<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-53999
TERRA NOVA INSURANCE (UK) HOLDINGS PLC
OFFER TO EXCHANGE 7% SENIOR NOTES DUE 2008,
WHICH WILL BE FULLY AND UNCONDITIONALLY
GUARANTEED BY TERRA NOVA (BERMUDA)
HOLDINGS LTD. AND WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OLD NOTES (AS DEFINED BELOW)
----------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
JULY 22, 1998, UNLESS EXTENDED. AS DESCRIBED HEREIN, WITHDRAWAL RIGHTS WITH
RESPECT TO THE EXCHANGE OFFER ARE EXPECTED TO EXPIRE AT THE EXPIRATION OF THE
EXCHANGE OFFER.
Terra Nova Insurance (UK) Holdings plc, a public limited company
organized under the laws of England and Wales ("UK Holdings" or the "Issuer"),
hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus (the "Prospectus") and the accompanying
Letter of Transmittal (the "Letter of Transmittal"), to exchange up to $100.0
million aggregate principal amount of its 7% Senior Notes due 2008 (the
"Exchange Notes") which will be fully and unconditionally guaranteed on a senior
basis by Terra Nova (Bermuda) Holdings Ltd. ("Bermuda Holdings"), and which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement of which this Prospectus is a part,
for an identical principal amount of its issued and outstanding 7% Senior Notes
due 2008 (the "Old Notes"). The Exchange Notes and the Old Notes are
collectively referred to herein as the "Senior Notes." The Old Notes were
originally issued and sold in a transaction that was exempt from registration
under the Securities Act and resold inside the United States to certain
qualified institutional buyers in reliance on, and subject to the restrictions
imposed pursuant to, Rule 144A under the Securities Act ("Rule 144A"). The terms
of the Exchange Notes are identical in all material respects to the terms of the
Old Notes, except that (i) the offer and sale of the Exchange Notes has been
registered under the Securities Act and therefore the Exchange Notes are not
subject to certain restrictions on transfer applicable to the Old Notes, will
not bear legends restricting the transferability thereof and will not be
entitled to registration rights or other rights under the Registration Rights
Agreement (as defined herein), and (ii) the Exchange Notes will not provide for
any increase in the interest rate pursuant to the Registration Rights Agreement,
which rights and provisions will terminate as to all of the Senior Notes upon
the consummation of the Exchange Offer. The Exchange Notes will be issued under
the same Indenture (as defined herein) as the Old Notes, and the Exchange Notes
and the Old Notes will constitute a single series of debt securities under the
Indenture. In the event the Exchange Offer is consummated, any Old Notes which
remain outstanding after consummation of the Exchange Offer and the Exchange
Notes issued in the Exchange Offer will vote together as a single class for
purposes of determining whether holders of a requisite percentage in outstanding
principal amount of Senior Notes have taken certain actions or exercised certain
rights under the Indenture. See "Description of Exchange Notes" and "The
Exchange Offer."
The Exchange Notes will mature on May 15, 2008. Interest on the
Exchange Notes will accrue from May 18, 1998, the issue date of the Old Notes,
and is payable semiannually on November 15 and May 15 of each year, commencing
on November 15, 1998. The Exchange Notes will be redeemable, in whole or in
part, at the option of the Issuer and at any time, at a redemption price equal
to the sum of: (i) the principal amount of the Exchange Notes being redeemed,
plus accrued and unpaid interest thereon to the redemption date, and (ii) the
Make-Whole Amount (as defined under "Description of Exchange Notes--Optional
Redemption"), if any. The Exchange Notes also may be redeemed under
circumstances described under "Description of Exchange Notes--Tax Redemption" at
100% of the principal amount thereof, plus accrued and unpaid interest thereon
to the redemption date. The Exchange Notes will not be subject to any mandatory
sinking fund payment.
The Exchange Notes and the guarantee (the "Guarantee") of the Exchange
Notes by Bermuda Holdings will constitute unsecured senior obligations of the
Issuer and Bermuda Holdings, respectively. The Exchange Notes and the Guarantee
will rank pari passu in right of payment with all other senior indebtedness of
the Issuer and Bermuda Holdings, respectively, including indebtedness of
approximately $75 million pursuant to the Issuer's 7.2% Senior Notes due 2007
(the "1997 Senior Notes") which are fully and unconditionally guaranteed by a
guarantee
<PAGE>
of Bermuda Holdings, as well as any Old Notes not tendered for exchange pursuant
to the Exchange Offer. See "Description of Exchange Notes--General" and "--
Guarantee." As of the date hereof, there is no outstanding indebtedness of
either the Issuer or Bermuda Holdings which will be subordinate to the Exchange
Notes. Because the Issuer and Bermuda Holdings are holding companies, in order
for them to make interest and principal payments on the Exchange Notes, they
will be dependent on the payment of dividends by their respective insurance
company subsidiaries. As a consequence, the Exchange Notes and the Guarantee
will be effectively subordinated to all existing and future liabilities of such
insurance company subsidiaries, which at March 31, 1998 consisted principally of
insurance liabilities and aggregated approximately $2 billion.
____________
SEE "RISK FACTORS" COMMENCING ON PAGE 13 FOR DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF THE OLD NOTES PRIOR TO TENDERING
THEIR OLD NOTES IN THE EXCHANGE OFFER.
____________
UNTIL DECEMBER 18, 1998 (180 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
____________
THE DATE OF THIS PROSPECTUS IS JUNE 22, 1998.
2
<PAGE>
The Issuer is making the Exchange Offer in reliance on the position of
the staff of the Division of Corporation Finance of the Securities and Exchange
Commission (the "Commission") as set forth in certain no-action letters
addressed to third parties in other transactions (including Exxon Capital
Holdings Corporation (available May 13, 1988), Morgan Stanley & Co. Incorporated
(available June 5, 1991), K-III Communications Corporation (available May 14,
1993) and Shearman & Sterling (available July 2, 1993)). However, neither the
Issuer nor Bermuda Holdings has sought its own no-action letter and there can be
no assurance that the staff of the Division of Corporation Finance of the
Commission would make a similar determination with respect to the Exchange Offer
as it has in such no-action letters to third parties. Based on these
interpretations by the staff of the Division of Corporation Finance, and subject
to the two immediately following sentences, the Issuer believes that the
Exchange Notes issued pursuant to this Exchange Offer in exchange for Old Notes
may be offered for resale, resold and otherwise transferred by a holder thereof
(other than a holder who is a broker-dealer or an "affiliate" of the Issuer or
Bermuda Holdings within the meaning of Rule 405 of the Securities Act) without
further compliance with the registration and prospectus delivery requirements of
the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holder's business and that such holder is not
participating, and has no arrangement or understanding with any Person to
participate, in a distribution (within the meaning of the Securities Act) of
such Exchange Notes. Any holder of Old Notes who is an "affiliate" of the Issuer
or Bermuda Holdings or who intends to participate in the Exchange Offer for the
purpose of distributing Exchange Notes, or any broker-dealer who purchased Old
Notes from the Issuer or Bermuda Holdings to resell pursuant to Rule 144A under
the Securities Act ("Rule 144A") or any other available exception under the
Securities Act, (a) will not be able to rely on the interpretations of the staff
of the Division of Corporation Finance of the Commission set forth in the above-
mentioned interpretive letters, (b) will not be permitted or entitled to tender
such Old Notes in the Exchange Offer and (c) must comply with the registration
and prospectus delivery requirement of the Securities Act in connection with any
sale or other transfer of such Old Notes unless such sale is made pursuant to an
exemption from such requirements. In addition, as described below, if any
broker-dealer holds Old Notes acquired for its own account as a result of
market-making or other trading activities and exchanges such Old Notes for
Exchange Notes, then such broker-dealer must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such
Exchange Notes.
Each holder of Old Notes who wishes to exchange Old Notes for Exchange
Notes in the Exchange Offer will be required to represent that (i) it is not an
"affiliate" of the Issuer or Bermuda Holdings, (ii) any Exchange Notes to be
received by it are being acquired in the ordinary course of its business, and
(iii) it has no arrangement or understanding with any person to participate in a
distribution (within the meaning of the Securities Act) of such Exchange Notes.
Each broker-dealer that receives Exchange Notes for its own account pursuant to
the Exchange Offer must acknowledge that it acquired the Old Notes for its
account as the result of market-making activities or other trading activities
and must agree that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes. A broker-
dealer that acquired Old Notes in a transaction other than as part of its
market-making or other trading activities will not be able to participate in the
Exchange Offer. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. Based on the
position taken by the staff of the Division of Corporation Finance of the
Commission in the no-action letters referred to above, the Issuer believes that
broker-dealers who acquired Old Notes for their own account as a result of
market-making activities or other trading activities ("Participating Broker-
Dealers"), may fulfill their prospectus delivery requirements with respect to
the Exchange Notes received upon exchange of such Old Notes (other than Old
Notes which represent an unsold allotment from the original sale of the Old
Notes) with a prospectus meeting the requirements of the Securities Act, which
may be a prospectus prepared for an exchange offer so long as it contains a
description of the plan of distribution with respect to the resale of such
Exchange Notes. Subject to certain provisions set forth in the Registration
Rights Agreement, the Issuer and Bermuda Holdings have agreed that this
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with resales of such Exchange
Notes for a period ending 180 days after the Expiration Date referred to below
or, if earlier, when all such Exchange Notes have been disposed of by such
Participating Broker-Dealer. See "Plan of Distribution." Any Participating
Broker-Dealer who is an "affiliate" of the Issuer or Bermuda Holdings may not
rely on such no-action letters and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. See "The Exchange Offer--Resales of the Exchange Notes."
3
<PAGE>
The Exchange Notes will be a new issue of securities for which there
currently is no market and there can be no assurance as to the liquidity of any
markets that may develop for the Exchange Notes or the ability of the holders to
sell their Exchange Notes, as the case may be. Neither the Issuer nor Bermuda
Holdings currently intends to apply for listing of the Exchange Notes on any
securities exchange other than on the New York Stock Exchange, Inc. or for
quotation through the National Association of Securities Dealers Automated
Quotation System.
Any Old Notes not tendered and accepted in the Exchange Offer will
remain outstanding, will continue to accrue interest and will be entitled to all
the same rights and will be subject to the same limitations applicable thereto
under the Indenture (except for those rights which terminate upon consummation
of the Exchange Offer). Following consummation of the Exchange Offer, the
holders of Old Notes will continue to be subject to the existing restrictions
upon transfer thereof, and neither the Issuer nor Bermuda Holdings will have any
further obligation to such holders to provide for registration under the
Securities Act of the Old Notes held by such holders. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, a holder's ability to
sell untendered Old Notes could be adversely affected. See "Prospectus Summary--
Certain Consequences of a Failure to Exchange Old Notes."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN
IMPORTANT INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS
AND THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO
TENDER THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
Old Notes may be tendered for exchange on or prior to 5:00 p.m., New
York City time, July 22, 1998 (such time on such date being hereinafter called
the "Expiration Date"), unless the Exchange Offer is extended by the Issuer (in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended). Tenders of Old Notes may be withdrawn at
any time on or prior to the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is subject to certain events and
conditions and to the terms and provisions of the Registration Rights Agreement.
Old Notes may be tendered in whole or in part in a principal amount of $1,000
and integral multiples thereof. See "The Exchange Offer--Fees and Expenses."
Each Exchange Note will bear interest from the most recent date to which
interest has been paid or duly provided for on the Old Note surrendered in
exchange for such Exchange Note or, if no such interest has been paid or duly
provided for on such Old Note, from May 18, 1998. Holders of the Old Notes whose
Old Notes are accepted for exchange will not receive accrued interest on such
Old Notes.
Any waiver, extension or termination of the Exchange Offer will be
publicly announced by the Issuer or Bermuda Holdings through a release to the
Dow Jones News Service and as otherwise required by applicable law or
regulations.
The Exchange Notes will be represented by one or more global receipts
(each a "Global Receipt") deposited with, or on behalf of, The Depository Trust
Company, as Depositary, and the Exchange Notes are expected to trade in the
Depositary's Same-Day Funds Settlement System. Secondary market trading
activity, if any, for the Exchange Notes will therefore settle in immediately
available funds. See "Description of Depositary Agreement."
The Issuer intends to list the Exchange Notes on the New York Stock
Exchange, Inc.
Neither the Issuer nor Bermuda Holdings will receive any proceeds from
the Exchange Offer. The Issuer and Bermuda Holdings have agreed to pay all
expenses of the Exchange Offer. No dealer manager is being utilized in
connection with the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES AND BLUE SKY LAWS OF SUCH JURISDICTION.
4
<PAGE>
AVAILABLE INFORMATION
Bermuda Holdings is subject to the periodic reporting and other information
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Issuer is exempt from such requirements, but summary financial
information of the Issuer will be provided in the reports filed by Bermuda
Holdings, as permitted by the rules and regulations of the Commission. Under
current law, for as long as the Senior Notes or Bermuda Holdings' Class A
Ordinary Shares, par value $5.80 per share, are listed on the New York Stock
Exchange, Inc., Bermuda Holdings will be required to file with the Commission
annual, quarterly and current financial information on Forms 10-K, 10-Q and 8-K.
Such reports and other information filed by Bermuda Holdings pursuant to the
Exchange Act may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 and at the Commission's regional offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, Suite 1300, New York, New York 10048, and such
material is contained on the worldwide web site maintained by the Commission at
http:\\www.sec.gov. Copies of such material may also be obtained at prescribed
rates by writing to the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, reports and
other material concerning Bermuda Holdings can be inspected at the offices of
the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
Whether or not required by the Exchange Act or the rules and regulations of
the Commission thereunder, so long as any Senior Notes are outstanding, Bermuda
Holdings has agreed to furnish to the holders of Senior Notes all financial
information that would be required to be contained in a filing with the
Commission on Form 10-K, 10-Q or 8-K if Bermuda Holdings were required to file
such Form, including a "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and, with respect to the annual financial
statements only, a report thereon by Bermuda Holdings' independent public
accountants. In addition, whether or not required by the Exchange Act or the
rules and regulations of the Commission thereunder, Bermuda Holdings will file a
copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to investors who request it in writing.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Bermuda Holdings with the Commission are
incorporated into this Prospectus by reference:
(1) Bermuda Holdings' Annual Report on Form 10-K for the year ended
December 31, 1997;
(2) Bermuda Holdings' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998; and
(3) Bermuda Holdings' Current Report on Form 8-K, dated May 28, 1998.
Any documents filed by Bermuda Holdings pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date hereof and prior to the
termination of the offering of the Exchange Notes and the Guarantee offered
hereby shall be deemed to be incorporated by reference into this Prospectus and
to be a part hereof.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein, or contained in this Prospectus, shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
BERMUDA HOLDINGS WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, UPON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY
OF ANY OR ALL OF THE FOREGOING DOCUMENTS INCORPORATED HEREIN BY REFERENCE (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE INTO THE FOREGOING DOCUMENTS). ANY SUCH REQUEST SHOULD
BE DIRECTED TO JEAN M. WAGGETT, ESQ., TERRA NOVA (BERMUDA) HOLDINGS LTD.,
RICHMOND HOUSE, 2ND FLOOR, 12 PAR-LA-VILLE ROAD, HAMILTON HM 08, BERMUDA
(TELEPHONE: 441-292-7731)). IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY JULY 22, 1998.
<PAGE>
ENFORCEABILITY OF CIVIL LIABILITIES
The Issuer is a public limited company incorporated under the laws of
England and Wales, and Bermuda Holdings is a company incorporated under the laws
of Bermuda. All of the directors and executive officers of the Issuer, all of
the executive officers of Bermuda Holdings, five of the eleven directors of
Bermuda Holdings, and the experts named herein are non-residents of the United
States, and all or a substantial portion of the assets of the Issuer, Bermuda
Holdings and such persons are located outside the United States. It may not be
possible for investors to effect service of process within the United States
upon such persons or to enforce against any of them, the Issuer or Bermuda
Holdings judgments of courts of the United States predicated upon the civil
liability provisions of the federal or state securities laws of the United
States. The Issuer and Bermuda Holdings have been advised by their respective
counsel, Clifford Chance and Conyers, Dill & Pearman, that there is doubt as to
the enforceability in the United Kingdom and in Bermuda, in original actions or
in actions for enforcement of judgments of United States courts, of civil
liabilities predicated solely upon such securities laws.
Bermuda Holdings has been informed by Conyers, Dill & Pearman that the
United States and Bermuda do not have a treaty providing for reciprocal
recognition and enforcement of judgments of U.S. courts in civil and commercial
matters and that a final judgment for the payment of money rendered by any
federal or state court in the United States based on civil liability, whether or
not predicated solely upon the U.S. federal securities laws, would, therefore,
not be automatically enforceable in Bermuda. Bermuda Holdings has also been
advised by Conyers, Dill & Pearman that a final and conclusive judgment obtained
in federal or state courts in the United States under which a sum of money is
payable as compensatory damages (i.e., not being a sum claimed by a revenue
authority for taxes or other charges of a similar nature by a governmental
authority, or in respect of a fine or penalty or multiple or punitive damages)
may be the subject of an action on a debt in the Supreme Court of Bermuda under
the common law doctrine of obligation. Such an action should be successful upon
proof that the sum of money is due and payable, without having to prove the
facts supporting the underlying judgment, as long as: (i) the court that gave
the judgment was competent to hear the action in accordance with private
international law principles as applied by the courts in Bermuda; and (ii) the
judgment was not contrary to public policy in Bermuda, was not obtained by fraud
or in proceedings contrary to the natural justice of Bermuda, and was not based
on an error in Bermuda law. A Bermuda court may impose civil liability on
Bermuda Holdings or its directors or officers in a suit brought in the Supreme
Court of Bermuda against Bermuda Holdings or such persons with respect to a
violation of U.S. federal securities laws, provided that the facts surrounding
such violation constitute or give rise to a cause of action under Bermuda law.
