-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DvZpGV2ewlrBSicvXmZijfEzzcbR4w5GXhZaxIttitzZp78/8VC0n5nYkuZ2cloV TQSZcg4yRy/T+fPBvdvhrg== 0000916641-01-500389.txt : 20010516 0000916641-01-500389.hdr.sgml : 20010516 ACCESSION NUMBER: 0000916641-01-500389 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TERRA NOVA BERMUDA HOLDING LTD CENTRAL INDEX KEY: 0000935937 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13834 FILM NUMBER: 1635743 BUSINESS ADDRESS: STREET 1: RICHMOND HOUSE 2ND FLOOR STREET 2: 12 PAR-LA-VILLE ROAD CITY: HAMILTON HM 11 BERMU STATE: D0 BUSINESS PHONE: 4412927731 MAIL ADDRESS: STREET 1: RICHMOND HOUSE 2ND FLOOR STREET 2: 12 PAR-LA-VILLE ROAD CITY: HAMILTON HM 11 BERMU STATE: D0 10-Q 1 d10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission File number 1-13832 TERRA NOVA (BERMUDA) HOLDINGS LTD. (Exact name of registrant as specified in its charter) Bermuda N/A - ---------------------------------- ---------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organisation) Identification No) Richmond House 12 Par La Ville Road Hamilton NM08 Bermuda -------------------------------------- (Address of principal executive offices) Telephone: (441) 292 7731 --------------------------------------------- (Registrants telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ------ The registrant meets the conditions set out in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format. The number of registrant's ordinary shares ($5.80 par value) outstanding on May 15, 2001, was 40,002,069. TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES INDEX TO FORM 10-Q
Part I - FINANCIAL INFORMATION Page No. ------------------------------ -------- Item 1. Financial Statements: Consolidated Balance Sheets March 31, 2001 (Unaudited) and December 31, 2000 2 Consolidated Statements of Operations (Unaudited) Three months ended March 31, 2001 and 2000 3 Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Three months ended March 31, 2001 and 2000 4 Consolidated Statements of Shareholder's Equity (Unaudited) Three months ended March 31, 2001 and 2000 5 Consolidated Statements of Cash Flows (Unaudited) Three months ended March 31, 2001 and 2000 6 Notes to the Interim Consolidated Financial Statements (Unaudited) 7 Item 2. Management's Discussion of Results of Operations 12 Item 3. Quantitative and Qualitative Disclosure About Market Risk 16 Part II - OTHER INFORMATION --------------------------- Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 Index to Exhibits 19
1 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Consolidated Balance Sheets (dollars in thousands)
At March 31, At December 31, 2001 2000 (Unaudited) ------------------ ------------------ ASSETS Investments available for sale, at fair value: Fixed maturities: Bonds (amortized cost $1,123,336 and $1,184,715, respectively) $1,157,330 $1,206,548 Common stocks (cost $72,549 and $70,792, respectively) 84,905 87,056 ------------------ ------------------ Total investments 1,242,235 1,293,604 Cash and cash equivalents 98,377 75,296 Accrued investment income 26,076 26,347 Insurance balances receivable 135,343 120,844 Reinsurance recoverable on paid losses 116,760 88,597 Reinsurance recoverable on unpaid losses 630,185 589,884 Accrued premium income 169,983 160,048 Prepaid reinsurance premiums 81,919 56,391 Deferred acquisition costs 90,477 70,241 Income taxes recoverable 1,743 2,070 Deferred income taxes 36,467 33,634 Other assets 113,143 119,635 Total assets $2,742,708 $2,636,591 ================== ================== LIABILITIES Unpaid losses and loss adjustment expenses $1,675,420 $1,671,738 Unearned premiums 430,774 367,167 Insurance balances payable 124,519 78,186 Long-term debt 175,000 175,000 Other liabilities 56,009 65,795 ------------------ ------------------ Total liabilities $2,461,722 $2,357,886 ------------------ ------------------ SHAREHOLDER'S EQUITY Common shares "A" ordinary shares, 75,000,000 authorized, $5.80 par value (40,002,069 issued and outstanding; 2000: 40,002,069) 232,012 232,012 "B" ordinary shares, convertible, 10,000,000 authorized, $5.80 par value (nil issued and outstanding; 2000: nil) - - Additional capital 34,153 34,153 Retained deficit (11,699) (12,136) Accumulated other comprehensive income 26,520 24,676 Total shareholder's equity 280,986 278,705 ------------------ ------------------ ------------------ ------------------ Total liabilities and shareholder's equity $2,742,708 $2,636,591 ================== ==================
