The following is a discussion and analysis of our results of operations for the
three months ended March 31, 2012 and 2011, respectively. The following also
includes a discussion of our liquidity and capital resources at March 31, 2012.
This discussion and analysis should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included in this filing and
the audited consolidated financial statements and notes thereto contained in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2011. This
filing 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 "Note on Forward-Looking Statements."
RenaissanceRe was established in Bermuda in 1993 to write principally property
catastrophe reinsurance and today is a leading global provider of reinsurance
and insurance coverages and related services. Our aspiration is to be the
world's best underwriter of high-severity, low frequency risks. Through our
operating subsidiaries, we seek to produce superior returns for our shareholders
by being a trusted, long-term partner to our customers, for assessing and
managing risk, delivering responsive solutions, and keeping our promises. We
accomplish this by leveraging our core capabilities of risk assessment and
information management, and by investing in our capabilities to serve our
customers across the cycles that have historically characterized our markets.
Overall, our strategy focuses on superior risk selection, customer relationships
and capital management. We provide value to our customers and joint venture
partners in the form of financial security, innovative products, and responsive
service. We are known as a leader in paying valid reinsurance claims promptly.
We principally measure our financial success through long-term growth in
tangible book value per common share plus the change in accumulated dividends,
which we believe is the most appropriate measure of our Company's financial
performance, and believe we have delivered superior performance in respect of
this measure over time.
Since a substantial portion of the reinsurance and insurance we write 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 coverages we offer to customers affected by these
events. We are exposed to significant losses from these catastrophic events and
other exposures that we cover. Accordingly, we expect a significant degree of
volatility in our financial results and our financial results may vary
significantly from quarter-to-quarter or from year-to-year, based on the level
of insured catastrophic losses occurring around the world.
Our revenues are principally derived from three sources: 1) net premiums earned
from the reinsurance and insurance policies we sell; 2) net investment income
and realized and unrealized gains from the investment of our capital funds and
the investment of the cash we receive on the policies which we sell; and 3)
other income received from our joint ventures, advisory services, weather and
energy risk management operations and various other items.
Our expenses primarily consist of: 1) net claims and claim expenses incurred on
the policies of reinsurance and insurance we sell; 2) acquisition costs which
typically represent a percentage of the premiums we write; 3) operating expenses
which primarily consist of personnel expenses, rent and other operating
expenses; 4) corporate expenses which include certain executive, legal and
consulting expenses, costs for research and development, and other miscellaneous
costs, including those associated with operating as a publicly traded company;
5) redeemable noncontrolling interest - DaVinciRe, which represents the interest
of third parties with respect to the net income (loss) of DaVinciRe; and 6)
interest and dividend costs related to our debt and preference shares. We are
also subject to taxes in certain jurisdictions in which we operate; however,
since the majority of our income is currently earned in Bermuda, a non-taxable
jurisdiction, the tax impact to our operations has historically been minimal.
The operating results, also known as the underwriting results, of an insurance
or reinsurance company are discussed frequently by reference to its net claims
and claim expense ratio, underwriting expense ratio, and combined ratio. The net
claims and claim expense ratio is calculated by dividing net claims and claim
expenses incurred by net premiums earned. The underwriting expense ratio is
calculated by dividing underwriting expenses (acquisition expenses and
operational expenses) by net premiums earned. The combined ratio is the sum of
the net claims and claim expense ratio and the underwriting expense ratio.
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. We also discuss our net claims and claim expense ratio on an accident
year basis. This ratio is calculated by taking net claims and claim expenses,
excluding development on net claims and claim expenses from events that took
place in prior fiscal years, divided by net premiums earned.
Our reportable segments include: (1) Reinsurance, (2) Lloyd's and (3) Insurance.
Our Reinsurance segment has two main units:
(1) Property catastrophe reinsurance, written for our own account, and for
DaVinci, is our traditional core business. We believe we are one of the
world's leading providers of this coverage, based on catastrophe gross
premiums written. This coverage protects against large natural catastrophes,
such as earthquakes, hurricanes and tsunamis, as well as claims arising from
other natural and man-made catastrophes such as winter storms, freezes,
floods, fires, wind storms, tornadoes, explosions and acts of terrorism. 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.
