<PAGE>
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.
<PAGE>
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
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
At March 31, At December 31,
1996 1995
------------ ---------------
(Unaudited)
<S> <C> <C>
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
========== ==========
</TABLE>
See accompanying notes to the interim consolidated financial statements.
1
<PAGE>
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)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
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
</TABLE>
See accompanying notes to the interim consolidated financial statements.
2
<PAGE>
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)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1996 1995
-------- -------
<S> <C> <C>
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
======== =======
</TABLE>
See accompanying notes to the interim consolidated financial statements.
3
<PAGE>
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)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1996 1995
-------- ---------
<S> <C> <C>
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 -
========= ========
</TABLE>
See accompanying notes to the interim consolidated financial statements.
4
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------- ----------
(dollars in thousands)
<S> <C> <C>
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
========== ==========
<CAPTION>
Three Months Ended March 31,
1996 1995
---------- ----------
(dollars in thousands)
<S> <C> <C>
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
========== ==========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------
1996 1995
------------------- -------------------
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
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 %
===== =====
</TABLE>
9
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- - ------- ----------- ----------
<S> <C> <C>
11.1 Statement regarding Computation of
Primary and Fully Diluted Earnings Per
Common Share and Common Share
Equivalents 17-18
Form 8K
</TABLE>
<PAGE>
EXHIBIT 11.1
- - ------------
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
COMPUTATION OF PRIMARY EARNINGS PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS
<TABLE>
<CAPTION>
Three Months Three Months
Ended March 31, Ended March 31,
1996 1995
--------------- ---------------
<S> <C> <C>
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
=========== ===========
</TABLE>
17
<PAGE>
EXHIBIT 11.1
------------
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
COMPUTATION OF FULLY DILUTED EARNINGS PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS
<TABLE>
<CAPTION>
Three Months Three Months
Ended March 31, Ended March 31,
1996 1995
--------------- ---------------
<S> <C> <C>
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
=========== ===========
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 930,266
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 117,591
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,047,857
<CASH> 77,963
<RECOVER-REINSURE> 44,681
<DEFERRED-ACQUISITION> 63,530
<TOTAL-ASSETS> 1,888,422
<POLICY-LOSSES> 1,133,992
<UNEARNED-PREMIUMS> 254,929
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 100,000
33,376
0
<COMMON> 90,014
<OTHER-SE> 101,344
<TOTAL-LIABILITY-AND-EQUITY> 1,888,422
75,170
<INVESTMENT-INCOME> 18,538
<INVESTMENT-GAINS> 8,008
<OTHER-INCOME> 226
<BENEFITS> 52,120
<UNDERWRITING-AMORTIZATION> 20,166
<UNDERWRITING-OTHER> 2,231
<INCOME-PRETAX> 21,634
<INCOME-TAX> 5,164
<INCOME-CONTINUING> 16,470
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15485
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.85
<RESERVE-OPEN> 814,235
<PROVISION-CURRENT> 52,120
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 683
<PAYMENTS-PRIOR> 50,329
<RESERVE-CLOSE> 815,343
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