See accompanying notes to the interim consolidated financial statements 2 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) (dollars in thousands)
Three months ended March 31, 2001 2000 ----------------- ------------------ Revenues Net written premiums $184,296 $ 241,402 Increase in unearned premiums (47,327) (86,666) ----------------- ------------------ Net earned premiums 136,969 154,736 Net investment income 19,638 21,621 Realized net capital gains (losses) on sales of investments 4,080 (3,674) Total revenues 160,687 172,683 ----------------- ------------------ Expenses Losses and loss adjustment expenses, net 107,825 156,791 Acquisition costs 43,830 90,103 Other operating expenses 6,402 7,887 Foreign exchange losses (gains) 289 (1,765) Interest expense 3,100 3,100 Agency expense (contribution) 143 (390) Other expenses 752 2,666 Amortization of intangible assets 1,093 981 Merger expenses - 18,416 ----------------- ------------------ Total expenses 163,434 277,789 ----------------- ------------------ Loss from operations before income tax (2,747) (105,106) Income tax benefit (3,184) (22,213) ----------------- ------------------ Net income (loss) $ 437 $ (82,893) ================= ==================
See accompanying notes to the interim consolidated financial statements 3 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (dollars in thousands)
Three months ended March 31, 2001 2000 ------------------ ----------------- Net income (loss) $ 437 $(82,893) ------------------ ----------------- Other comprehensive income: Unrealized appreciation of investments before 12,333 7,152 tax Tax (expense) (730) (2,815) ------------------ ----------------- Unrealized appreciation of investments after tax 11,603 4,337 ------------------ ----------------- Less: Reclassification adjustment for (gains) losses included in net income (loss) (4,080) 3,674 Tax benefit (expense) 909 (894) ------------------ ----------------- Reclassification adjustment for gains included in net income (loss) after tax (3,171) 2,780 ------------------ ----------------- Currency translation adjustments (6,588) (1,298) ------------------ ----------------- Other comprehensive income 1,844 5,819 ------------------ ----------------- ------------------ ----------------- Comprehensive income (loss) $ 2,281 $(77,074) ================== =================
See accompanying notes to the interim consolidated financial statements 4 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Consolidated Statements of Shareholder's Equity (Unaudited) (dollars in thousands)
Three months ended March 31, 2001 2000 ------------------ ------------------ Common "A" shares: Balance, beginning of period $232,012 $ 141,219 Cancellation of shares - (141,207) Issue of shares - 232,000 ------------------ ------------------ Balance, end of period 232,012 232,012 ------------------ ------------------ Common "B" shares: Balance, beginning of period - 10,418 Cancellation of shares - (10,418) ------------------ ------------------ Balance, end of period - - ------------------ ------------------ Stock held in Trust, at cost: Balance, beginning of period - (16,787) Exercise of stock options - 1,046 Cancellation of stock held in Trust - 15,741 ------------------ ------------------ Balance, end of period - - ------------------ ------------------ Deferred equity compensation: Balance, beginning of period - 7,564 Exercise of stock options - (4,839) Stock option compensation expense - 9,850 Transfer to additional capital - (12,575) ------------------ ------------------ Balance, end of period - - ------------------ ------------------ Additional capital: Balance, beginning of period 34,153 113,855 Exercise of stock options - 3,838 Cancellation of shares - (80,374) Cancellation of stock held in Trust - (15,741) Transfer from deferred equity compensation - 12,575 ------------------ ------------------ Balance, end of period 34,153 34,153 ------------------ ------------------ Retained (deficit) earnings: Balance, beginning of period (12,136) 195,163 Net income (loss) 437 (82,893) Dividends paid on ordinary shares - (75,000) ------------------ ------------------ Balance, end of period (11,699) 37,270 ------------------ ------------------ Accumulated other comprehensive income (loss): Balance, beginning of period 24,676 (7,422) Unrealized appreciation of investments, net of tax 8,432 7,117 Currency translation adjustments (6,588) (1,298) ------------------ ------------------ Balance, end of period 26,520 (1,603) ------------------ ------------------ Total shareholder's equity $280,986 $ 301,832 ================== ==================
