-----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, P3hcEd/+QFmjlNKekB2lz+m7GcqJ8UByEyFctPaGOn0vIEOFGMfkpitQUVwqw4Hd GbhdZ993IEZQ/t9s1Qnt9Q== 0000950130-96-001693.txt : 19960710 0000950130-96-001693.hdr.sgml : 19960710 ACCESSION NUMBER: 0000950130-96-001693 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TERRA NOVA BERMUDA HOLDING LTD CENTRAL INDEX KEY: 0000935937 STANDARD INDUSTRIAL CLASSIFICATION: 6331 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13834 FILM NUMBER: 96563223 BUSINESS ADDRESS: STREET 1: DALLAS BUILDING 7 VICTORIA STREET CITY: HAMILTON HM 11 BERMU STATE: D0 BUSINESS PHONE: 8092927731 MAIL ADDRESS: STREET 1: POST OFFICE BOX HM 664 STREET 2: HAMILTON HM CX BERMUDA STATE: D0 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO 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) DALLAS BUILDING 7 VICTORIA STREET HAMILTON, HM11 BERMUDA ------------------------------ (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) 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 number of registrant's ordinary shares ($5.80 par value) outstanding as of May 14, 1996 was 25,661,338. 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 December 31, 1995 and March 31, 1996 (Unaudited) 1 Consolidated Statements of Operations (Unaudited) Three Months Ended March 31, 1995 and 1996 2 Consolidated Statements of Shareholders' Equity (Unaudited) Three Months Ended March 31, 1995 and 1996 3 Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, 1995 and 1996 4 Notes to the Interim Consolidated Financial Statements (Unaudited) 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II - OTHER INFORMATION - - --------------------------- Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 Exhibit Index 16 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Consolidated Balance Sheets (dollars in thousands)
At March 31, At December 31, 1996 1995 ------------ --------------- (Unaudited) ASSETS Investments and cash: Fixed maturities, at market: $ 930,266 $ 998,901 Bonds (amortized cost $915,152 and $938,146, respectively) Equity securities, at market: Common stocks (cost $91,370 and $69,200, respectively) 117,591 80,410 Cash and cash equivalents 77,963 88,725 Total investments and cash 1,125,820 1,168,036 Accrued investment income 22,985 23,781 Insurance balances receivable 46,618 28,277 Reinsurance recoverable on paid losses 44,681 62,289 Reinsurance recoverable on unpaid losses 318,649 354,417 Accrued premium income 202,293 111,061 Prepaid reinsurance premiums 21,645 3,943 Deferred acquisition costs 63,530 36,950 Goodwill 10,770 - Receivable for securities sold 930 1,514 Other assets 30,501 27,652 ---------- ---------- Total assets $1,888,422 $1,817,920 ========== ========== LIABILITIES Unpaid losses and loss adjustment expenses $1,133,992 $1,168,652 Unearned premiums 254,929 139,993 Insurance balances payable 40,908 58,321 Income taxes payable 12,835 70 Deferred income taxes 10,417 14,931 Long-term debt 100,000 100,000 Net liabilities of Aviation business in run off 63,171 63,772 Other liabilities 27,039 21,041 ---------- ---------- Total liabilities $1,643,291 $1,566,780 ---------- ---------- Commitments and contingent liabilities (note 2) - - Convertible redeemable preferred shares 33,376 33,376 Minority interests in subsidiaries 20,397 20,756 ---------- ---------- SHAREHOLDERS' EQUITY Common shares 90,014 89,282 Additional capital 19,023 18,203 Unrealized appreciation of investments, net of minority interests and income tax 28,131 49,972 Retained earnings 54,190 39,551 ---------- ---------- Total shareholders' equity 191,358 197,008 ---------- ---------- Total liabilities, convertible redeemable preferred shares, minority interests and shareholders' equity $1,888,422 $1,817,920 ========== ==========
See accompanying notes to the interim consolidated financial statements. 1 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Consolidated Statements of Operations For the Three Months Ended March 31, 1995 and 1996 (Unaudited) (Dollars in Thousands Except Share Amounts)
