<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, 1997
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 IDENTIFICATION NO)
ORGANISATION)
RICHMOND HOUSE
12 PAR LA VILLE STREET
HAMILTON HM08
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, 1997 was 25,881,802.
<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
March 31, 1997 (Unaudited) and December 31, 1996 1
Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31,1997 and 1996 2
Consolidated Statements of Shareholders' Equity (Unaudited)
Three Months Ended March 31, 1997 and 1996 3
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 1997 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 13
Signatures 14
Exhibit Index 15
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
At March 31, At December 31,
1997 1996
---------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
Investments available for sale and cash, at fair value:
Fixed maturities:
Bonds (amortized cost $1,050,825 and $1,095,126, respectively) $1,050,576 $1,119,531
Common stocks (cost $97,911 and $92,877, respectively) 119,555 120,411
Cash and cash equivalents 77,407 50,544
---------- ----------
Total investments and cash 1,247,538 1,290,486
Accrued investment income 25,064 24,351
Insurance balances receivable 43,046 31,943
Reinsurance recoverable on paid losses 39,913 43,745
Reinsurance recoverable on unpaid losses 235,039 254,129
Accrued premium income 220,934 121,900
Prepaid reinsurance premiums 38,799 8,261
Deferred acquisition costs 86,746 45,279
Goodwill 9,665 9,942
Other assets 40,792 37,311
========== ==========
Total assets $1,987,536 $1,867,347
========== ==========
LIABILITIES
Unpaid losses and loss adjustment expenses $1,046,043 $1,078,108
Unearned premiums 308,253 173,120
Insurance balances payable 39,625 18,340
Income taxes payable 18,176 21,311
Deferred income taxes 8,004 8,720
Long-term debt 100,000 100,000
Net liabilities of Aviation business in run-off 43,135 43,286
Other liabilities 29,374 25,703
---------- ----------
Total liabilities $1,592,610 $1,468,588
---------- ----------
Commitments and contingent liabilities (note 2) - -
SHAREHOLDERS' EQUITY
Common shares 149,946 149,933
Additional capital 112,755 111,544
Unrealized appreciation of investments, net of income tax 13,682 36,271
Cumulative translation adjustments 95 190
Retained earnings 118,448 100,821
---------- ----------
Total shareholders' equity 394,926 398,759
---------- ----------
Total liabilities and shareholders' equity $1,987,536 $1,867,347
========== ==========
</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, 1997 and 1996
(Unaudited)
(dollars in thousands except share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues
Net premiums written $183,166 $172,451
(Increase) decrease in unearned premiums (104,703) (97,281)
---------- ----------
Net premiums earned 78,463 75,170
Net investment income 19,989 18,538
Realized net capital gains on sales of investments 5,930 8,008
Foreign exchange gains (losses) 151 (1,715)
Agency income 3,802 1,941
---------- ----------
Total revenues 108,335 101,942
---------- ----------
Expenses
Losses and loss adjustment expenses, net 51,267 52,120
Acquisition costs 22,643 20,166
Other operating expenses 3,971 2,231
Interest expense 2,688 2,688
Agency expense 3,186 1,735
Other expenses 1,098 1,368
---------- ----------
Total expenses 84,853 80,308
---------- ----------
Income from operations before income taxes and minority interests 23,482 21,634
Income tax expense 5,338 5,164
Minority interests in income of consolidated subsidiaries - 985
========== ==========
Net income $18,144 $15,485
========== ==========
Earnings per common share and common share equivalent $0.69 $0.88
Earnings per common share and common share equivalent
- assuming full dilution $0.69 $0.85
Weighted average number of common shares and common
share equivalents outstanding (in thousands) 26,299 17,695
Weighted average number of common shares and common share equivalents
outstanding (in thousands)
- assuming full dilution 26,290 18,844
</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, 1997 and 1996
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1997 1996
------------ -----------
<S> <C> <C>
Common shares:
Balance, beginning of period $149,933 $89,282
Issued during the period 13 732
============ ===========
Balance, end of period $149,946 $90,014
============ ===========
Additional capital:
Balance, beginning of period $111,544 $18,203
Contributed during the period - 820
Stock option compensation expense 1,211 -
============ ===========
Balance, end of period $112,755 $19,023
============ ===========
Unrealized appreciation of investments:
Balance, beginning of period $36,271 $49,972
Changes during the period (30,508) (29,091)
Deferred income tax benefit 7,919 7,250
============ ===========
Balance, end of period $13,682 $28,131
============ ===========
Cumulative translation adjustments:
Balance, beginning of period $190 $-
Changes during the period (95) -
