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).