Three Months Ended March 31, ---------------------- 1996 1995 -------- -------- Revenues: Net premiums written $172,451 $140,886 Change in unearned premiums (97,281) (63,229) -------- -------- Net premiums earned 75,170 77,657 Net investment income 18,538 17,552 Realized net capital gains (losses) on sales of investments 8,008 (130) Foreign exchange (losses) gains (1,715) 4,294 Octavian agency income 1,941 - -------- -------- Total revenues 101,942 99,373 -------- -------- Expenses: Losses and loss adjustment expenses, net 52,120 58,230 Acquisition costs 20,166 19,305 Other operating expenses 2,231 2,337 Interest expense 2,688 2,003 Octavian agency expense 1,735 - Other expenses 1,368 577 -------- -------- Total expenses 80,308 82,452 -------- -------- Income from operations before income taxes and minority interests 21,634 16,921 Income tax expense 5,164 3,548 Minority interests in income of consolidated subsidiaries 985 731 -------- -------- Net income $ 15,485 $ 12,642 ======== ======== Earnings per common share and common share equivalent $0.88 $0.80 Earnings per common share and common share equivalent - assuming full dilution $0.85 $0.77 Weighted average number of common shares and common share equivalents outstanding (in thousands) 17,695 15,650 Weighted average number of common shares and common share equivalents outstanding (in thousands) - assuming full dilution 18,844 16,799
See accompanying notes to the interim consolidated financial statements. 2 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity For the Three Months Ended March 31, 1995 and 1996 (Unaudited) (dollars in thousands)
Three Months Ended March 31, --------------------- 1996 1995 -------- ------- Common shares: Balance, beginning of period $89,282 $59,057 Issued during the period 732 100 -------- ------- Balance, end of period $90,014 $59,157 ======== ======= Additional capital: Balance, beginning of period $18,203 $- Issued during period 820 - -------- ------- Balance, end of period $19,023 $- ======== ======= Unrealized appreciation of investments: Balance, beginning of period $49,972 $- Changes during the period (29,091) 16,881 Deferred income tax benefit (expense) 7,250 (3,467) -------- ------- Balance, end of period $28,131 $13,414 ======== ======= Retained earnings: Balance, beginning of period $39,551 $- Net income 15,485 12,642 Dividends payable on convertible redeemable preferred shares (846) (900) -------- ------- Balance, end of period $54,190 $11,742 ======== ======= -------- ------- Total shareholders' equity $191,358 $84,313 ======== =======
See accompanying notes to the interim consolidated financial statements. 3 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Three Months Ended March 31, 1995 and 1996 (Unaudited) (dollars in thousands)
Three Months Ended March 31, -------------------- 1996 1995 -------- --------- Cash flows from operating activities: Net income $ 15,485 $ 12,642 Adjustments to reconcile net income to net cash provided by operating activities: Amortisation of goodwill 276 - Bad debt charge - 2,000 Realized capital (gains) losses (8,008) 130 Change in unpaid losses and loss adjustment expenses (37,571) 15,783 Change in unearned premiums and prepaid reinsurance 97,234 63,065 Change in insurance balances payable (17,413) 5,132 Change in insurance balances receivable, accrued premium income and reinsurance recoverable on paid and unpaid losses (58,308) (66,698) Change in deferred policy acquisition costs (26,580) (20,902) Change in accrued investment income 796 (3,798) Change in current and deferred income taxes 22,624 6,410 Change in other assets and liabilities - net 3,720 279 Change in net liabilities of Aviation business in run off (601) 3,415 -------- --------- Total adjustments (23,831) 4,816 -------- --------- Net cash (used in) provided by operating activities (8,346) 17,458 -------- --------- Cash flows from investing activities: Proceeds of fixed maturities matured 17,350 52,481 Proceeds of fixed maturities sold 76,005 7,638 Proceeds of equity securities sold 38,294 20,269 Purchase of fixed maturities (57,004) (187,748) Purchase of equity securities (66,301) (24,780) Payment consideration for Octavian (9,393) - Acquisition expenses (644) - -------- --------- Net cash used in investing activities (1,693) (132,140) -------- --------- Cash flows from financing activities: Payment of fees for financing - (526) Proceeds from shares issued - 100 -------- --------- Net cash provided by financing activities - (426) -------- --------- Change in cash and cash equivalents (10,039) (115,108) Exchange on foreign currency cash balances (723) (6,588) Cash and cash equivalents at beginning of period 88,725 242,206 -------- --------- Cash and cash equivalents at end of period $ 77,963 $ 120,510 ======== ========= Supplemental disclosure of cash flow information Income taxes (refunded) paid $(10,323) $494 ========= ======== Interest paid $5,405 - ========= ========