(2) Specialty reinsurance, written for our own account, and for DaVinci,
covering certain targeted classes of business where we believe we have a
sound basis for underwriting and pricing the risk that we assume. Our
portfolio includes various classes of business, such as catastrophe exposed
workers' compensation, surety, terrorism, energy, aviation, crop, political
risk, trade credit, financial, mortgage guarantee, catastrophe-exposed
personal lines property, casualty clash, certain other casualty lines and
other specialty lines of reinsurance that we collectively refer to as
specialty reinsurance. We believe that we are seen as a market leader in
certain of these classes of business. We are seeking to expand our specialty
reinsurance operations over time, although we cannot assure you that we will
do so, particularly in light of current and forecasted market conditions.
Our Lloyd's segment includes insurance and reinsurance business written for our
own account through Syndicate 1458. The syndicate enhances our underwriting
platform by providing access to Lloyd's extensive distribution network and
worldwide licenses. RenaissanceRe CCL, an indirect wholly owned subsidiary of
the Company, is the sole corporate member of Syndicate 1458. We expect Syndicate
1458's absolute and relative contributions to our consolidated results of
operations to continue to grow over time.
Our Insurance segment includes the insurance policies previously written in
connection with our Bermuda-based insurance operations which were not sold to
QBE. Our Insurance segment is managed by our Global Chief Underwriting Officer.
The Bermuda-based insurance business is written by Glencoe, a Bermuda domiciled
excess and surplus lines insurance company that is currently eligible to do
business on an excess and surplus lines basis in 49 U.S. states, the District of
Columbia, Puerto Rico and the U.S. Virgin Islands. We may from time to time
evaluate potential new business opportunities for our Insurance segment.
Our Other category primarily includes the results of: (1) our share of strategic
investments in certain markets we believe offer attractive risk-adjusted returns
or where we believe our investment adds value, where, rather than assuming
exclusive management responsibilities ourselves, we partner with other market
participants; (2) our weather and energy risk management operations primarily
through Renaissance Trading and REAL, (3) our investment unit which manages and
invests the funds generated by our consolidated operations, (4) corporate
expenses, capital services costs and noncontrolling interests; and (5) the
results of our discontinued operations.
From time to time we consider diversification into new ventures, either through
organic growth, the formation of new joint ventures, or the acquisition of or
the investment in other companies or books of business of other companies. This
potential diversification includes opportunities to write targeted, additional
classes of risk-exposed business, both directly for our own account and through
possible new joint venture opportunities. We also regularly evaluate potential
strategic opportunities that we believe might utilize our skills, capabilities,
proprietary technology and relationships to support possible expansion into
further risk-related coverages, services and products. Generally, we focus on
underwriting or trading risks where reasonably sufficient data may be available,
and where our analytical abilities may provide us a competitive advantage, in
order for us to seek to model estimated probabilities of losses and returns in
accordance with our approach in respect of our then current portfolio of risks.
We regularly review potential strategic transactions that might improve our
portfolio of business, enhance or focus our strategies, expand our distribution
or capabilities, or to seek other benefits. In evaluating potential new ventures
or investments, we generally seek an attractive estimated return on equity, the
ability to develop or capitalize on a competitive advantage, and opportunities
which we believe will not detract from our core operations. While we regularly
review potential strategic transactions and periodically engage in discussions
regarding possible transactions, there can be no assurance that we will complete
any such transactions or that any such transaction would be successful or
materially enhance our results of operations or financial condition. We believe
that our ability to potentially attract investment and operational opportunities
is supported by our strong reputation and financial resources, and by the
capabilities and track record of our ventures unit.
Effective January 1, 2012, we formed and launched a new managed joint venture,
Upsilon Reinsurance Ltd. ("Upsilon Re"), a special purpose insurer, to provide
additional capacity to the worldwide aggregate and per-occurrence retrocessional
property catastrophe excess of loss market for the 2012 underwriting year. The
original business was written by Renaissance Reinsurance of Europe ("ROE"), a
wholly owned subsidiary of the Company, and included $33.5 million of gross
premiums written. This business was in turn ceded to Upsilon Re under a fully
collateralized retrocessional reinsurance contract, effective January 1, 2012.