Bermuda Holdings and the Issuer have each appointed CT Corporation System,
New York, New York, as its agent to receive service of process in actions
brought against it, arising out of or in connection with U.S. federal or state
securities laws or out of violations of such laws, in any federal or state court
in the United States relating to the transactions covered by this Prospectus.
CURRENCY
In this Prospectus, references to "U.S. dollars," "$" or "cents" are to
U.S. currency, and references to "pounds," "sterling," "(Pounds)", "pence" or
"p" are to U.K. currency. Bermuda Holdings publishes its consolidated financial
statements in U.S. dollars, which is its functional currency.
2
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified by the more detailed information and
financial statements and notes thereto appearing elsewhere in this Prospectus or
incorporated herein by reference. Unless the context requires otherwise and
except as provided below, all references in this Prospectus to the "Company"
refer to Terra Nova (Bermuda) Holdings Ltd. ("Bermuda Holdings"), a Bermuda
holding corporation, and all of its direct and indirect subsidiaries, including
its principal subsidiaries, the Issuer, Terra Nova Insurance Company Limited
("Terra Nova"), Terra Nova (Bermuda) Insurance Company Ltd. ("Terra Nova
(Bermuda)"), Compagnie de Reassurance d'Ile de France ("Corifrance"). Octavian
Syndicate Management Limited ("Octavian") and Terra Nova Capital Limited ("Terra
Nova Capital"), through which it conducts substantially all of its operations.
Unless otherwise noted, all financial data and ratios included herein have been
prepared in accordance with United States generally accepted accounting
principles ("GAAP").
COMPANY OVERVIEW
OVERVIEW AND MARKETS
The Company is a specialty property, casualty, marine, aviation and auto
insurance and reinsurance company operating on a worldwide basis through
subsidiaries in the London company market and Lloyd's of London (together the
"London Market"), in the Bermuda Market, in Paris, France and through branch
offices in Toronto, Canada and Brussels, Belgium. Terra Nova, the Company's
predecessor and principal subsidiary, was established in 1969 and is believed by
management to be one of the largest London Market companies (as defined below).
The Company had gross premiums written of $338.2 million for the three months
ended March 31, 1998, and had shareholders' equity of $506.0 million at March
31, 1998.
The London Market is one of the world's largest insurance and reinsurance
marketplaces and attracts business from clients throughout the world who seek
flexible and innovative protection for a wide variety of risks. The London
Market is composed of Lloyd's and companies with underwriting offices in
proximity to Lloyd's ("London Market companies").
The Bermuda Market, comprised of both captive and independent companies, in
recent years has become one of the world's largest insurance and reinsurance
markets in which international business is written.
BUSINESS, PROFITABILITY AND FINANCIAL STRENGTH
The Company's principal lines of business consist of classes of (i) non-
marine property coverage written largely on a reinsurance basis, (ii) non-marine
casualty coverage written both on a primary and a reinsurance basis, (iii)
marine and aviation coverage written both on a primary and a reinsurance basis
and (iv) auto business written largely on a primary basis, accounting for
approximately 38.3%, 18.3%, 33.5%, and 9.9%, respectively, of the Company's
gross premiums written for 1997. Additionally, of the Company's gross premiums
written for 1997, approximately 51.0% consisted of reinsurance business and
approximately 34.5%, 33.5%, and 32.0% were attributable to clients from the
U.S., Europe and the rest of the world, respectively.
The Company and Terra Nova have a demonstrated history of profits, having
been profitable in every year of their combined 28-year existence, except for
1980 and 1992. The weighted average combined and operating ratios of the Company
were 99.4% and 74.4%, respectively, for the period from 1995 through 1997. For
the three months ended March 31, 1998, the Company had a combined and operating
ratio of 99.5% and 82.7%, respectively. The Company's income from continuing
operations before income taxes, interest expense, depreciation, amortization and
minority interests ("EBITDA") was $108.5 million for 1997 and $35.3 million for
the three months ended March 31, 1998.
At March 31, 1998, approximately 94.0% of the Company's $1.5 billion
investment portfolio consisted of fixed maturity debt securities and cash and
cash equivalents, with the balance consisting of equity securities. Of the fixed
maturity debt securities, 89.9% were rated "A" or better by Standard & Poor's
Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's"). The Company
currently has no investments in high yield fixed income securities, real estate
or mortgages.
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
STRATEGY/STRATEGIC INITIATIVES
The Company seeks to enhance its record of profitable growth through its
operating and growth strategies. The key elements of its operating strategy
consist of:
. FLEXIBLE OPERATING STRUCTURE. The Company, with subsidiaries in the London
company market, Lloyd's, the Bermuda Market and the Continental European
Market, and having offices in London, Bermuda, Paris, Toronto and Brussels,
believes that it has a significant competitive advantage through its
presence in many of the principal markets where insurance and reinsurance
business is transacted. By writing business in many of the major
international markets, the Company is able to diversify the risk of its
portfolio geographically and, at the same time, take advantage of
differences in rates and deductibles throughout the world. Having developed
an expertise in writing specific classes of non-marine property, non-marine
casualty and marine businesses which may react differently to varying
market conditions, the Company may shift its mix of business to those lines
where the Company believes the potential for profitable results is greater,
while continuing to maintain a smaller presence in less profitable lines in
anticipation of market improvements.
. LOW OPERATING COSTS. Through an international brokerage system, the Company
has access not only to the London and Bermuda Markets, but also to other
international insurance and reinsurance centers. By using this variable
cost distribution system and operating through a centralized administration
organization in London, the Company is able to minimize its fixed overhead
costs and therefore better control expense levels as market conditions for
writing insurance and reinsurance fluctuate. In addition, with operations
in Bermuda, the Company is able to take advantage of Bermuda's favorable
tax regime.
. SIGNIFICANT LEVELS OF INVESTMENT INCOME. With a $1.5 billion conservatively
managed investment portfolio as of March 31, 1998, the Company has been
able to generate significant and consistent levels of investment income
that have helped to stabilize profits. Of the $1.5 billion of invested
assets at March 31, 1998, $766.5 million were held by Terra Nova and $491.6
million were held by Terra Nova (Bermuda), with the balance held by other
group companies. The impact of investment income on the Company's results
is evidenced by the weighted average operating ratio of the Company over
the last three years of 74.4%.
The key elements of the Company's growth strategy include:
. CAPITAL GROWTH. With an expected pro forma total capitalization as of March
31, 1998 of $669.2 million after giving effect to the offering of the Old
Notes and the Debt Tender (as defined herein), the Company expects to
continue to increase its business writings in selected areas and to pursue
strategic acquisitions which management believes will enhance the Company's
presence in targeted markets or provide products for the group as a whole.
. EXPECTED FURTHER PARTICIPATION IN THE OCTAVIAN SYNDICATES. In 1997 the
Company provided $293.9 million of capacity to Octavian, representing 47%
of the Octavian Syndicates, total underwriting capacity for the 1997 year
of account. This capacity provided the Company with $204.3 million of gross
written premiums for 1997. In 1998, the Company has provided $372.8 million
of capacity to Octavian, representing approximately 60% of the Octavian
Syndicates' total underwriting capacity for the 1998 year of account. Based
on the Octavian Syndicates' recent utilization of capacity, the Company
estimates that this capacity will provide the Company with gross premiums
written of between $260 and $300 million in 1998. The Company expects to
increase the capacity available to the Octavian Syndicates for the 1998
year of account. In addition to providing additional capacity to the
Octavian Syndicates, the Company may increase its involvement in Lloyd's in
the future, through acquiring the rights to manage additional syndicates or
employing additional underwriters. The number of syndicates managed by
Octavian increased to eight for the 1998 year of account.
. GROWTH IN CONTINENTAL EUROPE. On September 8, 1997, the Company acquired
Compagnie de Reassurance d'Ile de France, Corifrance, based in Paris.
Corifrance is a French reinsurance company which transacts business
internationally, although mainly outside the United States. Its premium
volume in 1997 was $24 million, of which $2.4 million was reflected in the
Company's financial statements for the year ended December 31, 1997.
RECENT DEVELOPMENTS
On May 4, 1998, William O. Bailey retired as Chairman, President and Chief
Executive Officer of the Company. On the same day, John J. Dwyer was appointed
Chairman and Nigel H.J. Rogers was appointed Chief Executive Officer of the
Company.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
RELATED TRANSACTION
On April 20, 1998, the Issuer commenced a tender offer to purchase all of its
10 3/4% Senior Notes due 2005 (the "1995 Senior Notes"). Concurrently with the
tender offer, the Issuer commenced a related consent solicitation to eliminate
substantially all of the restrictive covenants relating to the 1995 Senior
Notes. The offer to purchase the outstanding 1995 Senior Notes and the related
consent solicitation are hereafter referred to as the "Debt Tender." As of May
1, 1998, all of the outstanding 1995 Senior Notes had been tendered. At the
closing of the Debt Tender on May 18, 1998, the Issuer purchased all of the
outstanding 1995 Senior Notes.
- --------------------------------------------------------------------------------
5
<PAGE>
________________________________________________________________________________
ORGANIZATION
The Company and its principal subsidiaries are currently organized as
follows:
[CHART APPEARS HERE]
________________________________________________________________________________
6
<PAGE>
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER
The Exchange Offer......................... Up to $100.0 million aggregate
principal amount of Exchange Notes
are being offered in exchange for a
like aggregate principal amount of
Old Notes. The Issuer is making the
Exchange Offer in order to satisfy
its obligations under the
Registration Rights Agreement,
dated as of May 18, 1998, by and
among the Issuer, Bermuda Holdings
and the Initial Purchaser (the
"Registration Rights Agreement")
relating to the Old Notes. For a
description of the procedures for
tendering Old Notes, see "The
Exchange Offer--Procedures for
Tendering Old Notes."
Expiration Date............................ 5:00 p.m., New York City time, on
July 22, 1998 (such time on such
date being hereinafter called the
"Expiration Date") unless the
Exchange Offer is extended by the
Issuer or Bermuda Holdings (in
which case the term "Expiration
Date" shall mean the latest date
and time to which the Exchange
Offer is extended). Any waiver,
extension or termination of the
Exchange Offer will be publicly
announced by the Issuer or Bermuda
Holdings through a release to the
Dow Jones News Service and as
otherwise required by applicable
law or regulations. See "The
Exchange Offer--Terms of the
Exchange Offer; Period for
Tendering Old Notes."
Certain Conditions to the Exchange Offer... The Exchange Offer is subject to
certain conditions. The Issuer
reserves the right, subject to
applicable law, at any time and
from time to time, (i) to delay the
acceptance of the Old Notes for
exchange, (ii) to amend or
terminate the Exchange Offer if
certain specified conditions have
not been satisfied, as set forth
under "The Exchange Offer--Certain
Conditions to the Exchange Offer,"
(iii) to extend the Expiration Date
of the Exchange Offer and retain
all Old Notes tendered pursuant to
the Exchange Offer, subject,
however, to the right of holders of
Old Notes to withdraw their
tendered Old Notes, or (iv) to
amend the terms of the Exchange
Offer in any manner deemed by it to
be advantageous to the holders of
the Old Notes. See "The Exchange
Offer--Terms of the Exchange Offer;
Period for Tendering Old Notes."
Withdrawal Rights.......................... Tenders of Old Notes may be
withdrawn at any time prior to the
Expiration Date by delivering a
written notice of such withdrawal
to the Exchange Agent in conformity
with certain procedures set forth
below under "The Exchange Offer--
Withdrawal Rights."
Procedures for Tendering Old Notes......... Tendering holders of Old Notes must
complete and sign a Letter of
Transmittal in accordance with the
instructions contained herein and
therein and forward the same by
mail, facsimile or hand delivery,
together with any other required
documents, to the Exchange Agent
(as defined below) at the address
set forth herein and effect a
tender of Old Notes pursuant to the
procedures for book-entry transfers
as provided for herein by the
Expiration Date, either with a
timely confirmation of book-entry
transfer (a "Book-Entry
Confirmation") or in compliance
with the specified procedures for
guaranteed delivery of Old Notes.
Certain brokers, dealers,
commercial banks, trust companies
and other nominees may also effect
tenders by book-entry transfer.
Holders of Old Notes in the name of
a broker, dealer, commercial bank,
trust company or other nominee are
urged to contact such person
promptly if they wish to tender Old
Notes pursuant to the Exchange
Offer. See "The Exchange Offer--
Procedures for Tendering Old
Notes." Letters of Transmittal and
Book-Entry Confirmations should not
be sent to the Issuer or Bermuda
Holdings. Such documents should
only be sent to the Exchange Agent.
Questions regarding how to tender
and requests for information should
be directed to the Exchange Agent.
See "The Exchange Offer--Exchange
Agent."
Guaranteed Delivery Procedures............. Holders of Old Notes who wish to
tender their Old Notes and who
cannot deliver Book-Entry
Confirmations, a Letter of
Transmittal or any other document
required by the Letter of
Transmittal to the Exchange Agent
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
prior to the Expiration Date, must tender
their Old Notes according to the guaranteed
delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery
Procedures."
Resales of Exchange Notes........ The Issuer is making the Exchange Offer in
reliance on the position of the staff of the
Division Corporation Finance of the
Commission as set forth in certain no-action
letters addressed to third parties in other
transactions (including Exxon Capital
Holdings Corporation (available May 13,
1988), Morgan Stanley & Co. Incorporated
(available June 5, 1991), K-III
Communications Corporation (available May 14,
1993) and Shearman & Sterling (available July
2, 1993)). However, neither the Issuer nor
Bermuda Holdings has sought its own no-action
letter and there can be no assurance that the
staff of the Division of Corporation Finance
of the Commission would make a similar
determination with respect to the Exchange
Offer as it has in such interpretive letters
to third parties. Based on these
interpretations by the staff of the Division
of Corporation Finance, and subject to the
two immediately following sentences, the
Issuer believes that Exchange Notes issued
pursuant to this Exchange Offer in exchange
for Old Notes may be offered for resale,
resold and otherwise transferred by a holder
thereof (other than a holder who is a broker-
dealer or an "affiliate" of the Issuer or
Bermuda Holdings within the meaning of Rule
405 of the Securities Act) without further
compliance with the registration and
prospectus delivery requirements of the
Securities Act, provided that such Exchange
Notes are acquired in the ordinary course of
such holder's business and that such holder
is not participating, and has no arrangement
or understanding with any person to
participate, in a distribution (within the
meaning of the Securities Act) of such
Exchange Notes. However, any holder of Old
Notes who is an "affiliate" of the Issuer or
Bermuda Holdings or who intends to
participate in the Exchange Offer for the
purpose of distributing the Exchange Notes,
or any broker-dealer who purchased the Old
Notes from the Issuer or Bermuda Holdings to
resell pursuant to Rule 144A or any other
available exemption under the Securities Act,
(a) will not be able to rely on the
interpretations of the staff of the Division
of Corporation Finance of the Commission set
forth in the above-mentioned interpretive
letters, (b) will not be permitted or
entitled to tender such Old Notes in the
Exchange Offer and (c) must comply with
registration and prospectus delivery
requirements of the Securities Act in
connection with any sale or other transfer of
such Old Notes unless such sale is made
pursuant to an exemption from such
requirements. In addition, as described
below, if any broker-dealer holds Old Notes
acquired for its own account as a result of
market-making or other trading activities and
exchanges such Old Notes for Exchange Notes,
then such broker-dealer must deliver a
prospectus meeting the requirements of the
Securities Act in connection with any resales
of such Exchange Notes.
Each holder of Old Notes who wishes to
exchange Old Notes for Exchange Notes in the
Exchange Offer will be required to represent
that (i) it is not an "affiliate" of the
Issuer or Bermuda Holdings within the meaning
of Rule 405 under the Securities Act, (ii)
any Exchange Notes to be received by it are
being acquired in the ordinary course of its
business, and (iii) it has no arrangement or
understanding with any person to participate
in a distribution (within the meaning of the
Securities Act) of such Exchange Notes. Each
broker-dealer that receives Exchange Notes
for its own account pursuant to the Exchange
Offer must acknowledge that it acquired the
Old Notes for its own account as the result
of market-making activities or other trading
activities and must agree that it will
deliver a prospectus
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
meeting the requirements of the
Securities Act in connection with any
resale of such Exchange Notes. A broker-
dealer that acquired Old Notes in a
transaction other than as part of its
market-making or other trading
activities will not be able to
participate in the Exchange Offer. The
Letter of Transmittal states that by so
acknowledging and by delivering a
prospectus, a broker-dealer will not be
deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. Based on the position
taken by the staff of the Division of
Corporation Finance of the Commission in
the no-action letters referred to above,
the Issuer believes that broker-dealers
who acquired Old Notes for their own
accounts as a result of market-making
activities or other trading activities
("Participating Broker-Dealers") may
fulfill their prospectus delivery
requirements with respect to the
Exchange Notes received upon exchange of
such Old Notes with a prospectus meeting
the requirements of the Securities Act,
which may be the prospectus prepared for
an exchange offer so long as it contains
a description of the plan of
distribution with respect to the resale
of such Exchange Notes. Subject to
certain provisions set forth in the
Registration Rights Agreement and the
limitations described below under "The
Exchange Offer--Resale of Exchange
Notes," the Issuer and Bermuda Holdings
have agreed that this Prospectus, as it
may be amended or supplemented from time
to time, may be used by a Participating
Broker-Dealer in connection with resales
of such Exchange Notes for a period
ending 180 days after the Expiration
Date (subject to extension under certain
limited circumstances) or, if earlier,
when all such Exchange Notes have been
disposed of by such Participating
Broker-Dealer. See "Plan of
Distribution." Any Participating Broker-
Dealer who is an "affiliate" of the
Issuer or Bermuda Holdings may not rely
on such no-action letters and must
comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with any
resale transaction. See "The Exchange
Offer--Resales of Exchange Notes."