============ ===========
Balance, end of period $95 $-
============ ===========
Retained earnings:
Balance, beginning of period $100,821 $39,551
Net income 18,144 15,485
Dividends payable on ordinary shares (517) -
Dividends payable on convertible redeemable preferred shares - (846)
============ ===========
Balance, end of period $118,448 $54,190
============ ===========
Total shareholders' equity $394,926 $191,358
============ ===========
</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, 1997 and 1996
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $18,144 $15,485
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill 276 276
Stock option compensation expense 811 -
Realized capital (gains) (5,930) (8,008)
Change in unpaid losses and loss adjustment expenses (25,401) (37,571)
Change in unearned premiums and prepaid reinsurance 104,596 97,234
Change in insurance balances payable 21,285 (17,413)
Change in insurance balances receivable, accrued premium income and
reinsurance recoverable on paid and unpaid losses (84,355) (58,308)
Change in deferred acquisition costs (41,466) (26,580)
Change in accrued investment income (713) 796
Change in current and deferred income taxes 2,932 22,624
Change in other assets and liabilities, net 409 3,720
Change in net liabilities of Aviation business in run-off (151) (601)
--------- --------
Total adjustments (27,707) (23,831)
--------- --------
Net cash (used in) operating activities (9,563) (8,346)
--------- --------
Cash flows from investing activities:
Proceeds of fixed maturities matured 10,048 17,350
Proceeds of fixed maturities sold 164,938 76,005
Proceeds of equity securities sold 41,768 38,294
Purchase of fixed maturities (136,207) (57,004)
Purchase of equity securities (43,091) (66,301)
Payment consideration for Octavian - (9,393)
Acquisition expenses - (644)
--------- --------
Net cash provided by (used in) investing activities 37,456 (1,693)
--------- --------
Cash flows from financing activities:
Ordinary dividend paid (517) -
Stock options exercised 13 -
--------- --------
Net cash used in financing activities (504) -
--------- --------
Change in cash and cash equivalents 27,389 (10,039)
Exchange on foreign currency cash balances (526) (723)
Cash and cash equivalents at beginning of period 50,544 88,725
========= ========
Cash and cash equivalents at end of period $77,407 $77,963
========= ========
Supplemental disclosure of cash flow information
Income taxes paid (refunded) $100 $(10,323)
========= =========
Interest paid $5,375 $5,405
========= =========
</TABLE>
See accompanying notes to the interim consolidated financial statements.
4
<PAGE>
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 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, 1996 and for each of the
three years for the period ended December 31, 1996, and related notes thereto
included in the Company's Annual Report as filed with the Securities and
Exchange Commission.
2. CONTINGENCIES
The Company is regularly involved, directly or indirectly, in litigation in the
ordinary course of conducting its 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. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("EPS") ("FAS 128").
FAS 128 specifies the computation presentation and disclosure requirements for
EPS and is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. Earlier application is not
permitted.
FAS 128 is designed to improve the EPS information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements, and increasing the comparability of EPS data on an
international basis. Some of the changes made to simplify the EPS computations
include: (a) eliminating the presentation of primary EPS and replacing it with
basic EPS, with the principal difference being that common stock equivalents
(CSEs) are not considered in computing basic EPS, (b) eliminating the modified
treasury stock method and the three percent materiality provision, and (c)
revising the contingent share provisions and the supplemental EPS data
requirements. FAS 128 requires dual presentation of basic and diluted EPS on
the face of the income statements for all entities with complex capital
structures regardless of whether basic and diluted EPS are the same; it also
requires a reconciliation of the numerator and denominator used in computing
basic and diluted EPS.
The impact of FAS 128 has not yet been determined.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 129, Disclosure of Information About Capital
Structure ("FAS 129"). FAS 129 is effective for financial statements for
periods ending after December 15, 1997.
5
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FAS 129 requires disclosure about an entity's capital structure including a
brief discussion of rights and privileges for securities outstanding, dividend
and liquidation preferences, participation rights, exercise prices or rates and
pertinent dates, significant terms of contracts to issue additional shares and
other similar items.