See accompanying notes to the interim consolidated financial statements. 4 TERRA NOVA (BERMUDA) HOLDINGS LTD. LIMITED AND SUBSIDIARIES NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying interim consolidated financial statements present information in relation to Terra Nova (Bermuda) Holdings Ltd. ("The Company") and have been prepared on the basis of accounting principles generally accepted in the United States of America. All material intercompany accounts and transactions among the companies included in the interim consolidated financial statements have been eliminated. In the opinion of management, these unaudited interim consolidated financial 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 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 1995 and for each of the three years for the period ended December 31, 1995, and related notes thereto included in the Company's Annual Report as filed with the Securities and Exchange Commission. 2. CONTINGENCIES This Company is regularly involved, directly or indirectly, in litigation in the ordinary course of conducting their insurance and reinsurance business. In a number of cases, plaintiffs seek to establish coverage for liability under environmental protection laws. While the nature and extent of insurance and reinsurance coverage for environmental liability has widened since 1980, in the judgement of management, none of these cases, individually or collectively, is likely to result in judgements for amounts which, net of losses and loss adjustment expense liabilities previously established and reinsurance recoverables which management believes are probable of realization, would have a material effect on the financial position of the Company, although there is no assurance that such losses will not materially effect the Company's results of operations for any period. 3. REINSURANCE CEDED In the ordinary course of business, Terra Nova Insurance Company Limited ("Terra Nova"), Terra Nova (Bermuda) Insurance Company Limited ("Terra Nova (Bermuda)") and Terra Nova Capital Limited ("Terra Nova Capital") cede reinsurance to other insurance companies. Ceded reinsurance arrangements provide greater diversification of business and limit the net loss potential arising from large risks. Reinsurance is effected under reinsurance treaties and by negotiation on individual risks. Terra Nova, Terra Nova (Bermuda) and Terra Nova Capital cede reinsurance to and assume reinsurance from Lloyd's of London ("Lloyd's") syndicates. As of March 31, 1996, the aggregate exposure in respect of reinsurance ceded to Lloyd's syndicates in respect of continuing operations, including estimated reinsurance recoveries in respect of losses incurred but not reported, was approximately $126.8 million. 5 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) (a) Net premiums written are comprised of the following: Three Months Ended March 31, ---------------------- 1996 1995 -------- -------- (dollars in thousands) Direct business $53,437 $49,081 Reinsurance assumed 148,339 124,358 Reinsurance ceded (29,325) (32,553) -------- -------- Net premiums written $172,451 $140,886 ======== ======== (b) Net premiums earned are comprised of the following: Three Months Ended March 31, ---------------------- 1996 1995 -------- -------- (dollars in thousands) Direct business $23,035 $28,188 Reinsurance assumed 63,805 59,657 Reinsurance ceded (11,670) (10,188) -------- -------- Net premiums earned $75,170 $77,657 ======== ======== (c) Losses and loss adjustment expenses, net, are comprised of the following: Three Months Ended March 31, ---------------------- 1996 1995 -------- -------- (dollars in thousands) Losses and loss adjustment expenses $55,831 $62,997 Reinsurance ceded (3,711) (4,767) -------- -------- Losses and loss adjustment expenses, net $52,120 $58,230 ======== ======== 4. EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT Primary earnings per share are computed using the weighted average number of common shares and common share equivalents outstanding during the period. Common share equivalents consist of shares issuable upon exercise of share options and shares issuable at the option of Bermuda Holdings under put agreements. For purposes of the calculation of primary earnings per share, net income has been increased to reflect the elimination of minority interests by exercise of the various put options and has been decreased to reflect the dividends paid to convertible redeemable preferred shareholders. In accordance with the SEC Staff Accounting Bulletin Topic 4-D, for purposes of the earnings per share calculations reflected in these interim consolidated financial statements, all shares of common stock issued and stock options granted prior to the date of the Registration Statement filed with the SEC on March 19, 1996 have been deemed to be outstanding since January 1, 1995. 