Acceptance of Old Notes for Exchange... Subject to the terms and conditions of
the Exchange Offer, including the
reservation of certain rights by the
Issuer and Bermuda Holdings, the Issuer
will accept for exchange any and all Old
Notes which are properly tendered in the
Exchange Offer, and not withdrawn, prior
to the Expiration Date. Subject to such
terms and conditions, the Exchange Notes
issued pursuant to the Exchange Offer
will be delivered promptly following the
Expiration Date. See "The Exchange
Offer--Acceptance of Old Notes for
Exchange."
Exchange Agent......................... The exchange agent with respect to the
Exchange Offer is The Chase Manhattan
Bank (the "Exchange Agent"). The address
and telephone and facsimile numbers of
the Exchange Agent are set forth in "The
Exchange Offer--Exchange Agent" and in
the Letter of Transmittal.
Use of Proceeds........................ Neither the Issuer nor Bermuda Holdings
will receive any cash proceeds from the
issuance of the Exchange Notes offered
hereby. See "Use of Proceeds."
Certain United States Federal Income
Tax Considerations................ Holders of Old Notes should review the
information set forth under "Certain Tax
Consequences of the Exchange Offer"
prior to tendering Old Notes in the
Exchange Offer.
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
THE EXCHANGE NOTES
Securities Offered..................... Up to $100.0 million principal amount of
7% Senior Notes due 2008. The Exchange
Notes will be issued and the Old Notes
were issued under an Indenture dated as
of May 18, 1998 (the"Indenture") between
the Issuer, Bermuda Holdings and The
Chase Manhattan Bank (the "Trustee").
The Exchange Notes and any Old Notes
which remain outstanding after
consummation of the Exchange Offer will
constitute a single series of debt
securities under the Indenture and,
accordingly, will vote together as a
single class for purposes of determining
whether holders of the requisite
percentage in outstanding principal
amount thereof have taken certain
actions or exercised certain rights
under the Indenture. See "Description of
Exchange Notes--General." The terms of
the Exchange Notes are identical in all
material respects to the terms of the
Old Notes, except that (i) the offer and
sale of the Exchange Notes have been
registered under the Securities Act and
therefore the Exchange Notes are not
subject to certain restrictions on
transfer applicable to the Old Notes,
will not bear legends relating thereto
and will not be entitled to registration
rights or other rights under the
Registration Rights Agreement, and (ii)
the Exchange Notes will not provide for
any increase in the interest rate
thereof, which rights and provision will
terminate as to all of the Senior Notes
upon the consummation of the Exchange
Offer. See "Description of Old Notes"
and "Description of Exchange Notes."
Maturity Date.......................... May 15, 2008.
Interest............................... Interest on the Exchange Notes will
accrue at the rate of 7% per annum
and is payable semi-annually on
November 15 and May 15 of each year,
commencing on November 15, 1998.
Each Exchange Note will bear interest
from May 18, 1998, the issue date for
the Old Notes. Holders of the Old
Notes whose Old Notes are accepted
for exchange will not receive accrued
interest on such Old Notes and will
be deemed to have waived the right to
receive any interest on such Old
Notes accrued, from and after May 18,
1998.
Guarantee.............................. The Exchange Notes will be fully and
unconditionally guaranteed on a
senior basis by Bermuda Holdings.
See "Description of Exchange Notes--
Guarantee."
Ranking................................ The Exchange Notes and the Guarantee
will constitute unsecured senior
obligations of the Issuer and Bermuda
Holdings, respectively, and will rank
pari passu in right of payment with
all other senior indebtedness, if
any, of the Issuer and Bermuda
Holdings, respectively. Because the
Issuer and Bermuda Holdings are
holding companies, the Exchange Notes
and the Guarantee will be effectively
subordinated to all existing and
future liabilities of their
respective insurance company
subsidiaries. See "Risk
Factors--Holding Company Structure;
Dividend Restrictions."
Optional Redemption.................... The Exchange Notes are redeemable at
the option of the Issuer at any time
in whole or in part, at a redemption
price equal to the sum of (i) the
principal amount of the Exchange
Notes being redeemed, plus accrued
and unpaid interest thereon to the
redemption date, and (ii) the
Make-Whole Amount, if any. See
"Description of Exchange
Notes--Optional Redemption."
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
Tax Redemption......................... The Exchange Notes are redeemable at
the option of the Issuer, under
certain circumstances, at a price
equal to 100% of the principal amount
thereof, plus accrued and unpaid
interest to the redemption date, in
the event that withholding of taxes
is required by any Relevant
Jurisdiction (as defined herein) with
respect to interest payments to
United States holders of the Exchange
Notes. See "Description of Exchange
Notes--Tax Redemption."
Listing................................ The Issuer intends to list the Exchange
Notes on the New York Stock Exchange,
Inc.
Absence of Market for the Exchange
Notes.................................. The Exchange Notes will be a new issue
of securities for which there currently
is no market and there can be no
assurance as to the liquidity of any
market that may develop for the Exchange
Notes or the ability of the holders to
sell their Exchange Notes, as the case
may be. The Issuer and Bermuda Holdings
currently do not intend to apply for
listing of the Exchange Notes on any
securities exchange other than the New
York Stock Exchange, Inc. or for
quotation through the National
Association of Securities Dealers
Automated Quotation System.
Use of Proceeds........................ Neither the Issuer nor Bermuda Holdings
will receive any cash proceeds from the
issuance of the Exchange Notes offered
hereby. The net proceeds received from
the issuance and sale of the Old Notes,
together with the available cash of the
Issuer, were used to fund the Debt
Tender. See "Use of Proceeds."
Book-Entry; Form....................... The Exchange Notes will initially be
issued as one or more global notes
without coupons in bearer form (the
"Global Note"), which will be deposited
with Chase Manhattan Bank Luxembourg
S.A., as custodian thereof (the
"Custodian"), for the benefit of The
Chase Manhattan Bank, as depositary (the
"Depositary"), pursuant to the
Depositary Agreement (as defined
herein). The Depositary will issue one
or more global receipts representing the
Exchange Notes, which will be delivered
and registered in the name of DTC or its
nominee. Beneficial interests in the
Exchange Notes will be shown on, and
transfers thereof effective only
through, the records maintained in book-
entry form by DTC and its participants.
See "Description of Exchange Notes--
General" and "Description of Depositary
Agreement--General."
CERTAIN CONSEQUENCES OF A FAILURE TO EXCHANGE OLD NOTES
The sale of the Old Notes was not registered under the Securities Act or
any state securities laws and therefore the Old Notes may not be offered, sold
or otherwise transferred, except in compliance with the registration
requirements of the Securities Act and any other applicable securities laws, or
pursuant to an exemption therefrom or in a transaction not subject thereto, and
in each case in compliance with certain other conditions and restrictions,
including the Issuer's, Bermuda Holdings' and the Trustee's right in certain
cases to require the delivery of opinions of counsel, certifications and other
information prior to any such transfer. Old Notes which remain outstanding after
consummation of the Exchange Offer will continue to bear a legend reflecting
such restrictions on transfer. In addition, upon consummation of the Exchange
Offer, holders of Old Notes which remain outstanding will not be entitled to any
rights to have the resale of such Old Notes registered under the Securities Act
or to any similar rights under the Registration Rights Agreement. Neither the
Issuer nor Bermuda Holdings currently intends to register under the Securities
Act the resale of any Old Notes which remain outstanding after consummation of
the Exchange Offer.
To the extent that Old Notes are tendered and accepted in the Exchange
Offer, a holder's ability to sell untendered Old Notes could be adversely
affected. In addition, although the Old Notes are eligible for trading in the
Depositary's Same-Day
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
Funds Settlement System, to the extent that Old Notes are tendered and accepted
in connection with the Exchange Offer, any trading market for Old Notes which
remain outstanding after the Exchange Offer could be adversely affected.
The Exchange Notes and any Old Notes which remain outstanding after
consummation of the Exchange Offer will constitute a single series of debt
securities under the Indenture and, accordingly, will vote together as a single
class for purposes of determining whether holders of the requisite percentage in
outstanding principal amount thereof have taken certain actions or exercised
certain rights under the Indenture. See "Description of Exchange Notes--
General."
The Old Notes provide that, in the event the Exchange Offer is not
consummated or a Shelf Registration Statement (as defined herein) is not
declared effective on or prior to November 18, 1998, then the annual interest
rate borne by the Old Notes shall be increased to 7.25%. If the Exchange Offer
is not consummated or a Shelf Registration Statement is not declared effective
by February 18, 1999, then the annual interest rate borne by the Old Notes shall
be increased to 7.5%. Upon consummation of the Exchange Offer or the
effectiveness of such Shelf Registration Statement, the interest rate borne by
the Old Notes will return to 7%.
- --------------------------------------------------------------------------------
12
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus the
following should be considered carefully in evaluating an investment in the
Exchange Notes offered hereby.
HOLDING COMPANY STRUCTURE; DIVIDEND RESTRICTIONS
The Issuer is a holding company whose primary assets are the capital stock
of Terra Nova, Octavian and Terra Nova Capital, and Bermuda Holdings is a
holding company whose primary assets are the capital stock of the Issuer and
Terra Nova (Bermuda) and a loan that has been extended to Terra Nova SAS, the
direct parent of Corifrance. Accordingly, substantially all of the Issuer's cash
flow is derived from dividends from Terra Nova and substantially all of the
Bermuda Holdings' cash flow is derived from dividends from the Issuer and Terra
Nova (Bermuda) and interest paid on the Terra Nova SAS loan. The payment of
dividends and other payments by Terra Nova and Terra Nova (Bermuda) is subject
to restrictions under U.K. law and Bermuda law, respectively.
Under U.K. company law, Terra Nova may not declare or pay a dividend except
from its distributable profits, which is its accumulated realized profits (so
far as not previously used by distribution or capitalization) less its
accumulated realized losses (so far as not previously written off in a reduction
or reorganization of capital). U.K. insurance company law and regulation require
an insurance company, such as Terra Nova, to maintain a minimum level of
solvency and provide that such a company may only pay a dividend to the extent
that the dividend would not reduce such company's net assets below its minimum
level of solvency. In addition, before Terra Nova may declare or pay any
dividend, it is required to give 14 days' advance notice to the U.K. HM Treasury
- -- Insurance Directorate Department of Trade and Industry (the "Treasury"),
which may direct that no such declaration or payment be made.
Under Bermuda insurance law, Terra Nova (Bermuda) is prohibited from
declaring or paying any dividends during any financial year if it is in breach
of its "minimum solvency margin" or "minimum liquidity ratio" or if the
declaration or payment of such dividends would cause it to fail to meet such
margin or ratio. Furthermore, if Terra Nova (Bermuda) fails to meet its minimum
solvency margin or minimum liquidity ratio on the last day of any financial
year, it will be prohibited, without the approval of the Minister of Finance of
Bermuda (the "Minister"), from declaring or paying any dividends during the next
financial year. In addition, under The Companies Act 1981, a company may not pay
a dividend or make a distribution out of contributed surplus if there are
reasonable grounds for believing that (a) the company is, or would be, after the
payment unable to pay its liabilities as they become due, or (b) the realizable
value of the company's assets would thereby be less than the aggregate of its
liabilities and its issued share capital and share premium accounts.
There can be no assurance as to the exact amount of dividend payments, if
any, which the Treasury will permit Terra Nova to make in the future or as to
what the standards for dividend payments by Terra Nova or Terra Nova (Bermuda)
will be in the future. Moreover, the surplus of each of Terra Nova and Terra
Nova (Bermuda) will be affected by the value of its respective investment
portfolio, which is sensitive to interest rate changes.
Because the Issuer and Bermuda Holdings are holding companies, the Exchange
Notes and the Guarantee are effectively subordinated to all existing and future
liabilities of their respective insurance company subsidiaries which at March
31, 1998 consisted principally of insurance liabilities of an aggregate $2.0
billion calculated in accordance with GAAP.
ABILITY TO SERVICE INTEREST AND PRINCIPAL PAYMENTS ON THE SENIOR NOTES
The Issuer expects to satisfy its interest payment obligations with respect
to the Senior Notes from dividend payments made by Terra Nova as well as capital
subscriptions and other payments from Bermuda Holdings. Similarly, Bermuda
Holdings' ability to satisfy its obligations under the Guarantee or to make
capital subscriptions and other payments to the Issuer is based on dividend
payments by the Issuer or Terra Nova (Bermuda). Neither the Issuer nor Bermuda
Holdings intends to establish a sinking fund with respect to the Senior Notes.
To the extent dividends or other monies received by the Issuer or Bermuda
Holdings are insufficient to make, directly or through the Guarantee, interest
payments on the Senior Notes and principal payments on the Senior Notes at
maturity or upon the occurrence of an Event of Default (as defined herein), the
Company anticipates that it may have to borrow additional funds or sell some of
its assets. There can be no assurance that such actions could be effected on
satisfactory terms, in a timely manner or at all, that they would enable the
Issuer or Bermuda Holdings to make any of the foregoing payments on the Senior
Notes or that any such actions would be permitted under the Indenture.
13
<PAGE>
LEVERAGE
As of March 31, 1998, after adjustment to give effect to the issuance and
sale of the Senior Notes and the Debt Tender, the Company had outstanding
indebtedness of approximately $175 million and shareholders' equity of $494.2
million.
The indenture pursuant to which the 1997 Notes were issued, and the
Indenture (collectively, the "Indentures") permit the Company to incur
additional indebtedness. Management believes that cash flow from operations,
together with other available sources of liquidity, will be adequate to permit
the Issuer to make required payments of principal and interest on its
indebtedness and to fund the working capital requirements of its operating
subsidiaries, although there can be no assurance that this will be the case. To
the extent that cash flow from operations is insufficient to satisfy the
Company's cash requirements, the Company may seek to obtain funds from
additional borrowings, sell a portion of the Company's business, investment
securities or other assets, engage in other transactions, raise additional
equity capital or acquire other businesses that would provide cash flow (in all
such cases to the extent permitted by the Indentures). There can be no assurance
that such actions could be effected on satisfactory terms, in a timely manner or
at all, that they would enable the Issuer or Bermuda Holdings to make any of the
payments due on the Senior Notes or that any such actions would be permitted
under the Indentures.
The Company's leverage could make the Company vulnerable to changes in
general economic conditions and impair the Company's ability to obtain
additional financing for working capital, acquisitions or general corporate
purposes. In addition, as noted above, Bermuda Holdings and the Issuer are
dependent on dividend payments from subsidiaries to meet their obligations,
including obligations under the Senior Notes.
CYCLICALITY OF INSURANCE AND REINSURANCE INDUSTRY; INDUSTRY DEVELOPMENTS
The property, casualty and marine insurance and reinsurance industry has a
history of being highly cyclical. Demand for reinsurance is influenced
significantly by underwriting results of primary property, casualty and marine
insurers and prevailing general economic and market conditions, all of which
affect liability retention decisions of primary insurers and reinsurance premium
rates. The supply of insurance and reinsurance is related directly to prevailing
prices and levels of surplus capacity which, in turn, fluctuate in response to
changes in rates of return on investments being realized in the property,
casualty and marine insurance and reinsurance industry.
As a result of the catastrophe losses suffered during the late 1980s and
the early 1990s and the contraction in reinsurance capacity caused by the
withdrawal of a number of the Company's competitors, property catastrophe
reinsurance rates hardened significantly and retentions increased sharply during
the period 1991 through 1993. In 1994 through 1997, property catastrophe
reinsurance rates fell from the strong levels of 1993. Management believes, in
light of its experience with the Company's renewals for 1998 business that
premium rates can be expected to decline in 1998 in the absence of a major
catastrophe event, but that rates and retention levels in the near future are
likely to remain higher than those experienced in 1992.
Premium rates for U.S. casualty insurance and reinsurance have generally
declined since 1990, primarily because of more predictable forms of coverage,
such as claims made, and the effects of lower inflationary expectations. This
has resulted in more competitive conditions which have continued in 1998.
Since the substantial rate and deductible increases for marine insurance in
the 1992 and 1993 underwriting years, prices generally stabilized in 1994 and
1995 and fell in 1996 and 1997. Management believes that increased competition
will lead generally to a further decline in rates in 1998. Increased deductibles
play an important role in reducing the number of very small claims. In the past,
this business was characterized by large volumes of very small claims, arising
from very low levels of deductibles which had remained unchanged for a number of
years, during which repair costs rose due to inflation and currency
fluctuations.
There can be no assurance that rates and/or underwriting terms and
conditions will not deteriorate further or at other times in the future as a
result of additional capital provided by recent or future market entrants or for
other reasons. Consolidations within the insurance industry may also reduce the
demand for reinsurance, which may adversely affect rates and/or underwriting
terms and conditions.
COMPETITION
The property and casualty insurance and reinsurance industry is highly
competitive. The Company competes for its business in the United States and
internationally with other Lloyd's syndicates, other London Market companies,
other
14
<PAGE>
domestic Bermuda reinsurers, domestic United States insurers and reinsurers and
other international insurers and reinsurers, many of whom are larger and have
greater financial resources than the Company. Additionally, other well-
capitalized insurers and reinsurers could start writing, or increase their
writing of, the classes of business in which the Company is primarily engaged.
Competition in the classes of business which the Company writes is based on
many factors, including the perceived overall financial strength of the insurer
or reinsurer, claims paying ability rating, premiums charged and other terms and
conditions, services provided, reputation and perceived technical ability and
experience of staff. Management of the Company believes that its principal
competitive strengths are its management and operational flexibility, its
expertise in risk assessment and underwriting skills and its relationships with
Lloyd's brokers, other leading brokers and reinsurance intermediaries.
Ratings have become an increasingly important factor in establishing the
competitive position of insurance and reinsurance companies. The Company
carries A, A and A+ claims paying ability ratings by S&P, A.M. Best and Duff &
Phelps, respectively, which is lower than those held by some of its principal
competitors. S&P and Duff & Phelps ratings range from a high "AAA" to a low
"CCC", while A.M. Best ratings range from a high "A++" to a low "C-."
Claims paying ability ratings are based upon a review of publicly available
information and communications between rating agency analysts and the insurance
company's management. Such ratings are the opinion of the rating agency giving
the rating and are not directed toward the protection of investors.
