this current market environment, we see
clients and the means to further expand our
many opportunities, and our key challenge is to
focus our energies on a few of the best prospects.”
• Our Board reviewed and determined that each of our
non-management directors satisfied the standards of
“independence” as defined under both the current and
pending New York Stock Exchange rules.
• We expanded the mandate of our Investment
Committee (accordingly recast as our Investment and
Risk Management Committee) to include the review
of insurance liabilities and other financial risk matters.
We plan to continue to develop our corporate
governance policies and procedures to seek to keep
pace with our rapidly evolving business.
Management Team – Formation of the
Operating Committee
If there is a single key to our record of success over the
past several years, it is the quality of our management
team. I believe that our top management team is
the best in the reinsurance business, and is deeper
in talent than is generally recognized. We have
20 senior officers, each of whom has embraced the
RenaissanceRe culture, and are the most critical
factors in driving the growth in our business.
As an organization, we value clarity and simplicity:
there should be no confusion as to who is
accountable for each decision and activity. Having
worked together collaboratively for many years,
we can make decisions quickly and this has
developed into an important competitive advantage,
since we are known in the market as an organization
that can effectively execute complex transactions very
quickly. Finally, we do not work in organizational
silos. Every significant risk-taking decision is viewed
by “multiple pairs of eyes.”
As we are growing into several operations in several
different locations, we have recognized the need
to adapt our management procedures. This year we
established an “Operating Committee” of our five
top executives: Bill Riker, Chief Operating Officer
and President; Dave Eklund, President, Renaissance
Reinsurance; John Lummis, Chief Financial Officer;
Jay Nichols, President, Renaissance Underwriting
Managers; and myself. This group approves all major
decisions, and we place great trust in each other’s
judgment, and on clear and complete communication
among the group.
Financial Measures – Charting RenaissanceRe’s
Performance
We judge the performance and financial health of
our Company by continuously reviewing a number
of financial measures. The most fundamental one,
in my judgment, is growth in tangible book value per
share (plus dividends):
for each share of stock,
how much “real money” - excluding soft assets such
as goodwill and tax loss carryforwards - has been
either accumulated in the Company or transferred to
the shareholder over time. This is a measure that we
manage to both in the short run and in the long run.
This is how I look at the value of my own
shareholding in the Company, which represents the
majority of my personal net worth. A business
is usually most successful in accomplishing what it
is focusing on, and in this case, we have been
very successful. Since the end of 1995, the year of our
IPO, through the end of 2002, we have produced
a compounded annual growth rate in tangible
book value per share of 19%. I do not believe
that any other public company in the insurance
or reinsurance industry has matched our record of
growth in tangible book value per share over the
same period.
6
RenaissanceRe Holdings Ltd. | Annual Report 2002
A second measure, less important, but still meaningful,
is growth in operating earnings per share. In a cyclical
business it would be a serious mistake to focus
exclusively on this measure in the short run. When
prices in the insurance markets decline, RenaissanceRe
will turn down under-priced business and let the top
line fall (as we did in the last soft market of 1996-1998).
However, over the course of cycles, measuring earnings
from peak to peak, or average growth over long periods,
we should be able to deliver surprisingly good growth.
Our track record from 1995 through 2002 represents
a compounded annual growth rate of 13% - which
includes periods of relatively modest growth, as well as
periods of explosive growth such as the past two years.
Of course, all shareholders want to see the stock price
appreciate, but as an investor who expects to be an
owner for the long run, I do not worry about the short-
term swings in valuation. I believe that valuation will
take care of itself if we continue to achieve strong
growth in tangible book value per share.
Challenges for 2003
The turmoil in the insurance market means that there
will be many more opportunities available to us than
we can hope to realize. We will balance our desire for
growth in this environment with the discipline and focus
that have enabled us to deliver superior performance for
shareholders over the course of our history.
Our main priorities for 2003 are to:
1. Continue to build RenaissanceRe’s position as the
world’s leading property catastrophe reinsurance
market;
2. Continue to meet or exceed our joint venture partners’
expectations;
3. Continue to build our specialty reinsurance and
individual risk businesses into sustainable franchises;
4. Successfully enter a small number of additional business
business segments, probably through startup, purchase
of renewal rights and/or joint ventures; and
5. Develop our management talent and organizational
structure to maintain our entrepreneurial culture as
our business and financial scale expand.
As always, we greatly appreciate your continued support
of RenaissanceRe.
Thank you.
James N. Stanard
Chairman of the Board
Chief Executive Officer
RenaissanceRe Holdings Ltd.
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RenaissanceRe Holdings Ltd. | Annual Report 2002
Underwriting Review
Underwriting
Standing Left to Right: Ross Curtis, Bill Jagaer, Russell Smith,
Rebecca Roberts
Sitting Left to Right: Mike Cash, Kevin O’Donnell, Jonathan
Paradine
Reinsurance
Catastrophe Reinsurance
the
is one of
Renaissance
largest writers of
catastrophe reinsurance in the world, with an
estimated market share of over 10%. Our business
has achieved exceptional growth, with managed
catastrophe premium increasing from $442 million
in 2001 to $739 million in 2002. Renaissance
achieved this growth by being the market of
choice for many reinsurance buyers and brokers,
as evidenced by our number one position in
Flaspohler Research Group’s July 2002 Broker Market
Opportunities Survey. Our “best overall” score in
this survey indicated that Renaissance was the
highest rated, best overall reinsurer in 2002.
Renaissance was also voted the best lead market for
new coverages in per occurrence excess property
catastrophe lines.
Value Added
While outsiders often view catastrophe reinsurance
as a commodity, we have proven our ability to
differentiate our product in a number of ways:
• Advisory services. We carry client service to a
higher level by consulting with clients on their
catastrophe risk management questions, and
routinely conducting seminars for clients on
catastrophe risk.
• Customized products. Although catastrophe
reinsurance
is often offered with standard
contract terms, we focus on designing customized
products to fit specific client needs. Proprietary
technologies and systems allow us to show brokers
and clients alternative transaction structures and
related pricing to help them make more effective
risk management decisions.
8
RenaissanceRe Holdings Ltd. | Annual Report 2002
• Consistent pricing. Renaissance prices its coverage
based on the underlying risk exposures of a client.
In a “soft” market environment,
some have
suggested that we are “too expensive.” In a “hard”
market environment, some have suggested that we
are “too cheap.” The reality is that we approach
pricing consistently across market conditions, and
our clients appreciate the predictability of our
decision-making.
• Pricing validation. Our reputation as the premier
underwriter of catastrophe risk enables us to attract
quality participants to open market reinsurance
programs in which we are the lead underwriter.
If Renaissance is leading a program, clients can
expect that it will be successfully completed.
• Capacity for large lines. Because of our confidence
in our risk selection, together with the multiple
balance sheets that we manage (Renaissance
Reinsurance, DaVinci Re and Top Layer Re), we
have the ability to provide large limits to clients.
• Credit quality. Renaissance Reinsurance, DaVinci
Re and Top Layer Re each have high credit ratings.
Because of our success in managing through large
loss years with profits, while most of the rest of
the
losses, we are
recognized for our risk management skills, and
seen as a partner that can be trusted, even more
than the ratings would suggest.
industry had substantial
RenaissanceRe of Europe
Standing Left to Right: Robin Lang, Bryan Dalton, Deidre Doyle,
James Burnett-Herkes
Sitting Left to Right: John Gill, Ian Branagan, Richard Emslie,
John-Paul O’Leary
Given the value that we add, clients reward us with a
greater amount of high quality business. We are often
able to obtain larger participations on “open market”
business, for which many reinsurers compete. We are
also invited to participate in business that is not
presented to the open market. We estimate as much as
30% of our total catastrophe premium comes from
these private transactions.
2002: Superior Performance in a Year of
Light Cat Activity
For 2002, total catastrophe losses to the worldwide
insurance industry are estimated at approximately
$13.5 billion; by contrast, using our simulation model,
which includes both low loss years and high loss years, we
estimate an average loss year for the industry worldwide
to be $34 billion. We estimate that our 2002 profits
included approximately $70 million of benefit from the
low catastrophe loss activity during the year, versus a
year of “normal” losses. While we were again the top
performer among our peers in 2002, both in terms of
underwriting and return on equity, we are even prouder
of our performance in more challenging years, such as the
high catastrophe years of 2001 and 1999, when our out-
performance was even more pronounced.
2003: A Market for Skilled Underwriters
We view the current catastrophe market as one that plays
to our strengths. Despite the large price increases that
followed the September 11th tragedy, there continues
to be wide disparity in the quality and pricing of
business in the catastrophe marketplace. Although we
are confident in the quality of our own book, which is
priced to acceptable returns, we estimate that over 50%
of the business written in the overall market is priced to
a negative or low return.
In light of the wide disparity in catastrophe market
pricing, we believe skillful underwriting and risk
assessment remain critical to success. For example,
even as recently as 2002, some companies learned of the
inadequacy of their understanding of
flood risk in
Europe. Similarly, contract terms - particularly how
contracts deal with issues such as terrorism - are very
important, and we have been an industry leader in
developing new contract terms. While good modeling
has been one key to our success, our emphasis on clarity
in contract terms has also been a significant contributor.
Specialty Reinsurance
During the year, we achieved dramatic growth in our
specialty reinsurance business line, booking $247
million of written premium in 2002 compared with
$78 million in 2001. This premium was generated from
82 programs, primarily focused on catastrophe-exposed
workers’ compensation and personal accident, aviation,
property per risk, surety, finite and terrorism.
Business Focus
Our approach to specialty reinsurance has been
grounded in our disciplined underwriting: we seek to
leverage the capabilities we have developed in our core
business to select specialty areas. We do not aspire to be
“all things to all people.” Instead, we focus on a relatively
small number of transactions, the terms of which
generally bear the following features:
• Expected margins in any class of business must be
clearly positive, and result in an acceptable return;
• The risk can be analyzed quantitatively;
• The “worst case” exposure of the risk is limited;
9
RenaissanceRe Holdings Ltd. | Annual Report 2002
Underwriting Review
Underwriting Support
Standing Left to Right: Georgina Trott, Stephanie Slayton,
Tina Caton, Giselle Baksh
Sitting Left to Right: Josie Smith, Abigail Saunders, Maria Bento
• For each class of risk, we can generate significant
from a relatively small number of
premium
transactions, and influence terms and conditions;
• There is low claims frequency; and
• The classes of risk present us with sustainable business.
There are various classes of business that satisfy these
criteria, but many that do not. As a result, we remain
selective, though poised to expand further in a market
environment where terms and conditions continue
to improve.
Growing a Franchise
We have begun to establish a significant market
presence and an important new franchise for
Renaissance in certain specialty areas. For example,
we have become the market leader in writing high
layer, catastrophe-exposed workers’ compensation
reinsurance. As in our core catastrophe reinsurance
business, we have become widely respected for the
modeling capabilities and other strengths we bring
to this segment, and we view this business as
an important long-term addition. In other specialty
classes of business, it is too soon to judge the longevity
of our market presence, though we believe that
Renaissance is positioned to become a “first call”
market across other lines of reinsurance.
In order to define the risk profile of each line
of specialty reinsurance, we establish probability
distributions and assess the correlations with the rest of
our portfolio.
In lines with catastrophe risk, such as
workers’ compensation, we are leveraging directly off
our skill in modeling for our core business, and it is
important to understand the correlations between these
lines and our core catastrophe reinsurance portfolio.
For other classes of business, which have little or
no natural catastrophe exposure, and hence have
significantly less correlation with our core catastrophe
reinsurance business, probability distributions are
derived from a variety of underlying information,
including recent historical experience, but with the
application of judgment as appropriate. The nature of
some of these businesses lends itself less to the scientific
analysis that we use on the catastrophe book, reflecting
both the nature of available exposure information,
and also the impact of human factors. We believe
that we benefit from having probability distributions
to represent the underlying risks so that we can
make consistent underwriting decisions, and manage
our total risk portfolio. Overall we seek conservative
representations of the risks.
Outlook for 2003
Since September 11th, 2001, prices have increased
across virtually all specialty classes of reinsurance.
At the same time, for some classes, and even for
certain business within profitable classes, pricing
remains below that required for an acceptable return.
In this environment, underwriting skill will continue
to be critical to ensure the quality of our book.
We remain focused on identifying and writing
business that will enable us to achieve better-than-
market-average results. We believe that we have good
prospects for further growth in 2003.
Specialty Reinsurance Premium
2000
2000
$37.7
$37.7
$77.5
$77.5
2001
2001
2002
2002
$247.0
$247.0
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RenaissanceRe Holdings Ltd. | Annual Report 2002
Structured Products
Standing Left to Right: Laurie Orchard, Larry Richardson
Sitting Left to Right: Paul Kaplan, Sean Moore
• Entrance and exit at book value, resulting in
financial returns that are primarily dependent upon
catastrophe risk experience;
• Diversification benefit for those investors who do
not have catastrophe risk exposures;
• Financial returns, net of fees, which on a modeled-
expected basis exceed the returns of the average
catastrophe reinsurance portfolio, as well as many
other investment opportunities.
The advantages to RenaissanceRe from these joint
ventures are:
• An additional source of capital;
• An additional balance sheet for our customers;
• A vehicle whose capital can be readily managed
up or down in response to reinsurance market
conditions, independent of public equity market
conditions; and
• A source of fee income.
Our Structured Products Group has both strong deal-
oriented skills and operational expertise to ensure
that the joint venture operations are integrated into
our overall operations.
Structured Products
Of the $739 million of managed catastrophe premium
that we wrote in 2002, $261 million was written in our
joint ventures, managed by our Structured Products
Group. This compares with $99 million of premium
written in our joint ventures in 2001. The rapid
growth in 2002 reflects the effectiveness of our
Structured Products Group in establishing DaVinci
Reinsurance as a significant market in its first full year
of operation. In addition, Structured Products was
involved in ceded reinsurance transactions with over
$70 million of ceded premium. In total for 2002, our
Structured Products Group was responsible for $54
million of fee income, and $52 million of equity pick-
up from the joint ventures in which we have invested.
Joint Ventures
At the core of our Structured Products Group is
the management of our joint venture relationships.
Our largest joint ventures are DaVinci Reinsurance
and Top Layer Re. While these joint ventures differ
in their details,
the broad theme is the same:
significant private investors seek access to the superior
underwriting skill of Renaissance, and invest in
special purpose companies that are managed and
operated by our Structured Products Group.
The advantages to investors in the joint ventures are:
• Immediate access to the superior catastrophe
reinsurance underwriting skill of Renaissance, with
the same underwriters for our joint ventures as for
Renaissance itself;
11
RenaissanceRe Holdings Ltd. | Annual Report 2002
Underwriting Review
Principal Reinsurance Underwriting Vehicles
Business
Ownership
Ratings
Renaissance Reinsurance Ltd.
Property Cat and
other short-tail lines
100% RenaissanceRe
Holdings Ltd.
Top Layer Reinsurance Ltd.
High Layer Non-U.S.
Property Cat
DaVinci Reinsurance Ltd.
Property Cat 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
S&P “A+”
A.M. Best “A+”
Moody’s “A1”
S&P “AA”
A.M. Best “A+”
Capital at
December 31, 2002
$1.1 Billion
$100 Million (plus
$3.9 Billion stop-
loss protection from
State Farm)
S&P “A”
A.M. Best “A”
$585 Million
Ceded and Assumed Reinsurance
Strategic Investments
Our Structured Products Group has created new ceded
reinsurance structures through which Renaissance
cedes a participation in its catastrophe portfolio to
stable, long-term partners. One of the unique products
resembles a quota share, but is highly customized and is
written with the underlying results tied to Renaissance’s
underwriting year loss ratio. Transactions are tailored
to each client’s particular needs and risk tolerance,
based upon a pre-agreed formula. RenaissanceRe
receives an override and profit commission based on
the results of the portfolio, and has the ability to reduce
or eliminate any overlap in exposure between the
clients’ portfolios and the Renaissance portfolio. These
structures provide additional sources of flexible capital,
augment our traditional reinsurance purchases, and
contribute to our total fee income.
Our Structured Products Group is also active in
executing structured transactions to assume risk, such
as catastrophe linked securities. With our proprietary
REMS© system, we can successfully model these risks
and accurately determine which bonds have favorable
risk/return profiles.
The Structured Products Group assists in analyzing
and executing on various strategic investments.
In 2002, we made an equity investment in Platinum
Underwriters Holdings, Ltd. and also agreed to
advise Platinum on catastrophe risk management.
We currently own 9.2% of the equity in Platinum,
plus warrants to purchase 2.5 million additional
shares. We will receive an annual fee for advice on
Platinum’s property catastrophe portfolio and this
investment will provide us with a window on the
hardening casualty market.
Outlook for 2003
For 2003, we expect to be very active across
the full range of Structured Product activities.
Joint venture premium
is expected to grow,
as are structured assumed and ceded reinsurance
transactions. In addition, we continue to explore
various strategic investments and additional joint
venture opportunities, particularly for classes of risk
that are not correlated with catastrophe risk.
12
RenaissanceRe Holdings Ltd. | Annual Report 2002
Individual Risk
Standing Left to Right: Craig Tillman, Peter Montpelier,
Bill Ashley, Nancy Spurling, Maggie Situ
Sitting Left to Right: Nikki Riker, Terry Faulkenberry,
Patricia Hendrickson, Dionne Burrows
Individual Risk
Like our Reinsurance segment, our Individual Risk
segment has achieved remarkable growth. Gross
written premium rose to $260 million in 2002 from
$50 million in 2001. Most of the business that we write
is commercial insurance (or quota share reinsurance)
that is catastrophe-exposed, which enables us to
leverage our core catastrophe underwriting and
management skills.