6 TERRA NOVA (BERMUDA) HOLDINGS LTD., AND SUBSIDIARIES NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) 5. PUBLIC OFFERING On April 22, 1996 the Company completed an initial public offering of 6,600,000 Class A Ordinary shares at a price to the public of $17, of which 5,280,000 Shares were initially offered for sale in the United States, Bermuda and Canada and 1,320,000 Shares were initially being offered for sale outside the United States, Bermuda and Canada in a concurrent offering ("the offerings"). In addition, the Company granted to the U.S. underwriters for the Offering an option to purchase up to 990,000 additional Shares of which 600,000 have been purchased to date. The proceeds of the offerings were $113.2 million after expenses. Of these net proceeds $16.5 million was used to redeem a portion of the Company's non-voting convertible redeemable preference shares, $70 million and $17 million is expected to be contributed to Terra Nova (Bermuda) and Terra Nova, respectively, to support their insurance operations, including increasing the capacity potentially available to the Octavian Syndicates from the Company with the balance retained for general corporate purposes. 6. CAPITALIZATION CHANGES On March 25, 1996 the Company's shareholders approved an increase in the par value of the Company's 'A' and 'B' ordinary shares to $5.80 per share and a reverse split of the Company's ordinary shares on a one for 5.80 basis. The shareholders also approved an amendment to the Bye-Laws which, among other things, eliminated the Company's Class C ordinary shares. In addition, the Company in connection with the offerings completed on April 22, 1996 performed the following: (a) issued 1,939,305 ordinary shares in exchange for the ordinary shares and preferred shares of Terra Nova and Terra Nova (Bermuda) which were held by minority interests. The effect of this transaction had it occurred at March 31, 1996, would be to increase shareholders' equity of the Company by $20,397,000 and to eliminate all minority interests. (b) converted 16,317,354 of the Company's convertible redeemable preferred shares outstanding at March 31, 1996 into 989,697 ordinary shares of the Company, and redeemed for cash 17,058,455 of the Company's convertible redeemable preferred shares outstanding at March 31, 1996 at a redemption price of $16,534,000 out of the proceeds of the offerings The effect of these transactions had they occurred at March 31, 1996 would be to increase shareholders' equity of the Company by $17,341,000 and to eliminate all preferred shares. 7. THE OCTAVIAN ACQUISITION On January 5, 1996, in continuation of its market diversification strategy, the Company purchased the business and assets of Octavian, a Lloyd's managing agent, consisting primarily of the rights to manage five Lloyd's syndicates (the "Octavian Syndicates") for the 1996 and subsequent years of account (the "Octavian Acquisition"), for a purchase price of $9.4 million and 126,268 Shares. The Octavian Syndicates, whose writings include primarily U.K. liability and marine lines, have approximately $350 million of aggregate underwriting capacity for the 1996 year of account, of which $38.8 million is provided by the Company through Terra Nova Capital, a limited liability corporate member of Lloyd's formed by the Company. The Company estimates that its share of the Octavian syndicates' written premiums gross of commission for the 1996 year of account will be approximately $35 to $40 million. 7 TERRA NOVA (BERMUDA) HOLDINGS LTD., AND SUBSIDIARIES NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) These activities are not expected to contribute significantly to the Company's earnings in 1996. The goodwill in the Company's balance sheet represents the goodwill arising on the acquisition of Octavian which has been calculated using the purchase method and is being amortized in a straight line over a 10 year period. The Octavian results from the date of the acquisition are included in the Consolidated Statements of Operations. 8. SUMMARIZED FINANCIAL INFORMATION FOR UK HOLDINGS Summarized consolidated balance sheet information as at December 31, 1995 and March 31, 1996 and summarized consolidated statement of operations information for the three months ended March 31, 1995 and 1996 relating to UK Holdings is set out below. Separate financial statements of UK Holdings are not presented because they would not be material to holders of UK Holdings 10 3/4 Senior Notes due 2005.