ADEQUACY OF LOSS RESERVES
The Company establishes loss reserves for the ultimate payment of all
losses and loss adjustment expenses (LAE) incurred with respect to its business.
The loss and LAE liabilities consist of two components: case reserves and
incurred but not reported (IBNR) reserves. Case reserves are estimates of future
loss payments with respect to insured events which have been reported to the
insurer. These reports may be made formally by the cedent or informally by other
means, such as evaluation of claims by attorneys. The Company determines case
reserves on a contract by contract basis. The amount reserved is the amount
expected to be ultimately paid and is not discounted or otherwise adjusted for
the time value of money. IBNR reserves are actuarially determined and reflect
(i) the estimated ultimate loss amount which will be paid by the insurer and
(ii) an estimate of possible changes in the value of those claims which have
already been reported to the insurer. The particular method of setting IBNR
reserves depends upon the class of business involved. The specific techniques
involve the use of projections and models based on the Company's or the relevant
market's experience and exposure. IBNR reserves reflect a margin for the
uncertainty involved as determined by sensitivity tests. While management
believes that the Company's reserves for losses and LAE are adequate, there can
be no assurances that the Company's ultimate losses and LAE will not deviate,
perhaps substantially, from the estimates reflected in its financial statements.
If the Company's reserves should prove to be inadequate, the Company will be
required to increase reserves, which could have a material adverse effect on the
Company's financial condition.
REGULATION
Terra Nova is a U.K. insurance company authorized by the Treasury to carry
on insurance business (including reinsurance) in the U.K. and is subject to
regulation and supervision in the U.K. by the Treasury. The Insurance Companies
Act 1982, as amended, imposes on U.K. insurance companies numerous requirements,
including capital, solvency, liquidity and management standards and auditing and
reporting requirements, and further grants to the Treasury powers to supervise,
investigate and intervene in the affairs of U.K. insurance companies. As is
often the practice of the Treasury in connection with a substantial change of
control of a U.K. insurance company, Terra Nova is currently subject to a Notice
of Requirements issued by the Secretary of State for Trade and Industry, the
predecessor to the Treasury, on May 22, 1995 (as modified by notices dated April
3 and 4, 1996) which, among other things, (i) requires 14 days' advance notice
of the declaration or payment of dividends, which declaration or payment may be
limited or prohibited by the Treasury, (ii) requires Terra Nova to give notice
and, in some instances, obtain Treasury consent, prior to entering into certain
transactions with connected persons and (iii) imposes restrictions, subject to
obtaining Treasury consent, on the type of investments which Terra Nova can
make. Each of Terra Nova Capital and Octavian are subject to regulation and
supervision by Lloyd's, including the imposition of capital, solvency and
management standards.
Terra Nova (Bermuda) is a registered Bermuda insurance company and is
subject to regulation and supervision in Bermuda. The Insurance Act 1978, as
amended, imposes on Bermuda insurance companies capital, solvency and liquidity
standards and auditing and reporting requirements.
15
<PAGE>
Neither Terra Nova nor Terra Nova (Bermuda) is registered or licensed as an
insurance company in any jurisdiction in the United States. Nevertheless, each
state of the United States regulates to an extent the sale of insurance by
foreign insurers such as Terra Nova and Terra Nova (Bermuda). The administration
of insurance laws and regulations in the United States is vested in state
agencies that have broad powers and are concerned primarily with the protection
of policyholders. The status of foreign insurance companies within the insurance
regulatory framework in the United States has been subject to increased scrutiny
by the National Association of Insurance Commissioners (the "NAIC"), state
legislatures and insurance regulators, as well as the U.S. Congress.
While it is not possible to predict the future impact of changing law or
regulation on the Company's operations, such changes could have a material
adverse effect on the Company and the insurance industry in general.
TAX MATTERS
The Company believes that neither Terra Nova nor Terra Nova (Bermuda) will
be subject to U.S. tax, other than U.S. excise tax on premiums of Terra Nova
(Bermuda) with respect to risks located in the United States and withholding tax
on certain U.S. source income, because neither engages in a trade or business in
the United States. However, since definitive identification of activities that
constitute being engaged in a U.S. trade or business is not provided by the
Internal Revenue Code (the "Code") or Treasury Regulations or court decisions,
there can be no assurance that the Internal Revenue Service (the "Service") will
not contend that Terra Nova (Bermuda) or Terra Nova is engaged in a U.S. trade
or business.
If Terra Nova (Bermuda) were considered to be engaged in a U.S. trade or
business, it would be subject to U.S. federal income tax at regular corporate
rates on income attributable to its U.S. trade or business, except to the extent
provided by the income tax treaty between the U.S. and Bermuda (the "Bermuda
Treaty"), and might also be subject to a 30% "branch profits" tax. There can be
no assurance that Terra Nova (Bermuda) is entitled, or in the future will be
entitled, to benefits under the Bermuda Treaty. However, if Terra Nova (Bermuda)
were so entitled and were considered to be engaged in a U.S. trade or business,
it would not be subject to U.S. federal income tax at regular corporate rates
except on income attributable to a U.S. permanent establishment. Terra Nova
(Bermuda) might, however, be subject to the U.S. branch profits tax if it were
engaged in a U.S. trade or business, even if it did not have a permanent
establishment in the United States. Although the Company believes that Terra
Nova (Bermuda) does not have a U.S. permanent establishment, there can be no
assurance that the Service will not contend otherwise.
If any subsidiary of UK Holdings were considered to be engaged in a U.S.
trade or business, that entity would be subject to U.S. federal income tax at
regular corporate rates on income attributable to its U.S. trade or business and
might also be subject to branch profits tax, except to the extent provided by
the income tax treaty between the U.S. and U.K. (the "U.K. Treaty"). The Company
believes that the subsidiaries of UK Holdings will be qualified residents of the
U.K. entitled to benefits under the U.K. Treaty and that, accordingly, even if
any of those entities were considered to be engaged in a U.S. trade or business,
it would be subject to U.S. federal income tax at regular corporate rates only
on income attributable to a U.S. permanent establishment and would not be
subject to the branch profits tax. Although the Company believes that none of
the subsidiaries of UK Holdings has a U.S. permanent establishment, there can be
no assurance that the Service will not contend otherwise.
The Issuer also believes that its French subsidiary, Corifrance, will
likely be entitled to the benefits of the Income Tax Convention between the
United States and France, with the result that Corifrance will not be subject to
income tax arising from the conduct of a U.S. trade or business unless such
income is effectively connected with a U.S. permanent establishment of
Corifrance. Corifrance does not believe that it maintains a permanent
establishment in the U.S.
If the Company or any of its subsidiaries were considered to be subject to
U.S. federal income tax in any of the ways described above, the Company's
results of operations could be materially adversely affected.
ABSENCE OF PUBLIC MARKET FOR THE EXCHANGE NOTES
There is no existing market for the Exchange Notes and there can be no
assurance as to the liquidity of any markets that may develop for the Exchange
Notes or the ability of the holders to sell their Exchange Notes, as the case
may be. Future trading prices of the Exchange Notes will depend on many factors
including, among other things, general economic conditions, government
legislation or regulation, prevailing interest rates, the Issuer's and Bermuda
Holdings' operating results, and the market for similar securities.
16
<PAGE>
ENFORCEMENT OF JUDGMENTS
All of the directors and executive officers of the Issuer, all of the
executive officers of Bermuda Holdings, five of the eleven directors of Bermuda
Holdings, and the experts named herein are non-residents of the United States,
and all or a substantial portion of the assets of the Issuer, Bermuda Holdings
and most such persons are located outside the United States. It may not be
possible for investors to effect service of process within the United States
upon such persons or to enforce against any of them, the Issuer or Bermuda
Holdings judgments of courts of the United States predicated upon the civil
liability provisions of the federal or state securities laws of the United
States. The Issuer and Bermuda Holdings have been advised by their respective
counsel, Clifford Chance and Conyers, Dill & Pearman, that there is doubt as to
the enforceability in the United Kingdom and in Bermuda, in original actions or
in actions for enforcement of judgments of United States courts, of civil
liabilities predicated solely upon such securities laws.
INVESTMENT PERFORMANCE
The Company's investment portfolio consists primarily of investment grade
securities with fixed maturities. The market value of the Company's investments
varies depending on economic and market conditions. Absent other factors, the
market values of fixed maturity securities are likely to decline as interest
rates rise. The Company may, from time to time, for business or regulatory
reasons, be required to sell certain of its investments at a time when their
market value is less than the cost of such investments.
17
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated financial information
with respect to the Company and Terra Nova, its predecessor, for the periods
indicated. This information should be read in conjunction with the Consolidated
Financial Statements of the Company and related notes thereto and "Management's
Discussion and Analysis of Results of Operations and Financial Condition" which
have been incorporated herein by reference.
In respect of Bermuda Holdings, the selected Statement of Operations Data for
the years ended December 31, 1995, 1996 and 1997 and the selected Balance Sheet
Data as of December 31, 1997 have been derived from the Company's audited
Consolidated Financial Statements incorporated herein by reference. The selected
Statement of Operations Data for the three months ended March 31, 1997 and 1998
and the selected Balance Sheet Data as of March 31, 1998 have been derived from
the Company's unaudited condensed consolidated financial statements incorporated
by reference herein. The financial information for the Company as of March 31,
1998 and for the three month periods ended March 31, 1997 and 1998 is unaudited;
however, in management's opinion, it includes all adjustments (consisting of
only normal recurring adjustments) necessary for a fair presentation of results
for such interim periods. The results of operations for the periods ended March
31, 1997 and 1998 are not necessarily indicative of the operating results for
the full year.
The Selected Statutory Data for Terra Nova for the year ended December 31,
1997 and for the three months ended March 31, 1998 have been derived from the
unaudited return made to the U.K. HM Treasury. The Selected Statutory Data for
Terra Nova (Bermuda) for the year ended December 31, 1997 has been derived from
the audited statutory financial statements of Terra Nova (Bermuda) and for the
three months ended March 31, 1998 has been derived from the unaudited financial
statements of Terra Nova (Bermuda). The respective statutory financial
information is prepared in accordance with the applicable statutory accounting
practices which differ from GAAP.
<TABLE>
<CAPTION>
TERRA NOVA COMPANY
--------------------- -------------------------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1997 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Gross premiums written.................. $ 320,183 $ 359,362 $ 302,658 $ 361,010 $ 550,243 $ 227,656 $ 338,237
Net premiums written.................... 262,019 282,503 246,985 311,166 483,545 183,166 281,845
Net premiums earned..................... 229,510 250,434 251,900 278,756 419,069 78,463 134,584
Net investment income................... 46,888 51,575 74,478 78,130 85,130 19,989 22,582
Realized net capital gains on sales
of investments......................... 40,533 13,898 9,384 11,750 15,333 5,930 11,388
Total revenues.......................... 314,877 320,722 336,872 378,059 533,835 108,335 171,917
Income from continuing
operations before income taxes and
minority interests..................... 81,869 50,737 62,433 82,668 91,049 23,482 30,052
Income tax expense ..................... 27,586 16,458 16,630 17,777 17,639 5,338 5,629
Minority interest in income of
consolidated subsidiaries.............. -- -- 2,552 985 -- -- --
Income from continuing
operations............................. 54,283 34,279 43,251 63,906 73,410 18,144 24,423
Net income ............................. 51,634 27,449 43,251 63,906 73,410 18,144 24,423
Dividends on the convertible
redeemable preferred shares............ -- -- 3,700 1,088 -- -- --
Net income to common
shareholders........................... 51,634 27,449 39,551 62,818 73,410 18,144 24,423
BALANCE SHEET DATA (AT END OF PERIOD)...
Total investments and cash.............. $1,475,556 $1,247,538 $1,497,230
Total assets............................ 2,220,134 1,987,536 2,481,639
Unpaid losses and loss adjustment
expenses............................... 1,157,724 1,046,043 1,184,709
Long-term debt.......................... 175,000 100,000 175,000
Total shareholders' equity.............. 481,888 394,926 505,958
</TABLE>
(Continued on following page)
18
<PAGE>
<TABLE>
<CAPTION>
TERRA NOVA COMPANY
-------------------------- ------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1993 1994 1995 1996 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
(Continued from previous page)
SELECTED STATUTORY DATA (AT END OF PERIOD)(1)
Terra Nova--Capital and surplus................. $ 231,674
Terra Nova (Bermuda)--Capital and
surplus........................................ 260,612
OTHER DATA
EBITDA(2)........................................ 82,564 51,669 72,889 97,032 108,508
Adjusted EBITDA(3)............................... 42,031 37,771 63,505 85,282 93,175
Loss and loss adjustment expense ratio(4)........ 71.24% 76.53% 71.10% 64.00% 67.41%
Underwriting expense ratio(5).................... 29.15 30.25 32.71 33.20 30.81
-------- -------- -------- -------- ----------
Combined ratio(6)................................ 100.39% 106.78% 103.81% 97.20% 98.22%
======== ======== ======== ======== ==========
Operating ratio(7)............................... 79.96% 86.19% 74.24% 69.13% 77.91%
======== ======== ======== ======== ==========
<CAPTION>
----------------------
THREE MONTHS
ENDED MARCH 31,
----------------------
1997 1998
<S> <C> <C>
(Continued from previous page)
SELECTED STATUTORY DATA (AT END OF PERIOD)(1)
Terra Nova--Capital and surplus................. $ 237,446
Terra Nova (Bermuda)--Capital and
surplus........................................ 263,567
OTHER DATA
EBITDA(2)........................................ 27,966 35,262
Adjusted EBITDA(3)............................... 22,036 23,874
Loss and loss adjustment expense ratio(4)........ 65.34% 70.74%
Underwriting expense ratio(5).................... 33.92 28.76
-------- --------
Combined ratio(6)................................ 99.26% 99.50%
======== ========
Operating ratio(7)............................... 73.78% 82.72%
======== ========
</TABLE>
(1) Capital and surplus under U.K. and Bermuda law, respectively.
(2) EBITDA consists of earnings before interest, taxes, minority interest,
depreciation and amortization. EBITDA is presented here not as a
measure of operating results, but rather as a measure of the Company's
cash flow and debt service ability, and should not be considered as an
alternative to net earnings and cash flows determined in accordance
with GAAP. Because the Company's ability to obtain dividends from its
insurance subsidiaries may be subject to certain restrictions, EBITDA
is not necessarily indicative of the Company's ability to service its
indebtedness.
(3) Adjusted EBITDA is comprised of EBITDA excluding realized gains or
losses on sales of investments.
(4) Loss and loss adjustment expense ratio represents the sum of losses
and loss adjustment expenses as a percentage of net premiums earned.
(5) Underwriting expense ratio represents underwriting expenses as a
percentage of net premiums earned.
(6) Combined ratio represents the sum of the loss and loss adjustment
expense ratio and underwriting expense ratio.
(7) Operating ratio represents the combined ratio less the ratio of net
investment income to net premiums earned.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges
for Bermuda Holdings and its consolidated subsidiaries for each of the last
five years.
<TABLE>
<CAPTION>
TERRA NOVA COMPANY
--------------------------------------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------------------------------
1993 1994 1995 1996 1997 1997 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
NM NM 7.07 7.64 7.25 7.44 7.75
</TABLE>
In determining the ratio of earnings to fixed charges, earnings are defined
as earnings from continuing operations before income taxes and fixed charges.
Fixed charges consist of the total of interest on all indebtedness, amortization
of deferred debt issuance costs and one-third of operating lease rental expense
deemed representative of the interest factor. The ratio of earnings to fixed
charges has not been adjusted to reflect minority interests because the shares
of capital stock which comprise such minority interests are not entitled to
dividends until debt service payments on the 1997 Senior Notes and the Senior
Notes have been made. Terra Nova had no indebtedness through December 21, 1994,
the date of its acquisition by Bermuda Holdings.
19
<PAGE>
USE OF PROCEEDS
Neither the Issuer nor Bermuda Holdings will receive any cash proceeds from
the issuance of the Exchange Notes offered hereby. The net proceeds received
from the issuance and sale of the Old Notes, together with available cash of the
Issuer, were used to fund the Debt Tender.
CAPITALIZATION
The table below summarizes the capitalization of the Company as of March
31, 1998 and as adjusted for the offering of the Senior Notes and the Debt
Tender, including the estimated costs of $11.8 million, net of tax, relating to
the Debt Tender.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------
ACTUAL AS ADJUSTED
<S> <C> <C>
(DOLLARS IN MILLIONS)
Senior Notes.................................. $ 0.0 $100.0
1995 Senior Notes............................. 100.0 0.0
1997 Senior Notes............................. 75.0 75.0
Stockholders' Equity:
Common Stock............................... 150.5 150.5
Stock Held in Trust........................ (9.5) (9.5)
Deferred equity compensation............... 4.0 4.0
Additional paid-in capital................. 111.7 111.7
Retained earnings.......................... 193.0 181.2
Accumulated other comprehensive income/(1)/ 56.3 56.3
------ ------
Total Stockholders' Equity.................... 506.0 494.2
------ ------
Total Capitalization.......................... $681.0 $669.2
====== ======
</TABLE>
________________
(1) Following the implementation of SFAS No. 130 "Reporting Comprehensive
Income," accumulated other comprehensive income includes unrealized
appreciation of investments and cumulative translation adjustments,
net of tax.
20
<PAGE>
DESCRIPTION OF EXCHANGE NOTES
GENERAL
The Old Notes were and the Exchange Notes will be issued pursuant to an
Indenture (the "Indenture"), dated as of May 18, 1998, among the Issuer, Bermuda
Holdings and The Chase Manhattan Bank, as trustee (the "Trustee"). The Indenture
has been filed as an exhibit to the registration statement (the "Registration
Statement") of which this Prospectus forms a part. The Indenture will be
qualified by the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act") upon the effectiveness of the Registration Statement. The terms of the
Exchange Notes will include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act. The Exchange Notes are
subject to all such terms, and holders of Exchange Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of certain provisions of the Indenture does not purport to be complete
and is qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below. The following description of
the terms of the Exchange Notes and the guarantee thereof by Bermuda Holdings
pursuant to the Indenture or pursuant to guarantees endorsed on the Exchange
Notes (both forms of guarantee are hereinafter referred to collectively as the
"Guarantee") sets forth certain terms and provisions of the Exchange Notes and
the Guarantee. The definitions of certain general terms used in the following
summary are set forth below under "--Certain Definitions."