See accompanying notes to the interim consolidated financial statements TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (dollars in thousands)
Three months ended March, 31, 2001 2000 ----------------- ------------------ Cash flows from operating activities: Net income (loss) $ 437 $ (82,893) Adjustments to reconcile net income (loss) to net cash and cash equivalents used in operating activities: Amortization of goodwill 1,093 981 Bad debt expenses - 1,630 Stock option compensation expense - 9,850 Realized net capital (gains) losses (4,080) 3,674 Change in unpaid losses and loss adjustment expenses 16,391 77,024 Change in unearned premiums and prepaid reinsurance 38,079 98,530 Change in insurance balances payable 46,333 32,721 Change in insurance balances receivable, accrued premium income and reinsurance recoverable on paid and unpaid losses (91,728) (182,539) Change in deferred acquisition costs (20,236) 6,650 Change in accrued investment income 271 2,709 Change in current and deferred income taxes (3,175) (20,359) Change in other assets and liabilities, net (6,604) (10,368) ----------------- ------------------ Total adjustments (23,656) 20,503 ----------------- ------------------ Net cash and cash equivalents used in operating activities (23,219) (62,390) ----------------- ------------------ Cash flows from investing activities: Proceeds of fixed maturities matured 20,000 13,294 Proceeds of fixed maturities sold 79,256 360,287 Proceeds of equity securities sold 4,323 19,900 Purchase of fixed maturities (52,071) (230,674) Purchase of equity securities (4,790) (20,280) ----------------- ------------------ Net cash and cash equivalents provided by investing activities 46,718 142,527 ----------------- ------------------ Cash flows from financing activities: Ordinary dividends paid to shareholders - (75,000) Proceeds from exercise of stock options - 46 ----------------- ------------------ Net cash and cash equivalents used in financing activities - (74,954) ----------------- ------------------ Change in cash and cash equivalents 23,499 5,183 Exchange on foreign currency cash balances (418) (98) Cash and cash equivalents at beginning of period 75,296 74,798 ----------------- ------------------ Cash and cash equivalents at end of period $ 98,377 $ 79,883 ================= ================== Supplemental disclosure of cash flow information Income taxes paid (repaid) $ 31 $ (4,223) ----------------- ------------------ Interest paid $ 2,700 $ 2,700 ----------------- ------------------
See accompanying notes to the interim consolidated financial statements 6 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Notes to the Interim Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The accompanying interim consolidated financial statements ("Statements") present information about Terra Nova (Bermuda) Holdings Ltd. (the "Company"), a wholly owned subsidiary of Markel Corporation, and have been prepared on the basis of United States generally accepted accounting principles. All material intercompany transactions and balances have been eliminated. In the opinion of management, these unaudited Statements reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the financial position, results of operations and cash flows of the Company. The results of operations for interim periods do not necessarily indicate the results to be expected for the full year. These Statements should be read with the audited consolidated financial statements as of December 31, 2000. 2. Contingencies On January 31, 2001, the Company received notice of a lawsuit filed in the United States District Court for the Southern District of New York against Terra Nova by Palladium Insurance Limited and Bank of America, N.A. seeking approximately $27 million plus exemplary damages in connection with alleged reinsurance agreements. The Company believes it has numerous defenses to these claims, including the defense that the alleged reinsurance agreements were not valid. The Company intends to vigorously defend this matter, however, it cannot predict the outcome at this time. The Company has other contingencies that arise in the normal conduct of its operations. In the opinion of management, the resolution of these contingencies are not expected to have a material impact on the Company's financial condition or results of operations. 