March 31, December 31, 1996 1995 ---------- ---------- (dollars in thousands) Investments and cash $807,659 $884,514 Reinsurance recoverable on unpaid losses 451,315 488,335 Accrued premium income 173,131 99,885 Other assets 248,023 188,367 ---------- ---------- Total assets $1,680,128 $1,661,101 ========== ========== Unpaid losses and loss adjustment expenses $1,062,755 $1,096,857 Unearned premiums 236,090 136,351 Net liabilities of Aviation business in run off 56,653 58,972 Long-term debt 100,000 100,000 Other liabilities 97,028 150,953 ---------- ---------- Total liabilities 1,552,526 1,543,133 ---------- ---------- Minority interests in subsidiary 10,452 10,584 Total shareholders' equity 117,150 107,384 ---------- ---------- Total liabilities, minority interests and shareholders' equity $1,680,128 $1,661,101 ========== ========== Three Months Ended March 31, 1996 1995 ---------- ---------- (dollars in thousands) Net premiums earned $68,109 $70,340 Net investment income 13,251 13,613 Realized investment gains/(losses) 7,800 (130) Foreign exchange(losses)/gains (1,659) 4,294 Octavian agency income 1,941 - ---------- ---------- Total revenues 89,442 88,117 ---------- ---------- Underwriting costs and expenses (71,886) (74,803) ---------- ---------- Octavian agency expenses (1,735) - ---------- ---------- Income from operations before income taxes and minority interests 15,821 13,314 ---------- ---------- Net income $10,149 $9,363 ========== ==========
9. DIVIDENDS DECLARED On April 30, 1996 the Company declared a dividend of $0.02 per share payable on June 28, 1996, to shareholders of record as of June 7, 1996. 8 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE COMPANY The following discussion addresses the principal factors affecting the earnings and financial condition of the Company. All references herein to the "Company" are to Terra Nova (Bermuda) Holdings Ltd. ("Bermuda Holdings") and all of its direct and indirect subsidiaries, including Terra Nova Insurance (UK) Holdings plc ("UK Holdings"), Terra Nova Insurance Company Limited ("Terra Nova"), Terra Nova (Bermuda) Insurance Company Ltd. ("Terra Nova (Bermuda)"), Octavian Syndicate Management Limited ("OSML") and Terra Nova Capital Limited ("Terra Nova Capital"). This discussion should be read in conjunction with audited consolidated financial statements of Bermuda Holdings as of December 31, 1995 and for each of the three years for the period ended December 31, 1995 and related notes thereto included in the Company's Annual Report as filed with the Securities and Exchange Commission. MIX OF BUSINESS The Company's mix of business and combined ratios for the three months ended March 31, 1995 and 1996 are set forth in the following table:
Three Months Ended March 31, ------------------------------------------ 1996 1995 ------------------- ------------------- Amount Percent Amount Percent Gross Premiums Written Non-marine property $117,187 58.1% $96,083 55.4% Non-marine casualty 28,973 14.3 29,960 17.3 Marine & Aviation 54,186 26.9 45,961 26.5 Life 1,430 0.7 1,435 0.8 -------- ----- -------- ----- Total $201,776 100.0% $173,439 100.0% ======== ===== ======== ===== Net Premiums Written Non-marine property $99,951 58.0 $74,772 53.1% Non-marine casualty 25,929 15.0 25,370 18.0 Marine & Aviation 45,174 26.2 39,406 28.0 Life 1,397 0.8 1,338 0.9 -------- ----- -------- ----- Total $172,451 100.0% $140,886 100.0% ======== ===== ======== ===== Net Premiums Earned Non-marine property $32,080 42.7% $30,292 39.0% Non-marine casualty 12,214 16.2 13,506 17.4 Marine & Aviation 29,479 39.2 32,521 41.9 Life 1,397 1.9 1,338 1.7 -------- ----- -------- ----- Total $75,170 100.0% $77,657 100.0% ======== ===== ======== ===== Losses and loss Adjustment Expense Ratios Non-marine property 65.5% 60.9% Non-marine casualty 84.1 96.5 Marine & Aviation 66.9 78.2 Life 79.7 97.6 ----- ----- Total 69.3% 75.0% ===== ===== Underwriting Expense Ratios Non-marine property 29.7% 30.2 % Non-marine casualty 25.3 26.8 Marine & Aviation 32.2 26.5 Life 20.3 21.0 ----- ----- Total 29.8% 27.9 % ===== ===== Combined Ratios Non-marine property 95.2% 91.1 % Non-marine casualty 109.4 123.3 Marine & Aviation 99.1 104.7 Life 100.0 118.6 ----- ----- Total 99.1% 102.9 % ===== =====