The Exchange Notes will rank senior in right of payment to all subordinated
indebtedness of the Issuer and pari passu in right of payment with all
indebtedness of the Issuer not expressly subordinated or secured. The Exchange
Notes will be fully and unconditionally guaranteed on a senior basis by Bermuda
Holdings, and the obligations of Bermuda Holdings under the Guarantee will rank
senior in right of payment to all subordinated indebtedness of Bermuda Holdings
and pari passu in right of payment with all indebtedness of Bermuda Holdings not
expressly subordinated or secured.
The Exchange Notes and the Old Notes are sometimes referred to as,
collectively, the "Senior Notes" and, individually, a "Senior Note."
The Old Notes and the Exchange Notes will constitute a single series of
debt securities under the Indenture. If the Exchange Offer is consummated,
holders of Old Notes who do not exchange their Old Notes for Exchange Notes will
vote together with the holders of Exchange Notes for all relevant purposes under
the Indenture. In that regard, the Indenture requires that certain actions by
the holders thereunder (including acceleration following an "Event of Default")
must be taken, and certain rights must be exercised, by specified minimum
percentages of the aggregate principal amount of the outstanding debt
securities. In determining whether holders of the requisite percentage and
principal amount have given any notice, consent or waiver or taken any other
action permitted under the Indenture, any Old Notes which remain outstanding
after the Exchange Offer will be aggregated with the Exchange Notes, and the
holders of such Old Notes and Exchange Notes will vote together as a single
series for all such purposes. Accordingly, all references herein to specified
percentages in aggregate principal amount of the outstanding Senior Notes shall
be deemed to mean, at any time after the Exchange Offer is consummated, such
percentage in aggregate principal amount of the Old Notes and Exchange Notes
then outstanding.
The Old Notes were issued and the Exchange Notes will initially be issued
as one or more Global Notes, which Exchange Notes will be deposited with the
Custodian, as custodian thereof for the Depositary, pursuant to the Deposit and
Custody Agreement, dated as of May 18, 1998 (the "Depositary Agreement"), among
the Issuer, Bermuda Holdings, the Custodian and the Depositary. For a
description of the Depositary Agreement, see "Description of Depositary
Agreement." The Depositary will issue one or more Global Receipts representing
the Exchange Notes, each of which the Depositary will deliver to and register in
the name of DTC or its nominee. Unless and until all of the beneficial interests
in the Global Notes ("Book-Entry Interests") are exchanged for Definitive Senior
Notes (as defined herein), the depositary interest to be held by DTC may not be
transferred except as a whole by DTC to a nominee of DTC or by a nominee of DTC
to DTC or another nominee of DTC or by DTC or any such nominee to a successor of
DTC or a nominee of such successor.
The Issuer intends to list the Exchange Notes on the New York Stock
Exchange, Inc.
21
<PAGE>
GUARANTEE
Bermuda Holdings will fully and unconditionally guarantee on a senior basis
to each holder of an Exchange Note the due and punctual payment of the principal
of and any premium and interest on such Exchange Note (and any Additional
Amounts (as defined herein) payable by the Issuer or Bermuda Holdings in respect
thereof) when and as the same shall become due and payable, whether at stated
maturity, by declaration of acceleration, call for redemption or otherwise, in
accordance with the terms of the Exchange Notes and the Indenture. Bermuda
Holdings' obligations under the Guarantee will be as if it were a principal
debtor and not merely a surety, and will be absolute and unconditional,
irrespective of, and will be unaffected by, any invalidity, irregularity or
unenforceability of any Exchange Note or the Indenture, any failure to enforce
the provisions of any Exchange Note or the Indenture, any waiver, modification
or indulgence granted to the Issuer with respect thereto, by the holder of any
Exchange Note or the Trustee, or any other circumstances which may otherwise
constitute a legal or equitable discharge of a surety or guarantor, provided,
however, that, notwithstanding the foregoing, no such waiver, modification or
indulgence shall, without the consent of Bermuda Holdings, increase the
principal amount of an Exchange Note or the interest rate thereon or increase
any premium payable upon redemption thereof.
PRINCIPAL, MATURITY AND INTEREST
The Senior Notes are limited in an aggregate principal amount to $100.0
million. The Senior Notes will mature on May 15, 2008. Interest on the Senior
Notes accrues at the rate of 7% per annum and is payable semi-annually in
arrears in cash on each November 15 and May 15, commencing November 15, 1998
(each, an "Interest Payment Date"), to holders of record on the immediately
preceding November 1 and May 1, respectively. Each Exchange Note will bear
interest from May 18, 1998, the issue date of the Old Notes. Holders of the Old
Notes whose Old Notes are accepted for exchange will not receive any accrued
interest on such Old Notes, and will be deemed to have waived the right to
receive any such accrued interest. Interest is to be computed on the basis of a
360-day year of twelve 30-day months.
OPTIONAL REDEMPTION
The Issuer shall have the right to redeem the Senior Notes, in whole or in
part, at any time and from time to time, subject to the receipt of any consent
required under the terms of any Indebtedness of the Issuer which may be
outstanding from time to time, upon not less than 30 nor more than 60 days
notice, at a redemption price equal to the sum of (i) the principal amount of
the Senior Notes being redeemed, plus accrued and unpaid interest thereon to the
redemption date, and (ii) the Make-Whole Amount, if any, with respect to such
Senior Notes.
"Make-Whole Amount" means, in connection with any optional redemption of
any Senior Notes, the excess, if any, of (i) the sum, as determined by a
Quotation Agent (as defined herein) of the present values of the principal
amount of such Senior Notes, together with scheduled payments of interest from
the redemption date to the Stated Maturity of the Senior Notes, in each case
discounted to the redemption date on a semi-annual basis (assuming a 360-day
year consisting of twelve 30-day months) at the Adjusted Treasury Rate (as
defined herein) over (ii) 100% of the principal amount of the Senior Notes to be
redeemed.
"Adjusted Treasury Rate" means, with respect to any redemption date, the
rate per annum equal to the semi-annual equivalent yield to maturity of the
Comparable Treasury Issue, calculated using a price for the Comparable Treasury
Issue (expressed as a percentage of its principal amount) equal to the
Comparable Treasury Price for such redemption date, calculated on the third
Business Day preceding the redemption date, plus in each case .20%.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Quotation Agent as having a maturity comparable to the remaining
term from the redemption date to the Stated Maturity Date of the Senior Notes
that would be utilized, at the time of selection and in accordance with
customary financial practice, in pricing new issues of corporate debt securities
of comparable maturity to the remaining term of the Senior Notes.
"Quotation Agent" means the Reference Treasury Dealer appointed by the
Issuer. "Reference Treasury Dealer" means: (i) Donaldson, Lufkin & Jenrette
Securities Corporation and its respective successors; provided, however, that if
the foregoing shall cease to be a primary U.S. Government securities dealer in
New York City (a "Primary Treasury Dealer"), the Issuer shall substitute
therefor another Primary Treasury Dealer; and (ii) any other Primary Treasury
Dealer selected by the Indenture Trustee after consultation with the Company.
22
<PAGE>
"Comparable Treasury Price" means, with respect to any redemption date, (i)
the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
Business Day preceding such redemption date, as set forth in the daily
statistical release (or any successor release) published by the Federal Reserve
Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities" or (ii) if such release (or any successor release) is not
published or does not contain such prices on such Business Day, (A) the average
of the Reference Treasury Dealer Quotations for such redemption date, after
excluding the highest and lowest such Reference Treasury Dealer Quotations, or
(B) if the Quotation Agent obtains fewer than three such Reference Treasury
Dealer Quotations, the average of all such Quotations.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the Quotation Agent, of the bid and asked prices for the Comparable Treasury
Issue (expressed in each case as a percentage of its principal amount) quoted in
writing to the Indenture Trustee by such Quotation Agent at 5:00 p.m., New York
City time, on the third Business Day preceding such redemption date.
"Additional Amounts" means such additional amounts as may be necessary in
order that the amount of distributions then due and payable by the Issuer on the
outstanding Senior Notes shall not be reduced as a result of any additional
taxes, duties or other governmental charges to which the Issuer has become
subject as a result of an event described in "--Tax Redemption."
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Senior Notes to be redeemed
at its registered address. Unless the Issuer defaults in payment of the
redemption price, on and after the redemption date interest ceases to accrue on
such Senior Notes called for redemption.
If the Issuer is required to pay any additional taxes, duties or other
governmental charges as a result of an event described in "--Tax Redemption,"
the Issuer will pay on the Senior Notes the Additional Amounts.
TAX REDEMPTION
The Senior Notes may also be redeemed at the option of the Issuer, in whole
but not in part, upon not less than 30 nor more than 60 days' notice given as
provided in the Indenture, at any time at a redemption price equal to 100% of
the principal amount thereof, together with accrued and unpaid interest to the
date fixed for redemption if (a) the Issuer is required to issue Definitive
Senior Notes (other than upon the request of a holder of Book-Entry Interests
following an Event of Default) after using all reasonable efforts to avoid
having to issue such Definitive Senior Notes and the Issuer is or would be so
required in the absence of any applicable tax treaty on the next succeeding
Interest Payment Date to pay Additional Amounts with respect to any of the
Senior Notes as described under "--Payment of Additional Amounts" or (b) the
Issuer or Bermuda Holdings is or would be so required in the absence of any
applicable tax treaty on the next succeeding Interest Payment Date to pay
Additional Amounts with respect to the Senior Notes as described under "--
Payment of Additional Amounts," and, in either case, the payment of such
Additional Amounts cannot be avoided by the use of any reasonable measures
available to the Issuer.
The Issuer or Bermuda Holdings will also pay, or make available for
payment, to holders of Senior Notes on the redemption date any Additional
Amounts (as described, but subject to the exceptions referred to, under "--
Payment of Additional Amounts") resulting from the payment of such redemption
price.
SELECTION AND NOTICE
For information with respect to the redemption of Book-Entry Interests, see
"Description of Depositary Agreement--Redemption or Repurchase." With respect to
any outstanding Definitive Senior Notes, if less than all of the definitive
registered Senior Notes (the "Definitive Senior Notes") are to be redeemed at
any time, selection of Definitive Senior Notes for redemption will be made by
the Trustee on a pro rata basis, by lot or by such other method as the Trustee
deems fair and appropriate and in compliance with the requirements of such
principal national securities exchange, if any, on which the Senior Notes are
listed or, if the Senior Notes are not so listed, on a pro rata basis, by lot or
by such other method as the Trustee deems fair and appropriate; provided that no
Definitive Senior Notes with a principal amount of $1,000 or less shall be
redeemed in part. With respect to any Definitive Senior Notes, notice of
redemption shall be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each holder of Definitive Senior Notes to be
redeemed at its registered address. If any Definitive Senior Note is to be
redeemed in part only, the notice of redemption that relates to such Definitive
Senior Note shall state the portion of the principal amount thereof to
23
<PAGE>
be redeemed. A new Definitive Senior Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof upon
cancellation of the original Definitive Senior Note. On and after the redemption
date, interest will cease to accrue on all Senior Notes or portions thereof
called for redemption. The Issuer or Bermuda Holdings will comply with the
Exchange Act and the rules and regulations of the Commission thereunder to the
extent applicable to any such redemption.
LIENS
The Indenture provides that Bermuda Holdings will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien securing Indebtedness (other than Permitted Liens)
on any property or asset now owned or hereafter acquired, or on any income or
profits therefrom or assign or convey any right to receive income therefrom,
unless all payments due under the Indenture and the Senior Notes are secured on
an equal and ratable basis with (or prior to) the obligations so secured until
such time as such obligations are no longer secured by a Lien.
REPORTS
Whether or not required by the Exchange Act, so long as any Senior Notes are
outstanding, Bermuda Holdings will furnish to the holders of Senior Notes all
financial information that would be required to be contained in a filing with
the Commission on Form 10-K, 10-Q or 8-K if Bermuda Holdings were required to
file such form, including a "Management's Discussion and Analysis of Results of
Operations and Financial Condition," and, with respect to the annual financial
statements only, a report thereon by Bermuda Holdings' independent public
accountants. In addition, whether or not required by the Exchange Act, Bermuda
Holdings will file a copy of all such information and reports with the
Commission for public availability (unless the Commission will not accept such a
filing) and make such information available to investors who request it in
writing. See "Available Information."
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture provides that after the Issue Date, Bermuda Holdings will not,
in any transaction, consolidate with or merge with or into any other Person or,
directly or indirectly, sell, or otherwise dispose of all or substantially all
of its assets in one or more related transactions to any Person or group of
affiliated Persons unless, at the time and after giving effect thereto:
(i)(A) Bermuda Holdings shall be the continuing corporation, or (B)
the Person (if other than Bermuda Holdings) formed by such consolidation,
or into which Bermuda Holdings is merged, or the Person that acquires by
sale or other disposition the assets of Bermuda Holdings, substantially as
an entirety (the "Surviving Entity"), is a corporation duly organized and
validly existing under the laws of the United States, the United Kingdom,
Bermuda, the Republic of Ireland, Barbados, the Channel Islands, the Cayman
Islands or any other jurisdiction that is not materially adverse to the
holders of the Senior Notes and shall, in the case of clause (B), expressly
assume, by supplemental indenture, executed and delivered to the Trustee,
in form reasonably satisfactory to the Trustee, all the obligations of
Bermuda Holdings under the Guarantee and the Indenture;
(ii) immediately before and after such transaction, giving effect to
such transaction, no Default or Event of Default shall have occurred and be
continuing;
(iii) immediately after giving effect to such transaction on a pro
forma basis, the Consolidated Net Worth (after giving pro forma effect to
such transaction but not including the effect of any purchase accounting
adjustments or the accrual of deferred tax liabilities resulting from the
transaction) of Bermuda Holdings (or the Surviving Entity if Bermuda
Holdings is not the continuing obligor with respect to the Guarantee under
the Indenture) is at least equal to the Consolidated Net Worth of Bermuda
Holdings immediately before such transaction;
(iv) if any of the property or assets of Bermuda Holdings would
thereupon become subject to any Lien, the outstanding Senior Notes shall be
secured equally and ratably with (or prior to) the obligation or liability
secured by such Lien, unless Bermuda Holdings could create such Lien
without equally and ratably securing the Senior Notes; and
24
<PAGE>
In connection with any consolidation, merger, transfer or lease contemplated
hereby, Bermuda Holdings shall deliver to the Trustee an officers' certificate
and an opinion of counsel, each stating that such consolidation, merger,
transfer or lease and the supplemental indenture in respect thereto comply with
the provisions described herein and that all conditions precedent provided for
in the Indenture relating to such transaction have been complied with.
Upon any consolidation or merger or any sale, assignment, transfer, lease or
conveyance or other disposition of all or substantially all of the assets of
Bermuda Holdings in accordance with the provisions described in the second
preceding paragraph, the successor Person formed by such consolidation or into
which Bermuda Holdings is merged or to which such sale, assignment, conveyance,
transfer, lease or other disposition is made shall succeed to, and be
substituted for, and may exercise every right and power of Bermuda Holdings
under the Indenture with the same effect as if such successor Person had been
named as Bermuda Holdings therein. When a successor assumes all the obligations
of its predecessor under the Indenture and the Senior Notes, the predecessor
will be released from those obligations; provided that, in the case of a
transfer by lease, the predecessor corporation shall not be released from the
payment of principal and interest on the Senior Notes.
