-----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, Mki9l0o7ORTKtZu75iI56ml5nB3sb+UnyCImVz4l09iNnxaM/h0uAujcjOb74+LU lpOCaNVqermIxVKkNNrHEQ== 0000916641-02-000711.txt : 20020508 0000916641-02-000711.hdr.sgml : 20020508 ACCESSION NUMBER: 0000916641-02-000711 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020508 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TERRA NOVA BERMUDA HOLDING LTD CENTRAL INDEX KEY: 0000935937 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13834 FILM NUMBER: 02637794 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 FORM 10-Q 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, 2002 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 10Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. The number of registrant's ordinary shares ($1.00 par value) outstanding on May 8, 2002, was 12,000. TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES INDEX TO FORM 10-Q
Page No. -------- Part I - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements: Consolidated Balance Sheets March 31, 2002 (Unaudited) and December 31, 2001 2 Consolidated Statements of Operations (Unaudited) Three months ended March 31, 2002 and 2001 3 Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Three months ended March 31, 2002 and 2001 4 Consolidated Statements of Shareholder's Equity (Unaudited) Three months ended March 31, 2002 and 2001 5 Consolidated Statements of Cash Flows (Unaudited) Three months ended March 31, 2002 and 2001 6 Notes to the Interim Consolidated Financial Statements (Unaudited) 7 Item 2. Management's Discussion of Results of Operations 14 Part II - OTHER INFORMATION --------------------------- Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 Index to Exhibits 21
1 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Consolidated Balance Sheets (dollars in thousands)
At March 31, At December 31, 2002 2001 (Unaudited) ----------------- ----------------- ASSETS Investments available for sale, at fair value: Fixed maturities: Bonds (amortized cost $1,131,444 and $1,110,860, respectively) $1,145,207 $1,141,197 Common stocks (cost $91,586 and $81,852, respectively) 115,143 104,362 --------------- -------------- Total investments 1,260,350 1,245,559 Cash and cash equivalents 114,864 178,412 Accrued investment income 22,309 21,733 Insurance balances receivable 110,434 93,407 Reinsurance recoverable on paid losses 143,604 132,339 Reinsurance recoverable on unpaid losses 987,553 953,231 Accrued premium income 174,579 135,674 Prepaid reinsurance premiums 77,558 51,603 Deferred acquisition costs 68,769 60,641 Income taxes recoverable 1,120 603 Deferred income taxes 94,410 92,317 Other assets 94,310 110,658 --------------- -------------- Total assets $3,149,860 $3,076,177 =============== ============== LIABILITIES Unpaid losses and loss adjustment expenses $2,183,791 $2,172,645 Unearned premiums 382,511 351,131 Insurance balances payable 118,331 85,322 Long-term debt 173,016 173,016 Other liabilities 128,589 124,897 --------------- -------------- Total liabilities $2,986,238 $2,907,011 --------------- -------------- SHAREHOLDER'S EQUITY Common shares "A" ordinary shares 12,000 authorized, issued and outstanding, $1.00 par value. 12 12 "B" ordinary shares, convertible, 10,000,000 authorized, $5.80 par value (nil issued and outstanding) - - Additional capital 268,853 266,153 Retained deficit (128,378) (133,321) Accumulated other comprehensive income, net of tax 23,135 36,322 --------------- -------------- Total shareholder's equity 163,622 169,166 --------------- -------------- --------------- -------------- Total liabilities and shareholder's equity $3,149,860 $3,076,177 =============== ==============
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, 2002 2001 ------------------- --------------- Revenues Net written premiums $114,944 $184,296 Decrease in unearned premiums (2,838) (47,327) -------------- -------------- Net earned premiums 112,106 136,969 Net investment income 15,771 19,638 Realized net capital gains on sales of investments 1,462 4,080 -------------- -------------- Total operating revenues 129,339 160,687 -------------- -------------- Expenses Losses and loss adjustment expenses, net 86,850 107,825 Underwriting, acquisition and insurance expenses 33,447 51,416 Amortization of intangible assets 862 1,093 Interest expense 3,065 3,100 -------------- -------------- Total operating expenses 124,224 163,434 -------------- -------------- Income (loss) before income tax 5,115 (2,747) Income tax expense (benefit) 172 (3,184) -------------- -------------- $4,943 $437 Net income ============== ==============