Dramatic Improvement in the Price Environment
Since the September 11th tragedy, the commercial
property insurance market has seen substantial price
increases, in many cases over 100%, coupled with
reduced coverage. There has been an increased
recognition of catastrophe risk, and a diminished
supply of capacity. Before this change in the
price environment, we generally did not find the
commercial property
insurance market to be
following September 11th, the
adequately priced;
market began to meet our hurdle rate.
Unique Approach to the Business
We have taken a unique approach to our Individual
Risk business; in fact, the very concept of Individual
Risk is unique, as we have combined the management
insurance companies,
of primary insurance written directly for our
subsidiary
together with
quota share reinsurance that we write behind
other, unaffiliated primary insurance companies.
Because quota share reinsurance has a similar
financial risk profile to primary insurance, and each
calls for a detailed understanding of the underlying
policies, we group the two together. Each individual
policy - with relatively small individual exposures - is
evaluated, and the originator of the risk must manage,
at a micro level, the construction of a well-priced,
balanced portfolio. (By contrast, our reinsurance
business is oriented around the analysis of existing
portfolios of risks, and assessing the appropriate
pricing of large limit excess of loss reinsurance).
Our approach to Individual Risk business is also
different from many in the industry in that we are using
external resources for many key functions. While we
view catastrophe risk underwriting as central to our
value added - and perform all of the catastrophe related
underwriting and risk management, we are extensively
using outside resources to perform such functions
as underwriting of non-catastrophe risks, policy
processing, premium accounting, and claims handling.
In turn, we have built an audit team to monitor and
manage the performance of these functions.
13
RenaissanceRe Holdings Ltd. | Annual Report 2002
Underwriting Review
Information Technology
Standing Left to Right: Dale Woods, Kenneth Lamb, Dion Tucker
Sitting Left to Right: Shalanda Durrant, John Wineinger,
Lloyd Holder
Origination
Outlook for 2003
After the substantial price increases for catastrophe
exposed commercial insurance in 2002, we expect the
rate of price increases to slow in 2003. For this
business, we continue to expect premium growth,
which will be generated predominantly by adding new
programs (as distinguished from further price
increases on the existing book). With the rapid growth
of our Individual Risk business, we remain focused
on developing our staff
to support the growth;
we have over 29 employees engaged in this business,
and expect to further grow our staff over the
course of 2003.
Individual Risk Premium
$50.3
$50.3
$49.9
$49.9
2000
2000
2001
2001
2002
2002
$260.4
$260.4
The Individual Risk business we write comes to us
from three distribution channels:
1. Brokers. We write primary insurance through
brokers on a risk-by-risk basis; all underwriting
and back-office functions for this business is based
in our offices in Bermuda while claims handling
is outsourced.
2. Program Managers. We also write primary
insurance through a small number of high quality,
specialized program managers, who produce business
under well defined underwriting guidelines, and
provide most of the back-office functions.
3. Quota Share Reinsurance. We write quota share
reinsurance, with primary insurers who, similar to
our program managers, provide most of the back-
office functions. The underwriting responsibility is
divided between us, focusing on catastrophe risk, and
the primary insurer, focusing on other classes of risk.
We have a full set of corporate vehicles to support
our growth in Individual Risk. To date we have
predominantly used our Glencoe subsidiary as our
vehicle for Individual Risk business. Glencoe, which
is a Bermuda-based company, is permitted to write
on an excess and surplus lines basis in 51 U.S.
jurisdictions. Going forward, we also expect to use
two other vehicles: Stonington, which is a Texas-based
company permitted to write on an “admitted” basis
in 50 U.S.
jurisdictions; and Lantana, which is a
Bermuda-based company permitted to write business
on an excess and surplus lines basis in 41 U.S.
jurisdictions. Both Stonington and Lantana are
intended to write business on a taxable basis in the
U.S., recognizing that some of our new activities may
call for a larger U.S. presence.
14
RenaissanceRe Holdings Ltd. | Annual Report 2002
Operations Support
Superior systems and effective operational support
are critical to the RenaissanceRe business model.
In particular, our Information Technology Team has
continued to provide excellent day-to-day support
while pursuing strategic projects to position the
Company to operate more effectively in the future.
Achievements over the past year included:
• Completion of significant upgrades to our REMS©
model by adding a module to increase our testing
of low probability catastrophe events.
• Creation of an initial model of terrorism. While
this model is still subject to further development, it
does allow us to manage against concentrations
within geographic zones, and to consistently
compare and rank reinsurance transactions that are
exposed to terrorism risk.
• Implementation of TRAC©, a new underwriting
tool aimed at improving primary insurance
customers’ understanding of catastrophe risk.
• A full audit of our systems and our capacity to
manage disasters that would shut down any of
our locations.
Marketing and Human Resources
Standing Left to Right: Vanessa Perreira, Fawn Burgess,
Wanda Richardson
Sitting Left to Right: Michelle Rafferty, Talitta Tucker
Various other operations support teams have also
been important to our success over the past year:
• Our Underwriting Support Team is responsible for
managing the back-office of our reinsurance
operations, including contract processing, premium
accounting and claims. Over the past year, this team
successfully executed an expansion of our joint
venture relations to include DaVinci, and the
expansion into specialty reinsurance.
is
• Our Marketing Team
for
coordinating our contacts with brokers and
customers, and our growth over the past year has
the relationships that have
been a function of
developed from our focused marketing efforts.
responsible
• Our Human Resources Team oversees
the
management of our Company’s most important
asset - its people.
15
RenaissanceRe Holdings Ltd. | Annual Report 2002
Finance
Finance
Standing Left to Right: Steve Weinstein, Preston Hutchings,
Todd Fonner, Susan Holland, Jenny Swan
Sitting Left to Right: Alana Smith, Diana Davies, Marty Merritt,
Helen James
Capital Management
While underwriting profit and reliable investment returns
are critical in generating returns under our business
model, effectively managing our capital base is the other
essential factor. For 2002, our 29% return on equity
reflects not only success in our operations, but also
the “right size” of our capital base. Even excluding our
estimated $70 million benefit from the light catastrophe
experience in 2002, our return on equity would have been
24%, demonstrating the effective deployment of our
capital in a positive reinsurance market environment.
This return on equity is especially impressive given the
$827 million of capital that we raised in 2001: $233
million of common equity; $145 million of perpetual
preferred; $149 million in senior notes; and $300
million of equity invested by outside investors in
DaVinci. We raised most of this capital in the aftermath
of September 11th, essentially making the judgment
that this capital could be deployed through organic
growth of our business. With the benefit of hindsight,
this judgment proved correct: using the proceeds of the
2001 capital transactions, we increased the capital
of each of our operating subsidiaries, and then
dramatically increased our premium volume, growing
premium by over $259 million in Renaissance, $224
million in Glencoe, and $188 million in DaVinci
(comparing 2002 with 2001).
For 2002, our biggest capital raising “event” was the
strong operating performance of our Company,
which generated $365 million in net income. By the
end of 2002, we had deployed additional capital
in our operations: we increased the capital of
Renaissance Reinsurance by $300 million to $1.1
billion; we increased the capital of Glencoe by $123
million to $325 million; we invested $84 million in
Platinum Underwriters Holdings, Ltd.
16
RenaissanceRe Holdings Ltd. | Annual Report 2002
As we look forward to 2003, we remain optimistic
about the prospects for our business, and retain a bias
towards having some excess capital so that we have
the flexibility to pursue new business opportunities.
To this end, in the first quarter of 2003, we raised $99
million in a senior notes offering and $97 million in
a perpetual preferred offering, which will supplement
the significant capital growth from earnings that we
expect for the year.
To gauge the level of risk in our capital structure, we
have a proprietary risk management system that
evaluates the probability of default and expected loss
for each component of our capital. Our objective is
to test that risk levels are consistent with indicated
ratings. Our high returns on equity are not a
function of exposing our creditors to excessive risk.
Recognizing this, we have strong financial strength
ratings and debt ratings from the various credit rating
agencies as shown below.
RenaissanceRe Holdings Ltd.
Senior Debt
Perpetual Preferred
Trust Preferred
Renaissance Reinsurance Ltd.
Financial Strength
Top Layer Reinsurance Ltd.
Financial Strength
Glencoe Insurance Ltd.
Financial Strength
DaVinci Reinsurance Ltd.
Financial Strength
A.M.
Best
a
bbb
bbb
A+
A+
A
A
Standard
Moody’s & Poor’s
A3
Baa2
Baa1
A1
A-
BBB
BBB
A+
AA
A
Investments and Cash by Category
At December 31, 2002
Cash & Cash Equivalents 3%
Cash & Cash Equivalents 3%
U.S. Treasuries & Agencies (Aaa) 21%
U.S. Treasuries & Agencies (Aaa) 21%
Other 8%
Other 8%
Short-term Investments 18%
Short-term Investments 18%
Investment Grade Corporates (1) 14%
Investment Grade Corporates (1) 14%
Emerging Markets & High Yield Debt (1) 6%
Emerging Markets & High Yield Debt (1) 6%
Sovereign & Supranational
Sovereign & Supranational
(Aaa/Aa) 11%
(Aaa/Aa) 11%
Mortgage Backed Securities (1) (Aaa) 9%
Mortgage Backed Securities (1) (Aaa) 9%
Asset Backed Securities (Aaa) 10%
Asset Backed Securities (Aaa) 10%
(1) Represents securities which are externally managed; a portion of Investment Grade Corporates are also externally managed.
Investments
Performance
the
aggregate,
In
investment portfolio of
RenaissanceRe returned 7.6% for 2002 with out-
performance across all components of our fixed
income portfolio offset somewhat by a) an
overweight position in cash and equivalent, and b)
weak performance in alternative assets. The fixed
income portfolio returned 8.9% for the year.
the year’s notable credit
By avoiding most of
problems, all components of
the fixed income
portfolio outperformed their benchmarks - some by
very substantial amounts. In particular, the non-
investment grade portion (approximately $220
million at December 31) performed exceptionally
well, returning 8.6% for the year, well above the
1.9% lost by the Merrill Lynch High Yield Index.
We chose to have a larger than target allocation to
short term investments - reflecting our substantial
operating cash flows and our concern about the
potential for an increase in interest rates. The short-
term investment portion of the Company’s portfolio
returned 2.0%, which was greater than the average
3-Month LIBOR rate for the year. Only our small
alternative asset portfolio ($96 million at December
31, 2002), which began to expand its hedge fund
allocation
less than
in mid-year, provided a
the 0.9% generated by the
satisfactory return;
portfolio was in line with relevant indices.
Portfolio Risk and Duration
Because most of RenaissanceRe’s reinsurance
business is short-tail in nature, our liability portfolio
does not require a particular portfolio duration.
Rather, we manage the portfolio’s duration - and
allocate amongst asset classes - in order to deliver an
attractive return with limited risk.
In fact, for the
three years ending December 31, 2002 our portfolio
delivered approximately 90% of the return of the
widely followed Lehman Brother U.S. Aggregate
Index - but with only 60% of the monthly variability
of returns. By managing interest rate and credit risk
in this way, we can: a) provide our clients with the
security that comes from knowing that we have a
high quality investment portfolio, with limited
risks; and b) help to provide our shareholders with
annual appreciation in book value per share.
As a consequence of
this approach to portfolio
management, and because interest rates have fallen
to historically low levels, our portfolio’s effective
duration stood at 2.25 years at year end - as opposed
to our “theoretical” target of 2.75 - 3.00 years. Until
interest rates rise appreciably, we are likely to
maintain this duration posture and to remain
overweight in the short-term investment category of
our portfolio.
17
RenaissanceRe Holdings Ltd. | Annual Report 2002
Finance
Administration
RenaissanceRe
is responsible for managing the
investment portfolios of its wholly-owned companies
as well as those of
its partly-owned joint venture
affiliates. Most of these portfolios are also consolidated
on our balance sheet. So, although the total of these
managed portfolios amounted to the $3 billion
shown in the accompanying financial statements,
RenaissanceRe’s effective “economic interest” in these
portfolios was approximately $2.4 billion at year-end -
and smaller still if only the wholly-owned companies
are considered. These various portfolios have slightly
varied investment objectives - but they all share a
strong focus on liquidity, high average credit quality
and short duration (relative to many insurance
company portfolios).
To deal with the administrative challenges of
fulfill
managing multiple portfolios,
its fiduciary responsibilities to its joint-venture
and
to
18
RenaissanceRe Holdings Ltd. | Annual Report 2002
partners, RenaissanceRe formed an internal mutual
fund in mid-2002. Because substantially all internally
managed assets are invested in this fund, Renaissance
Investment Holdings Ltd., RenaissanceRe and its
affiliates receive identical returns on the portions
of
their portfolios having identical objectives.
The fund, which is rated AAA-f by Standard & Poor’s,
consists of Treasuries, U.S. Government agencies,
highly-rated sovereigns, supranationals, asset backed
securities and corporate obligations. Approximately
85% of
the portfolio is rated Aaa/AAA and the
balance Aa/AA. Together with our banks and
custodian, we have structured an innovative secured
credit facility that enables the RenaissanceRe
companies and affiliates investing in our fund to
use their shares in this internal mutual fund as
collateral to support the letters of credit that those
companies and affiliates are frequently required
to post.
Financial Information
RenaissanceRe Holdings Ltd. and Subsidiaries
Table of Contents: Financial Information
Selected Financial Data
Management’s Discussion and 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
Glossary
Directors and Officers
Financial and Investor Information
20
21
40
40
41
42
43
44
45
60
63
64
19
RenaissanceRe Holdings Ltd. | Annual Report 2002
Selected Financial Data
(amounts in thousands, except per share data)
2002
2001
2000
1999
1998
Income Statement Data
Gross premiums written
Net premiums written
Net premiums earned
Net investment income
Claims and claim expenses incurred
Acquisition costs
Operational expenses
$ 1,173,049
$ 501,321
$ 433,002
$ 351,305
$ 270,460
923,711
760,905
104,098
289,525
95,644
49,159
339,547
333,065
75,156
149,917
45,359
38,603
293,303
267,681
77,868
108,604
38,530
37,954
213,513
221,117
60,334
77,141
25,500
36,768
195,019
204,947
52,834
112,752
26,506
34,525
74,577
1.11
0.40
Net income available to common shareholders
364,814
164,366
127,228
104,241
Earnings per common share - diluted
Dividends per common share
5.20
0.57
2.63
0.53
2.17
0.50
1.68
0.47
Weighted average common shares outstanding
70,211
62,391
58,728
61,884
67,284
(amounts in thousands)
Balance Sheet Data
2002
2001
2000
1999
1998
At December 31,
Total investments and cash
$ 3,128,879
$ 2,194,430
$1,082,046
$ 1,059,790
$ 942,309
Total assets
3,745,736
2,643,652
1,468,989
1,617,243
1,356,164
Reserve for claims and claim expenses
Reserve for unearned premiums
Debt
Capital securities (1)
Minority interest - DaVinci (2)
Total shareholders’ equity
Total shareholders’ equity attributable
to common shareholders
Common shares outstanding
804,795
331,985
275,000
84,630
363,546
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
-
1,642,035
1,225,024
700,818
600,329
612,232
1,492,035
1,075,024
69,750
67,893
700,818
58,863
600,329
59,058
612,232
64,938
(amounts in thousands, except per share data)
2002 (4)
2001
2000
1999
1998 (5)
Operating Ratios and other non-GAAP measures
Operating income to common shareholders (3)
$
365,236
$ 146,270
$ 134,379
$ 119,961
$ 121,547
Operating earnings per common share - diluted
5.20
2.34
2.29
1.94
1.81
Operating return on average common
shareholders’ equity
29.0%
17.8%
21.0%
19.8%
19.2%
Claims and claim expense ratio
Underwriting expense ratio
Combined ratio
38.1%
19.0
57.1%
45.0%
25.2
70.2%
40.6%
28.5
69.1%
34.9%
28.1
63.0%
33.1%
29.3
62.4%
Book value per common share
$
21.39
$
15.83
$ 11.91
$
10.17
$
9.43
(1)
(2)
(3)
(4)
(5)
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.
Operating income excludes net realized gains or losses on investments. (See page 21, Management’s Discussion and Analysis for discussion of non-GAAP measures)
Operating income, operating earnings per common share - diluted and operating return on average common shareholders’ equity for 2002 also exclude the
cumulative effect of a change in accounting principle.
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.
20
RenaissanceRe Holdings Ltd. | Annual Report 2002
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The following is a discussion and analysis of our results of operations for the year ended December 31, 2002 compared with the
years ended December 31, 2001 and December 31, 2000. The following also includes a discussion of our financial condition at
December 31, 2002. This discussion and analysis should be read in conjunction with the audited consolidated financial
statements and related notes included in this report. This 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.
We utilize two non-GAAP measures, operating income and operating return on equity, to measure our performance.
We currently use these measures to evaluate the underlying fundamentals of our operations and believe them to be useful
measures of our corporate performance. We define operating income as net income which excludes net realized gains and
losses from the sale of investments and certain one-time adjustments. Realized gains and losses from the sale of investments
are derived from the timing of the sale of investments and are not derived from our operating performance. Operating
return on equity is calculated by dividing operating income by the average net book value of our common equity for the year.
In calculating operating income, we have also excluded a one-time charge occurring in 2002:
• In 2002, we adopted a new accounting pronouncement, SFAS 142 “Goodwill and Other Intangible Assets.” During
2002, after completing our initial impairment review of our goodwill, we decided to reflect goodwill at zero value and
record a write-off of $9.2 million. Therefore, we felt it was appropriate to exclude this charge from our calculation of
operating income, because 1) this was associated with a one time adoption of a new accounting principle, and 2) we
wrote off 100% of our balance of goodwill.