9 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1995 Gross Premiums Written; Net Premiums Written; Net Premiums Earned. Gross premiums written increased 16.4%, to $201.8 million in 1996 from $173.4 million in 1995. The increase in gross written premiums arises from: (a) increased writings by Terra Nova (Bermuda) to $19.9 million in 1996 from $1.1 million in 1995 resulting from a full year of marketing prior to the January renewals. Approximately 85% of Terra Nova (Bermuda)'s business is non-marine property business and as a consequence the Company's gross written premiums for non-marine property business increased by $21.1 million, to $117.2 million in 1996 from $96.1 million in 1995, and (b) Terra Nova Capital writing gross premiums of $12.9 million in 1996. Terra Nova Capital was established by the Company to participate in business written by the Octavian Syndicates for the 1996 year of account. The majority of the business written by the Octavian Syndicates is Marine and Aviation business and as a consequence gross premiums written for Marine and Aviation business increased $8.2 million, to $54.8 million in 1996 from $46.0 million in 1995. Reinsurance ceded decreased by 9.8%, to $29.3 million in 1996 from $32.5 million in 1995 due to reductions in reinsurance costs in 1996 as a result of an increase in the retention of the non-marine property catastrophe reinsurance program and price reductions on the non-marine property, non-marine casualty and marine reinsurance programs. As a consequence of the higher gross premiums written and lower reinsurance ceded, net premiums written increased by $22.4% to $172.4 million in 1996 from $140.9 million in 1995. Net premiums earned decreased 3.2%, to $75.2 million in 1996 from $77.7 million in 1995. The marginal decrease in net premiums earned was attributable to the greater volume of premiums written in 1994 which were earned in 1995, compared to premiums written in 1995 and earned in 1996. Net Investment Income. Net investment income increased by 5.7%, to $18.5 million in 1996 from $17.5 million in 1995 resulting from an increase of 7.7% in average invested assets, attributable to the rights issue in October 1995, partially offset by lower portfolio yields. The average investment yield before realised gains and losses was 6.5% and 6.6% in 1996 and 1995, respectively. Realized Gains (Losses) on Sale of Investments. Realized gains on sales of investments increased $8.1 million to a gain of $8.0 million in 1996 from a loss of $0.1 million in 1995. The majority of gains in 1996 arose from equity securities sold during the period. Foreign Exchange (Losses) Gains. Foreign exchange losses of $1.7 million in 1996 and gains of $4.3 million in 1995 arose from foreign currency exchange during the quarter together with the translation of foreign currency assets and liabilities into U.S. dollars, the Company's functional currency. The foreign exchange losses and gains in the three months to March 31, 1996 and 1995 arose due to the strengthening and weakening of the US dollar against other currencies in which business is transacted and shareholders' funds invested. Octavian Agency Income. This income consists of fees received by OSML in respect of the managing of certain Lloyd's syndicates. Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses decreased 10.5%, to $52.1 million in 1996 from $58.2 million in 1995. As a percentage of net premiums earned, losses and LAE decreased 5.7 percentage points, to 69.3% from 75.0% in 1995. The decrease is due to an absence of large losses, favourable overall loss experience and no requirement to strengthen prior year reserves in 1996. 10 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Acquisition Costs. Acquisition costs, comprising commissions and other underwriting expenses, increased 4.5%, to $20.2 million in 1996 from $19.3 million in 1995. Acquisition costs as a percentage of net premiums earned increased 1.9 percentage points, to 26.8% in 1996 from 24.9% in 1995. The increase in 1996 was a consequence of changes made to Terra Nova's mix of business in order to protect earnings from price weakness in certain lines of business, but this has been offset by lower claims costs. Other Operating Expenses. Other operating expenses decreased 4.3%, to $2.2 million in 1996 from $2.3 million in 1995. Net Interest Expense. Net interest expense in 1996 relates to interest on the $100 million 10 3/4% Senior Notes issued on June 30, 1995. The net interest expense in 1995 relates to interest on a Credit Agreement which became effective on December 21, 1994 and which was repaid in full out of the proceeds of the Senior Notes issued on June 30, 1995. Other Expenses. Other expenses increased to $1.4 million in 1996 from $0.6 million in 1995 mainly due to the inclusion of certain expense accruals that were not made until the final quarter of 1995. Income from Operations before Income Taxes and Minority Interests. Income from operations before income taxes and minority interests increased 27.8%, to $21.6 million in 1996 from $16.9 million in 1995. This increase was primarily due to the improved underwriting result, higher investment income and realized investment gains in 1996. Income Tax Expense. Income tax expense increased 45.7% to $5.1 million in 1996 from $3.5 million in 1995, as a consequence of the increase in operating income of the United Kingdom subsidiaries. Net Income. Net income increased 22.3%, to $15.4 million in 1996 from $12.6 million in 1995 as a result of the factors described above. Combined Ratios. The Company's combined ratio was 99.1% for 1996 and 102.9% for 1995. The decrease was attributable to the 5.7 percentage