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, 2002 2001 ---------- -------- Net income $4,943 $437 ---------- -------- Other comprehensive (loss) income: Unrealized (depreciation) appreciation of investments before tax (14,065) 12,333 Tax benefit (expense) 3,522 (730) ---------- -------- Unrealized (depreciation) appreciation of investments after tax (10,543) 11,603 ---------- -------- Less: Reclassification adjustment for gains included in net loss before tax (1,462) (4,080) Tax (benefit) expense (428) 909 ---------- -------- Reclassification adjustment for gains included in net loss after tax (1,890) (3,171) ---------- -------- Currency translation adjustments (754) (6,588) ---------- -------- Other comprehensive (loss) income (13,187) 1,844 ---------- -------- ---------- -------- Comprehensive (loss) income $(8,244) $2,281 ========== ========
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, 2002 2001 ---------------- ----------------- Common "A" shares: ---------------- ----------------- Balance, beginning and end of period $12 $232,012 ---------------- ----------------- Common "B" shares: ---------------- ----------------- Balance, beginning and end of period - - ---------------- ----------------- Additional capital: Balance, beginning of period 266,153 34,153 Contribution from Markel Corporation 2,700 - ---------------- ----------------- Balance, end of period 268,853 34,153 ---------------- ----------------- Retained deficit: Balance, beginning of period (133,321) (12,136) Net income 4,943 437 ---------------- ----------------- Balance, end of period (128,378) (11,699) ---------------- ----------------- Accumulated other comprehensive income: Balance, beginning of period 36,322 24,676 Unrealized (depreciation) appreciation of investments, net of tax (12,433) 8,432 Currency translation adjustments (754) (6,588) ---------------- ----------------- Balance, end of period 23,135 26,520 ---------------- ----------------- ---------------- ----------------- Total shareholder's equity $163,622 $280,986 ================ =================
See accompanying notes to the interim consolidated financial statements 5 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (dollars in thousands)
Three months ended March 31, 2002 2001 -------------- -------------- Cash flows from operating activities: Net income $4,943 $437 Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: Amortization of intangible assets 862 1,093 Realized net capital gains (1,462) (4,080) Change in unpaid losses and loss adjustment expenses 20,425 16,391 Change in unearned premiums and prepaid reinsurance 5,425 38,079 Change in insurance balances payable 33,009 46,333 Change in insurance balances receivable, accrued premium income and reinsurance recoverable on paid and unpaid losses (100,009) (91,728) Change in deferred acquisition costs (8,128) (20,236) Change in accrued investment income (576) 271 Change in current and deferred income taxes (508) (3,175) Other 16,843 (7,022) -------------- ------------- Total adjustments (34,119) (24,074) -------------- ------------- Net cash and cash equivalents used in operating activities (29,176) (23,637) -------------- ------------- Cash flows from investing activities: Proceeds of fixed maturities matured 9,800 20,000 Proceeds of fixed maturities sold 202,267 79,256 Proceeds of equity securities sold - 4,323 Purchase of fixed maturities (239,374) (52,071) Purchase of equity securities (9,765) (4,790) -------------- ------------- Net cash and cash equivalents (used in) provided by investing activities (37,072) 46,718 -------------- ------------- Cash flows from financing activities: Contribution from Markel Corporation 2,700 - -------------- ------------- Net cash and cash equivalents provided by financing activities 2,700 - -------------- ------------- Change in cash and cash equivalents (63,548) 23,081 Cash and cash equivalents at beginning of period 178,412 75,296 -------------- ------------- Cash and cash equivalents at end of period $114,864 $98,377 ============== ============= Supplemental disclosure of cash flow information Income taxes paid $517 $31 -------------- ------------- Interest paid $2,665 $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, changes in shareholder's equity 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. Certain reclassifications of prior year's amounts have been made to conform with 2002 presentations. These Statements should be read with the audited consolidated financial statements as of December 31, 2001. 2. 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 affected under reinsurance treaties and by negotiation on individual risks. The Company cedes reinsurance to and assumes reinsurance from Lloyd's syndicates. At March 31, 2002, the aggregate exposure to Lloyd's syndicates in respect of continuing operations, including estimated reinsurance recoverables for losses incurred but not reported, was $268 million. Approximately 30% of this amount was ceded into Equitas with effect from September 4, 1996. Equitas is a reinsurance company that was formed to reinsure the 1992 and prior losses of Lloyd's syndicates. Therefore, ultimate recoverables under the reinsurance contracts ceded into Equitas will be dependent on Equitas being able to fulfil its commitment to the syndicates. No specific bad debt provision has been established for amounts due from Equitas and Lloyd's syndicates. (a) Net written premiums are comprised of the following:
Three months ended March 31, 2002 2001 ---------------------------------- (dollars in thousands) Direct business $130,730 $175,665 Reinsurance assumed 60,452 74,962 Reinsurance ceded (76,238) (66,331) ---------------- ------------- Net written premiums $114,944 $184,296 ================ =============
(b) Net earned premiums are comprised of the following:
Three months ended March 31, 2002 2001 ---------------------------------- (dollars in thousands) Direct business $143,193 $131,389 Reinsurance assumed 13,149 45,623 Reinsurance ceded (44,236) (40,043) ---------------- ------------- Net earned premiums $112,106 $136,969 ================ =============
7 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Notes to the Interim Consolidated Financial Statements (Unaudited) 2. Reinsurance (Continued) (c) Losses and loss adjustment expenses, net, are comprised of the following:
Three months ended March 31, 2002 2001 -------------------------------- (dollars in thousands) Losses and loss adjustment expenses $141,483 $211,632 Reinsurance ceded (54,633) (103,807) --------------- ------------- Losses and loss adjustment expenses, net $86,850 $107,825 =============== =============
3. Business Segments The Company has two operating segments: the London Insurance Market and Investing. Effective January 1, 2002, the Company realigned its underwriting operations along product lines and customers and combined the operations of four Lloyd's syndicates into one. As a result of these changes, the Company has the ability to compete in the London Insurance Market without distinction between its London insurance company and its Lloyd's syndicate. Prior year segment information has been made to conform with 2002 presentations. 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. 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. 8 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Notes to the Interim Consolidated Financial Statements (Unaudited) 3. Business Segments (Continued) (a) Following is a summary of segment disclosures: Segment Revenues - ------------------------------------------------------------------------------- Three months ended March 31, -------------------------------------- (dollars in thousands) 2002 2001 ---------------- ---------------- London Insurance Market $106,808 $104,610 Investing 17,233 23,718 Other (Discontinued Lines) 5,298 32,359 ---------------- ---------------- Total $129,339 $160,687 ================ ================ Segment (Loss) Profit - ------------------------------------------------------------------------------- Three months ended March 31, -------------------------------------- (dollars in thousands) 2002 2001 ---------------- ---------------- London Insurance Market $(5,634) $(13,029) Investing 17,233 23,718 Other (Discontinued Lines) (2,557) (9,243) ---------------- ---------------- Total $9,042 $1,446 ================ ================ Combined Ratio - ------------------------------------------------------------------------------- Three months ended March 31, -------------------------------------- 2002 2001 ---------------- -------------- London Insurance Market 105% 112% Investing - - Other (Discontinued Lines) 148% 129% ---------------- -------------- Consolidated 107% 116% ================ ==============
Segment Assets - ----------------------------------------------------------------------------------------------------------------------- At March 31, At December 31, (dollars in thousands) 2002 2001 ------------------- -------------------- Investing $1,375,214 $1,423,971 Other 1,774,646 1,652,206 ------------------- -------------------- Total $3,149,860 $3,076,177 =================== ====================
(b) The following summary reconciles segment loss to the Company's consolidated financial statements:
Three months ended March 31, ----------------------------------------- 2002 2001 ---------------- ----------------- (dollars in thousands) Segment profit $9,042 $1,446 Reconciling items: Interest expense (3,065) (3,100) Amortization of intangible assets (862) (1,093) ---------------- ----------------- Net income (loss) before tax $5,115 $(2,747) ================ =================
9 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Notes to the Interim Consolidated Financial Statements (Unaudited) 4. Summarized Financial Information for Markel International Limited ("Markel International") Markel International is a wholly-owned subsidiary of Terra Nova (Bermuda) Holdings Ltd. Markel International's summarized consolidated balance sheet information as at March 31, 2002, and December 31, 2001, and summarized consolidated statement of operations information for the three months ended March 31, 2002, and 2001, 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. During 2001, Markel Capital repurchased $2.0 million of these Notes. At March 31, 2002, the Company had $74 million of 7.2% Senior Notes due August 7, 2007 and $99 million of 7.0% Senior Notes due May 8, 2008. The Senior Notes are guaranteed fully and unconditionally by the Company.