Overview
RenaissanceRe Holdings Ltd. was originally formed to provide reinsurance to cover the risk of natural and man-made
catastrophes. We use sophisticated computer models to construct a superior portfolio of these coverages. Our disciplined
underwriting approach, sophisticated risk models and management expertise have established us as a leader in the property
catastrophe reinsurance business and led to consistent strong performance and growth for our Company.
Our principal business is property catastrophe reinsurance. Our subsidiary Renaissance Reinsurance is one of the world’s
premier providers of this coverage. Our coverage protects against large natural catastrophes, such as earthquakes and
hurricanes, as well as claims arising from other natural and man-made catastrophes such as winter storms, freezes, floods,
fires, tornadoes and explosions. We offer this coverage 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. We use our advanced proprietary modeling and management systems to maximize our return on equity, subject to
prudent risk constraints.
Recently, we have experienced substantial growth in premiums from specialty lines of reinsurance written by Renaissance
Reinsurance, including such lines as catastrophe-exposed workers’ compensation, surety, terrorism, property per risk,
aviation and finite reinsurance. We refer to these premiums as “specialty reinsurance.” During 2002 we more than tripled
our gross written premiums from specialty reinsurance to $247.0 million from $77.5 million written in 2001.
We have also experienced substantial growth in our individual risk business written on an excess and surplus lines basis by
Glencoe. We define our individual risk segment to include underwriting that involves understanding the characteristics of
the original underlying insurance policy. Our individual risk segment currently provides insurance for commercial and
homeowners catastrophe-exposed property business, and also provides reinsurance to other insureds on a quota share basis.
We significantly increased the gross written premiums of our individual risk operations to $260.4 million, compared to $50.0
million in 2001.
21
RenaissanceRe Holdings Ltd. | Annual Report 2002
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
In addition, we also manage property catastrophe reinsurance on behalf of two joint ventures. In 1999 we formed Top Layer
Reinsurance Ltd. (“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. We formed DaVinci Reinsurance Ltd. (“DaVinci”) in 2001 with
State Farm and other private investors to write property catastrophe reinsurance side-by-side with Renaissance Reinsurance.
We own a minority of DaVinci’s outstanding equity but control a majority of its outstanding voting power, and accordingly,
DaVinci’s financial results are consolidated in our financial statements. We also previously acted as underwriting manager
for OPCat, however in February 2002, OPCat’s parent company, Overseas Partners Limited, decided to exit the reinsurance
business, and we subsequently assumed the in-force book of business of OPCat. We act as the exclusive underwriting
manager for these joint ventures in return for management fees and a profit participation (such fees earned from DaVinci
are eliminated in consolidation). Together, these joint ventures wrote $261.0 million of premium in 2002, compared to
$98.9 million in 2001. In total, as of December 31, 2002, Top Layer Re and DaVinci had access to approximately $4.6 billion
of capital resources, which includes $3.9 billion of limit through reinsurance provided by State Farm.
We believe that our position as a leading property catastrophe reinsurance underwriter is reflected by the continued growth
in the gross property catastrophe premiums written by Renaissance Reinsurance and our joint ventures (which, when
combined, we refer to as "managed catastrophe premiums"). The total managed catastrophe premiums written on behalf of
Renaissance Reinsurance and our joint ventures increased by 67% in 2002 to $738.8 million from $441.8 million in 2001.
The occurrence of the World Trade Center disaster in 2001 and the significant losses stemming from this event caused an
imbalance in the supply and demand for reinsurance capacity. As a result of this increase in demand, we increased our
reinsurance operations, both in our established property catastrophe line and in specialty reinsurance, and we also increased
our individual risk operations written through Glencoe Insurance. Accordingly, during 2002 we more than doubled our
gross written premiums to $1,173.0 million from $501.3 million of gross written premiums in 2001. Also, for the year ended
December 31, 2002, our operating income available to common shareholders more than doubled to $365.2 million from
$146.3 million for the year ended December 31, 2001. Operating income is net income excluding realized gains and losses
on investments, and for 2002 operating income also excludes a $9.2 million write-off of goodwill. Our net income available
to common shareholders also more than doubled during 2002 to $364.8 million from $164.4 million for the same period
during 2001. During 2002 our total assets increased by $1.1 billion, or 41%, to $3.7 billion. At December 31, 2002, total
shareholders' equity attributable to common shareholders was $1.5 billion and our book value per common share was
$21.39, compared with $1.1 billion and $15.83 per share at December 31, 2001.
Because we write 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 consider opportunistic
diversification into new ventures, either through organic growth or the acquisition of other companies or books of business
of other companies. We may explore opportunities in lines of insurance or reinsurance business in which we have limited
experience, such as certain casualty coverages. If these opportunities come to fruition, they will present us with additional
management and operational risks for which we will need to further develop our resources to effectively manage this
expansion. 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 and individual risk 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 almost all property and casualty insurance and reinsurance companies, the most significant judgment made by
management is the estimate of the claims and claim expense reserves. Claim reserves represent estimates, including actuarial
and statistical projections at a given point in time, of our expectations of the ultimate settlement and administration costs
of claims incurred, and it is possible that the ultimate liability may materially exceed or be materially less than such estimates.
Such estimates are not precise in that, among other things, they are based on predictions of future developments and
estimates of future trends in claim severity and frequency and other variable factors such as inflation.
22
RenaissanceRe Holdings Ltd. | Annual Report 2002
Adjustments to our prior year estimated claims reserves will impact our current year net income by increasing our net income
if the prior year estimated claims reserves are determined to be overstated, or by reducing our net income if the prior year
estimated claims reserves prove to be insufficient. During the years ended December 31, 2002, 2001 and 2000, changes to
prior year estimated claims reserves had the following impact on our net income; during 2002, prior years estimated claims
reserves were overstated by $2.0 million and accordingly, our net income was increased by $2.0 million; during 2001,
prior years estimated claims reserves were overstated by $16.0 million, and our net income was increased by $16.0 million;
and during 2000, prior years estimated claims reserves were deficient by $8.4 million, and our net income was decreased by
$8.4 million. (Also see “Financial Condition – Reserves for Claims and Claims Expenses”.)
For our property catastrophe reinsurance operations, we initially set our case reserves based on case reserves and other reserve
estimates reported by insureds and ceding companies. We then add to these case reserves, our estimates for additional case
reserves, and an estimate for incurred but not reported reserves (“IBNR”). These estimates are normally based upon our
experience with similar claims, our knowledge of potential industry loss levels for each loss, and industry information which we
gather and retain in our REMS© modeling system. Our estimates of claims resulting from catastrophic events are inherently
difficult because of the variability and uncertainty associated with property catastrophe claims.
In reserving for our individual risk and specialty reinsurance coverages we do not have the benefit of a significant amount of our
own historical experience in these lines, and therefore we estimate our IBNR for our specialty reinsurance and individual risk
coverages by utilizing an actuarial method known as the Bornhuetter-Ferguson technique.
It is common for insurance and
reinsurance companies to utilize this method for lines of business where a company may have limited historical loss experience.
The utilization of the Bornhuetter-Ferguson technique requires a company to estimate an ultimate claims and claim expense ratio
for each line of business. We select our estimates of the ultimate claims and claim expense ratios by reviewing industry standards,
and adjusting these standards based upon the coverages we offer and the terms of the coverages we offer.
All of our estimates are reviewed annually with an independent actuarial firm. We also review our assumptions and our
methodologies on a quarterly basis. If we determine that our estimates need adjusting, such adjustments are recorded in the
quarter in which they are identified. Although we believe we are cautious in our assumptions, and in the application of these
methodologies, we cannot be certain that our ultimate payments will not vary, perhaps materially, from the estimates we have
made. As of December 31, 2002, our estimated IBNR reserves were $462.9 million, and a 5% change in such IBNR reserves,
would equate to a $23.1 million adjustment to claims and claim expenses incurred, which would represent 6.3% of our 2002
net income, and 1.4% of shareholders’ equity as at December 31, 2002.
We incurred claims and claim expenses of $289.5 million, $149.9 million and $108.6 million for the years ended December
31, 2002, 2001 and 2000, respectively. Our claims and claim expense reserves were $804.8 million, $572.9 million and $403.6
million at December 31, 2002, 2001 and 2000, respectively.
To estimate reinsurance recoverables which might be uncollectible, 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. As of December 31, 2002, we have recoverables of $207.3 million and we have
recorded a valuation allowance of $7.8 million, based on specific facts and circumstances evaluated by management. As of
December 31, 2002, the majority of the $199.5 million of losses recoverable relate to outstanding claims reserves on our books,
and in accordance with the terms of the policies, we generally must wait to collect from our reinsurers until we pay the
underlying claims. We expect to fully collect the recorded net balance of the losses recoverable. There has been little change
in our reinsurance recoverables or our valuation allowance at December 31, 2002 as compared to 2001 due to the relatively low
level of catastrophe losses during 2002, the slowdown in payments of older claims, specifically claims resulting from the World
Trade Center disaster, and the continued financial strength of our reinsurers.
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 2022, during 2002, 2001 and 2000 we recorded valuation allowances of $5.6 million, $14.0 million and $8.2 million,
respectively. As of December 31, 2002, the gross balance of the deferred tax asset was $32.7 million and the net balance of
the deferred tax asset was $4.0 million.
23
RenaissanceRe Holdings Ltd. | Annual Report 2002
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Summary of Results of Operations for 2002 and 2001
A summary of the significant components of our revenues and expenses is as follows:
Years ended December 31,
(In thousands)
Net underwriting income - Renaissance
Net underwriting income - DaVinci
Total Underwriting income Reinsurance (1)
Net underwriting income (loss) - Individual Risk (1)
Other income
Net investment income
Interest and preferred share dividends
Corporate expenses, taxes and other
Minority interest - DaVinci
Net operating income available to
common shareholders (2)
Net realized gains (losses) on investments
Cumulative effect of a change in accounting principle
Net income available to common shareholders
Operating income per common share - diluted
Net income per common share - diluted
2002
2001
2000
$ 232,532
76,116
308,648
17,929
32,821
104,098
(32,858)
(10,351)
(55,051)
365,236
8,765
(9,187)
$ 364,814
$
$
5.20
5.20
$ 100,655
-
100,655
(1,469)
16,244
75,156
(16,151)
(27,414)
(751)
146,270
18,096
-
$ 164,366
$ 85,532
-
85,532
(2,939)
10,959
77,868
(24,749)
(12,292)
-
134,379
(7,151)
-
$ 127,228
$ 2.34
$ 2.29
$
2.63
$ 2.17
(1) Net underwriting income consists of net premiums earned less claims and claim expenses incurred, acquisition costs and operational expenses.
(2) Net operating income excludes realized gains and losses on investments and the cumulative effect of a change in accounting principle.
The $219.0 million increase in net operating income in 2002, compared to 2001, was primarily the result of the following items:
• a $131.9 million increase in underwriting income from our reinsurance operations due primarily to an increase in net
earned premiums to $667.9 million from $325.2 million, primarily due to the market imbalances after the World Trade
Center disaster which enabled us to increase our property catastrophe reinsurance premiums and more than triple our
premiums from specialty reinsurance as discussed above. Also, in large part as a result of lower catastrophe losses
during the year, our loss ratio decreased in 2002 to 38.1% compared with a loss ratio of 45.0% in 2001. The 2001 loss
ratio was higher due to losses emanating from the World Trade Center disaster, plus
• the $76.1 million of underwriting income from the start-up of DaVinci during 2002, however after offsetting this with
the $54.3 million increase related to the interests owned by other investors, the net increase to our net income was $21.8
million, plus
• a $19.4 million increase in underwriting income from our individual risk operations which resulted from the increase in
our gross written premiums in our individual risk segment to $260.3 million in 2002 from $50.0 million in 2001, which
was the result of the market imbalances as noted above, plus
• a $16.6 million increase in other income, which was primarily due to an increase of $12.7 million in income from our
Top Layer Re joint venture, plus
• a $28.9 million increase in net investment income during the year, which was primarily due to the $785 million increase
in our assets from our net capital raising activities in the second half of 2001 and the $935 million increase in our assets
during 2002, primarily resulting from the $778 million of cash flows generated from our operating activities during 2002.
The impact of the increase in available assets was partially offset by a reduction in investment returns due to lower
interest rates, plus
• a $17.1 million reduction in corporate expenses, taxes and other, which was primarily due to the fact that in 2001 we
decided to increase our valuation allowance on our deferred tax asset by $14.0 million as a result of further reductions
of our U.S. based insurance business, less
• a $16.7 million increase in interest and fixed charges, which are primarily the result of the issuance of $150 million of
debt in July 2001, and the issuance of $150 million of our 8.1% Series A preference shares in November 2001.
24
RenaissanceRe Holdings Ltd. | Annual Report 2002
The $11.9 million increase in net 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, 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.
Results of Operations for 2002 and 2001
The following is a discussion and analysis of our results of operations for the year ended December 31, 2002, compared to each
of the years ended December 31, 2001, and 2000, and a discussion of our financial condition at December 31, 2002.
Premiums
Gross Written Premiums
Years ended December 31,
(In thousands)
Cat Premium
Renaissance
DaVinci
Assumed from OPCat
Total Cat Premium
Specialty Reinsurance
Total Reinsurance
Individual Risk Premium (1)
Total gross written premiums
2002
2001
2000
$
442,980
187,822
34,873
665,675
247,020
912,695
260,354
$ 1,173,049
$ 373,896
-
-
373,896
77,468
451,364
49,957
$ 501,321
$ 345,086
-
-
345,086
37,730
382,816
50,186
$ 433,002
(1) Excludes $22 million of premium ceded to Renaissance Reinsurance and DaVinci in 2002.
The increase in our property catastrophe premiums over the past two years is primarily due to an improving market following
1) the World Trade Center disaster in 2001 and 2) insured losses from nine significant worldwide catastrophic events in 1999:
hail storms in Sydney, Australia; tornados in Oklahoma; Hurricane Floyd in the U.S.; Typhoon Bart in Japan; Turkish and
Taiwanese earthquakes; Danish windstorm, Anatol; and the French windstorms, Lothar and Martin. Six of these events each
resulted in over $1 billion of insured damages.
Because of these events, as with many large losses, two changes 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, firstly 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. Also contributing to our increased written premiums
in 2002 was the inception of DaVinci, which wrote $187.8 million of gross written premiums.
25
RenaissanceRe Holdings Ltd. | Annual Report 2002
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The factors that caused the improved market conditions in the property catastrophe market also contributed to improving
market conditions in the lines of specialty reinsurance which we write and accordingly, we began writing an increased level
of specialty reinsurance premiums in 2001 and, subsequent to the World Trade Center disaster, we significantly increased our
participation in this market. We categorize our specialty reinsurance premiums as reinsurance coverages that are not
specifically property catastrophe coverages. Examples of specialty lines of reinsurance provided by us include catastrophe-
exposed workers’ compensation, surety, terrorism, property per risk, aviation and finite reinsurance. We expect specialty
reinsurance written premiums to be a significant contributor to our overall written premiums in 2003.
The market conditions that caused the improvements in the property catastrophe market and the specialty reinsurance
market have also caused improvements in the individual risk market, and accordingly, during 2002 we significantly increased
our premiums in the individual risk market. We define the individual risk market as underwriting that involves
understanding the characteristics of the original underlying insurance policy. The individual risk segment currently provides
insurance for commercial and homeowners catastrophe-exposed property business, and also provides reinsurance to other
insureds on a quota share basis. We expect individual risk written premiums to be a significant contributor to our overall
written premiums in 2003.
Gross Premiums Written by Geographic Region
Years ended December 31,
2002
2001
2000
(In thousands)
Property Catastrophe
United States and Caribbean
Worldwide
Europe
Worldwide (excluding U.S.) (1)
Other
Australia and New Zealand
Specialty reinsurance (2)
Total reinsurance
Individual risk (3)
Total gross premiums written
$ 332,314
169,790
86,461
56,628
18,354
2,127
247,021
912,695
260,354
$ 1,173,049
$ 180,305
93,474
20,414
45,111
22,433
12,159
77,468
451,364
49,957
$ 501,321
$ 145,871
98,923
22,071
60,382
9,559
8,280
37,730
382,816
50,186
$ 433,002
(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 written premiums written to date is predominantly from Europe and Japan.
(2) The category Specialty Reinsurance consist of contracts that are predominantly exposed to U.S. risks, with a small portion of the risks being Worldwide.
(3) The category Individual Risk is made up of contracts that are primarily exposed to U.S. risks.
Ceded Reinsurance Premiums
Years ended December 31,
(In thousands)
Reinsurance
Individual Risk (1)
Total gross written premiums ceded
2002
2001
2000
$ 218,072
31,265
$ 249,337
$ 124,684
37,090
$ 161,774
$ 94,875
44,824
$ 139,699
(1) Excludes $22 million of premium ceded to Renaissance Reinsurance and DaVinci in 2002.
26
RenaissanceRe Holdings Ltd. | Annual Report 2002
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 2002 and 2001, we increased
our purchases of reinsurance because we received a number of new opportunities to purchase reinsurance. Also affecting the
increase in our 2002 ceded reinsurance premiums were placements of structured quota share reinsurance agreements for
participations in our property catastrophe book of business. In accordance with these agreements we retain fees and have the
right to receive profit commissions associated with these cessions. The fees and profit commissions are reflected as a reduction
to operating expenses and acquisition expenses, respectively.
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. As of December 31, 2002, the majority of the $199.5 million of losses recoverable relate to
outstanding claims reserves on our books, and in accordance with the terms of the policies, we generally must wait to collect from our
reinsurers until we pay the underlying claims. We expect to fully collect the recorded net balance of the losses recoverable.
To the extent that appropriately priced coverage is available, we anticipate continued use of reinsurance to reduce the
potential volatility of our results.