point reduction in the overall loss ratio, offset by an 1.9 percentage point increase in the expense ratio. TAXATION Since 1983 the U.K. Inland Revenue had asserted the Terra Nova's loss reserves should have been discounted in determining underwriting results for corporation tax purposes, although Terra Nova did not accept discounting as an appropriate accounting policy nor the U.K. Inland Revenue's assertion in this regard. On January 26, 1996 the U.K. Inland Revenue withdrew their assertion and have stated that they currently have no intention of raising the issue in relation to the tax liability on all years prior to and including 1995. In March 1996, the Inland Revenue repaid all the taxes due (including interest on the overdue amount) to Terra Nova relating to this dispute. LIQUIDITY AND CAPITAL RESOURCES On April 22, 1996 the Company completed an initial public offering of 6,600,000 Class A Ordinary shares at a price to the public of $17, of which 5,280,000 Shares were initially offered for sale in the United States, Bermuda and Canada and 1,320,000 Shares were initially being offered for sale outside the United States, Bermuda and Canada in a concurrent offering ("the offerings"). In addition, the Company granted to the U.S. underwriters for the Offering an option to purchase up to 990,000 additional Shares of which 600,000 have been purchased to date. The proceeds of the offerings, including the additional 600,000 shares purchased, were $113.2 million after expenses. Of these net proceeds, $16.5 million was used to redeem a portion of the Company's non-voting convertible redeemable preference shares, up to $75 million and up to $25 million is expected to be contributed to Terra Nova (Bermuda) and Terra Nova, respectively, to support their insurance operations, including increasing the capacity 11 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS potentially available to the Octavian Syndicates from the Company, with the balance retained for general corporate purposes. The Company's assets consist primarily of the capital stock of UK Holdings and Terra Nova (Bermuda) and UK Holdings' assets consist primarily of the capital stock of Terra Nova, Terra Nova Capital and OSML. The ability of the Company to pay dividends on its capital stock and to pay its obligations depends primarily on dividends or other payments from Terra Nova, Terra Nova (Bermuda), Terra Nova Capital and OSML. The payment of dividends and other payments by Terra Nova, Terra Nova (Bermuda), Terra Nova Capital and OSML are subject to restrictions under U.K. law and Bermuda law, respectively. The sources of funds for the Company's subsidiaries consist primarily of net premiums, investment income and proceeds from sales and redemptions of investments. The funds are used primarily to pay claims and operating expenses and for the purchase of investments, largely fixed income securities. The consolidated shareholders' equity of the Company at March 31, 1996 of $191.4 million represented the combined shareholders' equity in Terra Nova and Terra Nova (Bermuda) of $328.7 million, offset by $100.0 million of debt in UK Holdings, $33.4 million of Bermuda Holdings convertible redeemable preferred shares, $20.4 million of minority interests in subsidiaries and other net assets of $16.5 million the majority of which represents UK Holdings' investment in OSML. The shareholders' equity of Terra Nova at March 31, 1996 was $208.9 million compared to $211.9 million at December 31, 1995. The decrease of $3.0 million in the three months to March 31, 1996 was a consequence of the weak bond markets in 1996 resulting in unrealised losses on investments (net of tax) of $12.7 million in the quarter, offset by net retained income of $9.7 million. The shareholders' equity of Terra Nova (Bermuda) at March 31, 1996 was $119.8 million compared to $122.9 million at December 31, 1995. The decrease of $3.1 million in the three months to March 31, 1996 was due to unrealised losses on investments of $9.6 million offset by net income of $6.5 million. Total investments and cash were $1,125.8 million at March 31, 1996, comprising fixed maturities-82.7%, common stocks-10.4% and cash and cash equivalents-6.9%. At March 31, 1996, approximately 93% of the Company's fixed income securities investments were rated AA or better by Moody's Investors Service Inc., or Standard & Poor's Corporation. The Company's investment portfolio earned interest and dividend income, net of investment management fees, of 6.5% and 6.6% in three months ended March 31, 1996 and 1995, respectively. The Company had realized investment gains and losses of $8.0 million and $0.1 million in 1996 and 1995, respectively. For the three months ended March 31, 1996, the cashflow used in operating activities of the Company was $8.3 compared to cashflow provided by operating activities and available for investment of $17.5 million in 1995. The decrease in cashflows provided by operating activities in 1996 was primarily attributable to the Company paying interest of $5.4 million on the senior notes in January 1996, the payment of two large claims relating to Exxon Valdez and the Pan Am Locherbie air disaster and to lower prior year premiums. Cashflows for the first three months on each year include the majority of payments made to reinsurers for reinsurance ceded for the year as a whole, while the majority of cash receipts for premiums written are received in the last three quarters of the year and, as a consequence, cashflows for 1996 are expected to be positive, as was the case with 1995, and are expected to be sufficient to meet the Company's foreseeable 1996 obligations. 