3. Reinsurance In the ordinary course of business, the Company cedes reinsurance to other insurance companies. Ceded reinsurance arrangements provide greater diversification of business and limit the net loss potential arising from large risks. Certain of these arrangements consist of excess of loss contracts which protect against losses over stipulated amounts. Reinsurance is effected under reinsurance treaties and by negotiation on individual risks. The Company cedes reinsurance to and assumes reinsurance from Lloyd's of London ("Lloyd's") syndicates. At March 31, 2001, the aggregate exposure on reinsurance ceded to Lloyd's syndicates for continuing operations, including estimated reinsurance recoveries for losses incurred but not reported, was approximately $177 million. On January 29, 2001, Reliance Insurance Company entered into an order of supervision with the Pennsylvania Insurance Department under which its business and operations will be monitored and reviewed by the Department. At March 31, 2001, and December 31, 2000, Reliance Insurance Company and its affiliates (Reliance Insurance Group) owed the Company approximately $33.4 million in reinsurance recoverables for paid and unpaid losses. These balances were considered in the normal course of assessing the collectability of reinsurance recoverables. The Company believes this matter will not have a material impact on its financial condition or result of operations. 7 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Notes to the Interim Consolidated Financial Statements (Unaudited) 3. Reinsurance (Continued) (a) Net written premiums are comprised of the following:
Three months ended March 31, 2001 2000 -------------------------------------- (dollars in thousands) Direct business $175,665 $181,639 Reinsurance assumed 74,962 108,228 Reinsurance ceded (66,331) (48,465) ----------------- --------------- Net written premiums $184,296 $241,402 ================= ===============
(b) Net earned premiums are comprised of the following:
Three months ended March 31, 2001 2000 -------------------------------------- (dollars in thousands) Direct business $131,389 135,545 Reinsurance assumed 45,623 65,220 Reinsurance ceded (40,043) (46,029) ----------------- --------------- Net earned premiums $136,969 $154,736 ================= ===============
(c) Losses and loss adjustment expenses, net, are comprised of the following:
Three months ended March 31, 2001 2000 -------------------------------------- (dollars in thousands) Losses and loss adjustment expenses $ 211,632 $ 293,485 Reinsurance ceded (103,807) (136,694) ----------------- --------------- Losses and loss adjustment expenses, net $ 107,825 $ 156,791 ================= ===============
4. Business Segments The Company has three operating segments: the London Company Market, the Lloyd's Market and Investing. All investing activities are included in the Investing operating segment. Discontinued programs and non-strategic insurance subsidiaries are included in Other for purposes of segment reporting. The Company considers many factors including the nature of the underwriting units' insurance products, production sources, distribution strategies and regulatory environment in determining how to aggregate operating segments. 8 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Notes to the Interim Consolidated Financial Statements (Unaudited) 4. Business Segments (Continued) Segment profit or loss is measured by underwriting profit or loss. Segment profit for the Investing operating segment is measured by net investment income and realized net gains or losses. The Company does not allocate assets to the operating divisions for management reporting purposes. The total investment portfolio and cash and cash equivalents are allocated to the Investing operating segment. The Company does not allocate capital expenditure for long-lived assets to any of its operating segments for management reporting purposes. (a) Following is a summary of segment disclosures:
Segment Revenues - ----------------- Three months ended March 31, ---------------------------------------- 2001 2000 -------- ------ (dollars in thousands) London Company Market $ 37,360 $ 54,562 Lloyd's Market 67,250 58,155 Investing 23,718 17,947 Other 32,359 42,019 -------- -------- Total $160,687 $172,683 ======== ========
Segment Profit (Loss) - --------------------- Three months ended March 31, ----------------------------------------- 2001 2000 ----------- --------- (dollars in thousands) London Company Market $(7,180) $(57,725) Lloyd's Market (5,849) (15,878) Investing 23,718 17,947 Other (9,243) (26,953) ------- -------- Total $ 1,446 $(82,609) ======= ========