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 costs and operational
expenses) by net premiums earned. The combined ratio is the sum of the loss ratio and the expense ratio.
The table below sets forth our net premiums earned, claims and claim expenses and underwriting expenses by segment and
their corresponding claims, underwriting expense and combined ratios:
Years ended December 31,
(In thousands)
Reinsurance net earned premiums - property catastrophe
Reinsurance net earned premiums - specialty
Total reinsurance net earned premiums
Individual risk net earned premiums
Total net earned premiums
Reinsurance claims and claim expenses
Individual risk claims and claim expenses
Total claims and claim expenses
Reinsurance underwriting expenses
Individual risk underwriting expenses
Total underwriting expenses
Reinsurance net underwriting income
Individual risk net underwriting income (loss)
Total net underwriting income
Reinsurance claims and claim expenses ratio
Individual risk claims and claim expenses ratio
Total claims and claim expenses ratio
Reinsurance underwriting expenses ratio
Individual risk underwriting expenses ratio
Total underwriting expenses ratio
Reinsurance combined ratio
Individual risk combined ratio
Total combined ratio
2002
2001
2000
$ 462,471
205,455
667,926
92,979
$ 760,905
$ 249,316
40,209
$ 289,525
$ 109,962
34,841
$ 144,803
$ 308,648
17,929
$ 362,577
$ 261,054
64,169
325,223
7,842
$ 333,065
$ 152,341
( 2,424 )
$ 149,917
$
$
$
$
72,227
11,735
83,962
100,655
( 1,469 )
99,186
$ 225,907
35,260
261,167
6,514
$ 267,681
$ 105,542
3,062
$ 108,604
$
$
$
$
70,093
6,391
76,484
85,532
( 2,939 )
82,593
37.3 %
43.2 %
38.1 %
16.5 %
37.5 %
19.0 %
53.8 %
80.7 %
57.1 %
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 %
27
RenaissanceRe Holdings Ltd. | Annual Report 2002
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The increase in our 2002 net underwriting income from our reinsurance segment was primarily the result of three factors:
1) the low level of property catastrophe losses during 2002; 2) the increase in our net reinsurance premiums earned during 2002,
as a result of our increase in gross written property catastrophe premiums and specialty reinsurance premiums (See “Premiums”
above); and 3) the inception of DaVinci’s operations during 2002. Losses from our property catastrophe reinsurance policies can
be infrequent, but severe; however, during periods with benign property catastrophe loss activity, such as 2002, we have the
potential to produce an unusually low level of losses and a related increase in underwriting income. Although this occurred during
2002, there can be no guarantee that this reduced level of losses will continue in 2003 or beyond.
Also during 2002, as discussed in the “Premiums” section above, we significantly increased our specialty reinsurance
premiums written. Although specialty reinsurance premiums will normally produce higher claims and claim expenses than
the property catastrophe reinsurance business, the reduction in our losses resulting from the low level of catastrophe losses
during 2002 more than offset the increased normal loss activity arising from our specialty reinsurance premiums.
The increase in our 2002 net underwriting income from our individual risk segment was primarily the result of the growth
in premiums in 2002 compared with 2001 (See “Premiums” above) and a reduction of the proportion of this business that
was ceded to third parties.
Our claims and claim expenses also benefited from our purchase of reinsurance protection as we recorded reinsurance
recoveries of $63.0 million, $160.4 million and $52.0 million during fiscal years 2002, 2001 and 2000, respectively. Although
there can be no assurance that our net claims and claim expenses will continue to benefit from the purchase of reinsurance,
we will continue to seek to purchase reinsurance protection to the extent that appropriately priced coverage is available.
Our underwriting expenses consist of acquisition costs and operational expenses. Acquisition costs consist of costs to acquire
premiums and are principally comprised of broker commissions and excise taxes. Acquisition costs are driven by contract terms
and are normally a set percentage of premiums. Operational expenses consist of salaries and other general and administrative
expenses. Our reinsurance business operates with a limited number of employees and we are able to grow our written premiums
without proportionally increasing our operating costs. As our premiums increase, we expect that our operating costs will tend to
increase to a lesser extent and since our acquisition costs are based on a percentage of the premiums earned, 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 2002 and 2001. Recently, we have entered into joint ventures and specialized quota share
cessions of our book of business. In accordance with the joint venture and quota share agreements, we are entitled to certain fee
income and profit commissions. We record these fees and profit commissions as a reduction in acquisition costs or operating
expenses and accordingly these fees have also contributed to the reduction in our expense ratio.
Although industry-wide insurance losses were the highest in history during 2001, we recorded increases in net underwriting
profit, cash flows from operations, earnings per share and book value per share. We attribute our performance to our disciplined
underwriting approach, the experience of our underwriters, and the advantage afforded by our sophisticated risk models.
During 2001 and 2000, the majority of the premiums written in the individual risk segment were ceded to other reinsurers
and as a result, net earned premiums from the individual risk operations were relatively minor. Based on this reduced level
of net earned premiums, relatively modest increases or decreases to net written premiums, claims and claim expenses
incurred, acquisition costs or operating expenses can cause, and did cause, unusual fluctuations in the claims and claim
expenses ratio and the underwriting expense ratio of such individual risk operations.
Net Investment Income
Years ended December 31,
(In thousands)
2002
$ 104,098
2001
$ 75,156
2000
$ 77,868
Because a majority of our coverages provide protection from damages resulting from natural and man-made catastrophes,
it is possible that we could become liable for a significant amount of losses on 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 marketable fixed income securities, such as U.S.
Government bonds, corporate bonds and mortgage backed and asset backed securities.
28
RenaissanceRe Holdings Ltd. | Annual Report 2002
As a result of the declining interest rate environment during 2002, the average yield on our portfolio fell to 3.09% as of
December 31, 2002 from 4.2% as of December 31, 2001. As yields on our portfolio decrease, our interest income will also
decrease. However, the decline in interest rates during 2002 was offset by our significant growth in invested assets during the
year, which was primarily due to our strong cash flows from operations. Also, in the latter half of 2001, we raised a net $785
million from financing activities, which was available to us for investment purposes for the full year of 2002 (See “Financial
Condition – Capital Resources”).
During 2001, as a result of the declining interest rate environment, the average yield on our portfolio fell from 6.8% as of
December 31, 2000 to 4.2% as of December 31, 2001, which caused a reduction in our investment income. The decline in
our investment income during 2001 to $75.1 million from $77.9 million during 2000 would have been greater, except that
offsetting the impact of the decreased yields were our strong cash flows from operations of $341 million and our capital
raising activities in the latter half of 2001, as noted above.
Other Income
Years ended December 31,
(In thousands)
2002
2001
2000
Cat business - Fee Income
Cat business - Equity earnings - Top Layer Re
Other items
Total
$ 3,882
22,339
6,600
$ 32,821
$ 8,643
9,663
(2,062)
$ 16,244
$
2,382
7,433
1,144
$ 10,959
As discussed previously, in 1999 we began to manage property catastrophe books of business for the Top Layer Re and OPCat
joint ventures and in return for managing these joint ventures, we receive fees, profit commissions and/or an equity
participation in these ventures.
During 2002, our fee income decreased primarily as a result of the reduced level of fees received from OPCat, as a result of
the decision by OPCat’s parent company, Overseas Partners Limited, to exit the reinsurance business. During 2002 our equity
earnings from Top Layer Re increased as a result of the increase in premiums written by Top Layer Re and the resultant
increase in Top Layer Re’s net income.
The balance of the other items in other income increased primarily due to profits of $7.2 million on derivative instruments under
which losses or recoveries are triggered by an industry loss index or geological or physical variables (2001 - a loss of $4.6 million).
During 2001, we formed DaVinci, in which we currently own 25% of the outstanding equity. However, we own a majority of
DaVinci’s outstanding voting rights and its results are consolidated in our financial statements. Accordingly, our income
from this joint venture is not reflected in other income; rather our profit participation and equity participation in DaVinci
are recorded 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 in “Ceded Premiums,” we have entered into certain
placements of structured quota share reinsurance agreements for participations in our property catastrophe book of
business. In accordance with these agreements, we retain fees and have the right to receive profit commissions associated with
these cessions. We record these fees and profit commissions as a reduction in acquisition costs and operating expenses.
If we were to record DaVinci on the equity method of accounting, and if we were to record our fees from the quota share
relationships in other income, our pro-forma other income from all of these relationships would be as follows:
Years ended December 31,
(In thousands)
2002
2001
2000
Cat business - Fee income
Cat business - Equity earnings - Top Layer Re, DaVinci
Other items
Total
$ 54,071
52,110
6,600
$ 112,781
$ 17,516
9,663
(1,813)
$ 25,366
$
7,577
7,433
1,144
$ 16,154
29
RenaissanceRe Holdings Ltd. | Annual Report 2002
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Corporate Expenses
Years ended December 31,
(In thousands)
2002
$ 14,327
2001
$ 11,485
2000
$ 8,022
Corporate expenses incurred 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 increase in
corporate expenses during 2002 primarily related to an increase in legal costs of $1.9 million and costs of $1.2 million related
to accelerated vesting of equity compensation. The majority of the increase in corporate expenses in 2001 primarily related
to costs related to research and development initiatives conducted by us in 2001.
Interest and Preferred Share Dividends
Years ended December 31,
(In thousands)
2002
2001
2000
Interest - Revolving Credit Facilities
Interest - $150 million 7% Senior Notes
Dividends - $87.6 million Capital Securities
Dividends - $150 million 8.1% Series A - Preference Shares
Total Interest and Preferred Dividends
$ 2,569
10,500
7,605
12,184
$ 32,858
$ 2,378
4,871
7,484
1,418
$ 16,151
$ 17,167
-
7,582
-
$ 24,749
Our interest payments and preferred share dividends increased during 2002, primarily as a result of the timing of our capital
raising activities, which occurred in the latter half of 2001. Accordingly, during 2002, the balance of the 7.0% Senior Notes
and the 8.1% Series A - Preference Shares were outstanding for the entire year, and we incurred a full year of charges related
to these securities as compared to a partial year of charges during 2001.
In January and February of 2003, we raised an additional $200 million from the issuance of $100 million in 5.875% Senior
Notes and $100 million in 7.3% Series B Preference Shares, respectively, and as a result we expect our interest and preferred
share dividends to increase during 2003 as compared with 2002.
Income Tax Expense (Benefit)
Years ended December 31,
(In thousands)
2002
(115)
$
2001
$ 14,262
2000
$ 4,648
During 2002, we chose to write a limited amount of business in our U.S. operations and, therefore, our U.S. net income was
minimal and the related tax impact for 2002 was also minimal.
During 2001 and 2000, we also had little or no net income in the U.S., however, as of December 31, 2001 we had accumulated
a $26.9 million deferred tax asset. As a result of the limited number of attractive opportunities in the U.S. primary insurance
market, our U.S. insurance operations did not generate taxable income during those years, which called into question the
recoverability of the $26.9 million deferred tax asset. Although we retain the benefit of this asset through 2020, during 2002,
2001 and 2000 we decided to increase our valuation allowance by $5.6 million, $14.0 million and $8.2 million, respectively.
As of December 31, 2002, the gross and net balance of the deferred tax asset was $32.7 million and $4.0 million, respectively.
We currently plan to increase the business written by our U.S. insurance subsidiaries. If, as a result, our U.S. operations begin
to generate taxable income, the appropriateness of the valuation allowance will be reassessed and, accordingly, any potential
profits from our U.S. operations would possibly not have a corresponding offset for tax expenses, up to the $27.7 million
valuation allowance recorded as of December 31, 2002.
30
RenaissanceRe Holdings Ltd. | Annual Report 2002
Realized Gains/(Losses)
Years ended December 31,
(In thousands)
2002
8,765
$
2001
$ 18,096
2000
$ (7,151)
Because our investment portfolio is structured to preserve capital and provide us with a high level of liquidity, a large
majority of our investments are in the fixed income markets and, therefore, our realized holding gains and losses on
investments are highly correlated to fluctuations in interest rates. Therefore, as interest rates decline, as occurred in 2002 and
2001, we will tend to have realized gains from the turnover of our investment portfolio, and as interest rates increase, as was
the case in 2000, we will tend to have realized losses from the turnover of our investment portfolio, although such correlation
for realized gains (losses) on sales of investments can be reduced depending on which specific securities we choose to sell.
The amount of the realized gains or realized losses that will be recorded in the future will be dependent upon the level of our
investments, the changes in the interest rate environment and how quickly or slowly we choose to turn over our investment
portfolio. A larger investment portfolio, greater fluctuations in the interest rate environment, and turning over an investment
portfolio quickly, will affect the magnitude of realized gains or realized losses.
Cumulative Effect of a Change in Accounting Principle – Goodwill
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard ("SFAS") 142, “Goodwill and
Other Intangible Assets.” In the second quarter of 2002, the Company completed its initial impairment review in compliance
with the transition provisions of SFAS 142 and, as a result, the Company decided to record goodwill at zero value, the low
end of an estimated range of values, and wrote off the balance of its goodwill during the second quarter of 2002, which totaled
$9.2 million. In accordance with the provisions of SFAS 142, this is required to be recorded as a cumulative effect of a change
in accounting principle in the consolidated statement of income and is required to be recorded retroactive to January 1, 2002.
Financial Condition
RenaissanceRe is a holding company, and we therefore rely on dividends from our subsidiaries and investment income to
make principal and interest and dividend 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 Bermuda subsidiaries is, under certain circumstances, limited under U.S. statutory
regulations and Bermuda insurance law, which require our Bermuda insurance subsidiaries to maintain certain measures of
solvency and liquidity. At December 31, 2002, the statutory capital and surplus of our Bermuda insurance subsidiaries was
$1,974.6 million, and the amount of capital and surplus required to be maintained was $414.7 million. Our U.S. subsidiaries
are also required to maintain certain measures of solvency and liquidity. At December 31, 2002, the statutory capital and
surplus of our U.S. subsidiaries was $25.4 million and the amount of capital and surplus required to be maintained was
$9.0 million. During 2002, Renaissance Reinsurance and DaVinci declared aggregate cash dividends to us of $224.3 million
and $3.5 million, respectively, compared with $147.1 million and $0.7 million, respectively, in 2001.
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 2002 were $778.4 million, which principally consisted of net income, prior to
dividends to preference shareholders, of $377.0 million, plus $231.2 million for increases to net reserves for claims and claim
expenses, plus $186.1 million for increases in reserves for unearned premiums. The 2002 cash flows from operations were
primarily utilized to invest in fixed income securities.
31
RenaissanceRe Holdings Ltd. | Annual Report 2002
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
We have generated cash flows from operations in 2002, 2001 and 2000 significantly in excess of our operating commitments.
To the extent that capital is not utilized in our reinsurance or individual risk segments, we will consider using such capital
to invest in new opportunities.
Because a large portion of the coverages we provide 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.
Reserves for Claims and Claim Expenses
As discussed in the “Summary of Critical Accounting Policies and Estimates,” for 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.
A large portion of our coverages provide protection from natural and man-made catastrophes which are generally infrequent,
but can be significant, such as losses from hurricanes and earthquakes. Because loss events to which we are exposed can be
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 claims reserves will also fluctuate based on the payments we make for these large loss events. The timing of
our payments on loss events can be affected by the event causing the loss, the location of the loss, and whether our losses are
from policies with insurers or reinsurers.
During 2002, we increased our specialty reinsurance and individual risk gross written premiums (See “Premiums”).
The addition of these lines of business adds additional uncertainty to our claims reserving process and our claims reserve
estimates as the reporting of information, the setting of initial reserves and the loss settlement process for these lines of
business vary from our traditional property catastrophe line of business.
For our reinsurance and individual risk operations, our estimates of claims reserves include case reserves reported to us as
well as our estimate of losses incurred but not reported (“IBNR”) to us. Our case reserve and our estimates for IBNR 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 claims reserves on a regular
basis. As of December 31, 2002, 2001 and 2000, included in our claims and claim expense reserves were IBNR reserves of
$462.9 million, $286.7 million and $228.8 million, respectively.
Capital Resources
Our total capital resources at December 31, 2002 and 2001 were as follows:
At December 31,
(In thousands)
Common shareholders’ equity
8.1% Series A Preference Shares
Total shareholders’ equity
7.00% Senior Notes
8.54% Capital Securities
DaVinci revolving credit facility - borrowed
Revolving credit facility - unborrowed
Term and revolving loan facility
2002
2001
$ 1,492,035
150,000
1,642,035
$ 1,075,024
150,000
1,225,024
150,000
84,630
100,000
310,000
25,000
150,000
87,630
-
310,000
33,500
Total capital resources
$ 2,311,665
$ 1,806,154
32
RenaissanceRe Holdings Ltd. | Annual Report 2002
During 2002, our capital resources increased primarily as a result of three items: 1) our net income of $364.8 million; 2) an
increase in unrealized gains on our investment portfolio to $95.2 million ($16.3 million as of December 31, 2001),
$36.1 million of which related to our investment in Platinum (See Investments); and 3) the borrowing of the full $100 million
available under DaVinci’s revolving credit facility.
On April 19, 2002, DaVinci entered into a credit agreement providing for a $100 million committed revolving credit facility.
On May 10, 2002, DaVinci borrowed the full $100 million available under this facility to repay $100 million of bridge financing
provided by RenaissanceRe. Neither RenaissanceRe nor Renaissance Reinsurance is a guarantor of this facility and the lenders
have no recourse against us or our subsidiaries other than DaVinci under this facility. Pursuant to the terms of the $310.0
million facility maintained by RenaissanceRe, a default by DaVinci in its obligations will not result in a default under the
RenaissanceRe facility.