PAYMENT OF ADDITIONAL AMOUNTS
All payments on the Senior Notes, and all payments pursuant to any Guarantee,
will be made without deduction or withholding, for or on account of any and all
present and future taxes, duties, assessments, or governmental charges of
whatever nature unless the deduction or withholding of such taxes, duties,
assessments or governmental charges is then required by law. If any deduction or
withholding for or on account of any present or future taxes, assessments or
other governmental charges of the U.K., Bermuda or any relevant jurisdiction or
any political subdivision or taxing authority thereof or therein (the "Relevant
Jurisdiction") shall at any time be required in respect of any amounts to be
paid under the Senior Notes or under the Guarantee, the Issuer or Bermuda
Holdings, as applicable, will pay or cause to be paid such additional amounts
("Additional Amounts") as may be necessary in order that the net amounts
received by a holder of a Senior Note after such deduction or withholding shall
be not less than the amounts specified in such Senior Note to which such holder
is entitled; provided, however, that the Issuer or Bermuda Holdings, as
applicable, shall not be required to make any payment of Additional Amounts for
or on account of:
(a) any tax, assessment or other governmental charge which would not
have been imposed but for (i) the existence of any present or former
connection between such holder (or between a fiduciary, settlor,
beneficiary, member or shareholder of, or possessor of a power over, such
holder, if such holder is an estate, nominee, trust, partnership or
corporation), otherwise than merely by the holding of a Senior Note or the
receipt of amounts payable in respect of such Senior Notes, and any
Relevant Jurisdiction or such holder being subject to the jurisdiction of
any Relevant Jurisdiction, including, without limitation, such holder (or
such fiduciary, settlor, beneficiary, member, shareholder or possessor)
being or having been a citizen or resident thereof or being or having been
present or engaged in trade or business therein or having or having had a
permanent establishment therein or (ii) the presentation of the Senior Note
(where presentation is required) for payment on a date more than 30 days
after the date on which such payment became due and payable or the date on
which payment thereof is duly provided for, whichever occurs later, except
to the extent that the holder would have been entitled to Additional
Amounts had the Senior Notes been presented on the last day of such period
of 30 days;
(b) any tax, assessment, or other governmental charge that is imposed
or withheld by reason of the failure to comply by the holder of the Global
Note or, if different, the beneficial owner of the interest payable on the
Global Note, with a timely request of the Issuer addressed to such holder
or beneficial owner to provide information, documents or other evidence
concerning the nationality, residence, identity or connection with the
taxing jurisdiction of such holder or beneficial owner which is required or
imposed by a statute, treaty, regulation or administrative practice of the
taxing jurisdiction as a precondition to exemption from all or part of such
tax, assessment or governmental charge;
(c) payments in respect of Definitive Senior Notes issued at the
request of the holder (including on or after the occurrence of an Event of
Default); or
(d) any combination of items (a), (b) and (c) above;
nor shall Additional Amounts be paid with respect to any payment of the
principal of, or any interest on, any Senior Note to any holder who is a
fiduciary or partnership or other than the sole beneficial owner of such payment
to the extent that a beneficiary or settlor with respect to such fiduciary or
member of such partnership or beneficial owner would not have
25
<PAGE>
been entitled to any Additional Amounts had such beneficiary, settlor, member or
beneficial owner been the holder of such Senior Note.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default (whatever the reason for such Event of Default and whether or not it
shall be voluntary or involuntary or be effected by the operation of law or
pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(i) default in the payment of interest on any Senior Note when the same
becomes due and payable and the continuance of such default for a period of
30 days; or
(ii) default in the payment of the principal of (or premium, if any, on)
any Senior Note at its Maturity; or
(iii) default in the performance, or breach, of any covenant or agreement
of the Issuer or Bermuda Holdings under the Indenture (other than the
obligations specified in (i), (ii) and (viii)), and continuance of such
default or breach for a period of 60 days after there has been given, by
registered or certified mail, to the Issuer or Bermuda Holdings, as the case
may be, by the Trustee or to the Issuer or Bermuda Holdings, as the case may
be, and the Trustee by the holders of at least 25% in principal amount of the
outstanding Senior Notes a written notice specifying such default or breach
and stating that such notice is a "Notice of Default"; or
(iv)(A) an event of default shall have occurred under any mortgage, bond,
indenture, loan agreement or other document evidencing any issue of
Indebtedness of Bermuda Holdings or any Restricted Subsidiary for money
borrowed (or the payment of which is guaranteed by Bermuda Holdings or any of
its Restricted Subsidiaries), which issue has an aggregate outstanding
principal amount of not less than $10.0 million, and such default shall have
resulted in such Indebtedness becoming, whether by declaration or otherwise,
due and payable prior to the date on which it would otherwise become due and
payable, or (B) a default in any payment when due at final Stated Maturity of
any such Indebtedness outstanding in an aggregate principal amount of not
less than $10.0 million and, in each case, 10 Business Days shall have
elapsed after such event during which period such event shall not have been
cured or rescinded or such Indebtedness shall not have been satisfied; or
(v) final judgments or orders are rendered against Bermuda Holdings, the
Issuer or any Restricted Subsidiary by a court or regulatory agency of
competent jurisdiction which require the payment in money, either
individually or in an aggregate amount, that is more than $10.0 million
(other than any judgment to the extent a reputable non-affiliated insurance
company has accepted liability) and such judgment or order shall not be
discharged and either (A) any creditor shall have commenced an enforcement
proceeding upon such judgment or order, which enforcement proceeding shall
have remained unstayed for a period of 10 days, or (B) a period of 60 days
during which a stay of enforcement shall not be in effect shall have elapsed
following the date on which any period for appeal has expired; or
(vi) a decree or order is entered (A) for relief in respect of the Issuer,
Bermuda Holdings or any Principal Insurance Subsidiary in an involuntary case
or other bankruptcy proceeding under applicable law, or (B) adjudging the
Issuer, Bermuda Holdings or any Principal Insurance Subsidiary a bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment or composition
of or in respect of the Issuer, Bermuda Holdings or any Principal Insurance
Subsidiary under applicable law, or appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of
the Issuer, Bermuda Holdings or any Principal Insurance Subsidiary or of any
substantial part of any of their properties, or ordering the winding up or
liquidation of any of their affairs, and any such decree or order remains
unstayed and in effect for a period of 60 consecutive days; or
(vii) the Issuer, Bermuda Holdings or any Principal Insurance Subsidiary
institutes a voluntary case or proceeding under applicable bankruptcy,
insolvency, reorganization or similar law, or any other case or proceedings
to be adjudicated a bankrupt or insolvent, or the Issuer, Bermuda Holdings or
any Principal Insurance Subsidiary files a petition or answer or consent
seeking reorganization or relief under applicable bankruptcy, insolvency,
reorganization or similar law, or consents to the filing of any such petition
or to the appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of
any of the Issuer, Bermuda Holdings or any Principal Insurance Subsidiary or
of any substantial part of its property, or makes an assignment for the
benefit of creditors, or admits in writing its inability to pay its debts
generally as they become due or takes corporate action in furtherance of any
such action; or
26
<PAGE>
(viii) default in the performance, or breach, of the provisions described
under "--Merger, Consolidation or Sale of Assets."
If any Event of Default (other than an Event of Default described in (vi) or
(vii) above) occurs and is continuing, the Trustee or the holders of at least
25% in principal amount of the outstanding Senior Notes, by written notice to
the Issuer (and to the Trustee, if such notice is given by the holders), may,
and the Trustee at the request of such holders shall, declare all unpaid
principal of, premium, if any, and accrued interest on all the Senior Notes to
be due and payable immediately. Notwithstanding the foregoing, in the case of an
Event of Default described in (vi) or (vii) above, all outstanding Senior Notes
will become due and payable without further action or notice. Holders of the
Senior Notes may not enforce the Indenture or the Senior Notes except as
provided in the Indenture. Subject to certain limitations, holders of a majority
in principal amount of the then outstanding Senior Notes may direct the Trustee
in its exercise of any trust or power. The Trustee may withhold from holders of
the Senior Notes notice of any continuing Default or Event of Default (except a
Default or Event of Default relating to the payment of principal or interest) if
the board of directors, the executive committee or a trust committee of
directors and/or Responsible Officers (as defined in the Indenture) of the
Trustee determine in good faith that withholding such notice is in the interest
of the holders.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of at
least a majority in aggregate principal amount of the outstanding Senior Notes,
by written notice to the Issuer and the Trustee, may annul such declaration if:
(i) the Issuer or Bermuda Holdings has paid or deposited with the Trustee a sum
sufficient to pay (A) all sums paid or advanced by the Trustee under the
Indenture and the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel, (B) all overdue interest on all Senior
Notes, (C) the principal of and premium, if any, on any Senior Notes which have
become due otherwise than by such declaration of acceleration and interest
thereon at the rate borne by the Senior Notes and (D) to the extent that payment
of such interest is lawful, interest upon overdue interest at the rate borne by
the Senior Notes; and (ii) all Events of Default, other than the non-payment of
principal of the Senior Notes which have become due solely by such declaration
or acceleration, have been waived as provided in the Indenture or cured. No such
rescission shall affect any subsequent default or impair any right consequent
thereon.
The holders of a majority in aggregate principal amount of the outstanding
Senior Notes by notice to the Trustee may on the behalf of the holders of all of
the Senior Notes waive any existing or past Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of Default
in the payment of interest on, or the principal of, or premium, if any, on the
Senior Notes or in respect of covenants or provisions in the Indenture which
cannot be modified or amended without the consent of the holders of a greater
percentage of the principal amount of, or all of, the outstanding Senior Notes.
The Issuer and Bermuda Holdings are required to deliver to the Trustee
annually a statement regarding compliance with the Indenture, and the Issuer is
required, upon becoming aware of any Default or Event of Default, to deliver to
the Trustee a statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee or stockholder of the Issuer, Bermuda Holdings
or any Subsidiary of Bermuda Holdings, as such, shall have any liability for any
obligations of the Issuer or Bermuda Holdings under the Senior Notes, the
Guarantee or the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each holder of the Senior Notes
by accepting a Senior Note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the Senior Notes. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the Commission that such a waiver is against public
policy.
DEFEASANCE OR COVENANT DEFEASANCE
Under certain conditions, each of the Issuer or Bermuda Holdings may, at its
option and at any time, elect to have the obligations of the Issuer and Bermuda
Holdings discharged with respect to the outstanding Senior Notes and the
Guarantee ("defeasance"). Such defeasance means that the Issuer and Bermuda
Holdings shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Senior Notes and the Guarantee, except for: (i)
the rights of holders of outstanding Senior Notes to receive payments in respect
of the principal of, premium, if any, and
27
<PAGE>
interest on such Senior Notes when such payments are due, or on the redemption
date, as the case may be; (ii) the Issuer's obligations with respect to the
Senior Notes concerning issuing temporary Senior Notes, registration of Senior
Notes, mutilated, destroyed, lost or stolen Senior Notes and the maintenance of
an office or agency for payment and money for security payments held in trust;
(iii) the rights, powers, trust, duties and immunities of the Trustee, and the
Issuer's and Bermuda Holdings' obligations in connection therewith; (iv) the
defeasance provisions of the Indenture; and (v) the obligations of the Issuer
and Bermuda Holdings to pay any Additional Amounts under the Indenture. In
addition, under certain conditions, the Issuer may, at its option and at any
time, elect to have the obligations of Bermuda Holdings and its Subsidiaries
released with respect to certain covenants that are described in the Indenture
("covenant defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or an Event of Default with respect
to the Senior Notes. In the event covenant defeasance occurs, certain events
(not including non-payment, bankruptcy, receivership, rehabilitation and
insolvency events) described under "--Events of Default and Remedies" will no
longer constitute an Event of Default with respect to the Senior Notes.
In order to exercise either defeasance or covenant defeasance: (i) the Issuer
or Bermuda Holdings must irrevocably deposit with the Trustee, in trust, for the
benefit of the holders of the Senior Notes, cash in U.S. dollars, U.S.
Government Obligations, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the
outstanding Senior Notes; (ii) in the case of defeasance, the Issuer shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that: (a) the Issuer has received from, or
there has been published by, the Internal Revenue Service a ruling; or (b) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the holders of the outstanding Senior
Notes will not recognize income, gain or loss for federal income tax purposes as
a result of such defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such defeasance had not occurred; (iii) in the case of covenant
defeasance, the Issuer shall have delivered to the Trustee an opinion of counsel
in the United States reasonably acceptable to the Trustee confirming that the
holders of the outstanding Senior Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such covenant defeasance and will
be subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such covenant defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period ending
on the 91st day after the date of deposit; (v) such defeasance or covenant
defeasance shall not result in a breach or violation of, or constitute a default
under the Indenture, or any other material agreement or instrument to which
Bermuda Holdings is a party or by which Bermuda Holdings is bound; (vi) the
Issuer shall have delivered to the Trustee an opinion of counsel to the effect
that after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally; (vii) the Issuer shall
have delivered to the Trustee an officers' certificate stating that the deposit
was not made by the Issuer or Bermuda Holdings with the intent of preferring the
holders of Senior Notes over the other creditors of the Issuer or Bermuda
Holdings or with the intent of defeating, hindering, delaying or defrauding
creditors of the Issuer or Bermuda Holdings or others; and (viii) the Issuer
shall have delivered to the Trustee an officers' certificate and an opinion of
counsel, each stating that all conditions precedent provided for relating to
either the defeasance or the covenant defeasance, as the case may be, have been
complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
The Indenture provides that the consent of holders of a majority in
outstanding aggregate principal amount of Senior Notes will be required with
respect to amendments which do not affect the payment terms of the Senior Notes
or the amount of Senior Notes whose holders must consent to any amendment or the
relative ranking of the Senior Notes. The latter amendments may only be made
with the consent of each such Senior Note holder.
With the consent of the holders of not less than a majority in principal
amount of the outstanding Senior Notes (including consents obtained in
connection with a tender offer or exchange offer for the Senior Notes), the
Issuer and Bermuda Holdings, each when authorized by a board resolution, and the
Trustee may enter into one or more supplemental indentures for the purpose of
adding any provisions to or changing in any manner the rights of the holders
under the Indenture or of waiving or modifying in any manner the rights of the
holders under the Indenture; provided, however, that no such supplemental
indenture, amendment or waiver shall without the consent of the holder of each
outstanding Senior Note affected thereby: (a) change the Stated Maturity or the
principal of, or any installment of interest on, or change the obligation of the
Issuer or Bermuda Holdings to pay any Additional Amount with respect to, any
Senior Note
28
<PAGE>
or reduce the principal amount thereof or the rate of interest thereon or any
provisions relating to the redemption price of the Senior Notes or the periods
during which redemption may be effected, or change the coin or currency in which
the principal of any Senior Note or any premium or the interest thereon is
payable, or impair the right to institute suit for the enforcement of any such
payment after the Stated Maturity thereof (or, in the case of redemption, on or
after the redemption date); or (b) reduce the percentage in principal amount of
the outstanding Senior Notes, the consent of whose holders is required for any
such supplemental indenture or the consent of whose holders is required for any
waiver (of compliance with certain provisions of the Indenture or certain
defaults and their consequences) provided for in the Indenture; or (c) modify
any of the provisions of the Indenture relating to amendments or waivers of
payment or covenant defaults, except to increase any such percentage or to
provide that certain other provisions of the Indenture cannot be modified or
waived without the consent of the holder of each Senior Note affected thereby.
Notwithstanding the foregoing, without the consent of any holder of Senior
Notes, the Issuer, Bermuda Holdings and the Trustee may amend or supplement the
Indenture or the Senior Notes: (i) to cure any ambiguity or to correct any
provision in the Indenture which may be defective or inconsistent with any other
provision therein; or (ii) to provide for Definitive Senior Notes in addition to
or in place of Book-Entry Interests; or (iii) to provide for the assumption of
Bermuda Holdings' obligations to holders of the Senior Notes in the case of a
merger or consolidation; or (iv) to secure the Senior Notes pursuant to the
requirements of the provisions described under "--Merger, Consolidation or Sale
of Assets" or "--Liens," or otherwise; or (v) to comply with the requirements of
the Commission in order to maintain the qualification of the Indenture under the
Trust Indenture Act, as contemplated by the Indenture or otherwise; or (vi) to
evidence and provide the acceptance of the appointment of a successor Trustee
thereunder; or (vii) to make any other change that would provide any additional
rights or benefits to the holders or that does not adversely affect the legal
rights of any holder under the Indenture or the Senior Notes.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Issuer or Bermuda Holdings, to obtain payment
of claims in certain cases or to realize on certain property received in respect
of any such claim as security or otherwise. The Trustee is permitted to engage
in other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The holders of a majority in principal amount of the outstanding Senior Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any holder of Senior Notes, unless such holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference is
made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Affiliate" means, with respect to any specified Person: (i) any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person (except in cases where substantially
all of the control that would ordinarily be exercisable by virtue of ownership
of stock, other than the election of directors, has been eliminated by
applicable regulatory authorities); or (ii) for the purposes of the provisions
of the Indenture restricting transactions with Affiliates only, any other Person
that owns, directly or indirectly, 10% or more of such Person's Capital Stock or
any officer or director of any Person or other Person or with respect to any
natural Person, any person having a relationship with such Person by blood,
marriage or adoption not more remote than first cousin. For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of Voting Stock, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing: (i) the sum of the products of
(A) the number of years (or portion thereof) from the date of determination to
the
29
<PAGE>
dates of each successive scheduled principal payment of such Indebtedness
multiplied by (B) the amount of such principal payment by (ii) the sum of all
such principal payments.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday that
is not a day on which banking institutions in The City of New York or London are
authorized or obligated by law, regulation or executive order to close.
"Capital Lease Obligation" of any Person means any obligations of such Person
and its Subsidiaries on a consolidated basis under any capital lease of real or
personal property which, in accordance with GAAP, has been recorded as a
capitalized lease obligation.
"Capital Stock" of any Person means any and all shares, interests,
participation, or other equivalent (however designated) of such Person's capital
stock and any rights (other than debt securities convertible into or
exchangeable for capital stock), warrants or options to purchase the foregoing
whether now outstanding or issued after the date hereof.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person and its Restricted Subsidiaries as determined in
accordance with GAAP, consistently applied.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect such
Person or any of its Restricted Subsidiaries against fluctuations in currency
values.
"Default" means any event which is, or after notice or passage of time or both
would be, an Event of Default.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing
buyer.
"Generally Accepted Accounting Principles" or "GAAP" means generally accepted
accounting principles in the United States, consistently applied, as in effect
from time to time.
"Guaranteed Debt" of any Person means, without duplication, all Indebtedness
of any other Person guaranteed directly or indirectly in any manner by such
Person, or in effect guaranteed directly or indirectly by such Person through an
agreement: (i) to pay or purchase such Indebtedness or to advance or supply
funds for the payment or purchase of such Indebtedness; (ii) to purchase, sell
or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling such other Person to make payment of such
Indebtedness or to assure the holder of such Indebtedness against loss; (iii) to
supply funds to, or in any other manner invest in, such other Person (including
any agreement to pay for property or services to be acquired by such other
Person irrespective of whether such property is received or such services are
rendered); (iv) to maintain working capital or equity capital of such other
Person, or otherwise to maintain the net worth, solvency or other financial
condition of the debtor, or (v) otherwise to assure a creditor of such other
Person against loss; provided that the term "guarantee" shall not include
endorsements for collection or deposit, in either case in the ordinary course of
business, or any obligation or liability of such other Person in respect of
leasehold interests assigned by such other Person to any other Person.
