We lease office space in Bermuda, where our executive offices are located.
The following table sets forth our selected financial data and other financial information at and for each of the years in the five year period ended December 31, 2000. The historical financial information was prepared in accordance with U.S. generally accepted accounting principles. The statement of income data for the years ended December 31, 2000, 1999, 1998, 1997 and 1996 and the balance sheet data at December 31, 2000, 1999, 1998, 1997 and 1996 were derived from our audited consolidated financial statements, which have been audited by Ernst & Young, our independent auditors. You should read the selected financial data in conjunction with our consolidated financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this filing and all other information appearing elsewhere or incorporated into this filing by reference.
(3) The item "Company obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of RenaissanceRe" reflects $87.6 million aggregate liquidation amount of the capital securities issued by a subsidiary trust. The sole assets of the trust are $87.6 million aggregate principal amount of 8.54% junior subordinated debentures due March 1, 2027 issued by RenaissanceRe.
(4) Book value per common share was computed by dividing total shareholders' equity by the number of outstanding common shares.
The following is a discussion and analysis of our results of operations for the year ended December 31, 2000 compared with the year ended December 31, 1999, and for the year ended December 31, 1999 compared with the year ended December 31, 1998 and also a discussion of our financial condition at December 31, 2000. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes included in this filing. 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.
For the years ended December 31, 2000 and December 31, 1999, our gross premiums written were approximately $433.0 million and $351.3 million, respectively, our net premiums written were $293.3 million and $213.5 million, respectively, our operating income was $134.4 million (or $6.86 per share) and $120.0 million (or $5.82 per share), respectively, and our net income was $127.2 million (or $6.50 per share) and $104.2 million (or $5.05 per share), respectively. At December 31, 2000, we had total assets of $1.5 billion and total shareholders' equity of $700.8 million.
DeSoto Insurance was incorporated in 1997 as a wholly owned subsidiary of Glencoe, to assume and renew homeowner policies from the Florida Residential Property and Casualty Joint Underwriting Association, a state sponsored insurance company. During 2000, DeSoto wrote $12.7 million of primary homeowners insurance coverage, compared to $14.3 million in 1999. Paget, Pembroke and DeSoto Prime are all active in the Florida homeowners market.
Our results depend to a large extent on the frequency and severity of catastrophic events, and the coverage offered to clients impacted by these events. In addition, from time to time, we may consider opportunistic diversification into new ventures, either through organic growth or the acquisition of other companies or books of business. In evaluating such new ventures, we seek an attractive return on equity, the ability to develop or capitalize on a competitive advantage and opportunities that will not detract from our core reinsurance operations. Accordingly, we regularly review strategic opportunities and periodically engage in discussions regarding possible transactions, although there can be no assurance that we will complete any such transactions or that any such transaction would contribute materially to our results of operations or financial condition.
Our operating income, which excludes realized gains and losses on investments, for the year ended December 31, 2000 was $134.4 million, compared with $120.0 million for the year ended December 31, 1999. Our operating earnings per common share for the year ended December 31, 2000 was $6.86, compared with $5.82 for the year ended December 31, 1999. The increase in operating income was primarily the result of increased fee income from our joint ventures, Top Layer Re and OPCat, and also from an increase in investment income due to increased yields and an increase in the size of the investment portfolio, slightly offset by an increase in interest expense.
Our gross premiums written for the year ended December 31, 2000 increased by $81.7 million, or 23.2%, to $433.0 million from $351.3 million for the year ended December 31, 1999. Gross premiums written by segment were:
Our increase in reinsurance premiums written in 2000 resulted primarily from (1) an increase of $35.0 million in our premiums from noncatastrophe reinsurance, from $2.7 million in 1999 to $37.7 million in 2000, (2) an increase in reinstatement premiums to $20.3 million in 2000, compared with $6.8 million in 1999, primarily related to the 1999 European windstorms and (3) increased opportunities to provide reinsurance to reinsurers due to the large level of catastrophes in 1999. Premiums written by our primary insurance companies decreased due to the reduced premiums at Nobel, from $49.6 million in 1999 to $32.2 million in 2000, due to the run-off of the Nobel businesses.