Although we own a minority of the economic interest of DaVinci, we control a majority of its outstanding voting rights and,
accordingly, DaVinci is consolidated in our financial statements; as a result, the replacement of $100 million of debt from
RenaissanceRe with $100 million of debt from a third party has caused our reported consolidated debt to increase by $100
million. As of December 31, 2002, the full amount was outstanding under this facility. Interest rates on the facility are based
on a spread above LIBOR, and averaged approximately 2.63% during 2002. The credit agreement contains certain covenants
requiring DaVinci to maintain a debt to capital ratio of 30% or below and a minimum net worth of $230 million. As at
December 31, 2002, DaVinci was in compliance with the covenants of this agreement.
With the increased opportunities to grow our business, we also decided to materially increase our capital resources through
the following activities:
1. In October 2001, we issued 2.5 million 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
8.1% 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 2001, 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.
In October 2001 we formed DaVinci, and raised $300 million of outside capital ($275 million as of December 31, 2001). We
also utilized $200 million of our own capital in the formation of DaVinci when we contributed $100 million as equity and
provided $100 million as bridge financing. The bridge financing was repaid in May 2002 when DaVinci entered into a
revolving credit facility, as noted above.
Also, in conjunction with market opportunities, as of December 31, 2002 we increased the capital of Renaissance Reinsurance
to $1.1 billion and increased the capital of Glencoe to $325 million.
We maintain a revolving credit and term loan agreement with a syndicate of commercial banks. There was no outstanding
balance as of December 31, 2002 and 2001. During the third quarter of 2001, we repaid our borrowings of $16.5 million on
this facility. Interest rates on the facility are based on a spread above LIBOR and averaged 5.45% during 2001. If we were to
borrow under this agreement, the 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 $175.0 million or 125%
of consolidated debt; and 80% of invested assets must be rated BBB- by S&P or Baa3 by Moodys Investor Service or better.
33
RenaissanceRe Holdings Ltd. | Annual Report 2002
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Our subsidiary, Renaissance U.S. Holdings (“Renaissance U.S.”), has a $10.0 million term loan and $15.0 million revolving
loan facility with a syndicate of commercial banks. Interest rates on the facility are based upon a spread above LIBOR, and
averaged 2.35% during 2002, compared to 4.71% during 2001. 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 and revolving credit facility has a mandatory repayment provision of $25 million in June 2003. During 2002,
Renaissance U.S. repaid the third installment of $8.5 million in accordance with the terms of the loan. Renaissance U.S. was
in compliance with all the covenants of this term loan and revolving loan facility as at December 31, 2002.
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 2002, RenaissanceRe repurchased $3.0 million of the Capital Securities.
No Capital Securities were repurchased in 2001. RenaissanceRe has repurchased an aggregate $15.4 million of the Capital
Securities since their issuance in 1997. 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, 2002. 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 recorded 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. At December 31, 2002, we had outstanding letters of credit aggregating $223.1
million, compared to $125.8 million in 2001. Also, in connection with our Top Layer Re joint venture we have committed $37.5
million of collateral to support a letter of credit. Our principal facility is a $385 million secured facility which accepts as collateral
shares issued by our subsidiary Renaissance Investment Holdings Ltd., or “RIHL”. Our participating operating subsidiaries and
our managed joint ventures have pledged (and must maintain) RIHL shares issued to it with a sufficient collateral value to
support its obligations under the facility, including reimbursement obligations for outstanding letters of credit. The participating
In addition, each participating subsidiary and joint
subsidiaries also have the option to post alternative forms of collateral.
venture must maintain additional unpledged RIHL shares at least equal to 15% of its facility usage, and in the aggregate total
unpledged RIHL shares must be maintained at least equal to 15% of all of the outstanding RIHL shares, for liquidity purposes,
in addition to those pledged to support the facility. In the case of a default under the facility, or in other circumstances in which
the rights of our lenders to collect on their collateral may be impaired, the lenders are granted broad enforcement powers under
the facility agreements, in accordance with and subject to its terms. Upon the occurence of certain events (including events of
default) specified in the facility, the collateral agent acting on behalf of the lenders is permitted to redeem pledged shares and
convert the collateral into cash or eligible marketable securities. The redemption of shares by the collateral agent takes priority
over any pending redemption of unpledged shares by us or other holders.
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, 2002 was $22.9 million, compared to $24.1 million in 2001. 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. No further loans or draws will be made under this facility. We anticipate the repayment of these loans
and the subsequent closure of this facility prior to December 31, 2003.
In January 2003, we issued $100 million of 5.875% Senior Notes due February 15, 2013. The proceeds will be used for
general corporate purposes. Interest on the notes is payable on February 15 and August 15 of each year, commencing August
15, 2003. The notes can be redeemed by us prior to maturity subject to payment of a "make-whole" premium; however, we
have no current intentions of calling the notes. The notes, which are senior obligations, 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.
34
RenaissanceRe Holdings Ltd. | Annual Report 2002
In February 2003, we issued 4,000,000 Series B Preference Shares at $25 per share. The shares may be redeemed at $25 per
share at our option on or after February 4, 2008. Dividends are cumulative from the date of original issuance and are payable
quarterly in arrears at 7.3%, commencing June 1, 2003 when, if, and as declared by the Board of Directors. If we submit a
proposal to our shareholders concerning an amalgamation or submit 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, we may redeem the shares
prior to February 4, 2008 at $26 per share. The preference shares have no stated maturity and are not convertible into any
other of our securities.
Shareholders’ Equity
During 2002, shareholders' equity increased by $417 million to $1.6 billion as of December 31, 2002, from $1.2 billion as of
December 31, 2001. The significant components of the change in shareholders' equity included net income from continuing
operations of $364.8 million and an increase in our unrealized gains on investments available for sale of $78.9 million, offset
by dividends to common and preference shareholders of $51.2 million.
From time to time, we have returned capital to our shareholders through share repurchase programs. The value of the
remaining shares authorized under the repurchase programs is $27.1 million. No shares were repurchased during 2002 or
2001. In the future, we may purchase shares under our current authorization, or increase the size of our program. Any such
determination will be subject to market conditions and numerous other factors. Under Bermuda law, RenaissanceRe
common shares repurchased are normally cancelled and retired.
Investments
At December 31, 2002, we held cash and investments totaling $3.1 billion, compared to $2.2 billion in 2001.
The table below shows the aggregate amounts of our invested assets:
At December 31,
(In thousands)
Fixed maturities available for sale, at fair value
Short-term investments, at cost
Other investments
Equity investment in reinsurance company, at fair value
Cash and cash equivalents
Total investments
2002
2001
$ 2,221,109
570,497
129,918
120,288
87,067
$ 3,128,879
$ 1,282,483
733,925
38,307
-
139,715
$ 2,194,430
The $934.5 million growth in our portfolio of invested assets for the year ended December 31, 2002 resulted primarily from
net cash provided by operating activities of $778.4 million, an addition of $100 million in debt by DaVinci and the increase
in the net unrealized appreciation on the available for sale investment portfolio of $78.9 million.
The equity investment in reinsurance company relates to our November 1, 2002 purchase of 3,960,000 common shares of
Platinum Underwriters Holdings, Ltd. (“Platinum”) in a private placement transaction. In addition, we received a ten-year
warrant to purchase up to 2.5 million additional common shares of Platinum for $27.00 per share. We purchased the
common shares for an aggregate price of $84.2 million. As at December 31, 2002, we own 9.2% of Platinum’s outstanding
common shares. We have recorded our investment in Platinum at fair value, and at December 31, 2002 the aggregate fair
value was $120.3 million. The aggregate unrealized gain of $36.1 million on the Platinum investment is included in
accumulated other comprehensive income, of which $15.9 million represents our estimate of the value of the warrants.
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.
35
RenaissanceRe Holdings Ltd. | Annual Report 2002
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Alternative Investments
Included in other investments are investments in hedge funds and a fund invested in bank loans of $81.8 million (2001 - $28.4
million) and private equity funds of $14.6 million (2001 - $4.9 million) (collectively “Investment Funds”). Fair values for our
investments in such Investment Funds are established on the basis of the net valuation criteria established by the managers of
such Investment Funds. These net valuations are determined based upon the valuation criteria established by the governing
documents of such Investment Funds. Such valuations may differ significantly from the values that would have been used had
ready markets existed for the shares of the Investment Funds. Realized and unrealized gains and losses on Investment Funds
are included as a component of net investment income.
We have committed capital to private equity funds of $54.0 million, of which $14.4 million has been contributed as at
December 31, 2002.
Our current investment guidelines call for the invested asset portfolio, which includes investments available for sale and
short term investments to have at least an average AA rating as measured by Standard & Poor's Ratings Group. At December
31, 2002, our invested asset portfolio had a dollar weighted average rating of AA, an average duration of 2.25 years and an
average yield to maturity of 3.09%.
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 2002, 2001 and 2000 we recorded income or recoveries on non-
indemnity catastrophe index transactions of $7.2 million, and a loss of $4.6 million and nil, respectively. We report these
recoveries in other income. We cannot provide assurances that this performance will continue.
Market Sensitive Instruments
Our investment portfolio includes investments whose market values will fluctuate with changes in interest rates.
The aggregate hypothetical loss generated from an immediate adverse parallel shift in the treasury yield curve of 100 basis
points would cause a decrease in total return of 2.25%, which equated to a decrease in market value of approximately $62.8
million on a portfolio valued at $2,791.6 million at December 31, 2002. At December 31, 2001, the decrease in total return
would have been 1.9%, which equated to a decrease in market value of approximately $41.0 million on a portfolio valued at
$2,156.1 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.
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, 2002, we did not have any outstanding options, swaps or forward contracts related to foreign currency exposure.
36
RenaissanceRe Holdings Ltd. | Annual Report 2002
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, 2002, we have not entered into any off-balance sheet arrangements, as defined by Item 303 (a)(4) of
Regulation S-K.
New Accounting Pronouncements
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard ("SFAS") 142, “Goodwill and Other
Intangible Assets.” See “Results of Operations – Cumulative Effect of a Change in Accounting Principle – Goodwill,” above.
In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS
148”), which amends SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and provides transitional disclosure
requirements. For the years ended December 31, 2002 and for the prior years, the Company followed Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for
its employee stock compensation. Effective January 1, 2003, the Company adopted, prospectively, the fair value recognition
provisions of SFAS 123 for all stock-based employee compensation granted, modified or settled after January 1, 2003. Under the
fair value recognition provisions of SFAS 123, the Company estimates the fair value of employee stock options and other stock-
based compensation on the date of grant and amortizes this value as an expense over the vesting period.
In accordance with the transitional disclosure provisions of SFAS 148, the following table sets out the effect on the
Company’s net income and earnings per share for all reported periods had the compensation cost been calculated based
upon the fair value method recommended in SFAS 123:
Years ended December 31,
(In thousands, except share and per share data)
Net income, as reported
add: stock-based employee compensation cost included in
determination of net income
less: fair value compensation cost under SFAS 123
Pro-forma net income
Earnings per share
Basic - as reported
Basic - pro-forma
Diluted - as reported
Diluted - pro-forma
2002
2001
2000
$ 364,814
$ 164,366
$ 127,228
8,243
22,307
$ 350,750
$
$
$
$
5.40
5.19
5.20
5.00
6,387
21,942
$ 148,811
5,347
23,175
$ 109,400
$
$
$
$
2.76
2.50
2.63
2.39
$
$
$
$
2.23
1.92
2.17
1.86
37
RenaissanceRe Holdings Ltd. | Annual Report 2002
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Current Outlook
We believe that there has been a significant dislocation in the insurance and reinsurance markets, due primarily to:
• the increase in demand for insurance and reinsurance protection, and the withdrawal in supply, as a result of the
substantial losses stemming from the World Trade Center disaster;
• substantial increases in prior years, loss reserves stemming from asbestos related claims and an increase in losses from other
casualty coverages written in the late 1990’s and 2000; and
• significant reductions in shareholders’ equity of many insurance and reinsurance companies due to the decline in the
global equity markets.
Based on the factors above, the financial strength ratings of various insurance and reinsurance companies were reduced
during late 2001 and during 2002. Because of these and other factors, we believe that the property catastrophe reinsurance
market, the specialty reinsurance market, and the individual risk markets in which we participate, will continue to display
strong fundamentals and will provide us with growth opportunities during 2003. Also, because we experienced relatively
limited net losses from the World Trade Center disaster and the other events noted above, we believe that we are well
positioned to take advantage of these and other potential opportunities during 2003.
Subsequent to the World Trade Center disaster, a substantial amount of capital entered the insurance and reinsurance
markets both through investments in established companies and through start-up ventures. Currently, we do not believe
that the new capital has offset the widespread underwriting and investment losses sufficiently to cause significant adverse
changes to the prevailing pricing structure in the property catastrophe reinsurance market. However, it is possible that the
new capital in the market, an environment with continued light catastrophe losses, or other factors could cause a reduction
in prices of our products. To the extent that industry pricing of our products does not meet our hurdle rate, we would plan
to reduce our future underwriting activities thus resulting in reduced premiums and a reduction in expected earnings from
this portion of our business.
The growth in our premiums from the specialty reinsurance and individual risk markets presents us with added operational
and management risks for which our historical experience is limited. Accordingly, we plan to continue to expand and
enhance our underwriting, risk management and operational capabilities in specialty reinsurance and individual risk to help
control the risks associated with these businesses.
We also believe that some of our future opportunities may arise in other lines of business in which we have limited experience,
such as certain casualty coverages. If these opportunities come to fruition, they will present us with additional management
and operational risks for which we will need to further develop our resources to effectively manage this expansion.
The World Trade Center disaster has caused insurers and reinsurers to seek to limit their potential exposures to losses from
terrorism attacks. We often exclude losses from terrorism in the reinsurance coverages that we write, however, we have
offered specific coverage for certain terrorism or terrorism related events and, accordingly, we do have potential exposures
to this risk. Also, our subsidiary, Glencoe Insurance Ltd., in accordance with recently passed legislation in the United States,
is required to offer terrorism insurance to the majority of its customers. Currently, the take-up rate by Glencoe’s customers
has approximated 2%, however, we can not be certain on what the future take up rates by Glencoe’s clients will be.
We continue to monitor our aggregate exposure to terrorist attacks.
The cost of our reinsurance protection may increase during 2003. If prices rise to levels at which we believe the purchase of
reinsurance protection would become uneconomical, we may retain a greater level of net risk in certain geographic regions
or for certain classes of risk. However, depending on market conditions, it is also possible that we will have increased
opportunities to purchase reinsurance, resulting in increased levels of ceded premium.
In order to obtain longer-term
retrocessional capacity, we have entered into multi-year contracts with respect to a portion of our portfolio. We have also
begun to enter into quota share type reinsurance relationships from which we generate fees and profit commissions.
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.
38
RenaissanceRe Holdings Ltd. | Annual Report 2002
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)
risks associated with implementing our business strategies and initiatives for organic growth, including risks relating to
managing that growth;
(5) acts of terrorism or acts of war;
(6)
slower than anticipated growth in our fee-based operations, including risks associated with retaining our existing
partners and attracting potential new partners;
(7) changes in economic conditions, including interest and currency rate conditions which could affect our investment portfolio;
(8) uncertainties in our reserving process;
(9)
failures of our reinsurers, brokers or program managers to honor their obligations;
(10) extraordinary events affecting our clients, such as bankruptcies and liquidations, and the risk that we may not retain or
replace our large clients in all future periods;
(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) changes in insurance regulations in the United States, including potential challenges to Renaissance Reinsurance's claim
of exemption from insurance regulation under 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, 2002, 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.
39
RenaissanceRe Holdings Ltd. | Annual Report 2002
Management’s Responsibility for Financial Statements
Management 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 the financial
statements are free of material misstatement and provide
a reasonable basis for their opinion.
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.
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, 2002 and 2001,
and the consolidated results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2002,
in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial
statements, in 2002 the Company changed its method of
accounting for goodwill.
Hamilton, Bermuda
February 4, 2003
statements of
We have audited the accompanying consolidated balance
sheets of RenaissanceRe Holdings Ltd. and Subsidiaries
as of December 31, 2002 and 2001, and the related
consolidated
in
shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2002. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these financial statements based on our audits.
changes
income,
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.
40
RenaissanceRe Holdings Ltd. | Annual Report 2002
Consolidated Balance Sheets
At December 31,
(In thousands of United States dollars, except per share amounts)
Assets
Investments and cash
2002
2001
Fixed maturity investments available for sale, at fair value
$ 2,221,109
$ 1,282,483
(Amortized cost $2,153,715 and $1,266,188 at December 31, 2002
and 2001, respectively) (Note 3)
Short term investments, at cost
Other investments
Equity investment in reinsurance company, at fair value
(Cost $84,199 at December 31, 2002)
Cash and cash equivalents
Total investments and cash
Reinsurance premiums receivable
Ceded reinsurance balances
Losses recoverable (Note 4)
Accrued investment income
Deferred acquisition costs
Other assets
Total Assets
570,497
129,918
120,288
87,067
3,128,879
199,449
73,360
199,533
25,833
55,853
62,829
733,925
38,307
-
139,715
2,194,430
102,202
41,690
217,556
17,696
12,814
57,264
$ 3,745,736
$ 2,643,652
Liabilities, Minority Interests and Shareholders’ Equity
Liabilities
Reserve for claims and claim expenses (Note 5)
$
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 the Company (Note 7)
Minority interest - DaVinci (Note 7)
Shareholders’ Equity (Note 8)
Series A Preference Shares: $1.00 par value - 6,000,000 shares authorized,
804,795
331,985
275,000
146,732
97,013
$ 572,877
125,053
183,500
115,967
58,650
1,655,525
1,056,047
84,630
363,546
87,630
274,951
issued and outstanding at December 31, 2002 and 2001
150,000
150,000
Common Shares and additional paid-in capital: $1.00 par value - authorized
225,000,000 shares; issued and outstanding at December 31, 2002 -
69,749,826 shares (2001 - 67,892,649 shares)
Unearned stock grant compensation (Note 16)
Accumulated other comprehensive income
Retained earnings
Total Shareholders’ Equity
320,936
(18,468)
95,234
1,094,333
1,642,035
264,623
( 20,163)
16,295
814,269
1,225,024
Total Liabilities, Minority Interests and Shareholders’ Equity
$ 3,745,736
$ 2,643,652
See accompanying notes to the consolidated financial statements.