Combined Ratio - -------------------- Three months ended March 31, ------------------------------------- 2001 2000 ---------- ------- London Company Market 120% 206% Lloyd's Market 109% 127% Investing - - Other 129% 164% ----- --- Total 116% 165% ===== ====
9 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Notes to the Interim Consolidated Financial Statements (Unaudited) 4. Business Segments (Continued)
Segment Assets - -------------------- At March 31, ---------------------------------------- 2001 2000 --------------- ----------------- (dollars in thousands) London Company Market $ - $ - Lloyd's Market - - Investing 1,340,612 1,350,858 Unallocated assets 1,402,096 1,324,508 --------------- ----------------- Total $2,742,708 $2,675,366 =============== =================
(b) The following summary reconciles segment profit (loss) to the Company's consolidated financial statements:
Three months ended March 31, ------------------------------------------- 2001 2000 --------------- ----------------- (dollars in thousands) Segment profit (loss) $ 1,446 $ (82,609) Reconciling items: Interest expense (3,100) (3,100) Merger expenses - (18,416) Amortization of intangible assets (1,093) (981) ------------- ------------- Loss from operations before tax $(2,747) $(105,106) ============= =============
5. Summarized Financial Information for Markel International Limited ("Markel International") Markel International's summarized consolidated balance sheet information as at March 31, 2001, and December 31, 2000, and summarized consolidated statement of operations information for the three months ended March 31, 2001, and 2000, is set out below. Markel International is the issuer of $75 million 7.2% Senior Notes due 2007 and $100 million 7.0% Senior Notes due 2008. The Senior Notes are guaranteed fully and unconditionally by the Company.
March 31, December 31, 2001 2000 -------------------- ----------------- (dollars in thousands) Investments and cash $ 927,541 $ 964,969 Reinsurance recoverable on unpaid losses 757,072 723,787 Accrued premium income 168,839 146,061 Other assets 544,192 471,243 ------------------- ----------------- Total assets $2,397,644 $2,306,060 ==================== ================= Unpaid losses and loss adjustment expenses $1,590,282 $1,573,617 Unearned premiums 428,481 363,412 Long-term debt 175,000 175,000 Other liabilities 122,118 93,680 ------------------- ----------------- Total liabilities 2,315,881 2,205,709 ------------------- ----------------- Total shareholder's equity 81,763 100,351 ------------------- ----------------- Total liabilities and shareholder's equity $2,397,644 $2,306,060 ==================== =================
10 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Notes to the Interim Consolidated Financial Statements (Unaudited) 5. Summarized Financial Information for Markel International Limited (Continued)
Three months ended March 31, 2001 2000 ------------------ ------------------ (dollars in thousands) Net earned premiums $ 133,500 $ 144,908 Net investment income 13,463 12,698 Realized investment gains (losses) 3,350 (2,975) Foreign exchange (losses) gains (293) 1,807 Agency income 680 2,026 ------------------ ------------------ Total revenues 150,700 158,464 ------------------ ------------------ Underwriting costs and expenses (166,532) (234,932) ------------------ ------------------ Loss from operations before income tax (15,832) (76,468) ------------------ ------------------ Net loss $ (12,649) $ (54,255) ================== ==================
6. Derivatives The Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and 138, effective January 1, 2001. The standard requires that all derivatives be recorded as an asset or liability, at estimated fair value, regardless of the purpose or intent for holding the derivative. If a derivative does not qualify as a hedge under SFAS No. 133, all gains or losses from the change in the derivative's estimated fair value are recognized in earnings. The gains or losses from the change in estimated fair value of derivatives that qualify as hedges under SFAS No. 133 are recognized in earnings or other comprehensive income depending on the type of hedge relationship. The Company has entered into forward foreign exchange contracts which have been designated as hedges of net investments in foreign operations. The contracts are recorded at fair value, with the change in fair value recorded in cumulative translation adjustments (CTA) to the extent the change is equal to or less than the offsetting adjustment recorded in CTA that arose by translating the hedged foreign operation's financial statements to the Company's reporting currency. To the extent the change