YEAR ENDED DECEMBER 31, ------------------------- 2000 1999 ----------- ----------- (IN THOUSANDS) Reinsurance............................. $ 94,875 $ 77,152 Primary................................. 44,824 60,640 --------- --------- Total................................... $ 139,699 $ 137,792 ========= =========
For both our reinsurance and primary operations, we use statistical and actuarial methods to estimate ultimate expected claims and claim expenses. The period of time from the reporting of a loss to us through the settlement of
our liability may be several years. During this period, additional facts and trends will be revealed. As these factors become apparent, case reserves will be adjusted, sometimes requiring an increase in our overall reserves, while at other times we may reallocate incurred but not reported (IBNR) reserves to specific case reserves. Reserve 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.
Acquisition costs and operational expenses, consisting of brokerage commissions, excise taxes and other costs directly related to our underwriting operations, for the year ended December 31, 2000 were $76.5 million, or 28.5% of net premiums earned, compared with $62.3 million, or 28.1% of net premiums earned, for the year ended December 31, 1999. The primary contributor to the increase in the underwriting expense ratio was the increase in gross premiums earned by Renaissance Reinsurance with respect to noncatastrophe reinsurance products, which typically produce a higher underwriting expense ratio than our principal product, property catastrophe reinsurance.
During 2000, we reported other income of $11.0 million, compared with $4.9 million for the year ended December 31, 1999. Substantially all of this income related to our profit participation and performance-based fees received by us from our joint ventures, Top Layer Re and OPCat. Also included in other income is approximately $0.7 million from our primary operations, and $0.4 million from our investments in non-indemnity catastrophe index transactions. For 1999, we reported $2.5 million in other income relating to recoveries on catastrophe linked index transactions and $1.4 million relating to other income from our primary operations.
During 2000, net realized losses on sales of investments were $7.1 million, compared with $15.7 million in 1999. The realized losses in 2000 and in 1999 were primarily the result of increased interest rates and the subsequent sales of fixed income securities.
Corporate expenses were $7.0 million in 2000 compared with $3.1 million in 1999, excluding the write-off of goodwill attributable to Nobel of $1.0 million in 2000 and $6.7 million in 1999. The primary cause of the increase was an increase in developmental expenses for our primary operations and other business development activities.
During the year ended December 31, 2000, we recorded interest expense of $17.2 million on our outstanding debt compared with $9.9 million in 1999. The increase in interest expense was primarily related to an increase in borrowing rates during late 1999 and early 2000 and additional borrowings of $150.0 million which were outstanding for approximately five months during 1999 and for approximately eleven months during 2000. In the fourth quarter of 2000, we repaid $200.0 million of our outstanding debt.
Also during 2000, we recorded $4.6 million of tax expense compared with a tax benefit of $1.5 million in 1999. The increase in our tax expense primarily relates to a $8.2 million deferred tax valuation allowance we recorded during 2000. Primarily as a result of the losses from Nobel, Renaissance U.S. Holdings, Inc. has recorded a net deferred tax asset, the balance of which is $18.5 million at December 31, 2000. We believe the future operations of Nobel, combined with other operating subsidiaries of Renaissance U.S., will enable us to utilize the remainder of this net operating loss carry-forward. However, it is not certain that we will realize the full benefit of this asset.
YEAR ENDED DECEMBER 31, 1999 1998 ----------- ----------- (IN THOUSANDS) Reinsurance............................. $ 282,345 $ 207,189 Primary................................. 68,960 63,271 --------- --------- Total................................... $ 351,305 $ 270,460 ========= =========
Premiums written by our primary insurance companies increased in 1999, largely because such results reflect a full year of premiums written for Nobel, compared with only six months of Nobel premiums during 1998. This increase was partially offset by reduced premiums written for DeSoto Insurance in 1999. The reduction in DeSoto Insurance premiums was due to the one-time initial premiums assumed from the Florida JUA during 1998 of approximately $10.0 million. During 1999 Nobel sold its principal operating units and, as a result, we expect a decrease in future premium volume from our primary insurance businesses.