41
RenaissanceRe Holdings Ltd. | Annual Report 2002
Consolidated Statements of Income
Years Ended December 31,
2002
2001
2000
(In thousands of United States dollars, except per share amounts)
Revenues
Gross premiums written
Net premiums written
Increase in unearned premiums
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
$ 1,173,049
$ 501,321
$ 433,002
$ 923,711
$ 339,547
$ 293,303
(162,806)
(6,482 )
(25,622 )
760,905
104,098
3,861
32,821
8,765
333,065
75,156
(1,667)
16,244
18,096
267,681
77,868
378
10,959
(7,151)
910,450
440,894
349,735
289,525
95,644
49,159
14,327
13,069
149,917
45,359
38,603
11,485
7,249
108,604
38,530
37,954
8,022
17,167
461,724
252,613
210,277
Net income before minority interests, taxes and change in
accounting principle
448,726
188,281
139,458
Minority interest - Company obligated, mandatorily redeemable
capital securities of a subsidiary trust holding solely junior
subordinated debentures of the Company (Note 7)
Minority interest - DaVinci (Note 7)
Net income before taxes and change in accounting principle
Income tax benefit (expense) (Note 13)
Cumulative effects of a change in accounting principle
Net income
Dividends on Series A Preference Shares
(7,605)
(55,051)
386,070
115
(9,187)
376,998
(12,184)
(7,484)
(751)
180,046
(14,262)
-
165,784
(1,418)
(7,582)
-
131,876
(4,648)
-
127,228
-
Net income available to Common Shareholders
$ 364,814
$ 164,366
$ 127,228
Earnings per Common Share - basic
Earnings per Common Share - diluted
$
$
5.40
5.20
$
$
2.76
2.63
$ 2.23
$ 2.17
See accompanying notes to the consolidated financial statements.
42
RenaissanceRe Holdings Ltd. | Annual Report 2002
Consolidated Statements of Changes in Shareholders’ Equity
Years Ended December 31,
(In thousands of United States dollars)
Series A Preference Shares
Balance - January 1
Issuance of shares
Balance - December 31
Common shares & additional paid-in capital
Balance - January 1
Issuance of common stock
Exercise of stock options & restricted stock awards
Offering expenses
Stock dividend
Repurchase of shares
Balance - December 31
Unearned stock grant compensation
Balance - January 1
Net stock grants awarded, cancelled
Amortization
Balance - December 31
Accumulated other comprehensive income
Balance - January 1
Net unrealized gains on securities,
net of adjustment (see disclosure below)
Balance - December 31
Retained earnings
Balance - January 1
Net income
Dividends paid on Common Shares
Dividends paid on Preference Shares
Stock dividend
Repurchase of shares
Balance - December 31
2002
2001
2000
$
150,000
$ -
$
-
150,000
150,000
150,000
264,623
-
10,675
(73)
45,711
-
22,999
232,525
14,652
(5,553)
-
-
-
-
-
19,686
-
3,495
490
-
(672)
320,936
264,623
22,999
(20,163)
(7,607)
9,302
(18,468)
(11,716 )
(15,653 )
7,206
(20,163 )
(10,026)
(7,215)
5,525
(11,716)
16,295
6,831
(18,470)
78,939
95,234
9,464
16,295
25,301
6,831
814,269
376,998
(39,039)
(12,184)
(45,711)
-
682,704
165,784
(32,801)
(1,418)
-
-
1,094,333
814,269
609,139
127,228
(29,228)
-
-
(24,435)
682,704
Total Shareholders’ Equity
$ 1,642,035
$ 1,225,024
$ 700,818
Comprehensive Income
Net income
Other comprehensive income
Comprehensive Income
Disclosure Regarding Net Unrealized Gains
Net unrealized holding gains arising during year
Net realized losses (gains) included in net income
Net unrealized gains on securities
See accompanying notes to the consolidated financial statements.
$
$
$
$
376,998
78,939
455,937
$ 165,784
$ 127,228
9,464
25,301
$ 175,248
$ 152,529
87,704
(8,765)
78,939
$ 27,560
$ 18,150
(18,096)
7,151
$
9,464
$ 25,301
43
RenaissanceRe Holdings Ltd. | Annual Report 2002
Consolidated Statements of Cash Flows
Years Ended December 31,
(In thousands of United States dollars )
2002
2001
2000
Cash Flows Provided by Operating Activities:
Net income
$ 376,998
$ 165,784
$ 127,228
Adjustments to reconcile net income to 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
Minority interest in undistributed net income of DaVinci
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 investments
Equity investment in reinsurance company
Acquisition of subsidiary, net of cash acquired
Net cash applied to investing activities
Cash Flows Provided by (Applied to) Financing Activities:
Issuance of debt
Repayment of debt
Minority interests
Dividends paid on Common Shares
Dividends paid on Preference Shares
Purchase of Capital Securities
Issuance (purchase) of Common Shares
Issuance of Preference Shares
Net cash provided by (applied to) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and Cash Equivalents, Beginning of Year
19,041
(8,765)
(60,214)
(21,780)
(8,137)
186,124
231,236
55,051
8,872
778,426
5,775,865
(6,727,950)
166,428
(84,199)
(23,495)
(893,351)
100,000
(8,500)
25,000
(39,039)
(12,184)
(3,000)
-
-
62,277
(52,648)
139,715
3,190
(18,096 )
58,408
(4,169 )
(2,661)
12,513
119,314
751
6,448
341,482
315
7,151
(14,346)
12,717
(1,578)
14,155
86,033
-
9,153
250,828
3,290,264
(3,633,332)
(720,170)
-
-
2,171,484
(2,187,007)
(1,001)
-
-
(1,063,238 )
(16,524)
148,868
(16,500)
274,951
(32,801)
(1,418)
-
232,525
145,275
750,900
29,144
110,571
-
(200,000)
-
(29,228)
-
(1,510)
(25,107)
-
(255,845)
(21,541)
132,112
Cash and Cash Equivalents, End of Year
$
87,067
$ 139,715
$ 110,571
See accompanying notes to the consolidated financial statements.
44
RenaissanceRe Holdings Ltd. | Annual Report 2002
Notes to Consolidated Financial Statements
December 31, 2002 (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, the Company provides reinsurance and insurance to a broad range of customers.
• 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. Renaissance Reinsurance also writes
specialty reinsurance in certain lines, including such lines as catastrophe-exposed workers’ compensation coverage,
surety, property per risk, terrorism, aviation and finite reinsurance.
• During the year, the Company renamed its primary segment “individual risk” to more accurately reflect the risk
characteristics of
this business. The individual risk segment currently provides insurance for commercial and
homeowners catastrophe-exposed property business, and also provides reinsurance on a quota share basis. The
Company's individual risk operations principally include Glencoe Insurance Ltd. (“Glencoe”), and Stonington
Insurance Company (“Stonington”).
• The Company also manages property catastrophe reinsurance written on behalf of joint ventures, principally including
Top Layer Reinsurance Ltd. (“Top Layer Re”) and DaVinci Reinsurance Ltd. (“DaVinci”). The results of DaVinci,
and the results of DaVinci’s parent, DaVinciRe Holdings Ltd. (“DaVinciRe”), are consolidated in the Company's
financial statements (Note 7). The Company acts as exclusive underwriting manager for these joint ventures in return
for fee-based income and profit participation.
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 (Note 7).
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 most significant judgment made
by management is the estimation of claims and claims expense reserves. Other material judgments made by management
include the estimates of potential impairments in assets, particularly regarding the collectibility of reinsurance
recoverables and the recoverability of deferred tax assets.
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.
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.
45
RenaissanceRe Holdings Ltd. | Annual Report 2002
Notes to Consolidated Financial Statements
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. Also, the Company has recently increased its specialty reinsurance and
individual risk premiums, but does not have the benefit of a significant amount of its own historical experience in these
lines of business. Accordingly, the setting and reserving for incurred losses in these lines of business could be subject to
greater variability.
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 in fixed maturities and the equity investment in reinsurance company are classified as available for sale
and are reported at fair value. The net unrealized appreciation or depreciation on these 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 cost basis 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 and/or internal pricing valuation techniques.
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.
During 2002, the Company changed the classification of certain investments previously reflected as cash and cash
equivalents. These investments were reclassified to short-term investments to more appropriately reflect the Company’s
investment strategy regarding those assets. Prior period comparative information has been reclassified to conform with
the current year presentation.
Goodwill
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard 142 “Goodwill and Other
Intangible Assets” (“SFAS 142”). In the second quarter of 2002, the Company completed its initial impairment review in
compliance with the transition provisions of SFAS 142 and, as a result, the Company decided to reflect goodwill at zero
value, the low end of an estimated range of values. In accordance with the provisions of SFAS 142, this is required to be
reflected as a cumulative effect of a change in accounting principle in the statement of income and is required to be
reflected as if this adjustment was recorded in the first quarter of 2002.
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.
46
RenaissanceRe Holdings Ltd. | Annual Report 2002
Stock incentive compensation plans
For the years ended December 31, 2002 and for the prior years, the Company followed Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations in accounting for its
employee stock compensation. Effective January 1, 2003, the Company adopted, prospectively, the fair value recognition
provisions of SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), for all stock-based employee
compensation granted, modified or settled after January 1, 2003. Under the fair value recognition provisions of SFAS 123,
the Company estimates the fair value of employee stock options and other stock-based compensation on the date of grant
and amortizes this value as an expense over the vesting period.
In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”,
(“SFAS 148”), which amends SFAS 123 and provides transitional disclosure requirements.
In accordance with the
transitional disclosure provisions of SFAS 148, the following table sets out the effect on the Company’s net income and
earnings per share for all reported periods had the compensation cost been calculated based upon the fair value method
recommended in SFAS 123:
Years ended December 31,
2002
2001
2000
Net income as reported
add: stock-based employee compensation cost included in
determination of net income
less: fair value compensation cost under SFAS 123
Pro-forma net income
Earnings per share
Basic - as reported
Basic - pro-forma
Diluted - as reported
Diluted - pro-forma
$ 364,814
$ 164,366
$ 127,228
8,243
22,307
6,387
21,942
5,347
23,175
$ 350,750
$ 148,811
$ 109,400
$ 5.40
$ 5.19
$ 5.20
$ 5.00
$ 2.76
$ 2.50
$ 2.63
$ 2.39
$ 2.23
$ 1.92
$ 2.17
$ 1.86
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, 2002
U.S. treasuries and agencies
Corporate securities
Non-U.S. government bonds
Asset-backed securities
Mortgage-backed securities
Total investments
Amortized
Cost
$
644,826
536,053
367,638
312,647
292,551
$ 2,153,715
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$ 14,647
29,235
13,507
6,567
9,106
$ 73,062
$
$
(122)
(3,943)
(1,473)
(105)
(25)
(5,668)
Fair
Value
$
659,351
561,345
379,672
319,109
301,632
$ 2,221,109
47
RenaissanceRe Holdings Ltd. | Annual Report 2002
Notes to Consolidated Financial Statements
At December 31, 2001
U.S. treasuries and agencies
Corporate securities
Non-U.S. government bonds
Asset-backed securities
Mortgage-backed securities
Total investments
Amortized
Cost
$
272,698
339,374
160,732
292,175
201,209
$ 1,266,188
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
$
3,972
7,534
5,399
3,804
3,196
23,905
$
$
(774)
(4,199)
(760)
(1,188)
(689)
(7,610)
Fair
Value
$
275,896
342,709
165,371
294,791
203,716
$ 1,282,483
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, 2002
Due in less than one year
Due after one through five years
Due after five through ten years
Due after ten years
Mortgage-backed securities
Asset-backed securities
Total investments
Amortized
Cost
Fair
Value
$
23,102
1,078,572
337,759
109,084
292,551
312,647
$ 2,153,715
$
23,203
1,107,899
350,275
118,991
301,632
319,109
$ 2,221,109
Investment income
The components of net investment income are as follows:
Years Ended December 31,
Fixed maturities
Short term investments
Cash and cash equivalents
Other investments
Investment expenses
Net investment income
2002
91,784
11,137
3,238
1,029
107,188
3,090
104,098
$
$
2001
65,168
7,785
3,285
955
77,193
2,037
75,156
$
$
2000
62,588
6,213
10,858
-
79,659
1,791
77,868
$
$
The analysis of realized gains (losses) and the change in unrealized gains (losses) on investments is as follows:
Years Ended December 31,
2002
2001
2000
Gross realized gains
Gross realized losses
Net realized gains (losses) on investments
Unrealized gains
Total realized and unrealized gains
on investments
$
70,815
(62,050)
8,765
78,939
$
78,247
(60,151)
18,096
9,464
$
11,173
(18,324)
(7,151)
25,301
$
87,704
$
27,560
$
18,150
At December 31, 2002 approximately $29.7 million (2001 - $12.1 million) of cash and investments at fair value were on
deposit with, or in trust accounts for the benefit of, various regulatory authorities as required by law.
48
RenaissanceRe Holdings Ltd. | Annual Report 2002
Alternative investments
Included in other investments are investments in hedge funds and a fund invested in bank loans totaling $81.8 million
(2001 - $28.4 million) and private equity funds of $14.6 million (2001 - $4.9 million) (collectively “Investment Funds”).
Fair values for the Company’s investments in such Investment Funds are established on the basis of the net valuation
criteria established by the managers of such Investment Funds. These net valuations are determined based upon the
valuation criteria established by the governing documents of such Investment Funds.
Such valuations may differ
significantly from the values that would have been used had ready markets existed for the shares of the Investment Funds.
Realized and unrealized gains and losses on Investment Funds are included as a component of net investment income.
The Company has committed capital to private equity funds of $54.0 million, of which $14.4 million has been contributed
as at December 31, 2002.
Equity investment in reinsurance company
On November 1, 2002, the Company purchased 3,960,000 common shares of Platinum Underwriters Holdings, Ltd.
(“Platinum”) in a private placement transaction and received ten-year warrants to purchase up to 2.5 million additional
common shares of Platinum for $27.00 per share. The Company purchased the common shares and warrants for an
aggregate purchase price of $84.2 million. As at December 31, 2002, the Company owns 9.2% of Platinum’s outstanding
common shares. The Company records its investment in Platinum at fair value, and at December 31, 2002 the aggregate
fair value was $120.3 million. The aggregate unrealized gain of $36.1 million is included in accumulated other
comprehensive income.
Derivatives related to physical variables
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 2002, 2001 and 2000,
the Company recognized gains (losses) on these contracts of $7.2 million, a loss of $4.6 million, and nil, respectively,
which are included in other income.
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 $218.0 million, $155.7 million and $149.8 million for 2002,
2001 and 2000, 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 $63.0 million, $160.4
million and $52.0 million for 2002, 2001 and 2000, respectively. As of December 31, 2002, the Company has recorded a
$7.8 million valuation allowance against losses recoverable (2001 - $7.5 million).
Included in losses recoverable as of December 31, 2002 are recoverables of $10.0 million (2001 - $14.4 million) which
relate to a retroactive reinsurance contract entered into by Stonington. SFAS 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, 2002 was $5.6 million (2001 - $8.4 million).
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 is
inherently difficult because of the potential severity of property catastrophe claims. Additionally, the Company has recently
increased its individual risk and specialty reinsurance premiums but does not have the benefit of a significant amount of
its own historical experience in these lines. 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.
49
RenaissanceRe Holdings Ltd. | Annual Report 2002
Notes to Consolidated Financial Statements
For both the Company's reinsurance and individual risk 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 or decrease 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.
Adjustments to the Company’s claims and claim expense reserves can impact current year net income by either increasing
net income if the estimates of prior year claims and claim expense reserves prove to be overstated or by decreasing net
income if the estimates of prior year claims and claim expense reserves prove to be insufficient.
Activity in the liability for unpaid claims and claim expenses is summarized as follows:
Years Ended December 31,
2002
2001
2000
Net reserves as of January 1
Net reserves assumed in acquisition of subsidiary
$
355,321
33,579
$
237,014
-
$
174,913
-
Net incurred related to:
Current year
Prior years
Total net incurred
Net paid related to:
Current year
Prior years
Total net paid
291,520
(1,995)
289,525
10,017
63,146
73,163
165,914
(15,997)
149,917
20,470
11,140
31,610
100,168
8,436
108,604
12,545
33,958
46,503
Total net reserves as of December 31
Losses recoverable as of December 31
Total gross reserves as of December 31
605,262
199,533
804,795
$
355,321
217,556
572,877
$
237,014
166,597
403,611
$
The prior year favorable development in 2001 was due primarily to net additional recoveries on 1999 property catastrophe
loss events. The prior year adverse development in 2000 was due primarily to adverse development on the 1999 losses
related to the European storms. The Company's total gross reserve for IBNR claims was $462.9 million as of December 31,
2002 (2001 - $286.7 million).
Claims and claim expenses incurred were reduced by $15.0 million during 2002 (2001-nil) related to income earned on
an assumed reinsurance contract that is classified as an underwriting-risk only deposit contract. A deposit liability of
$103.0 million is included in reinsurance balance payable at December 31, 2002 (2001-$80.0 million).