"Indebtedness" means, with respect to any Person, without duplication: (i) all
obligations of such Person for borrowed money or for the deferred purchase price
of property or services, excluding any trade payables and other accrued current
liabilities incurred in the ordinary course of business, if, and to the extent,
any of the foregoing would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP; (ii) all obligations of such Person
evidenced by bonds, notes, debentures or other similar instruments, if, and to
the extent, any of the foregoing would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP; (iii) all obligations
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such Person (even if the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), but excluding trade
accounts payable arising in the ordinary course of business; (iv) all Capital
Lease Obligations of such Person; (v) all obligations referred to in (but not
excluded from) clause (i), (ii), (iii) or (iv) above of other Persons and all
dividends of other Persons, the payment of which is secured by (or for which the
holder of such obligations has an existing right, contingent or otherwise, to be
secured by) any Lien, upon or in property (including, without limitation,
accounts and contract rights) owned by such Person, even though such Person has
not assumed or become liable for the payment of such obligations; (vi) all
Guaranteed Debt of such Person; (vii) all Redeemable Capital Stock issued by
such Person valued at the greater of its voluntary or involuntary maximum fixed
repurchase price plus accrued and unpaid dividends; (viii) all obligations under
Currency Agreements or Interest Swap
30
<PAGE>
Obligations of such Person; (ix) all obligations for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit securing
insurance obligations entered into in the ordinary course of business of such
Person to the extent that such letters of credit are not drawn upon, or if and
to the extent drawn upon, such drawing is reimbursed not later than the 30th
Business Day following a demand for reimbursement following payment on the
letter of credit); and (x) any amendment, supplement, modification, deferral,
renewal, extension or refunding of any liability of the types referred to in
clauses (i) through (ix) above. Indebtedness shall not include obligations under
insurance, reinsurance or retrocession contracts entered into in the ordinary
course of business. For purposes hereof, the "maximum fixed repurchase price" of
any Redeemable Capital Stock which does not have a fixed repurchase price shall
be calculated in accordance with the terms of such Redeemable Capital Stock as
if such Redeemable Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indenture, and
if such price is based upon, or measured by, the Fair Market Value of such
Redeemable Capital Stock, such Fair Market Value shall be determined in good
faith by the board of directors of the issuer of such Redeemable Capital Stock.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any interest rate swap agreement, interest rate collar agreement or other
similar agreement or arrangement designed to protect such Person or any of its
subsidiaries against fluctuations in interest rates.
"Issue Date" means the date on which Senior Notes are originally issued
under the Indenture.
"Lien" means any mortgage, charge, pledge, lien, security interest or
encumbrance of any kind.
"Maturity" when used with respect to any Senior Note means the date on
which the principal of (and premium, if any) and interest on such Senior Note
becomes due and payable as therein provided, whether at Stated Maturity,
redemption date and whether by declaration of acceleration, call for redemption
or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Non-Recourse Indebtedness" means Indebtedness: (i) as to which neither
Bermuda Holdings nor any of its Subsidiaries (other than the Person incurring
such Non-Recourse Indebtedness) (a) provides credit support (including any
undertaking, agreement or instrument that would constitute Indebtedness), (b) is
directly or indirectly liable or (c) constitutes the lender; and (ii) no default
with respect to which (including any rights that the holders thereof may have to
take enforcement action against such Person incurring such Non-Recourse
Indebtedness) would permit (upon notice, lapse of time or both) any holder of
any other Indebtedness of Bermuda Holdings or any of its Subsidiaries (other
than the Person incurring such Non-Recourse Indebtedness) to declare a default
on such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its Stated Maturity.
"Permitted Liens" means (a) Liens securing Indebtedness pursuant to any
credit agreement or credit facility that is permitted by the terms of the
Indenture to be outstanding; (b) Liens in favor of Bermuda Holdings or any
Restricted Subsidiary; (c) Liens on property of a Person existing at the time
such Person is merged into or consolidated with Bermuda Holdings or any
Restricted Subsidiary of Bermuda Holdings; provided that such Liens were not
incurred in connection with, or in contemplation of, such merger or
consolidation and such Liens do not extend to any assets of Bermuda Holdings or
any of its Restricted Subsidiaries other than the assets of the Person so merged
into or consolidated with Bermuda Holdings or such Restricted Subsidiary; (d)
Liens on property existing at the time of acquisition thereof by Bermuda
Holdings or any Restricted Subsidiary of Bermuda Holdings; provided that such
Liens were not incurred in connection with, or in contemplation of, such
acquisition and do not extend to any assets of Bermuda Holdings or any of its
Restricted Subsidiaries other than the property so acquired; (e) Liens to secure
the performance of statutory obligations, surety or appeal bonds or performance
bonds, or landlords', carriers', warehousemen's, mechanics', suppliers',
materialmen's or other like Liens, in any case incurred in the ordinary course
of business and with respect to amounts not yet delinquent or being contested in
good faith by appropriate process of law, if a reserve or other appropriate
provision, if any, as is required by GAAP shall have been made therefor; (f)
Liens existing on the date of the Indenture; (g) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded; provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor; (h)
Liens with respect to obligations under Currency Agreements or Interest Swap
Obligations and other similar agreements or arrangements designed to protect
Bermuda Holdings or any of its Restricted Subsidiaries against fluctuations in
the value of Investments of Bermuda Holdings and its Restricted Subsidiaries, in
each case to the extent permitted under the Indenture; (i) Liens incurred in the
ordinary course of business of Bermuda Holdings or any Subsidiary of Bermuda
31
<PAGE>
Holdings with respect to obligations permitted under the Indenture that do not
exceed $10.0 million in principal amount in the aggregate at any one time
outstanding; and (j) Liens on assets of Unrestricted Subsidiaries that secure
Non-Recourse Indebtedness (to the extent permitted under the Indenture) of
Unrestricted Subsidiaries.
"Person" means any individual, corporation, limited or general partnership,
limited liability company, joint venture, association, joint stock company,
trust, fund, unincorporated organization or government or any agency or
political subdivision thereof.
"Principal Insurance Subsidiary" means: (i) the Subsidiaries of Bermuda
Holdings in existence on the Issue Date; (ii) any other insurance company
Subsidiary of Bermuda Holdings that becomes a "significant subsidiary" as
defined in Regulation S-X, as promulgated by the Commission; and (iii) any other
Subsidiary of Bermuda Holdings that may succeed, by merger, consolidation or
otherwise, to all or substantially all of the business of one or more of such
Persons as specified in (i) and (ii) above.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Corporation and its successors.
"Stated Maturity" means, when used with respect to any Indebtedness or any
installment of principal or of interest thereon, the date specified in such
Indebtedness as the fixed date on which the principal of such Indebtedness or
such installment of principal or of interest is due and payable.
"Subordinated Indebtedness" means Indebtedness expressly subordinated in
right of payment to the Senior Notes.
"Subsidiary" means any Person, a majority of the equity ownership or the
Voting Stock of which is at the time owned, directly or indirectly, by Bermuda
Holdings or by one or more other Subsidiaries, or by Bermuda Holdings and one or
more other Subsidiaries.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof, and
shall also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act of 1933, as amended), as custodian with respect to
any such U.S. Government Obligation or a specific payment of principal of or
interest on any such U.S. Government Obligation held by such custodian for the
account of the holder of such depository receipt; provided that (except as
required by law) such custodian is not authorized to make any deduction from the
amount payable to the holder of such depository receipt from any amount received
by the custodian in respect of the U.S. Government Obligation or the specific
payment of principal of or interest on the U.S. Government Obligation evidenced
by such depository receipt.
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) is designated an
Unrestricted Subsidiary prior to formation or creation; (b) has total assets at
the time of formation or creation with a fair market value not exceeding $1,000;
(c) has no Indebtedness other than Non-Recourse Indebtedness; (d) is not party
to any agreement, contract, arrangement or understanding with Bermuda Holdings
or any Restricted Subsidiary of Bermuda Holdings unless the terms of any such
agreement, contract, arrangement or understanding are no less favorable to
Bermuda Holdings or such Restricted Subsidiary than those that might be obtained
at the time from Persons who are not Affiliates of Bermuda Holdings; (e) is a
Person with respect to which neither Bermuda Holdings nor any of its Restricted
Subsidiaries has any direct or indirect obligation (x) to subscribe for
additional Capital Stock or (y) to maintain or preserve such Person's financial
condition or to cause such Person to achieve any specified levels of operating
results; and (f) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of Bermuda Holdings or any of its Restricted
Subsidiaries. Any such designation by the Board of Directors shall be evidenced
to the Trustee by filing with the Trustee a certified copy of the Board
Resolution giving effect to such designation and an officers' certificate
certifying that such designation complied with the foregoing conditions. If, at
any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of
Bermuda Holdings as of such date. The Board of Directors of Bermuda Holdings may
at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided that such designation shall be deemed to be an
32
<PAGE>
incurrence of Indebtedness by a Restricted Subsidiary of Bermuda Holdings of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if no Default or Event of Default would be in existence
following such designation.
"Voting Stock" means stock of the class or classes pursuant to which the
holders thereof have the general voting power under ordinary circumstances to
elect at least a majority of the board of directors, managers or trustees of a
corporation (irrespective of whether or not at the time stock of any other class
or classes shall have or might have voting power by reason of the happening of
any contingency).
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
principal amount of such Indebtedness into (b) the total of the product obtained
by multiplying (i) the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal, including payment at
final maturity, in respect thereof, by (ii) the number of years (calculated to
the nearest one-twelfth) that will elapse between such date and the making of
such payment.
"Wholly-Owned Restricted Subsidiary" of any Person means a Subsidiary of
such Person all of the outstanding Capital Stock or other ownership interests of
which (other than directors' qualifying shares) shall at the time be owned by
such Person or by one or more Wholly-Owned Subsidiaries of such Person.
DESCRIPTION OF DEPOSITARY AGREEMENT
GENERAL
All Exchange Notes underlying the Book-Entry Interests will be represented
by one or more Global Notes, will be issued in a denomination equal to the
aggregate principal amount of the sum of outstanding Old Notes properly tendered
pursuant to the terms of the Exchange Offer, and will be deposited with the
Custodian pursuant to the terms of the Depositary Agreement.
With respect to such Global Notes issued, the Depositary will issue a
receipt representing a 100% interest in the underlying Global Note (the
"Exchange Global Receipt", and together with global receipts issued in respect
of Old Notes not exchanged pursuant to the Exchange Offer, the "Global
Receipts"), which will be delivered to and registered in the name of DTC or its
nominee.
Ownership of Book-Entry Interests is limited to Persons that have accounts
with DTC ("participants") or Persons that may hold interests through
participants.
Procedures with respect to the ownership of Book-Entry Interests are set
forth below. Unless and until the Book-Entry Interests representing the Exchange
Global Receipts are exchanged for Definitive Senior Notes, the depositary
interest held by DTC may not be transferred except as a whole by DTC to a
nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC
or any such nominee to a successor of DTC or a nominee of such successor.
So long as the Custodian, or its nominee, is the holder of the Global Notes
underlying Book-Entry Interests, the Custodian or such nominee, as the case may
be, will be considered the sole holder of such Exchange Global Note for all
purposes under the Indenture. Except as set forth below under "--Issuance of
Definitive Senior Notes," participants or Persons that may hold Book-Entry
Interests through participants will not be entitled to have Senior Notes
registered in their names, will not receive or be entitled to receive physical
delivery of Definitive Senior Notes and will not be considered the owners or
holders thereof under the Indenture. Accordingly, each Person holding a Book-
Entry Interest must rely on the procedures of the Custodian, the Depositary and
DTC and, in addition, if such Person is not a participant in DTC, on the
procedures of the participant through which such Person owns its interest to
exercise any rights and obligations of a holder under the Indenture. See "--
Action by Holders of Book-Entry Interests."
PAYMENTS ON GLOBAL NOTE
Payment of any amounts in respect of the Global Notes, as long as it is
held by the Custodian, will be made to or by the order of the Custodian, as the
bearer thereof. The Custodian will distribute all such payments received by it
to the Depositary. The Depositary will distribute all such payments received by
it to DTC, or its nominee, which will distribute such payments to its
participants. All such payments will be distributed without deduction or
withholding for any taxes, assessments or other governmental charges of whatever
nature except as may be required by law. If any such deduction
33
<PAGE>
or withholding is required to be made under the provisions of any applicable law
or regulation, then, except as provided in "Description of Exchange Notes--
Payment of Additional Amounts," such additional amounts will be paid by the
Issuer and Bermuda Holdings to or for the order of the Custodian as may be
necessary in order that the net amounts received by a holder of Book-Entry
Interests after such deduction or withholding shall be not less than the amounts
which such holder would otherwise have received in respect of such Book-Entry
Interests absent such withholding or deduction. DTC, upon receipt of any
payment, will promptly credit participants' accounts with payments in amounts
proportionate to their respective ownership of Book-Entry Interests, as shown on
the records of DTC. The Issuer expects that payments by participants to holders
of Book-Entry Interests held through such participants will be governed by
standing customer instructions and customary practices, as is now the case with
the securities held for the accounts of customers in bearer form or registered
in "street name," and will be the responsibility of such participants. None of
the Issuer, Bermuda Holdings, the Trustee or any other agent of the Issuer,
Bermuda Holdings or the Trustee will have any responsibility or liability for
any aspect of the records relating to or payments made on account of a
participant's Book-Entry Interests or for maintaining, supervising or reviewing
any records relating to a participant's Book-Entry Interests.
DTC has advised the Issuer as follows: DTC is a limited-purpose trust
company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC was created to hold securities of its
participants and to facilitate the clearance and settlement of transactions
among its participants in such securities through electronic book-entry
exchanges in accounts of the participants, thereby eliminating the need for
physical movement of securities certificates. DTC participants include
securities brokers and dealers (including the Underwriters), banks, trust
companies, clearing corporations and certain other organizations, some of whom
(and/or their representatives) own DTC. Access to DTC book-entry system is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of Book-Entry Interests among participants of DTC, DTC is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Issuer, Bermuda Holdings
nor the Trustee will have any responsibility for the performance by DTC of
obligations under the rules and procedure governing their operations.
Upon the issuance by the Depositary of the Exchange Global Receipts to DTC,
DTC will credit, on its book-entry registration and transfer system, the
participants' accounts with the respective interest beneficially owned by such
participants. Ownership of Book-Entry Interests will be shown on, and the
transfer of such interests will be effected only through, records maintained by
DTC (with respect to interests of participants) and on the records of
participants (with respect to interests of Persons holding through
participants). The laws of some states may require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to own, transfer or pledge Book-
Entry Interests.
The Issuer understands that under existing industry practices, if either
the Issuer or the Trustee requests any action of holders of Book-Entry Interests
or if a holder of a Book-Entry Interest desires to give or take any action that
a holder of Senior Notes is entitled to give or take under the Indenture, DTC
would authorize the participants holding the relevant Book-Entry Interests to
give or take such action, and such participants would authorize beneficial
owners owning through such participants to give or take such action or would
otherwise act upon the instructions of beneficial owners holding through them.
REDEMPTION OR REPURCHASE
In the event the Global Notes (or portions thereof) are redeemed or
repurchased, the Custodian will deliver all amounts received by it in respect of
the redemption or repurchase to the Depositary. The Depositary will deliver all
amounts received by it in respect of the redemption or repurchase of the Global
Notes to DTC. The redemption or repurchase price paid in connection with the
redemption or repurchase of Book-Entry Interests will be equal to the amount
received by the Depositary in connection with the redemption or repurchase of
the Global Notes (or portions thereof). For any redemptions of the Global Notes
in part, selection of Book-Entry Interests to be redeemed will be made by DTC on
a pro rata basis, by lot or by such other method as DTC deems fair and
appropriate, and in compliance with the requirements of the principal national
securities exchange, if any, on which the Senior Notes are listed, or, if the
Senior Notes are not so listed, on a pro rata basis, by lot or by such method as
DTC shall deem fair and appropriate; provided that no beneficial interests of
$1,000 principal amount at maturity or less shall be redeemed in part.
34
<PAGE>
TRANSFERS
All transfers of Book-Entry Interests will be recorded in accordance with
the book-entry system maintained by DTC, pursuant to customary procedures
established by DTC and its participants and will be settled in same-day funds.
ISSUANCE OF DEFINITIVE SENIOR NOTES
Holders of Book-Entry Interests will receive Definitive Senior Notes if (i)
DTC notifies the Issuer and the Depositary that it is unwilling or unable to
continue as holder of the Global Receipts or ceases to be a clearing agency
registered under the Exchange Act and, in either case, a successor to DTC
registered as a clearing agency under the Exchange Act is not appointed by the
Issuer within 90 days of such notification, (ii) either the Depositary or the
Custodian, as the case may be, notifies the Trustee and the Issuer that it is
unwilling or unable to continue as Depositary or Custodian, respectively, and a
successor Depositary or Custodian, as the case may be, is not appointed by the
Issuer within 90 days of such notification, or (iii) the Issuer determines that
Definitive Senior Notes shall be issued. Any Definitive Senior Notes issued in
exchange for Book-Entry Interests will be registered in such name or names as
the Custodian shall instruct the Trustee based on the instructions of DTC. It is
expected that such instructions will be based upon directions received by DTC
from participants with respect to ownership of Book-Entry Interests.
In addition to the foregoing, holders of Book-Entry Interests will at any
time on or after the occurrence of an Event of Default be entitled to request
and receive Definitive Senior Notes. Such Definitive Senior Notes will be issued
to and registered in the name of, or as directed by, such holders only upon the
request in writing by the Depositary (based upon the instructions of DTC).
HOLDERS OF BOOK-ENTRY INTERESTS SHOULD BE AWARE THAT, UNDER CURRENT U.K.
TAX LAW, UPON THE ISSUANCE OF DEFINITIVE SENIOR NOTES TO A HOLDER, SUCH HOLDER
WILL BECOME SUBJECT TO U.K. INCOME TAX (CURRENTLY 20%) TO BE WITHHELD ON ANY
PAYMENTS OF INTEREST ON THE SENIOR NOTES AS SET FORTH UNDER "CERTAIN TAX
CONSIDERATIONS--TAXATION OF U.S. HOLDERS OF THE SENIOR NOTES--UNITED KINGDOM."