In conjunction with the formation and launch of Upsilon Re, $15.0 million of
non-voting Class B shares were sold to external investors, and we invested $43.7
million in Upsilon Re's non-voting Class B shares, representing a 74.5%
ownership interest in Upsilon Re. The Class B shareholders will participate in
substantially all of the profits or losses of Upsilon Re while the Class B
shares remain outstanding. The holders of Class B shares indemnify Upsilon Re
against losses relating to insurance risk and therefore these shares have been
accounted for as prospective reinsurance under Financial Accounting Standards
Board Accounting Standards Codification Topic Financial Services - Insurance. In
addition, another third party investor supplied $15.0 million of capital through
a reinsurance participation with ROE alongside Upsilon Re. Inclusive of the
third party quota share agreement, we have a 61.4% participation in the original
risks assumed by ROE. Both Upsilon Re and the third party reinsurance
participation related to Upsilon Re are managed by RUM in return for an expense
override, as well as a potential underwriting profit commission. We maintain
majority voting control of Upsilon Re and, accordingly, we have consolidated the
results of Upsilon Re in our consolidated results of operations and financial
position. We currently have an ownership interest in Upsilon Re which could
change over time, perhaps materially so, and we may also elect to underwrite
additional risks within Upsilon Re and utilize Upsilon Re to write business in
future underwriting years. We cannot assure you that additional opportunities to
grow the business we have accessed through Upsilon Re will be realized, however.
We seek to develop and effectively utilize sophisticated computer models and
other analytical tools to assess and manage the risks that we underwrite and
attempt to optimize our portfolio of reinsurance and insurance contracts and
other financial risks. Our policies, procedures, tools and resources to monitor
and assess our operational risks companywide, as well as our global
enterprise-wide risk management practices, are overseen by our Chief Risk
Officer, who reports directly to our Chief Financial Officer.
With respect to our Reinsurance operations, since 1993 we have developed and
continuously seek to improve our proprietary, computer-based pricing and
exposure management system, REMS©. We believe that REMS©, as updated from time
to time, is a more robust underwriting and risk management system
than is currently commercially available elsewhere in the reinsurance industry
and offers us a significant competitive advantage. REMS© was originally
developed to analyze catastrophe risks, though we continuously seek ways to
enhance the program in order to analyze other classes of risk.
During the fourth quarter of 2010, we made the strategic decision to divest
substantially all of our U.S.-based insurance operations in order to focus on
the business encompassed within our Reinsurance and Lloyd's segments and our
other businesses. Except as explicitly described as held for sale or as
discontinued operations, and unless otherwise noted, all discussions and amounts
presented herein relate to our continuing operations. Prior years presented have
been reclassified to conform to this new presentation.
On November 18, 2010, we entered into a Stock Purchase Agreement with QBE to
sell substantially all of our U.S.-based insurance operations, including our
U.S. property and casualty business underwritten through managing general
agents, our crop insurance business underwritten through Agro National Inc.
("Agro National"), our commercial property insurance operations and our claims
operations. We have classified the assets and liabilities associated with this
transaction as held for sale. The financial results for these operations have
been presented as discontinued operations in our Consolidated Statements of
Consideration for the transaction was book value at December 31, 2010, for the
aforementioned businesses, payable in cash at closing and subject to adjustment
for certain tax and other items. The transaction closed on March 4, 2011 and we
received net consideration of $269.5 million.
Pursuant to the Stock Purchase Agreement, the Company is subject to a
post-closing review following December 31, 2011 of the net reserve for claims
and claim expenses for loss events occurring on or prior to December 31, 2010
(the "Reserve Collar"). Subsequent to the post-closing review, the Company is
liable to pay, or otherwise reimburse QBE amounts up to $10.0 million for net
adverse development on prior accident years net claims and claim expenses.
Conversely, if prior accident years net claims and claim expenses experience net
favorable development, QBE is liable to pay, or otherwise reimburse the Company
amounts up to $10.0 million.
During 2011, the Company recognized a $10.0 million liability and corresponding
expense in liabilities of discontinued operations held for sale and (loss)
income from discontinued operations, respectively, due to purported net adverse
development on prior accident years net claims and claim expenses associated
with the Reserve Collar. The $10.0 million represented the maximum amount
payable under the Reserve Collar. We continue to evaluate any favorable or
adverse developments related to the Reserve Collar pursuant to the Stock
Purchase Agreement with QBE.
See "Note 3. Discontinued Operations in our Notes to Consolidated Financial
Statements" for additional information.
SUMMARY OF CRITICAL ACCOUNTING ESTIMATES
The Company's critical accounting estimates are discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations found
in our Annual Report on Form 10-K for the year ended December 31, 2011.