The impact of FAS 129 has not yet been determined.
4. REINSURANCE CEDED
In the ordinary course of business, Terra Nova Insurance Company Limited ("Terra
Nova"), Terra Nova (Bermuda) Insurance Company Ltd. ("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 Lloyds of London ("Lloyds") syndicates. As of March 31,
1997 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 $90
million, the majority of which was ceded into Equitas with effect from September
4, 1996.
(a) Net premiums written are comprised of the following:
Three Months Ended
March 31,
----------------------
1997 1996
--------- ----------
(dollars in thousands)
Direct business $ 83,489 $ 53,437
Reinsurance assumed 144,167 148,339
Reinsurance ceded (44,490) (29,325)
--------- ----------
Net premiums written $183,166 $172,451
========= ==========
(b) Net premiums earned are comprised of the following:
Three Months Ended
March 31,
----------------------
1997 1996
--------- ----------
(dollars in thousands)
Direct business $31,381 $23,035
Reinsurance assumed 61,034 63,805
Reinsurance ceded (13,952) (11,670)
--------- ----------
Net premiums earned $78,463 $75,170
========= =========
(c) Losses and loss adjustment expenses, net, are comprised of the following:
Three Months Ended
March 31,
----------------------
1997 1996
--------- ----------
(dollars in thousands)
Losses and loss adjustment expenses $54,938 $55,831
Reinsurance ceded (3,671) (3,711)
--------- ----------
Losses and loss adjustment expenses, net $51,267 $52,120
========= =========
6
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
5. 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 prior to April 22, 1996 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. SUMMARIZED FINANCIAL INFORMATION FOR TERRA NOVA INSURANCE (UK) HOLDINGS PLC
("UK HOLDINGS")
Summarized consolidated balance sheet information as at March 31, 1997 and
December 31, 1996 and summarized consolidated statement of operations
information for the three months ended March 31, 1997 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,
1997 1996
------------- -------------
(dollars in thousands)
<S> <C> <C>
Investments and cash $834,499 $872,171
Reinsurance recoverable on unpaid losses 367,400 387,733
Accrued premium income 196,880 108,012
Other assets 271,519 193,212
============= =============
Total assets $1,670,298 $1,561,128
============= =============
Unpaid losses and loss adjustment expenses $980,454 $1,011,015
Unearned premiums 276,342 157,515
Net liabilities of Aviation business in run-off 36,645 36,913
Long-term debt 100,000 100,000
Other liabilities 108,027 83,440
------------- -------------
Total liabilities 1,501,468 1,388,883
------------- -------------
Total shareholders' equity 168,830 172,245
============= =============
Total liabilities and shareholders' equity $1,670,298 $1,561,128
============= =============
<CAPTION>
Three Months Ended March 31,
-------------------------------
1997 1996
------------- -------------
(dollars in thousands)
Net premiums earned $66,692 $68,109
Net investment income 13,144 13,251
Realized investment gains 6,148 7,800
Foreign exchange losses (117) (1,659)
Agency income 3,802 1,941
------------- -------------
Total revenues 89,669 89,442
------------- -------------
Underwriting costs and expenses (70,360) (71,886)
Agency expenses (3,186) (1,735)
------------- -------------
Income from operations before income taxes and minority interests 16,123 15,821
------------- -------------
Net income $10,785 $10,149
============= =============
</TABLE>
7
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
7. DIVIDENDS DECLARED
On February 10, 1997 the Company declared a dividend of $0.02 per share payable
on March 27, 1997 to shareholders of record as of March 6, 1997.
On May 5, 1997 the Company declared a dividend of $0.05 per share payable on
June 27, 1997, to shareholders of record as of June 6, 1997.