in the fair value of the forward contracts is greater than the adjustment of the net investment, it would be included in earnings. At March 31, 2001, the Company had entered into forward foreign exchange contracts with an aggregate notional amount of $81.5 million to buy United Kingdom Sterling. Contract maturities range from June 2001 to June 2002. The fair value of the forward contracts was a cumulative loss of $2.3 million at March 31, 2001 and was included in Other Liabilities on the accompanying consolidated balance sheets. The change in the fair value for the three months ended March 31, 2001 was a loss of $3.2 million and was included in CTA. 11 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS Safe Harbor Statement This is a Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. Any written or oral statements made by or on behalf of the Company reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to uncertainties and inherent risks that could cause actual results to differ materially from those contained in any forward-looking statement. The Company has identified certain factors that could cause actual plans or results to differ substantially from those included in any forward-looking statements. These risk factors include, but are not limited to, the following: (i) uncertainties and changes in government policy and law (both statute and case law) with respect to the Company, its brokers or customers (for example, the Company is subjected to taxation in an additional jurisdiction, there is a change in the way insurance contracts are interpreted by a court of law, etc.); (ii) uncertainties and changes in regulatory policy and law (for example, the Company is subjected to insurance regulation in an additional jurisdiction); (iii) the occurrence of man-made or natural catastrophic events with a frequency or severity exceeding the estimates of the Company; (iv) the uncertainties of the reserving process; (v) changing rates of inflation and other economic conditions; (vi) losses due to foreign currency exchange rate fluctuations; (vii) ability to collect reinsurance recoverables; (viii) changes in the availability, cost or quality of reinsurance; (ix) developments in global financial markets that could affect the Company's investment portfolio; (x) risks associated with the introduction of new products and services; (xi) increased competition on the basis of pricing, capacity, coverage terms or other factors; (xii) changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers; (xiii) the impact of Year 2000 related issues on the Company's underwriting exposures; (xiv) the effects of mergers, acquisitions and divestitures; (xv) ineffectiveness or obsolescence of the Company's business strategy due to changes in present or future market conditions; (xvi) the legal environment and social trends; and (xvii) the loss of the services of any of the Company's executive officers and significant changes in personnel. The Company undertakes no obligation to publicly update or revise any forward- looking statement, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on any forward- looking statements, which speak only as at their dates. The Company is currently working to increase its focus on underwriting profitability in continuing programs. These initiatives may lead to the repricing or discontinuance of poor performing lines of business, reorganization of business units to achieve operating efficiencies and a review of reinsurance programs and exposures. These initiatives could lead to further charges and expense for the Company. The Company's premium growth, underwriting and investment results have been and will continue to be potentially and materially affected by the above factors. The Company The following is a summary explanation of the material changes in the Company's revenue and expenses. All references to the "Company" are to Terra Nova (Bermuda) Holdings Ltd. and all of its direct and indirect subsidiaries, including Markel International Limited ("Markel International"), Terra Nova Insurance Company Limited ("Terra Nova"), Terra Nova (Bermuda) Insurance Company Ltd. ("Terra Nova (Bermuda)"), Compagnie de Reassurance d'Ile de France ("Corifrance"), Markel Syndicate Management Limited ("Markel Syndicate Management") and Markel Capital Limited ("Markel Capital"). The Company is a wholly owned subsidiary of Markel Corporation. This discussion should be read with the audited consolidated financial statements of the Company as of December 31, 2000. 