During 1999, we continued to purchase reinsurance to reduce our exposure to certain losses. Our ceded premiums were as follows:
YEAR ENDED DECEMBER 31, 1999 1998 ----------- ---------- (IN THOUSANDS) United States and Caribbean...................... $ 173,598 $ 132,776 Worldwide........................................ 46,712 17,033 Worldwide (excluding U.S.)(1).................... 27,276 26,326 Europe........................................... 26,437 18,522 Other............................................ 2,370 4,495 Australia and New Zealand........................ 3,212 3,932 Noncatastrophe reinsurance(2).................... 2,740 4,105 --------- --------- Total reinsurance................................ 282,345 207,189 United States -- primary......................... 68,960 63,271 --------- --------- Total gross premiums written..................... $ 351,305 $ 270,460 ========= =========
Our claims and claim expenses incurred for the year ended December 31, 1999 were $77.1 million, or 34.9%, of net premiums earned. In comparison, claims and claim expenses incurred for the year ended December 31, 1998 were $67.8 million, or 33.1%, of net premiums earned. The primary reason for the increase in the net incurred losses was the significant catastrophe losses that occurred during 1999. During 1999 nine significant worldwide catastrophic events occurred: the hail storms in Sydney, Australia, in April; the Oklahoma tornados in May; Hurricane Floyd in September; Typhoon Bart which struck Japan in September; Turkish and Taiwanese earthquakes in August and September, respectively; and the Danish windstorm, Anatol, and the French windstorms, Lothar and Martin, in December. Seven of these events each resulted in over $1 billion of insured damages. These events caused net incurred losses for Renaissance Reinsurance to increase to $64.4 million for 1999, or a loss ratio of 32.7%, compared with $42.4 million for 1998, or a loss ratio of 25.0%. Due to the potential high severity of claims related to the property catastrophe reinsurance business, there can be no assurance that we will continue to experience this level of claims in future years.
Acquisition costs and operational expenses, consisting of brokerage commissions, excise taxes and other costs directly related to our underwriting operations, for the year ended December 31, 1999 were $62.3 million, or 28.1%, of net premiums earned, compared with $60.1 million, or 29.3%, of net premiums earned for the year ended December 31, 1998, excluding the 1998 Nobel charge. The primary contributor to the decrease in the underwriting expense ratio was the increase in premiums earned by Renaissance Reinsurance with no corresponding increase in the costs to operate the reinsurance operations. This was slightly offset by increased costs at Nobel, primarily related to severance costs, and increased costs at DeSoto Insurance for additional hires.
During the year ended December 31, 1999, we recorded interest expense of $9.9 million on our outstanding debt and $8.3 million on our capital trust securities, compared with $4.5 million and $8.5 million in 1998, respectively. The increase in interest expense on our outstanding debt was primarily related to an increase in borrowing rates and the additional borrowings of $150.0 million during 1999, $125.0 million of which was drawn on August 17, 1999.
On June 25, 1998, we completed our acquisition of the U.S. operating subsidiaries (including Nobel) of Nobel Insurance Limited, a Bermuda company, for $56.1 million. We accounted for this acquisition using the purchase method of accounting. We did not issue shares as part of the purchase.
During the fourth quarter of 1998, we recorded an after-tax charge of $40.1 million, consisting of $29.6 million of adverse development on Nobel's casualty and surety books of business, a goodwill write-down of $6.6 million, and other related costs of $3.9 million. Consequently, we adopted a plan to exit each of Nobel's business units. Subsequently, Nobel completed the reinsurance of the casualty and surety books of business and its bail and low-value dwelling books of business have been assumed by third parties. Also, Nobel completed the sale of its IAS/Cat Crew subsidiary to its management team in an earn-out transaction.
As a holding company, we rely on investment income, cash dividends and other permitted payments from our subsidiaries to make principal and interest payments on our debt, cash distributions on outstanding obligations and to pay quarterly dividends to our shareholders. The payment of dividends by our subsidiaries is, under certain circumstances, limited under U.S. statutory regulations and Bermuda insurance law. U.S. statutory regulations and The Bermuda Insurance Act 1978, amendments thereto and related regulations of Bermuda require our Bermuda insurance subsidiaries to maintain certain measures of solvency and liquidity. At December 31, 2000, the statutory capital and surplus of our Bermuda insurance subsidiaries was $738.5 million, and the amount required to be maintained by the Act was $135.0 million. During 2000, Renaissance Reinsurance paid aggregate cash dividends of $95.6 million to our parent company, compared with $95.1 million in 1999.
Our operating subsidiaries have historically produced sufficient cash flows to meet 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 the liquidity needs of our subsidiaries. We had drawn down $8.0 million of this facility at December 31, 2000.
Cash flows from operating activities resulted principally from premiums, collections on losses recoverable and investment income, net of paid losses, acquisition costs and underwriting expenses. Cash flows from operations in 2000 were $250.8 million, compared with $130.3 million in 1999. The 2000 cash flows from operations were primarily utilized to purchase $25.1 million of our common shares, pay aggregate quarterly dividends of $29.2 million and repay $200.0 million of our bank loans. Our 1999 cash flows from operations were primarily utilized to purchase $80.1 million of our common shares and pay aggregate quarterly dividends of $28.9 million. Also during 1999, we borrowed an additional $150.0 million under our revolving credit facility, which was primarily used to purchase additional fixed income securities for the holding company's portfolio of investments.