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 ("Octavian") and Terra Nova Capital Limited ("Terra
Nova Capital"). This discussion should be read in conjunction with the audited
consolidated financial statements of Bermuda Holdings as of December 31, 1996
and for each of the three years for the period ended December 31, 1996 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, 1997 and 1996 are set forth in the following table:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
Amount Percent Amount Percent
--------- ------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Gross Premiums Written
Non-marine property $119,073 52.3% $117,187 58.1%
Non-marine casualty 36,197 15.9 28,973 14.3
Marine & Aviation 72,386 31.8 54,186 26.9
Life (1) - - 1,430 0.7
========= ======= ========== ========
Total $227,656 100.0% $201,776 100.0%
========= ======= ========== ========
Net Premiums Written
Non-marine property $100,998 55.1% $ 99,951 58.0%
Non-marine casualty 31,664 17.3 25,929 15.0
Marine & Aviation 50,504 27.6 45,174 26.2
Life (1) - - 1,397 0.8
========= ======= ========== ========
Total $183,166 100.0% $172,451 100.0%
========= ======= ========== ========
Net Premiums Earned
Non-marine property $ 41,107 52.4% $ 32,080 42.7%
Non-marine casualty 13,423 17.1 12,214 16.2
Marine & Aviation 23,933 30.5 29,479 39.2
Life (1) - - 1,397 1.9
========= ======== ========== ========
Total $ 78,463 100.0% $ 75,170 100.0%
========= ======== ========== ========
Losses and Loss Adjustment Expense Ratios
Non-marine property 63.9% 65.5%
Non-marine casualty 78.2 84.1
Marine & Aviation 60.6 66.9
Life (1) N/A 79.7
======== =======
Total 65.3% 69.3%
======== =======
Underwriting Expense Ratios
Non-marine property 33.7% 29.7%
Non-marine casualty 31.3 25.3
Marine & Aviation 35.7 32.2
Life (1) N/A 20.3
======== =======
Total 33.9% 29.8%
======== =======
Combined Ratios
Non-marine property 97.6% 95.2%
Non-marine casualty 109.5 109.4
Marine & Aviation 96.3 99.1
Life (1) N/A 100.0
======== =======
Total 99.2% 99.1%
======== =======
</TABLE>
(1) The Company ceased writing new life insurance business on March 1, 1996.
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, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996
Gross Premiums Written; Net Premiums Written; Net Premiums Earned. Gross
premiums written increased 12.8%, to $227.7 million in 1997 from $201.8
million in 1996. The overall increase in gross premiums written of $25.9
million was mainly a consequence of:
(a) Terra Nova Capital writing gross premiums of $50.3 million in 1997 from
$12.9 million in 1996, as a consequence of Terra Nova Capital increasing its
participation on syndicates managed by Octavian from 11% in 1996 to 40% in 1997
(excluding the corporate syndicate 1227). The majority of the business written
by Terra Nova Capital is U.K. Motor, casualty, marine and aviation business;
partially offset by
(b) decreased writings from Terra Nova to $153.1 million in 1997 from $169.0
million in 1996 mainly due to rate competition on all accounts.
Reinsurance ceded increased by 51.7%, to $44.5 million in 1997 from $29.3
million in 1996. The increase was mainly due to an increase in reinsurance
ceded by Terra Nova Capital of $18.1 million in 1997 from $4.7 million in 1996
due to the significant increase in 1997 of Terra Nova Capital's participation in
syndicates managed by Octavian in 1997.
Net premiums written increased by 6.2%, to $183.2 million in 1997 from $172.5
million in 1996, as a consequence of the increase in gross premiums written
referred to above largely offset by the increase in reinsurance ceded. Net
premiums earned increased 4.4%, to $78.5 million in 1997 from $75.2 million in
1996.
Net Investment Income. Net investment income increased by 7.8%, to $20.0
million in 1997 from $18.5 million in 1996 resulting from an increase of 10.0%
in average invested assets, attributable to the IPO in April 1996, partially
offset by lower portfolio yields. The average investment yield before realized
gains and losses was 6.3% and 6.5% in 1997 and 1996, respectively. The average
duration of fixed maturity investments at both March 31, 1997 and 1996 was 4.3
years.
Realized Net Capital Gains on Sales of Investments. Realized net capital
gains on sales of investments decreased $2.1 million to $5.9 million in 1997
from $8.0 million in 1996. The majority of gains in 1997 arose from equity
securities sold during the period.
Foreign Exchange Gains (Losses). Foreign exchange gains of $0.2 million in
1997 and losses of $1.7 million in 1996 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.
Agency Income. This income consists of fees and profit commissions earned by
Octavian in respect of the managing of certain Lloyd's syndicates.