12 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS Business Operations The London Company Market consists of the operations of Terra Nova. The Lloyd's Market includes Markel Capital, which is the corporate capital provider for four Lloyd's syndicates for the 2001 year of account managed by Markel Syndicate Management. Non-Marine Syndicate 702, Marine Syndicate 1009, the continuing lines of Motor Syndicate 1228 and Non-Marine Syndicate 1239 are included in the Lloyd's Market segment. Discontinued syndicates, the discontinued lines of Motor Syndicate 1228, Terra Nova (Bermuda) and Corifrance are included in Other for segment reporting purposes as they are either discontinued lines of business or non-strategic businesses. Markel International's operating units write specialty property, casualty, marine and aviation insurance and reinsurance on a worldwide basis. The majority of Markel International's business comes from the United Kingdom and the United States. Following, is a comparison of gross premium volume by significant underwriting area:
Gross Premium Volume Three months ended March 31, 2001 2000 - ---------------------------------------------------------------------------- (dollars in thousands) London Company Market $ 55,762 $103,712 Lloyd's Market 178,963 112,897 Other 15,902 73,258 - ---------------------------------------------------------------------------- Total $250,627 $289,867 - ----------------------------------------------------------------------------
Gross written premiums decreased 13.5% to $250.6 million in the first quarter of 2001 from $289.9 million written in the first quarter of 2000. The decrease is primarily a result of: (a) A 46.2% decrease in gross written premiums at the London Company Market to $55.8 million in the first quarter of 2001 from $103.7 million in the first quarter of 2000. The decrease was predominantly the result of Terra Nova reducing its property writings by 55.8% in the three months to March 31, 2001, compared to 2000. The decrease on the property account arose primarily on the property catastrophe, risk excess and pro rata business due to the non-renewal of unprofitable accounts. In addition, in line with the Company's philosophy to focus on underwriting profitability, writings on the casualty account (professional indemnity business) and marine account have also reduced in 2001 compared to 2000. (b) Significant decreases in gross written premiums in discontinued lines due to the closure of Terra Nova (Bermuda) on April 2, 2000, and the decision to cease underwriting at Marine Syndicate 329, Non Marine Syndicate 1227 and the discontinued lines of Motor Syndicate 1228 in the third quarter of 2000. The majority of discontinued premium income in the first quarter of 2001 arose at Corifrance which is considered as non-strategic and is therefore included within Other for segment reporting purposes. 13 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS Business Operations (Continued) (c) These decreases have been partially offset by a 58.5% increase in gross written premiums at the Lloyd's Market for the three months to March 31, 2001. The increase is primarily due to Markel Capital increasing its participation on the continuing syndicates to 100% in 2001 compared to approximately 87% in 2000 and increased writings at Non Marine Syndicate 702, Marine and Aviation Syndicate 1009 and Non Marine Syndicate 1239. This increase is partially offset by lower writings at Motor Syndicate 1228. Net written premiums decreased 23.7% to $184.3 million in the first quarter of 2001 from $241.4 million in the first quarter of 2000. This reflects the fall in gross written premiums as well as a decrease in retention rates to 74% in the first quarter of 2001 compared to 83% in the first quarter of 2000. In 2000, a large proportion of reinsurance was purchased in the second quarter so as to avoid coverage disputes with respect to Year 2000 issues. In 2001, the majority of these policies incepted in the first quarter. Net earned premiums decreased by 11.5% in the first quarter of 2001 to $137.0 million from $154.7 million in 2000. The decrease reflects the decreased writings in 2001. Following, is a comparison of selected data from the Company's operations:
Three months ended March 31, 2001 2000 - ------------------------------------------------------------------------------------- (dollars in thousands) Gross premium volume $250,627 $ 289,867 Net written premiums 184,296 241,402 Net retention 74% 83% Net earned premiums 136,969 154,736 Losses and loss adjustment expenses 107,825 156,791 Underwriting, acquisition and insurance expenses 51,416 98,500 Underwriting loss (22,272) (100,556) GAAP ratios Loss ratio 79% 101% Expense ratio 37% 64% - ------------------------------------------------------------------------------------- Combined ratio 116% 165% - -------------------------------------------------------------------------------------