Note 6. Debt
In July 2001, RenaissanceRe issued $150 million of 7% Senior Notes due July 2008. RenaissanceRe 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 RenaissanceRe prior to
maturity subject to payment of a “make-whole” premium; however, RenaissanceRe has no current intentions of calling the
notes. The notes, which are senior obligations of RenaissanceRe, 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, 2002 the fair value of the notes was $164.0 million (2001 - $151.1 million).
On April 19, 2002, DaVinciRe entered into a credit agreement providing for a $100 million committed revolving credit
facility. On May 10, 2002, DaVinciRe borrowed the full $100 million available under this facility to repay $100 million
bridge financing provided by RenaissanceRe. Neither RenaissanceRe nor Renaissance Reinsurance is a guarantor of this
facility and the lenders have no recourse against RenaissanceRe or its subsidiaries other than DaVinciRe under this facility.
Pursuant to the terms of the $310.0 million facility maintained by RenaissanceRe, a default by DaVinciRe on its obligations
will not result in a default under the RenaissanceRe facility. Although RenaissanceRe owns a minority of the economic
interest of DaVinciRe, RenaissanceRe controls a majority of its outstanding voting rights and, accordingly, DaVinciRe is
consolidated in the Company’s financial statements; as a result, the replacement of $100 million of debt from
RenaissanceRe with $100 million of debt from a third party has caused the Company’s reported consolidated debt to
50
RenaissanceRe Holdings Ltd. | Annual Report 2002
increase by $100 million. As of December 31, 2002, the full amount was outstanding under this facility. Interest rates on
the facility are based on a spread above LIBOR, and averaged approximately 2.63% during 2002. The credit agreement
contains certain covenants requiring DaVinciRe to maintain a debt to capital ratio of 30% or below and a minimum net
worth of $230 million. As at December 31, 2002, DaVinciRe was in compliance with the covenants of this agreement.
RenaissanceRe has a $310 million committed revolving credit and term loan agreement with a syndicate of commercial banks.
There was no outstanding balance as of December 31, 2002 and 2001. During the third quarter of 2001, RenaissanceRe repaid
its borrowings of $16.5 million on this facility. Interest rates on the facility are based on a spread above LIBOR and averaged
5.45% in 2001. If RenaissanceRe were to borrow under this agreement, the 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 $175 million or 125% of consolidated debt; and 80% of invested assets must be rated BBB- by S&P or Baa3 by
Moody’s Investor Service or better.
Renaissance U.S. has a $10 million term loan and a $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 2.35% during 2002 (4.71% in 2001). As of
December 31, 2002 the balance outstanding was $25 million (2001 - $33.5 million). The credit agreement contains certain
financial covenants, the primary one being that RenaissanceRe be its principal guarantor and maintain a ratio of liquid assets to
debt service of 4:1. The term loan and revolving credit facility has a mandatory repayment provision of $25 million in 2003.
During 2002, the Company repaid the third 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, 2002. The fair value of
the borrowings approximate the carrying values because such loans reprice frequently.
Interest payments on the above debt totaled $13.1 million, $7.3 million and $17.2 million for the years ended December 31, 2002,
2001 and 2000, respectively.
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% 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%,
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. RenaissanceRe’s guarantee of the distributions on the Capital Securities issued by the Trust,
when taken together with RenaissanceRe’s obligations under an expense reimbursement agreement with the Trust, provides
full and unconditional guarantee of amounts due on the Capital Securities issued by the Trust.
During 2002, the Company repurchased $3.0 million of the Capital Securities. No Capital Securities were repurchased in
2001. The Company has repurchased an aggregate $15.4 million of the Capital Securities since their issuance in 1997.
DaVinci
In October 2001, the Company formed DaVinciRe with other equity investors. RenaissanceRe owns a minority economic interest
in DaVinciRe, however, because RenaissanceRe controls a majority of DaVinciRe’s outstanding voting rights, the financial
statements of DaVinciRe are included in the consolidated financial statements of the Company. The 75% portion of DaVinciRe's
earnings and shareholders’ equity held by third parties is recorded 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:
At December 31, 2002
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
Remaining Authorized
Outstanding
128,620,006
10,224,185
185,532
139,029,723
66,200,226
3,549,600
-
69,749,826
51
RenaissanceRe Holdings Ltd. | Annual Report 2002
Notes to Consolidated Financial Statements
On October 15, 2001, the Company issued 7.5 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 17.1 million common shares for 12.6 million Diluted
Voting I Shares and 4.5 million Diluted Voting II Shares, and as such are the sole holders of the Diluted Voting I Shares.
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% 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. No shares were repurchased during 2002
or 2001. Common shares repurchased by the Company are normally cancelled and retired.
During 2001, GEI completed the sale of 0.9 million and Diluted Voting I Shares, pursuant to shelf registrations on Form
S-3. The Diluted Voting I Shares sold by GEI were subsequently converted into common shares.
Note 9. Earnings Per Share
The Company utilizes SFAS 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):
Years Ended December 31,
Weighted average shares - basic
Per share equivalents of employee
stock options and restricted shares
Weighted average shares - diluted
2002
67,555
2,656
70,211
2001
2000
59,490
57,102
2,901
62,391
1,626
58,728
Note 10. Related Party Transactions and Major Customers
Other assets include the Company’s investment in Top Layer Re of $36.1 million (2001 - $23.4 million), which is 50% owned
by Renaissance Reinsurance and is carried using the equity method. The Company's earnings from Top Layer Re totaled
$22.3 million for the year ended December 31, 2002 (2001 - $9.7 million) and are included in other income. During 2002 and
2001, the Company also received distributions from Top Layer Re of $9.7 million and $7.5 million, respectively.
During the years ended December 31, 2002, 2001 and 2000, the Company received 71.1%, 76.9%, and 78.3%, respectively,
of its reinsurance premium assumed from four reinsurance brokers. Subsidiaries and affiliates of Marsh Inc., the Benfield
Group PLC, Willis Faber and AON Re Group accounted for approximately 27.5%, 19.0%, 13.1% and 11.5%, respectively,
of the Company's gross premiums written in 2002.
52
RenaissanceRe Holdings Ltd. | Annual Report 2002
Note 11. Goodwill
In connection with the Company’s adoption of SFAS 142, the Company wrote-off the balance of its goodwill during the
second quarter of 2002, which totaled $9.2 million. As required by SFAS 142, this charge has been reflected in the
statement of operations as a cumulative effect of a change in accounting principle. The following table sets forth the effect
of goodwill amortization on comparative period earnings:
Years ended December 31,
Net income available to common shareholders, as reported
Add back: goodwill amortization expense
Adjusted net income available to common shareholders
Average common shares outstanding - basic
Average common shares outstanding - diluted
Adjusted per common share data
Earnings per common share - basic
Earnings per common share - diluted
Note 12. Dividends
2001
$ 164,366
557
$ 164,923
59,490
62,391
$
$
2.77
2.64
2000
$ 127,228
209
$ 127,437
57,102
58,728
$
$
2.23
2.17
Dividends declared and paid on Common Shares amounted to $0.57, $0.53 and $0.50 per common share for the years
ended December 31, 2002, 2001, and 2000, respectively.
During the second quarter of 2002, RenaissanceRe effected a three-for-one stock split through a stock dividend of two
additional common shares for each common share owned. All of the common share and per common share information
provided in these financial statements is as if the stock dividend had occurred for all periods presented.
The total amount of dividends paid to holders of the Common Shares during 2002, 2001 and 2000 was $39.0 million,
$32.8 million and $29.2 million, respectively.
Note 13. 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 (benefit) expense for 2002, 2001 and 2000 is comprised as follows:
Year ended December 31, 2002
U.S. federal
U.S. state and local
Year ended December 31, 2001
U.S. federal
U.S. state and local
Year ended December 31, 2000
U.S. federal
U.S. state and local
Current
$
$
-
-
-
Current
$ 2,369
21
$ 2,390
Current
$
$
28
18
46
Deferred
$
$
(115)
-
(115)
Deferred
$ 11,872
-
$ 11,872
Deferred
$
$
4,602
-
4,602
Total
(115)
-
(115)
Total
14,241
21
14,262
Total
4,630
18
4,648
$
$
$
$
$
$
53
RenaissanceRe Holdings Ltd. | Annual Report 2002
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax
liabilities are presented below:
At December 31,
2002
2001
Deferred tax assets
Allowance for doubtful accounts
Claims reserves, principally due to discounting for tax
Retroactive reinsurance gain
Net operating loss carryforwards
Goodwill
Others
Deferred tax liabilities
Other
Net deferred tax asset before valuation allowance
Valuation allowance
Net deferred tax asset
$
1,683
1,409
1,892
22,392
3,924
1,839
33,139
(1,428)
31,711
(27,724)
3,987
$
$
1,627
1,071
2,861
19,710
1,177
437
26,883
(480)
26,403
(22,155)
4,248
$
The net deferred tax asset is included in other assets in the consolidated balance sheet. The net operating loss
carryforward of $65.9 million (2001 - $58.5 million) is available to offset regular taxable U.S. income during the
carryforward period (through 2022).
During 2002, the Company recorded additions to the valuation allowance of $5.6 million. The Company’s deferred tax
asset relates primarily to net operating loss carryforwards that are available to offset future taxes payable by the
Company’s U.S. subsidiaries. Although the net operating losses, which gave rise to a deferred tax asset have a
carryforward period through 2022, the Company's U.S. operations did not generate significant taxable income during
the year ended December 31, 2002 and prior years. 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.
Note 14. Geographic Information
Financial information relating to gross premiums by geographic region is as follows:
Years Ended December 31,
United States and Caribbean
Worldwide
Europe
Worldwide (excluding U.S.) (1)
Other
Australia and New Zealand
Specialty reinsurance (2)
Total reinsurance
Individual risk (3)
$
2002
332,314
169,790
86,461
56,628
18,354
2,127
247,021
912,695
260,354
2001
2000
$ 180,305
93,474
20,414
45,111
22,433
12,159
77,468
451,364
49,957
$ 145,871
98,923
22,071
60,382
9,559
8,280
37,730
382,816
50,186
Total gross premiums written
$ 1,173,049
$ 501,321
$ 433,002
(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 written premiums written to date is predominantly
from Europe and Japan.
(2) The category Specialty Reinsurance consists of contracts that are predominantly exposed to U.S. risks, with a
small portion of the risks being Worldwide.
(3) The category Individual Risk consists of contracts that are primarily exposed to U.S. risks.
54
RenaissanceRe Holdings Ltd. | Annual Report 2002
Note 15. Segment Reporting
The Company has two reportable segments: reinsurance operations and individual risk operations (formerly primary
operations). The reinsurance segment, which includes the results of DaVinci in 2002, primarily provides property catastrophe
reinsurance and specialty reinsurance to selected insurers and reinsurers on a worldwide basis. During the year, we renamed
our primary segment “individual risk” to more accurately describe the risk characteristics of this business. We define the
individual risk segment to include underwriting that involves understanding the characteristics of the original underlying
insurance policy. The individual risk segment currently provides insurance for commercial and homeowners’ catastrophe-
exposed property business, and also provides reinsurance on a quota share basis.
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 individual risk segments. The pre-tax loss of the holding companies primarily consisted of interest expense
on bank loans, minority interests, 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.
Data for the years ended December 31, 2002, 2001 and 2000 was as follows:
Year ended December 31, 2002
Reinsurance (1)
Individual Risk (1)
Other
Eliminations (2)
Total
Gross premiums written
Net premiums written
Income
$ 912,695
696,610
308,648
$ 282,579
227,101
17,929
-
$ 38,237
$ (22,225) $ 1,173,049
923,711
364,814
Claims and claim expense ratio
Underwriting expense ratio
Combined ratio
37.3%
16.5
53.8%
43.2%
37.5
80.7%
38.1%
19.0
57.1%
Year ended December 31, 2001
Reinsurance (1)
Individual Risk (1)
Other
Eliminations
Total
Gross premiums written
Net premiums written
Income (loss)
$ 451,364
326,680
100,655
$
49,957
12,867
(1,469)
-
$ 65,180
Claims and claim expense ratio
Underwriting expense ratio
Combined ratio
46.8%
22.2
69.0%
(30.9)%
149.6
118.7%
Year ended December 31, 2000
$ 501,321
339,547
164,366
45.0%
25.2
70.2%
Reinsurance (1)
Individual Risk (1)
Other
Eliminations
Total
Gross premiums written
Net premiums written
Income (loss)
$ 382,816
287,941
85,532
$
50,186
5,362
(2,939)
-
$ 44,635
Claims and claim expense ratio
Underwriting expense ratio
Combined ratio
40.4%
26.8
67.2%
47.0%
98.1
145.1%
$ 433,002
293,303
127,228
40.6%
28.5
69.1%
(1) Income (loss) for the Reinsurance and Individual Risk segments represents net underwriting income. Net
underwriting income consists of net premiums earned less claims and claims expenses, acquisition costs and
operational expenses.
(2) Represents premium ceded from Individual Risk segment to Reinsurance segment.
With the low level of net earned premium for the individual risk operations of $7.8 million and $6.5 million in 2001 and 2000,
respectively, relatively modest adjustments to claims and claim expenses incurred and to operating expenses caused unusual
fluctuations in the claims and claim expenses ratio and the underwriting expense ratio of our individual risk operations.
The Company does not manage its assets by segment and therefore investment income and total assets are not allocated to the segments.
55
RenaissanceRe Holdings Ltd. | Annual Report 2002
Notes to Consolidated Financial Statements
Note 16. 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 fair value of option grants is estimated on the date of grant using a Black-Scholes option pricing model for pro-forma
footnote purposes with the following weighted average assumptions used for grants in 2002, 2001 and 2000, respectively:
dividend yield of 1.4%, 1.7% and 1.9%; expected option life of five years for all years; expected volatility of 30%, 31%
and 29%; and a risk-free interest rate of 2.7%, 4.8% and 5.0%.
The following is a table of the changes in options outstanding for 2002, 2001 and 2000, respectively:
Awards
available for
grant
Weighted
Options
outstanding
Average exercise Fair value of
price
options
Range of
exercise prices
Balance, December 31, 1999
3,634,383
4,760,604
$ 12.41
Options granted
Options forfeited
Options exercised
Shares turned in or withheld
Restricted stock issued
Restricted stock forfeited
(4,770,354 )
226,680
2,188,080
(710,637 )
26,910
4,770,354
(226,680 )
(3,235,725 )
$ 16.34
$ 14.48
$ 12.91
$
4.50
$ 11.33 - 24.82
Balance, December 31, 2000
595,062
6,068,553
$ 15.50
Options authorized
Options granted
Options forfeited
Options exercised
Shares turned in or withheld
Restricted stock issued
Restricted stock forfeited
2,850,000
(1,500,867 )
97,668
1,346,178
(716,748 )
47,394
1,500,867
( 97,668 )
(2,195,037 )
$ 30.61
$ 18.27
$ 18.44
$
8.56
$ 21.35 - 33.85
Balance, December 31, 2001
2,718,687
5,276,715
$ 18.97
Options authorized
Options granted
Options forfeited
Options exercised
Shares turned in or withheld
Restricted stock issued
Restricted stock forfeited
2,550,000
(2,637,929 )
137,655
2,114,379
(380,233)
68,660
2,637,929
(137,655 )
(3,597,769 )
$ 39.30
$ 18.95
$ 22.09
$
6.47
$ 29.77 - 42.74
Balance, December 31, 2002
4,571,219
4,179,220
$ 28.93
Total options exercisable at
December 31, 2002
2,062,886
56
RenaissanceRe Holdings Ltd. | Annual Report 2002
The Company's 2001 Stock Incentive Plan 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, 2002 was
656,700 shares. As of December 31, 2002, the number of options issued to directors and unexercised was 300,000.
In 2002, 12,000 options to purchase common shares were granted and 3,132 restricted common shares were granted.
In 2001, 12,000 options to purchase common shares and 5,616 restricted common shares were granted. In 2000, 210,000
options to purchase common shares and 9,984 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% 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 2002, 2001 and 2000 the Company issued 101,536, 150,660 and 232,026 shares
under this plan, respectively, with fair values of $3.9 million, $3.2 million and $2.9 million, respectively. Additionally, in
2002, 2001 and 2000 the Board of Directors granted 278,697, 566,088 and 478,611 restricted shares with a value of
$10.7 million, $14.0 million, and $6.3 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
$8.2 million, $7.2 million, and $5.5 million in 2002, 2001 and 2000, respectively.
All of the Company's employees are eligible for defined contribution pension plans. Contributions are primarily based
upon a percentage of eligible compensation.
Note 17. 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, 2002 the statutory capital and surplus of the Bermuda subsidiaries was $2.0 billion and the
amount required to be maintained under Bermuda law was $414.7 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% 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 2002, Renaissance Reinsurance and DaVinci paid aggregate cash dividends of
$224.3 million and $3.5 million, respectively.
Under the Act, Glencoe is classified as a Class 3 insurer and Glencoe is also eligible as an excess and surplus lines insurer
in a number of states in America. Under the various capital and surplus requirements in Bermuda and in these states,
In this regard, the declaration of dividends from
Glencoe is required to maintain a minimum of capital and surplus.
retained earnings and distributions from additional paid-in capital are limited to the extent that the above requirement
is 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 $25.4 million at December 31, 2002 and the amount
required to be maintained was $9.0 million.
57
RenaissanceRe Holdings Ltd. | Annual Report 2002
Notes to Consolidated Financial Statements
Note 18. 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% of shareholders’
equity at December 31, 2002. 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. The Company had no investments in these
derivative instruments as of December 31, 2002 and 2001.
Letters of credit
As of December 31, 2002, the Company’s bankers have issued letters of credit of approximately $223.1 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, upon a change in control, as defined therein and by the Company’s 2001 Stock
Incentive Plan.