Losses and Loss Adjustment Expenses. Losses and LAE decreased 1.6%, to $51.3
million in 1997 from $52.1 million in 1996. As a percentage of net premiums
earned, losses and LAE decreased 4.0 percentage points, to 65.3% in 1997 from
69.3% in 1996. The decrease is due to an absence of large losses, favorable
overall loss experience and no requirement to strengthen prior year reserves in
1997.
Acquisition Costs. Acquisition costs, comprising commissions and other
underwriting expenses, increased 12.3%, to $22.6 million in 1997 from $20.2
million in 1996. Acquisition costs as a percentage of net premiums earned
increased 2.1 percentage points, to 28.9% in 1997 from 26.8% in 1996. The
increase was a
10
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
result of changes made to the Group'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 increased 78.0%, to $4.0
million in 1997 from $2.2 million in 1996. Other operating expenses as a
percentage of net premiums earned increased to 5.1% in 1997 from 3.0% in 1996,
primarily due to the greater proportion of Terra Nova Capital business earned in
1997 with its higher other operating expense ratio.
Net Interest Expense. Net interest expense in 1997 and 1996 relates to
interest on the $100 million 10.75% Senior Notes issued on June 30, 1995.
Agency Expenses. These expenses consist of costs incurred by Octavian in
managing certain Lloyd's syndicates.
Other Expenses. Other expenses decreased 19.7% to $1.1 million in 1997 from
$1.4 million in 1996.
Income from Operations before Income Taxes and Minority Interests. Income
from operations before income taxes and minority interests increased 8.5%, to
$23.5 million in 1997 from $21.6 million in 1996. This increase was mainly due
to an increase in investment income.
Income Tax Expense. Income tax expense increased 3.4%, to $5.3 million in
1997 from $5.2 million in 1996, as a consequence of the increase in operating
income.
Net Income. Net Income increased $2.6 million to $18.1 million in 1997 from
$15.5 million in 1996 as a result of the factors described above.
Combined Ratios. The Company's combined ratios were 99.2% for 1997 and 99.1%
for 1996.
LIQUIDITY AND CAPITAL RESOURCES
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 Octavian. 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 Octavian. The payment of dividends and other payments by
Terra Nova, Terra Nova Capital and Octavian are subject to restrictions under UK
law and Terra Nova (Bermuda), Bermuda law.
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, 1997 of $394.9
million represented the combined shareholders' equity in Terra Nova and Terra
Nova (Bermuda) and Octavian of $483.8 million and other net assets of $11.1
million, reduced by $100.0 million of debt in UK Holdings.
The shareholders' equity of Terra Nova at March 31, 1997 was $248.9 million.
The decrease of $4.2 million in the first three months to March 31, 1997 was
due to unrealized losses on investments (net of tax) of $13.8 million,
partially offset by $9.6 million of net income. The shareholders' equity of
Terra Nova (Bermuda) at March 31, 1997 was $222.9 million. The decrease of
$0.5 million during 1997 was due to unrealized losses on investments of $8.5
million, partially offset by $8.0 million of net income.
11
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the three months ended March 31, 1997 the cashflow used in operating
activities of the Company was $9.6 million compared to cashflow used in
operating activities of $8.3 million in 1996. The increase in cash flows used in
operating activities in 1997 compared to 1996 was primarily due to a tax refund
(including interest on the overdue amount) received by Terra Nova in 1996 of
$14.9 million, partially offset by improved insurance cashflows at Terra Nova,
Terra Nova (Bermuda) and Terra Nova Capital in 1997 compared to 1996.
Total investments and cash were $1,247.5 million at March 31, 1997. At March
31, 1997, 84.2%, 9.6% and 6.2% of total investments and cash were held in fixed
maturities, common stocks and cash and cash equivalents, respectively. At March
31, 1997, approximately 94% of the Company's fixed income investments were rated
"AA" or better by S&P. The Company's investment portfolio earned interest and
dividend income, net of investment management fees, of 6.3% and 6.5% in the
three months ended March 31, 1997 and 1996, respectively. The Company had
realized investment gains of $5.9 million and $8.0 million in the three months
ended March 31, 1997 and 1996, respectively.
On February 26, 1997 the Company announced that net premiums written for 1997
would exceed 1996 by 40% primarily because of the large increase in the
Company's participation in syndicates managed by Octavian.
On May 5, 1997 the Company announced its plans to buy back up to $20 million
of its common stock on the open market at prevailing market prices or in
privately negotiated transactions.