The underwriting loss was $22.3 million in the first quarter of 2001 compared to $100.6 million in 2000 resulting in an improvement in the combined ratio to 116% in 2001 from 165% in 2000. The improvement in 2001 reflects the underwriting discipline adopted since the acquisition by Markel Corporation on March 24, 2000 and the impact as premiums written since acquisition are earned. In addition, the underwriting loss from discontinued and non-strategic lines decreased to $9.2 million in the first quarter of 2001 compared to a loss of $27.0 million in 2000 due to lower unfavorable prior year reserve development. The underwriting loss in the first quarter of 2000 was primarily the result of inadequate pricing, poor underwriting controls on the discontinued lines and portions of the continuing programs and included non-recurring transaction related expenses of $58.6 million. The Company will continue to review claims and reinsurance experience, and although loss and bad debt reserves are believed to be adequate, adverse experience is possible and could result in reserve increases in the future. 14 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS Business Operations (Continued) The Company had a pre-tax loss of $2.7 million in the first three months of 2001 compared to a pre-tax loss of $105.1 million in 2000. The pre-tax loss of $2.7 million in 2001 was primarily a result of the underwriting loss, being partially offset by investment income and realized investment gains. The pre- tax loss of $105.1 million in 2000 was primarily a result of the $100.6 million underwriting loss and merger expenses of $18.4 million being partially offset by investment income. The post-tax income was $0.4 million in the first quarter of 2001 compared to a post-tax loss of $82.9 million in 2000. The tax benefit as a percentage of loss from operations before tax was 115.9% in the first quarter of 2001 compared to 21.1% in 2000. This was due to losses generated from the Company's UK operations which give rise to tax credits, off-set by income generated in Bermuda which is not subject to tax. Shareholder's equity increased by 0.8% to $281.0 million at March 31, 2001, compared to $278.7 million at December 31, 2000. The increase of $2.3 million was primarily due to the net profit of $0.4 million and unrealized appreciation of investments after tax of $8.4 million, partially offset by currency translation adjustments of $6.6 million. 15 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in equity prices, interest rates, foreign exchange rates and commodity prices. The Company's consolidated balance sheets include assets and liabilities whose estimated fair values are subject to market risk. The primary market risks to the Company are equity price risk associated with investments in equity securities, interest rate risk associated with investments in fixed maturities and foreign exchange risk. The Company has no material commodity risk. The Company's market risks at March 31, 2001 have not materially changed from those identified at December 31, 2000. 16 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES PART II - OTHER INFORMATION - --------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits Index to Exhibits filed as part of this report b) Form 8-K None 17 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES SIGNATURES ---------- Under the requirements of the Securities Exchange Act of 1934, the registrant has had this report signed on its behalf by the undersigned who are so authorized. Date: May 15, 2001 By: /s/JEREMY D. COOKE ------------ ------------------ Jeremy D. Cooke Chief Operating Officer Date: May 15, 2001 By: /s/ANDREW J. DAVIES ------------ ------------------- Andrew J. Davies Finance Director and Principal Accounting Officer 18 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES INDEX TO EXHIBITS Exhibit Number 3.1 Certificate of Incorporation and Memorandum of Association of the Company (incorporated by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-1, Registration No. 33-93358). 3.2 Amended and Restated Bye-Laws of the Company (incorporated by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-1, Registration No. 333-1726). -----END PRIVACY-ENHANCED MESSAGE-----