March 31, December 31, 2002 2001 ------------------ --------------- (dollars in thousands) Investments and cash $1,051,106 $1,094,932 Reinsurance recoverable on unpaid losses 1,102,023 1,070,378 Accrued premium income 176,405 137,136 Other assets 597,451 546,436 --------------- --------------- Total assets $2,926,985 $2,848,882 =============== =============== Unpaid losses and loss adjustment expenses $2,123,455 $2,106,356 Unearned premiums 382,449 351,131 Long-term debt 173,016 173,016 Other liabilities 222,739 186,424 --------------- --------------- Total liabilities $2,901,659 $2,816,927 --------------- --------------- Total shareholder's equity $25,326 $31,955 --------------- --------------- Total liabilities and shareholder's equity $2,926,985 $2,848,882 =============== =============== Three months ended March 31, 2002 2001 ------------------ --------------- (dollars in thousands) Net earned premiums $112,111 $133,500 Net investment income 11,109 13,463 Realized investment (losses) gains (1,425) 3,350 Foreign exchange gains (losses) 139 (293) Agency income 878 680 ------------------ --------------- Total operating revenues 122,812 150,700 ------------------ --------------- Underwriting costs and expenses (126,050) (166,532) ------------------ --------------- Loss from operations before income tax (3,238) (15,832) ------------------ --------------- Net loss $(3,410) $(12,649) ================== ===============
5. Derivative Financial Instruments The Company held positions in foreign exchange forward contracts with an aggregate notional amount of $55.3 million at both March 31, 2002 and December 31, 2001, respectively, to buy United Kingdom Sterling. Contracts unsettled at March 31, 2002 mature in June 2002. The fair value of the unsettled forward contracts and the gain (loss) on the settled and unsettled forward contracts were immaterial at and for the three month period ended March 31, 2002 and 2001, respectively. 10 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Notes to the Interim Consolidated Financial Statements (Unaudited) 6. Goodwill and Other Intangible Assets The Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards (Statement) No. 142, Goodwill and Other Intangible Assets effective January 1, 2002. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Statement 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment. The Company completed the transitional goodwill impairment test required by Statement 142 in the first quarter of 2002 and determined that there was no indication of goodwill impairment. (a) Acquired Intangible Assets:
At March 31, 2002 -------------------------------------------------------------- Gross Accumulated Net (dollars in thousands) Carrying Amount Amortization Carrying Amount - ---------------------------------------- --------------------- ----------------- ---------------------- Amortized Intangible Assets --------------------- ----------------- ---------------------- Lloyd's capacity costs $35,461 $(10,309) $25,152 ===================== ================= ====================== Unamortized Intangible Assets --------------------- ----------------- ---------------------- Goodwill $24,135 $(926) $23,209 ===================== ================= ====================== At December 31, 2001 -------------------------------------------------------------- Gross Accumulated Net (dollars in thousands) Carrying Amount Amortization Carrying Amount - ---------------------------------------- --------------------- ----------------- ---------------------- Amortized Intangible Assets --------------------- ----------------- ---------------------- Lloyd's capacity costs $35,461 $(9,447) $26,014 ===================== ================= ====================== Unamortized Intangible Assets --------------------- ----------------- ---------------------- Goodwill $24,135 $(926) $23,209 ===================== ================= ======================
The amortization expense for intangible assets for the quarters ended March 31, 2002 and March 31, 2001 was $0.9 million and $1.1 million, respectively. Following is a schedule of estimated annual amortization expense: (dollars in thousands) Years ending December 31, - -------------------------------------- --------------------------------------- 2002 $3,448 2003 $3,448 2004 $3,448 2005 $3,448 2006 and thereafter $12,222 - -------------------------------------- --------------------------------------- 11 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Notes to the Interim Consolidated Financial Statements (Unaudited) 6. Goodwill and Other Intangible Assets (Continued) There were no changes to the carrying amounts of goodwill for the quarter ended March 31, 2002. The following table shows the carrying amounts of goodwill by segment at March 31, 2002:
London Insurance Discontinued Lines Total (dollars in thousands) Market (Corifrance) - ---------------------------------------------- ----------------------- ----------------------- ------------------------ ----------------------- ----------------------- ------------------------ Balance as of March 31, 2002 $8,321 $14,888 $23,209 ======================= ======================= ========================
(b) Goodwill and Intangible Asset - Adoption of Statement 142: The following table compares net income, as adjusted for the adoption of Statement 142:
(dollars in thousands) As at March 31, 2002 As at March 31, 2001 - ---------------------------------------------- ---------------------------- ----------------------------- Net income $4,943 $437 Add: goodwill amortization - 232 ---------------------------- ----------------------------- Adjusted net income $4,943 $669 ============================ =============================
7. Related Party Transactions At March 31, 2002, the Company had outstanding interest-free short-term borrowings of $54.8 million due to its parent company, Markel Corporation. Effective January 1, 2001, the Company entered into a quota share reinsurance agreement (the Agreement) with Markel Insurance Company (MIC) and Deerfield Insurance Company (DIC), United States insurance subsidiaries of its parent, Markel Corporation. Under the Agreement the Company's subsidiary, Markel Capital Limited, cedes 24% of net written premiums and related losses and expenses to MIC and DIC on the 2001 and 2002 years of account. 8. Subsequent Event On April 15, 2002, the Company's parent, Markel Corporation, filed a registration statement with the Securities and Exchange Commission and commenced an exchange offering for approximately $173 million of outstanding notes issued by Markel International, a wholly-owned subsidiary. If successful, the offer will reduce the outstanding indebtedness included in the Company's consolidated balance sheet. 12 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Notes to the Interim Consolidated Financial Statements (Unaudited) 9. 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 Insurance Company Limited by Palladium Insurance Limited and Bank of America, N.A. seeking approximately $27 million plus exemplary damages in connection with alleged reinsurance agreements. A similar lawsuit seeking approximately $8.5 million for breach of an alleged insurance policy was previously filed by PXRe Corporation. The Company believes it has numerous defenses to these claims, including the defense that the alleged reinsurance agreements and insurance policy were not valid. The Company intends to vigorously defend these matters; however, the outcome cannot be predicted at this time. The PXRe matter is currently scheduled for trial in early June 2002. In late 2001, Reliance Insurance Company was placed in liquidation by the Pennsylvania Insurance Department. Reliance Insurance Company and its affiliates owed the Company approximately $26 million in reinsurance recoverables for paid and unpaid losses at March 31, 2002 and December 31, 2001, respectively. In addition a portion of the Reliance recoverables are the subject of dispute. These balances were considered in the normal course of assessing the collectability of reinsurance recoverables and an allowance was established. 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. However, adverse outcomes are possible and could negatively impact the Company's financial condition or results of operations. 13 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS 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, 2001. Business Operations On January 1, 2002, the Company realigned its underwriting operations along product lines and customers into six underwriting centers. The Company also combined the operations of four Lloyd's syndicates into one, Markel Syndicate 3000. The six underwriting centers have the ability to write business either via Terra Nova or Markel Syndicate 3000. Prior year segment information has been made to conform with 2002 presentations. The majority of the Company's business comes from the United Kingdom and United States. Discontinued lines of business and non-strategic insurance subsidiaries are included in Other (Discontinued Lines) for segment reporting purposes. Following, is a comparison of gross premium volume by significant underwriting area:
Gross Premium Volume Three months ended March 31, (dollars in thousands) 2002 2001 - ---------------------------------------- -------------------- --------------------- London Insurance Market $170,959 $234,725 Other (Discontinued Lines) 20,223 15,902 - ---------------------------------------- -------------------- --------------------- Total $191,182 $250,627 ======================================== ==================== =====================