On May 7, 1997 S&P raised its claims-paying ability rating of the Terra Nova
Group to single "A" from single "A-" minus and the senior debt rating of UK
Holdings to triple "BBB" from triple "BBB-" minus. The rating increases reflect
the continued enhancement of the Company's overall profile, including a
stronger than expected operating performance in 1996 and success in securing a
significant participation in the "new" Lloyd's market, while maintaining a
strong degree of capitalization.
Certain information contained herein is based on management's estimates,
assumptions and projections. Important factors that could cause actual results
to differ materially from those estimated by management include, among other
things, an unexpected increase in competition, unfavorable government
regulation, the pricing environment and other industry developments.
FOREIGN CURRENCY
The Company's assets, liabilities, revenues and expenses, except for the
majority of corporate overheads which are paid in British pounds, are
predominantly in U.S. dollars. Accordingly, the Company's functional currency
is the U.S. dollar. Certain other net translation adjustments are shown as a
separate component of shareholders' equity.
DIVIDEND POLICY
On February 10, 1997 the Company declared a dividend of $0.02 per share
payable on March 27, 1997 to shareholders of record as of March 6, 1997.
On May 5, 1997 the Company declared a dividend of $0.05 per share payable on
June 27, 1997, to shareholders of record as of June 6, 1997. 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.
12
<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.
13
<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, 1997 By: /s/WILLIAM O. BAILEY
------------ --------------------
William O. Bailey
Chairman, President and Chief Executive Officer
Date: May 14, 1997 By: /s/WILLIAM J. WEDLAKE
------------ ---------------------
William J. Wedlake
Chief Financial Officer,
Senior Vice President and
Principal Accounting Officer.
14
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
EXHIBIT INDEX
-------------
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ ----------- ----------
11.1 Statement regarding Computation of 16-17
Primary and Fully Diluted Earnings Per
Common Share and Common Share
Equivalents
Form 8K
15
<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,
1997 1996
Earnings per common share and common share equivalents
- Primary
<S> <C> <C>
Weighted average common shares outstanding 25,852,473 15,519,742
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) 446,794 2,174,891
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 26,299,267 17,694,633
================= ===============
Net income $18,257,000 $15,622,598
================= ===============
Primary earnings per common share $0.69 $0.88
and common share equivalent
================= ===============
</TABLE>
16
<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,
1997 1996
Earnings per common share and common share equivalents
- - Fully Diluted
<S> <C> <C>
Weighted average common shares outstanding 25,852,473 15,519,742
Weighted average common shares outstanding
(under as if converted method) - 1,148,916
Average stock options and warrants outstanding
(net of repurchased shares under the treasury
stock method) 437,807 2,174,891
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 26,290,280 18,843,549
============= ==============
Net income $18,257,000 $16,068,598
============= ==============
Fully diluted earnings per common share $0.69 $0.85
and common share equivalent
============= ==============
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TERRA NOVA
(BERMUDA) HOLDINGS LTD. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 1,050,576
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 119,555
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,170,131
<CASH> 77,407
<RECOVER-REINSURE> 39,913
<DEFERRED-ACQUISITION> 86,746
<TOTAL-ASSETS> 1,987,536
<POLICY-LOSSES> 1,046,043
<UNEARNED-PREMIUMS> 308,253
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 100,000
0
0
<COMMON> 149,946
<OTHER-SE> 244,980
<TOTAL-LIABILITY-AND-EQUITY> 1,987,536
78,463
<INVESTMENT-INCOME> 19,989
<INVESTMENT-GAINS> 5,930
<OTHER-INCOME> 3,953
<BENEFITS> 51,267
<UNDERWRITING-AMORTIZATION> 22,643
<UNDERWRITING-OTHER> 3,971
<INCOME-PRETAX> 23,482
<INCOME-TAX> 5,338
<INCOME-CONTINUING> 18,144
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,144
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.69
<RESERVE-OPEN> 823,979
<PROVISION-CURRENT> 52,867
<PROVISION-PRIOR> (1,600)
<PAYMENTS-CURRENT> 58
<PAYMENTS-PRIOR> 64,184<F1>
<RESERVE-CLOSE> 811,004
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>"PAYMENTS PRIOR" includes $11,520,000 in respect of a foreign exchange
adjustment to the opening reserves.
</FN>
</TABLE>