Employee credit facility
In June 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.
Following the adoption of revised rules by the Securities and Exchange Commission in 2002 which prohibit the Company
from extending credit to its employees, there have been no further advances of credit to employees under this facility.
At December 31, 2002, the bank loans guaranteed by the Company totaled $22.9 million (2001 - $24.1 million).
At December 31, 2002, the common shares that collateralize the loans had a fair value of $53.7 million (2001 - $59.2
million). No new loans may be made under this facility and the Company anticipates the repayment of these loans and
the subsequent closure of the facility prior to December 31, 2003.
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.
Note 19. Subsequent Events
In January 2003, the Company issued $100 million of 5.875% Senior Notes due February 15, 2013. The proceeds will be
used for general corporate purposes.
Interest on the notes is payable on February 15 and August 15 of each year,
commencing August 15, 2003. 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.
In February 2003, the Company issued 4,000,000 $1.00 par value Series B Preference Shares at $25 per share. The shares
may be redeemed at $25 per share at the Company's option on or after February 4, 2008. Dividends are cumulative from
the date of original issuance and are payable quarterly in arrears at 7.3%, commencing June 1, 2003 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 February 4, 2008 at $26 per share.
The preference shares have no stated maturity and are not convertible into any other securities of the Company.
58
RenaissanceRe Holdings Ltd. | Annual Report 2002
Note 20. Quarterly Financial Results (Unaudited)
Quarter Ended
March 31,
Quarter Ended
June 30,
Quarter Ended
September 30,
Quarter Ended
December 31,
2002
2001
2002
2001
2002
2001
2002
2001
Gross premiums written
Net premiums written
$ 460,834 $ 198,208
$ 270,294 $ 122,012
$ 282,597 $ 123,571
$ 159,324
$ 57,530
$ 379,096 $ 121,232
$ 198,517
$ 92,946
$ 192,687 $ 79,030
$ 153,411
$ 46,339
Net premiums earned
$ 150,308 $ 83,900
$ 184,742
$ 75,531
$ 191,310 $ 79,933
$ 234,545
$ 93,701
Net investment income
22,783
17,884
26,364
18,270
26,065
18,738
28,886
20,264
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
(1,950)
8,129
(295)
3,869
3,650
8,147
233
3,901
888
7,951
(1,051)
1,070
1,273
8,594
(554)
7,404
686
7,615
2,968
2,881
7,891
4,978
(2,780)
2,622
179,956
112,973
255,871
100,816
234,105
103,668
270,518
123,437
43,118
18,549
10,663
2,690
2,714
41,895
12,545
8,512
1,528
864
73,149
20,368
9,962
4,688
3,433
32,315
10,608
9,894
4,780
683
82,931
23,802
9,616
3,466
3,499
46,986
11,461
9,408
1,366
2,699
90,327
32,925
18,918
3,483
3,423
28,721
10,745
10,789
3,811
3,003
77,734
65,344
111,600
58,280
123,314
71,920
149,076
57,069
Income before minority interest
and taxes
102,222
47,629
114,271
42,536
110,791
31,748
121,442
66,368
Minority interest -
Capital Securities
Minority interest - DaVinci
1,833
9,477
1,847
-
Income before taxes
90,912
45,782
Income tax benefit (expense)
(596)
(876)
Cumulative effect of a change in
accounting principle - SFAS 142 -
Goodwill
Net income
(9,187)
-
81,129
44,906
Dividends on Preference Shares
3,038
-
Net income to Common
1,831
13,470
98,970
273
1,895
-
40,641
(302)
1,759
17,689
91,343
(59)
-
99,243
3,003
-
40,339
-
-
91,284
3,038
1,823
-
2,182
14,415
1,919
751
29,925
104,845
63,698
497
(13,087)
29,928
105,342
-
3,105
-
-
50,611
1,418
3
-
Shareholders
$ 78,091 $ 44,906
$ 96,240
$ 40,339
$ 88,246 $ 29,928
$ 102,237
$ 49,193
Earnings per common
share - basic
$ 1.17 $ 0.78
$ 1.43
$ 0.70
$ 1.30 $ 0.51
Earnings per common
share - diluted
$ 1.12 $ 0.74
$ 1.37
$ 0.67
$ 1.26 $ 0.49
$
$
1.50
$ 0.76
1.45
$ 0.73
Weighted average
shares-basic
Weighted average
66,788
57,681
67,326
57,838
67,865
58,130
68,241
64,317
shares-diluted
69,787
60,689
70,209
60,454
70,272
60,863
70,574
67,554
Claims and claim expense ratio
28.7%
49.9%
39.6%
42.8%
43.3%
58.8%
38.5%
30.7%
Underwriting expense ratio
Combined ratio
19.4
25.1
16.4
27.1
17.5
26.1
22.1
23.0
48.1%
75.0%
56.0%
69.9%
60.8%
84.9%
60.6%
53.7%
59
59
RenaissanceRe Holdings Ltd. | Annual Report 2002
RenaissanceRe Holdings Ltd. | Annual Report 2001
Glossary of Selected Insurance Terms
Attachment point
The amount of loss (per occurrence or in the aggregate, as the case may be) above which
excess of loss reinsurance becomes operative.
Broker
Capacity
Casualty insurance
Catastrophe
One who negotiates contracts of insurance or reinsurance, receiving a commission for
placement and other services rendered, between (1) a policy holder and a primary insurer,
on behalf of the insured party, (2) a primary insurer and reinsurer, on behalf of the primary
insurer, or (3) a reinsurer and a retrocessionaire, on behalf of the reinsurer.
The percentage of surplus, or the dollar amount of exposure, that an insurer or reinsurer is
willing or able to place at risk. Capacity may apply to a single risk, a program, a line of
business or an entire book of business. Capacity may be constrained by legal restrictions,
corporate restrictions or indirect restrictions.
Insurance that is primarily concerned with the losses caused by injuries to third persons and
their property (in other words, persons other than the policyholder) and the legal liability
imposed on the insured resulting therefrom. Also referred to as liability insurance.
A severe loss, typically involving multiple claimants. Common perils include earthquakes,
hurricanes, hailstorms, severe winter weather, floods, fires, tornadoes, explosions and other
natural or man-made disasters. Catastrophe losses may also arise from acts of war, acts of
terrorism and political instability.
Catastrophe excess
of loss reinsurance
A form of excess of loss reinsurance that, subject to a specified limit, indemnifies the ceding
company for the amount of loss in excess of a specified retention with respect to an
accumulation of losses resulting from a “catastrophe”.
Cede; cedent;
ceding company
Claim expenses
When a party reinsures its liability with another, it “cedes” business and is referred to as the
“cedent” or “ceding company.”
The expenses of settling claims, including legal and other fees and the portion of general
expenses allocated to claim settlement costs.
Claims and claim
expense ratio
The ratio of claims and claim expenses to net premiums earned, determined in
accordance with either SAP or GAAP.
Claims and
claim expenses
Claims reserves
Combined ratio
The expenses of settling claims, including legal and other fees and the portion of general
expenses allocated to claim settlement costs (also known as claim adjustment expenses) plus
losses incurred with respect to claims.
Liabilities established by insurers and reinsurers to reflect the estimated costs of claim
payments and the related expenses that the insurer or reinsurer will ultimately be required
to pay in respect of insurance or reinsurance policies it has issued. Claims reserves consist
of reserves established with respect to individual reported claims, and “IBNR” reserves. For
reinsurers, loss expense reserves are generally not significant because substantially all of the
loss expenses associated with particular claims are incurred by the primary insurer and
reported to reinsurers as losses.
The combined ratio is the sum of the loss and loss expense ratio, the acquisition cost ratio
and the general and administrative expense ratio, determined in accordance with U.S.
GAAP. A combined ratio below 100% generally indicates profitable underwriting prior to
the consideration of investment income. A combined ratio over 100% generally indicates
unprofitable underwriting prior to the consideration of investment income.
Excess and surplus
lines reinsurance
Any type of coverage that cannot be placed with an insurer admitted to do business in a
certain jurisdiction. Risks placed in excess and surplus lines markets are often substandard
as respects adverse loss experience, unusual, or unable to be placed in conventional markets
due to a shortage of capacity.
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RenaissanceRe Holdings Ltd. | Annual Report 2002
Excess of loss
reinsurance
A generic term describing reinsurance that indemnifies the reinsured against all or a
specified portion of losses on underlying insurance policies in excess of a specified amount,
which is called a “level” or “retention.” Also known as non-proportional reinsurance. Excess
of loss reinsurance is written in layers. A reinsurer or group of reinsurers accepts a layer of
coverage up to a specified amount. The total coverage purchased by the cedent is referred to
as a “program” and will typically be placed with predetermined reinsurers in pre-negotiated
layers. Any liability exceeding the outer limit of the program reverts to the ceding company,
which also bears the credit risk of a reinsurer's insolvency.
Frequency
The number of claims occurring during a given coverage period.
Funded cover
A form of insurance where the insured pays premiums to a reinsurer to serve essentially as
a deposit in order to offset future losses. On a funded cover, there is generally limited or no
transfer of risk for catastrophe losses from the insured to the reinsurer.
Generally accepted
accounting principles
(“GAAP”)
the Accounting Principles Board
Accounting principles as set forth in opinions of
of the American Institute of Certified Public Accountants and/or statements of the Financial
Accounting Standards Board and/or their respective successors and which are applicable in
the circumstances as of the date in question. Also referred to as GAAP.
Gross premiums written
Total premiums for insurance written and assumed reinsurance during a given period.
Incurred but not
reported (“IBNR”)
Reserves for estimated losses that have been incurred by insureds and reinsureds but not yet
reported to the insurer or reinsurer including unknown future developments on losses
which are known to the insurer or reinsurer.
Layer
The interval between the retention or attachment point and the maximum limit of
indemnity for which a reinsurer is responsible.
Net premiums earned
The portion of net premiums written during or prior to a given period that was actually
recognized as income during such period.
Net premiums written
Gross premiums written for a given period less premiums ceded to reinsurers and
retrocessionaires during such period.
Premiums
The amount charged during the term on policies and contracts issued, renewed or reinsured
by an insurance company or reinsurance company.
Property insurance
or reinsurance
Insurance or reinsurance that provides coverage to a person with an insurable
interest in tangible property for that person's property loss, damage or loss of use.
Property per risk
treaty reinsurance
Proportional
reinsurance
Reinsurance on a treaty basis of individual property risks insured by a ceding company.
A generic term describing all forms of reinsurance in which the reinsurer shares a
proportional part of the original premiums and losses of the reinsured. (Also known as pro
rata reinsurance, quota share reinsurance or participating reinsurance.) In proportional
reinsurance the reinsurer generally pays the ceding company a ceding commission. The
ceding commission generally is based on the ceding company's cost of acquiring the
business being reinsured (including commissions, premium taxes, assessments and
miscellaneous administrative expense) and also may include a profit factor.
Reinstatement premium
The premium charged for the restoration of the reinsurance limit of a catastrophe contract
to its full amount after payment by the reinsurer of losses as a result of an occurrence.
61
61
RenaissanceRe Holdings Ltd. | Annual Report 2002
RenaissanceRe Holdings Ltd. | Annual Report 2001
Glossary of Selected Insurance Terms
Reinsurance
An arrangement in which an insurance company, the reinsurer, agrees to indemnify another
insurance or reinsurance company, the ceding company, against all or a portion of the
insurance or reinsurance risks underwritten by the ceding company under one or more
policies. Reinsurance can provide a ceding company with several benefits, including a
reduction in net liability on individual risks and catastrophe protection from large or
multiple losses. Reinsurance also provides a ceding company with additional underwriting
capacity by permitting it to accept larger risks and write more business than would be
possible without a concomitant increase in capital and surplus, and facilitates the
maintenance of acceptable financial ratios by the ceding company. Reinsurance does not legally
discharge the primary insurer from its liability with respect to its obligations to the insured.
Retention
The amount or portion of risk that an insurer retains for its own account. Losses in excess
of the retention level are paid by the reinsurer. In proportional treaties, the retention may
be a percentage of the original policy's limit. In excess of loss business, the retention is a
dollar amount of loss, a loss ratio or a percentage.
Retrocessional reinsurance; A transaction whereby a reinsurer cedes to another reinsurer, the retrocessionaire, all or part of
the reinsurance that the first reinsurer has assumed. Retrocessional reinsurance does not legally
retrocessionaire
discharge the ceding reinsurer from its liability with respect to its obligations to the reinsured.
Reinsurance companies cede risks to retrocessionaires for reasons similar to those that cause
primary insurers to purchase reinsurance: to reduce net liability on individual risks, to protect
against catastrophic losses, to stabilize financial ratios and to obtain additional underwriting
capacity.
Risk excess of
loss reinsurance
Specialty lines
Submission
A form of excess of loss reinsurance that covers a loss of the reinsured on a single
“risk” in excess of its retention level of the type reinsured, rather than to aggregate losses for
all covered risks, as does catastrophe excess of loss reinsurance. A “risk” in this context might
mean the insurance coverage on one building or a group of buildings or the insurance
coverage under a single policy, which the reinsured treats as a single risk.
Lines of insurance and reinsurance that provide coverage for risks that are often unusual
or difficult to place and do not fit the underwriting criteria of standard commercial
products carriers.
An unprocessed application for (i) insurance coverage forwarded to a primary insurer by a
prospective policyholder or by a broker on behalf of such prospective policyholder, (ii)
reinsurance coverage forwarded to a reinsurer by a prospective ceding insurer or by a broker
or intermediary on behalf of such prospective ceding insurer or (iii) retrocessional coverage
forwarded to a retrocessionaire by a prospective ceding reinsurer or by a broker or
intermediary on behalf of such prospective ceding reinsurer.
Statutory accounting
principles (“SAP”)
Recording transactions and preparing financial statements in accordance with the rules and
procedures prescribed or permitted by Bermuda and/or the United States state insurance
regulatory authorities including the NAIC, which in general reflect a liquidating, rather than
going concern, concept of accounting.
Total Managed
Cat Premium
Underwriting
The total catastrophe reinsurance premiums written on a gross basis by our managed
catastrophe joint ventures as well as by our wholly owned subsidiaries.
The insurer's or reinsurer's process of reviewing applications submitted for insurance
coverage, deciding whether to accept all or part of the coverage requested and determining
the applicable premiums.
Underwriting capacity
The maximum amount that an insurance company can underwrite. The limit is generally
determined by the company's retained earnings and investment capital. Reinsurance serves to
increase a company's underwriting capacity by reducing its exposure from particular risks.
Underwriting expenses
The aggregate of policy acquisition costs, including commissions, and the portion of
administrative, general and other expenses attributable to underwriting operations.
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RenaissanceRe Holdings Ltd. | Annual Report 2002
Directors and Officers
RenaissanceRe Holdings Ltd. and Subsidiaries
(as of March 1, 2003)
Board of Directors
James N. Stanard (4)
Chairman of the Board
Chief Executive Officer
Thomas A. Cooper (2)(4)
TAC Associates
Edmund B. Greene (1)
Retired
General Electric Company
Brian R. Hall (1)(2)
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 & Governance 3 - Investment & Risk Management 4 - Transaction
Officers of RenaissanceRe Holdings Ltd. and Subsidiaries
William B. Ashley
Chief Operating Officer
Glencoe Insurance Ltd.
Ian D. Branagan
Managing Director
Renaissance Reinsurance of Europe
Michael W. Cash
Senior Vice President
Renaissance Reinsurance Ltd.
Ross A. Curtis
Vice President
Renaissance Reinsurance Ltd.
David A. Eklund
President
Chief Underwriting Officer
Renaissance Reinsurance Ltd.
Todd R. Fonner
Vice President
Treasurer
RenaissanceRe Holdings Ltd.
Thomas H. Friedberg
President
Stonington Insurance Company
W. Preston Hutchings
Senior Vice President
Chief Investment Officer
RenaissanceRe Holdings Ltd.
John M. Lummis
Executive Vice President
Chief Financial Officer
RenaissanceRe Holdings Ltd.
Martin J. Merritt
Senior Vice President
Controller
RenaissanceRe Holdings Ltd.
John D. Nichols, Jr.
President
Renaissance Underwriting
Managers, Ltd.
Kevin J. O’Donnell
Senior Vice President
Renaissance Reinsurance Ltd.
Jonathan D. Paradine
Vice President
Renaissance Reinsurance Ltd.
Laurence B. Richardson II
Vice President
Renaissance Underwriting
Managers, Ltd.
William I. Riker
President
Chief Operating Officer
RenaissanceRe Holdings Ltd.
Russell M. Smith
Senior Vice President
Renaissance Reinsurance Ltd.
James N. Stanard
Chairman of the Board
Chief Executive Officer
RenaissanceRe Holdings Ltd.
Craig W. Tillman
Chief Underwriting Officer
Glencoe Insurance Ltd.
Stephen H. Weinstein
Vice President
General Counsel
Corporate Secretary
RenaissanceRe Holdings Ltd.
John R. Wineinger
Vice President
Renaissance Services Ltd.
63
RenaissanceRe Holdings Ltd. | Annual Report 2002
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
Senior 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
2002 Price Range
2001 Price Range
High
Low
High
Low
$ 36.35
$ 28.90
$ 27.95
$ 21.18
39.65
39.40
43.24
33.85
31.30
37.49
25.23
29.64
34.57
20.83
22.87
30.47
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
64
RenaissanceRe Holdings Ltd. | Annual Report 2002
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2
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RenaissanceRe Holdings Ltd.
Renaissance House
8 -12 East Broadway
P.O. Box HM 2527
Hamilton HMGX, Bermuda
Tel: 441 295 4513
Fax: 441 292 9453
Web site: www.renre.com
2002 ANNUAL REPORT