12 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DIVIDEND POLICY On April 30, 1996 the Company declared a dividend of $0.02 per share payable on June 28, 1996. The declaration and payment of dividends is at the discretion of the Board of Directors of the Company and will depend upon the Company's results of operations, the financial position and capital requirements of the Company's operating subsidiaries, general business conditions, legal, tax and regulatory restrictions on the payment of dividends and other factors the Board of Directors of the Company deems relevant. While the Company is not itself subject to any contractual restrictions or significant legal prohibitions on dividend payments the Company's subsidiaries are subject to regulatory and legal constraints on their respective abilities to pay dividends. Accordingly, there is no assurance that dividends will be declared or paid in the future. 13 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES PART II - OTHER INFORMATION --------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBIT 11.1 Statement regarding Computation of Primary and Fully Diluted Earnings Per Common Share and Common Share Equivalents. b) FORM 8K None. 14 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. Date: May 14, 1996 By: /s/WILLIAM O. BAILEY ------------ -------------------- William O. Bailey Chairman, Chief Executive Officer and Chief Financial Officer 15 TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES EXHIBIT INDEX -------------
SEQUENTIAL EXHIBIT PAGE NUMBER DESCRIPTION NUMBER - - ------- ----------- ---------- 11.1 Statement regarding Computation of Primary and Fully Diluted Earnings Per Common Share and Common Share Equivalents 17-18 Form 8K
EX-11.1 2 COMPUTATION OF PRIMARY EARNINGS EXHIBIT 11.1 - - ------------ TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES COMPUTATION OF PRIMARY EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENTS
Three Months Three Months Ended March 31, Ended March 31, 1996 1995 --------------- --------------- Earnings per common share and common share equivalents - - - Primary Weighted average common shares outstanding 15,519,742 11,610,232 Weighted average common shares outstanding (under as if converted method) - - Average stock options and warrants outstanding (net of repurchased shares under the treasury stock method) 2,174,891 4,039,983 Other dilutive securities assumed to be outstanding under regulatory rules (net of repurchased shares under the treasury stock method) - - ----------- ------------ Weighted average common shares and common share equivalents outstanding 17,694,633 15,650,215 =========== =========== Net income $15,622,598 $12,473,000 =========== =========== Primary earnings per common share and common share equivalent 0.88 0.80 =========== ===========
17 EXHIBIT 11.1 ------------ TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES COMPUTATION OF FULLY DILUTED EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENTS
Three Months Three Months Ended March 31, Ended March 31, 1996 1995 --------------- --------------- Earnings per common share and common share equivalents - - - Fully Diluted Weighted average common shares outstanding 15,519,742 11,610,232 Weighted average preferred shares outstanding (under as of converted method) 1,148,916 1,148,916 Average stock options and warrants outstanding (net of repurchased shares under the treasury stock method) 2,174,891 4,039,983 Other dilutive securities assumed to be outstanding under regulatory rules (net of repuchased shares under the treasury stock method) - - ----------- ----------- Weighted average common shares and common share equivalents outstanding 18,843,549 16,799,131 =========== =========== Net income $16,068,598 $12,947,000 =========== =========== Fully diluted earnings per common share and common share equivalent 0.85 0.77 =========== ===========
18 EX-27 3 FINANCIAL DATA SCHEDULE
7 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 930,266 0 0 117,591 0 0 1,047,857 77,963 44,681 63,530 1,888,422 1,133,992 254,929 0 0 100,000 33,376 0 90,014 101,344 1,888,422 75,170 18,538 8,008 226 52,120 20,166 2,231 21,634 5,164 16,470 0 0 0 15485 0.88 0.85 814,235 52,120 0 683 50,329 815,343 0
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