In the first quarter of 2002, gross premium volume at the London Insurance Market declined 27% to $171.0 million from $234.7 million in 2001. This decline was primarily due to stricter underwriting guidelines, reduced aggregate policy limits and the reunderwriting of some classes of business. Premium rates have begun to increase in the London Insurance Market, and first quarter writings met management's expectations both in terms of volume and price increases achieved. The Company anticipates markets will continue to provide a favorable environment for its operations. During the first quarter of 2002, A. M. Best (Best) and Standard & Poor's (S&P) downgraded the financial strength ratings (FSR) of Terra Nova, a wholly-owned subsidiary participating in the London Insurance Market. Best downgraded Terra Nova's FSR to "B++" (very good) from "A-" (excellent) while S&P reduced its FSR for Terra Nova to "BBB-" (good). Both actions were the result of Terra Nova's underwriting losses. The downgrades are expected to have a negative impact on Terra Nova's ability to retain business. The Company will attempt to retain business by moving premium writings to Markel Syndicate 3000. Discontinued Lines' gross written premiums, which consisted primarily of Corifrance's writings in both periods, increased to $20.2 million in the first quarter of 2002 from $15.9 million in 2001 due to favorable reinsurance market conditions. 14 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS Business Operations (Continued) The Company's net retention of gross premium volume decreased to 60% in the first quarter of 2002 compared to 74% in the prior year. The decrease was primarily due to increased reinsurance costs in the Company's marine & energy programs. Upon renewal in early January 2002, the cost of the Company's marine & energy reinsurance programs increased significantly and the Company determined that unearned premiums at December 31, 2001 were not adequate to cover future losses, increased reinsurance costs and related deferred acquisition costs. As a result the Company wrote off $20 million of deferred acquisition costs in the fourth quarter of 2001. These reinsurance premiums reduced net written premiums in the first quarter of 2002. Before the impact of the marine & energy reinsurance programs in 2002, the Company's retention rate was 71%. Total operating revenues decreased to $129.3 million from $160.7 million in the prior year. The decrease was attributed to lower earned premium due to lower gross premium volume, and lower net investment income due to lower investment yields and lower realized gains. Earned premiums decreased 18% to $112.1 million for the first quarter of 2002 from $137.0 million in the prior year, due to lower earned premiums from Discontinued Lines. Following, is a comparison of selected data from the Company's operations:
Three months ended March 31, 2002 2001 ---------------------------- (dollars in thousands) Gross premium volume $191,182 $250,627 Net written premiums 114,944 184,296 Net retention 60% 74% Net earned premiums 112,106 136,969 Losses and loss adjustment expenses 86,850 107,825 Underwriting, acquisition and insurance expenses 33,447 51,416 Underwriting loss (8,191) (22,272) GAAP ratios Loss ratio 77% 79% Expense ratio 30% 37% - ----------------------------------------------------- ------------ --------------- Combined ratio 107% 116% ===================================================== ============ ===============
Underwriting performance is measured by the combined ratio of losses and expenses to earned premiums. The Company reported a combined ratio of 107% in 2002 compared to a combined ratio of 116% in the first quarter of 2001. The combined ratio for the London Insurance Market was 105% in the first quarter of 2002 compared to a combined ratio of 112% in the first quarter of 2001. 15 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS Business Operations (Continued) The first quarter 2002 combined ratio was in line with the Company's expectations and improved when compared to 115% (before the effect of reserve strengthening) in the fourth quarter of 2001. The Company benefited from an improved expense ratio due to lower commission rates and lower overhead costs. The Company is intent on strengthening its operating performance and balance sheet through a focus on expense control and underwriting discipline which includes improved risk selection, pricing and the appropriate use of reinsurance. The underwriting loss from Discontinued Lines decreased to $2.6 million in the first quarter of 2002 compared