We have generated cash flows from operations in 2000 and in 1999 significantly in excess of our operating commitments. To the extent that capital is not utilized in our reinsurance business, we will consider using such capital to invest in new opportunities or will consider returning such capital to our shareholders.
AT DECEMBER 31, ------------------------------ 2000 1999 -------------- -------------- (IN THOUSANDS) Shareholders' equity......................... $ 700,818 $ 600,329 Revolving credit facility -- unborrowed...... 302,000 100,000 Revolving credit facility -- borrowed........ 8,000 200,000 Term and revolving loan facility............. 42,000 50,000 Minority interest -- capital securities...... 87,630 89,630 ----------- ----------- Total capital resources............ $ 1,140,448 $ 1,039,959 =========== ===========
Renaissance U.S. has a $27.0 million term loan and $15.0 million revolving loan facility with a syndicate of commercial banks, each of which is guaranteed by RenaissanceRe. Interest rates on the facility are based upon a spread above LIBOR, and averaged 6.98% during 2000, compared to 5.91% in 1999. The related agreements contain certain financial covenants, including a covenant that RenaissanceRe, as principal guarantor, maintain a ratio of liquid assets to debt service of 4:1. The term loan has mandatory repayment provisions approximating $9 million per year in each of years 2001 through 2003. During 2000, Renaissance U.S. repaid approximately $8 million of this facility. We were in compliance with all the covenants of this term loan and revolving loan facility at December 31, 2000.
Our subsidiary RenaissanceRe Capital Trust has issued capital securities which pay cumulative cash distributions at an annual rate of 8.54%, payable semi-annually. During 2000 we purchased $2.0 million of these
capital securities recognizing a gain of $0.5 million which has been reflected in shareholders' equity. During 1999 we purchased $10.4 million of these capital securities recognizing a gain of $1.8 million which was also reflected in shareholders' equity. 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, 2000. The capital trust securities mature on March 1, 2027. These securities are required by accounting principles to be classified as minority interest, rather than as a component of our shareholders' equity.
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. We have obtained a facility providing for the issuance of letters of credit. This facility is secured by a lien on a portion of our investment portfolio. At December 31, 2000, we had outstanding letters of credit aggregating $44.9 million, compared to $73.2 million in 1999. Also, in connection with our Top Layer Re joint venture we have committed $37.5 million of collateral to support a letter of credit.
During 2000, shareholders' equity increased by $100.5 million, from $600.3 million at December 31, 1999, to $700.8 million at December 31, 2000. The significant components of the change in shareholders' equity included net income from continuing operations of $127.2 million, plus an increase in unrealized appreciation on investments of $25.3 million, offset by the payment of dividends of $29.2 million and the purchase of common shares for $25.0 million.
From time to time, we have sought to return capital to our shareholders through share repurchase programs. We currently have $27.1 million remaining under our existing programs. During 2000, we purchased 671,900 common shares for an aggregate value of $25.1 million. During 1999, we repurchased 2,226,700 common shares for an aggregate value of $80.1 million. During 1998, we purchased 1,020,670 common shares for an aggregate value of $42.7 million.
Because we primarily provide coverage for damages resulting from natural and man-made catastrophes, we may become liable for substantial claim payments. Accordingly, our investment portfolio is structured to preserve capital and provide a high level of liquidity.
The growth in our portfolio of invested assets for the year ended December 31, 2000 resulted primarily from net cash provided by operating activities of $250.8 million, partially offset by payments of $200.0 million under our revolving credit facility, $29.2 million of dividends paid and $25.1 million of common share repurchases. Our investment income also increased during this period, largely as a result of the increased size of the fixed income portfolio and an increase in interest rates.
Our current investment guidelines call for the invested asset portfolio, including cash and cash equivalents, to have at least an average AA rating as measured by Standard & Poor's Ratings Group. At December 31, 2000, our invested asset portfolio had a dollar weighted average rating of AA, an average duration of 2.7 years and an average yield to maturity of 6.7%.
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 can not be accurately known until claims are ultimately settled.
During recent fiscal years there has been considerable consolidation among leading brokerage firms and also among our customers. Although consolidation may continue to occur, we believe that our financial strength, our position as one of the market leaders in the property catastrophe reinsurance industry and our ability to provide innovative products to the industry will minimize any adverse effect of such consolidation on our business.