to $9.2 million in 2001. The Company did not experience any significant unfavorable loss development in Discontinued Lines in the first quarter of 2002. As the Company's discontinued programs run-off, the negative impact of Discontinued Lines should continue to decrease. Amortization of intangible assets was $0.9 million in the first quarter of 2002 compared to $1.1 million last year. The Company adopted Financial Accounting Standards Board Statement (Statement) No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. The decrease in amortization in 2002 is due to the fact that goodwill is no longer amortized after the adoption of Statement 142. Instead, Statement 142 requires that goodwill and other intangible assets with indefinite useful lives be tested for impairment at least annually. The Company completed the transitional goodwill impairment test required by Statement 142 in the first quarter of 2002 and determined that there was no indication of goodwill impairment. Interest expense was $3.1 million in the first quarter of 2002 and the first quarter of 2001. The Company's ratio of earnings to fixed charges was 2.5 for the first quarter of 2002 compared to 0.2 for 2001. The ratio of earnings to fixed charges is computed by dividing pre-tax income from continuing operations before fixed charges by fixed charges. Fixed charges consist of interest charges and amortization of debt expense and discount or premium related to indebtedness, whether expensed or capitalized, and that portion of rental expense believed to be representative of interest. The Company had pre-tax income of $5.1 million in the first three months of 2002 compared to a pre-tax loss of $2.7 million in 2001. The pre-tax income of $5.1 million in 2002 was primarily the result of investment income and realized investment gains, partially offset by the underwriting loss. The post-tax income was $4.9 million in the first quarter of 2002 compared to a post-tax income of $0.4 million in 2001. The tax benefit as a percentage of loss from operations before tax was 35.4% in the first quarter of 2001. This was due to losses generated from the Company's UK operations which give rise to tax benefits, offset by income generated in Bermuda which is not subject to tax. 16 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS Financial Condition as of March 31, 2002 The Company's insurance operations collect premiums and pay current claims, reinsurance commissions and operating expenses. Premiums collected and positive cash flows from the insurance operations are invested primarily in short-term investments and long-term bonds. Short-term investments held by the Company's insurance subsidiaries provide liquidity for projected claims, reinsurance costs and operating expenses. The Company's invested assets and cash and cash equivalents were $1.4 billion at both March 31, 2002 and December 31, 2001. For the three month period ended March 31, 2002, the Company reported net cash used by operating activities of $29.2 million compared to net cash used by operating activities of $23.6 million for the same period in 2001. As discontinued programs run off, the Company anticipates that operating cash flows will improve. For the three month period ended March 31, 2002, the Company reported net cash used by investing activities of $37.1 million compared to net cash provided by investing activities of $46.7 million in 2001. For the three month period ended March 31, 2002, the Company reported net cash provided by financing activities of $2.7 million compared to nil net cash used by financing activities in 2001. The net cash provided by financing activities during the first quarter of 2002 was due to additional investment in the Company by its parent, Markel Corporation. Shareholder's equity decreased to $163.6 million at March 31, 2002, compared to $169.2 million at December 31, 2001. The decrease of $5.6 million was primarily due to other comprehensive loss of $13.2 million partially offset by net income of $4.9 million. Critical Accounting Policies The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and include the accounts of Terra Nova (Bermuda) Holdings Ltd. and all subsidiaries. For a complete discussion of the Company's accounting policies, see the Company's 2001 filing on Form 10-K. Critical accounting policies are defined as those that are both important to the portrayal of the Company's financial condition and results of operations and require management to exercise significant judgements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported 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. Management periodically reviews its estimates and assumptions including the adequacy of reserves for unpaid losses and loss adjustment expenses, reinsurance allowance for doubtful accounts and litigation liabilities, as well as the recoverability of deferred tax assets, deferred policy acquisition costs and intangible assets. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements. 17 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. Certain statements contained herein are forward-looking statements that involve risks and uncertainties. Future actual results may materially differ from those in these statements because of many factors. Among other things, the impact of the events of September 11, 2001 will depend on the number of insureds and reinsureds affected by the events, the amount and timing of losses incurred and reported and questions of how coverage applies. The occurrence of additional terrorist activities could have a material impact on the Company and the insurance industry. The Company's anticipated premium growth is based on current knowledge and assumes no man-made or natural catastrophes, no significant changes in products or personnel and no adverse changes in market conditions. Changing legal and social trends and inherent uncertainties in the loss estimation process can adversely impact the adequacy of loss reserves. The Company continues to closely monitor Discontinued Lines and reinsurance programs and exposures. Adverse experience in these areas could lead to additional charges. Regulatory actions can impede the Company's ability to charge adequate rates and efficiently allocate capital. Economic conditions, interest and foreign exchange rate volatility can have a significant impact on the market value of fixed maturity and equity investments as well as the carrying value of other assets and liabilities. The Company's premium growth, underwriting and investment results have been and will continue to be potentially materially affected by these factors. Additional factors, which could affect the Company, are discussed in the Company's reports on Forms 8-K, 10-Q and 10-K. By making these forward-looking statements, the Company is not intending to become obligated to publicly update or revise any forward-looking statements whether as a result of new information, future events or other changes. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as at their dates. 18 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 19 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 8, 2002 By: /s/JEREMY D. COOKE ----------- ------------------ Jeremy D. Cooke President Date: May 8, 2002 By: /s/ANDREW J. DAVIES ----------- ------------------- Andrew J. Davies Finance Director, Principal Financial Officer and Principal Accounting Officer 20 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). 4 The registrant hereby agrees to furnish to the Securities and Exchange Commission a copy of all instruments defining the rights of holders of long-term debt of the registrant and subsidiaries shown on the Consolidated Balance Sheet of the registrant at March 31, 2002 and the respective Notes thereto, included in the Quarterly Report on Form 10-Q. 12 Terra Nova (Bermuda) Holdings Ltd. Ratio of Earnings to Fixed Charges 21 EX-12 3 dex12.txt EXHIBIT 12 Exhibit 12 Terra Nova (Bermuda) Holdings Ratio of Earnings to Fixed Charges (Dollars in Thousands)
3 months ended Year Ended March 31, December 31, ----------------- --------------------------------------------------------------------- 2002 2001 2000 1999 1998 1997 ----------------- --------------------------------------------------------------------- Earnings: Earnings from continuing operations before income taxes $5,115 $(180,223) $(144,726) $(72,602) $101,261 $91,049 Fixed charges 3,381 13,844 14,069 13,874 15,098 14,064 ------- --------------------------------------------------------------------- Earnings from continuing operations, as adjusted $8,496 $(166,379) $(130,657) $(58,728) $116,359 $105,113 ======= ===================================================================== Fixed Charges: Interest Expense $3,065 $12,365 $12,400 $12,400 $13,697 $12,710 Portion of rental expense representative of interest 316 1,479 1,669 1,474 1,401 1,354 ------- --------------------------------------------------------------------- Fixed Charges $3,381 $13,844 $14,069 $13,874 $15,098 $14,064 ======= ===================================================================== Ratio of Earnings to Fixed Charges 2.5 -12.0 -9.3 -4.2 7.7 7.5 Deficiency in the coverage of fixed charges by earnings before fixed charges $- $180,223 $144,726 $72,602 $- $-
Notes: - ----- o The Company's consolidated insurance company subsidiaries are subject to certain regulatory restrictions on the payment of dividends or advances to the Company. -----END PRIVACY-ENHANCED MESSAGE-----