IF SUCH DEFINITIVE SENIOR NOTES ARE ISSUED PURSUANT TO THE REQUEST OF A HOLDER
OF BOOK-ENTRY INTERESTS FOLLOWING AN EVENT OF DEFAULT, NEITHER THE ISSUER NOR
BERMUDA HOLDINGS WILL BE OBLIGATED TO PAY ANY ADDITIONAL AMOUNTS WITH RESPECT TO
SUCH SENIOR NOTES. However, U.S. holders of Definitive Senior Notes may be
entitled to receive a refund of withheld amounts from the U.K. Inland Revenue in
certain circumstances. See "Certain Tax Considerations--Taxation of U.S. Holders
of the Senior Notes--United Kingdom." In addition, if a holder of Book-Entry
Interests receives Definitive Senior Notes other than pursuant to its request,
such holder will be entitled to receive Additional Amounts with respect to such
Senior Notes. See "Description of Exchange Notes--Payment of Additional
Amounts."
Exchanges of Book-Entry Interests for Definitive Senior Notes shall be made
free of any fees of the Depositary to the holders of Book-Entry Interests;
provided that the Issuer may require the payment of a sum sufficient to pay any
tax, assessment, or other governmental charge.
ACTION BY HOLDERS OF BOOK-ENTRY INTERESTS
As soon as practicable after receipt by the Custodian of notice of any
solicitation of consents or request for a waiver or other action by the holders
of Book-Entry Interests, the Custodian shall direct the Depositary to mail to
DTC a notice containing (a) such information as is contained in such notice, (b)
a statement that at the close of business on a specified record date DTC will be
entitled to instruct the Depositary as to the consent, waiver or other action,
if any, pertaining to the Book-Entry Interests, and (c) a statement as to the
manner in which such instructions may be given. Upon the written request of DTC,
the Depositary shall endeavor insofar as practicable to take such action
regarding the requested consent, waiver or other action in respect of the Book-
Entry Interests in accordance with any instructions set forth in such request.
DTC is expected to follow the procedures described under "--General" above with
respect to soliciting instructions from its participants. Neither the Depositary
nor the Custodian will exercise any discretion in the granting of consents or
waivers or the taking of any other action relating to the Depositary Agreement
or the Indenture.
REPORTS
The Depositary will promptly send to DTC a copy of any notices, reports and
other communications received from the Issuer which are received by the
Custodian as holder of the Global Note.
35
<PAGE>
THE DEPOSITARY AND CUSTODIAN
The Chase Manhattan Bank is the Depositary for the Global Note. The address
of the Depositary is 450 West 33rd Street, 15th Floor, New York, New York 10001.
Chase Manhattan Bank Luxembourg S.A. will be the Custodian for the Exchange
Global Receipt. The address of the Custodian is 5 rue Plaetis L-2338,
Luxembourg.
ACTION BY DEPOSITARY AND CUSTODIAN
Upon the occurrence of a default with respect to the Global Note, or in
connection with any other right of the holder of the Global Note under the
Indenture or the Depositary Agreement, if requested in writing by DTC in respect
thereof, the Depositary and the Custodian will take any such action as shall be
requested in such notice; provided that the Depositary and the Custodian have
been offered reasonable security or indemnity against the costs, expenses and
liabilities that might be incurred by them in complying with such request.
Neither the Depositary nor the Custodian will exercise any discretion in
the taking of any such action.
CHARGES OF DEPOSITARY AND CUSTODIAN
The Issuer and Bermuda Holdings have agreed to pay all charges of the
Depositary and the Custodian under the Depositary Agreement. The Issuer and
Bermuda Holdings have also agreed to indemnify the Depositary and the Custodian
against certain liabilities incurred by it under the Depositary Agreement.
AMENDMENT AND TERMINATION
The Depositary Agreement may be amended by agreement among the Issuer,
Bermuda Holdings, the Custodian and the Depositary. The consent of DTC shall not
be required in connection with any amendment to the Depositary Agreement: (i) to
cure any defect, omission, inconsistency or ambiguity in the Depositary
Agreement; (ii) to add to the covenants and agreements of the Depositary or the
Custodian, the Issuer and Bermuda Holdings; (iii) to effectuate the assignment
of the Depositary's or the Custodian's rights and duties to a qualified
successor; (iv) to comply with the Securities Act, the Exchange Act or the U.S.
Investment Company Act of 1940, as amended; or (v) to modify, alter, amend or
supplement the Depositary Agreement in any other manner that, in the opinion of
counsel acceptable to the Issuer and the Depositary, is not adverse to DTC or
the owners of Book-Entry Interests. Except as set forth above, no amendment that
adversely affects DTC may be made to the Depositary Agreement or the Book-Entry
Interests without the consent of DTC.
The Depositary shall at any time at the direction of the Issuer or Bermuda
Holdings terminate the Depositary Agreement by mailing a notice of such
termination to DTC and requesting, on behalf of the Custodian in accordance with
the Indenture, the issuance of Definitive Senior Notes to the persons and in the
amounts as specified by DTC. Upon the issuance of Definitive Senior Notes in an
aggregate principal amount equal to the aggregate principal amount of Senior
Notes outstanding, the Depositary Agreement shall terminate. The Depositary
Agreement may also be terminated upon the resignation of the Depositary or the
Custodian if no successor depositary or custodian, as the case may be, has been
appointed by the Issuer within 90 days of the notification of such resignation
as set forth under "--Resignation or Removal of Depositary or Custodian" below.
RESIGNATION OR REMOVAL OF DEPOSITARY OR CUSTODIAN
The Depositary or Custodian may at any time resign as Depositary or
Custodian by written notice delivered to each of the Issuer and the Trustee,
such resignation to take effect upon the appointment by the Issuer of a
successor depositary or custodian (approved, in the case of a successor
depositary, by the Trustee and DTC and, in the case of a successor custodian, by
the Depositary, none of which shall unreasonably withhold such approval) and
such successor's acceptance of such appointment. If at the end of 90 days after
delivery of such notice, no successor depositary or custodian has been appointed
and approved, and has accepted such appointment, the resigning Depositary or
Custodian may terminate the Depositary Agreement.
OBLIGATIONS OF DEPOSITARY AND CUSTODIAN
Except with respect to the payment of any amount received by it in respect of
the Global Notes, neither the Depositary nor the Custodian will assume any
obligation or be subject to any liability under the Depositary Agreement, other
than by reason of bad faith or negligence in the performance of its respective
duties under the Depositary Agreement.
36
<PAGE>
DESCRIPTION OF OLD NOTES
The terms of the Exchange Notes are identical in all material respects to
the terms of the Old Notes, except that (i) the offer and sale of the Exchange
Notes have been registered under the Securities Act and therefore the Exchange
Notes are not subject to certain restrictions on transfer applicable to the Old
Notes, will not contain legends relating thereto and will not be entitled to
registration rights or other rights under the Registration Rights Agreement, and
(ii) the Exchange Notes will not provide for any increase in the interest rate
thereon, which rights and provision will terminate as to all of the Senior Notes
upon the consummation of the Exchange Offer. In addition, the Old Notes and the
Exchange Notes will constitute a single series of debt securities under the
Indenture. See "Description of Exchange Notes--General."
THE EXCHANGE OFFER
The Issuer and Bermuda Holdings entered into the Registration Rights
Agreement dated as of May 18, 1998 (the "Registration Rights Agreement") with
Donaldson, Lufkin & Jenrette Securities Corporation, as Initial Purchaser,
pursuant to which the Issuer and Bermuda Holdings agreed, for the benefit of the
holders of the Old Notes, at the cost of the Issuer and Bermuda Holdings, to use
commercially reasonable efforts to file and cause to become effective a
registration statement with respect to an exchange offer for exchange notes with
terms identical in all material respects to the Old Notes, except as described
under "Description of Old Notes." In the event that applicable interpretations
of the Commission do not permit the Issuer and Bermuda Holdings to effect the
Exchange Offer, or under certain other circumstances, the Issuer and Bermuda
Holdings agreed, for the benefit of the Holders of the Old Notes, at the cost of
the Issuer and Bermuda Holdings, to use commercially reasonable efforts to cause
to become effective a shelf registration statement (the "Shelf Registration
Statement") with respect to resales of the Senior Notes and to keep such
registration statement effective until May 18, 2001 or such earlier time when
the Senior Notes have been sold pursuant to such Shelf Registration Statement.
The Old Notes provide that, in the event the Exchange Offer is not
consummated or a Shelf Registration Statement is not declared effective on or
prior to November 18, 1998, then the annual interest rate borne by the Old Notes
shall be increased to 7.25%. If the Exchange Offer is not consummated or a Shelf
Registration Statement is not declared effective by February 18, 1999, then the
annual interest rate borne by the Old Notes shall be increased to 7.5%. Upon
consummation of the Exchange Offer or the effectiveness of such Shelf
Registration Statement, the interest rate borne by the Old Notes will return to
7%.
The Exchange Offer is not being made to, nor will the Issuer or Bermuda
Holdings accept tenders for exchange from, holders of Old Notes in any
jurisdiction in which the Exchange Offer or the acceptance thereof would not be
in compliance with the securities or blue sky laws of such jurisdiction.
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Issuer will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. For each $1,000 principal amount of Old Notes surrendered to
the Issuer pursuant to the Exchange Offer, the Holder of such Old Note will
receive an Exchange Note having a principal amount equal to that of the
surrendered Old Note. The Issuer will keep the Exchange Offer open for not less
than 20 business days (or longer if required by applicable law) after the date
notice of the Exchange Offer is mailed to the Holders of the Old Notes. As used
herein, the term "Expiration Date" means 5:00 p.m., New York City time, on
July 22, 1998; provided, however, that if the Issuer and Bermuda Holdings,
in their sole discretion, have extended the period of time for which the
Exchange Offer is open, the term "Expiration Date" means the latest time and
date to which the Exchange Offer is extended.
As of the date of this Prospectus, $100.0 million in aggregate principal
amount of the Old Notes were outstanding. The Exchange Offer is not conditioned
upon any minimum principal amount of Old Notes being tendered. This Prospectus,
together with the Letter of Transmittal, is first being sent on or about the
date set forth on the cover page to all holders of Old Notes at the addresses
set forth in the security register with respect to Old Notes maintained by the
Trustee. The Issuer's obligations to accept Old Notes for exchange pursuant to
the Exchange Offer is subject to certain conditions as set forth under "--
Certain Conditions to the Exchange Offer."
37
<PAGE>
The Issuer and Bermuda Holdings expressly reserve the right, at any time or
from time to time, to extend the period of time during which the Exchange Offer
is open, and thereby delay acceptance of any Old Notes, by giving oral or
written notice of such extension to the Exchange Agent and notice of such
extension to the holders of Old Notes as described below. During any such
extension, all Old Notes previously tendered will be retained by the Issuer or
Bermuda Holdings, subject to the rights of holders of Old Notes to withdraw
their tendered Old Notes as specified in "--Withdrawal Rights." Any Old Notes
not accepted for exchange for any reason will be returned without expense to the
tendering holder thereof as promptly as practicable after the expiration or
termination of the Exchange Offer.
The Issuer and Bermuda Holdings expressly reserve the right to amend or
terminate the Exchange Offer, and not to accept for exchange any Old Notes not
theretofore accepted for exchange, upon the occurrence of any of the conditions
of the Exchange Offer specified below under "--Certain Conditions to the
Exchange Offer." The Issuer or Bermuda Holdings will give oral or written
notice of any extension, amendment, non-acceptance or termination to the holders
of the Old Notes as promptly as practicable, such notice in the case of any
extension to be issued by means of a press release or other public announcement
no later than 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date. Without limiting the manner in which the
Issuer or Bermuda Holdings may choose to make any public announcement and
subject to applicable law, neither the Issuer nor Bermuda Holdings shall have
any obligation to publish, advertise or otherwise communicate any such public
announcement other than by issuing a release to the Dow Jones News Service.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer. Old Notes which are not tendered for
exchange or are tendered but not accepted in connection with the Exchange Offer
will remain outstanding, will be entitled to the benefits of the Indenture and
continue to accrue interest, but will not be entitled to any further
registration rights under the Registration Rights Agreement. The Issuer and
Bermuda Holdings intend to conduct the Exchange Offer in accordance to the
applicable requirements of the Exchange Act and the rules and regulations of the
Commission thereunder.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Issuer of Old Notes by a Holder thereof as set forth
below and the acceptance thereof by the Issuer will constitute a binding
agreement between the tendering holder, the Issuer and Bermuda Holdings upon the
terms and subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal. Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
nominee and who wishes to tender should contact such registered holder promptly
and instruct such registered holder to tender on his behalf. A holder who wishes
to tender Old Notes for exchange pursuant to the Exchange Offer must transmit a
properly completed and duly executed Letter of Transmittal, including all other
documents required by such Letter of Transmittal, to the Exchange Agent at the
address set forth below under "Exchange Agent" on or prior to the Expiration
Date. In addition, (i) a timely confirmation of a book-entry transfer (a "Book-
Entry Confirmation") of such Old Notes, if such procedure is available, into the
Exchange Agent's account at DTC pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date, or (ii) the holder must comply with the guaranteed delivery
procedures described below under "--Guaranteed Delivery Procedures." THE METHOD
OF DELIVERY OF LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE
ELECTION AND RISK OF THE TENDERING HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR ANY OTHER REQUIRED DOCUMENTS
SHOULD BE SENT TO THE ISSUER OR BERMUDA HOLDINGS. Delivery of all documents must
be made to the Exchange Agent at its address set forth below. Holders may also
request their respective brokers, dealers, commercial banks, trust companies or
nominees to effect such tender for such Holders.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered for the account of an Eligible Institution (as
defined below). In the event that signatures on a Letter of Transmittal or a
notice of withdrawal, as the case may be, are required to be guaranteed, such
guarantees must be by a firm which is a member of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc. or by a commercial bank or trust company having an office or
correspondent in the United States (collectively, "Eligible Institutions"). If a
Book-Entry Confirmation indicates that ownership of the Old Notes is in the name
of a person other than the person signing the Letter of Transmittal, the
Exchange Agent must receive a written instrument or instruments of transfer or
exchange, in satisfactory form as
38
<PAGE>
determined by the Issuer and Bermuda Holdings in their sole discretion, duly
executed by the owner as evidenced by the Book-Entry Confirmation with the
signature thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Issuer and Bermuda Holdings in their sole discretion, which determination
shall be final and binding. The Issuer and Bermuda Holdings reserve the absolute
right to reject any and all tenders of any particular Old Notes not properly
tendered or to not accept any particular Old Notes which acceptance might, in
the judgment of the Issuer and Bermuda Holdings or their counsel, be unlawful.
The Issuer and Bermuda Holdings also reserve the absolute right to waive any
defects or irregularities or conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including the
right to waive the ineligibility of any holder who seeks to tender Old Notes in
the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer as to any particular Old Notes either before or after the
Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Issuer and Bermuda Holdings shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with the
tender of Old Notes for exchange must be cured within such reasonable period of
time as the Issuer or Bermuda Holdings shall determine. Neither the Issuer,
Bermuda Holdings, the Exchange Agent nor any other person shall be under any
duty to give notification of any defect or irregularity with respect to any
tender of Old Notes for exchange, nor shall any of them incur any liability for
failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than
the owner as evidenced by the Book-Entry Confirmation, such Letter of
Transmittal must be accompanied by an endorsement or appropriate powers of
attorney, in either case signed exactly as the name or names of the owner as
evidenced by the Book-Entry Confirmation. Signatures on such powers of attorney
must be guaranteed by an Eligible Institution.
If the Letter of Transmittal or powers of attorney are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers or
corporations or others acting in a fiduciary or representative capacity, such
person should so indicate when signing and, unless waived by the Issuer or
Bermuda Holdings, proper evidence satisfactory to the Issuer and Bermuda
Holdings of its authority to so act must be submitted.
By executing, or otherwise becoming bound by, the Letter of Transmittal,
each holder of the Old Notes (other than certain specified holders) will
represent that (i) it is not an affiliate of the Issuer or Bermuda Holdings,
(ii) any Exchange Notes to be received by it were acquired in the ordinary
course of its business, and (iii) it has no arrangement or understanding with
any person to participate in a distribution (within the meaning of the
Securities Act) of the Exchange Notes. If the tendering holder is a broker-
dealer that will receive Exchange Notes for its own account in exchange for Old
Notes that were acquired as a result of market-making activities or other
trading activities, it will be required to acknowledge that it acquired the Old
Notes for its account as the result of market-making activities or other trading
activities and must agree that it will deliver a prospectus in connection with
any resale of such Exchange Notes. A broker-dealer that acquired Old Notes in a
transaction other than as part of its market-making or other trading activities
will not be able to participate in the Exchange Offer. See "--Resales of the
Exchange Notes."
ACCEPTANCE OF OLD NOTES FOR EXCHANGE
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Issuer will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the Exchange Notes promptly after acceptance of
the Old Notes. See "--Certain Conditions to the Exchange Offer." For purposes of
the Exchange Offer, the Issuer shall be deemed to have accepted properly
tendered Old Notes for exchange when, as and if the Issuer has given oral or
written notice thereof to the Exchange Agent.
In all cases, issuance of Exchange Notes for Old Notes that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of a timely Book-Entry Confirmation of such Old
Notes into the Exchange Agent's account at DTC, a properly completed and duly
executed Letter of Transmittal and all other required documents. If any tendered
Old Notes are not accepted for any reason set forth in the terms and conditions
of the Exchange Offer or Old Notes are submitted for a greater principal amount
than the holder desires to exchange, such unaccepted or non-exchanged Old Notes
will be credited to an account maintained with DTC as promptly as practicable
after the expiration or termination of the Exchange Offer.
39
<PAGE>
INTEREST ON THE EXCHANGE NOTES
Each Exchange Note will bear interest from May 18, 1998, the date of
issuance of the Old Notes. Holders of the Old Notes whose Old Notes are accepted
for exchange will not receive accrued interest on such Old Notes from and after
May 18, 1998.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at DTC for purposes of the Exchange Offer promptly after the
date of this Prospectus. Any financial institution that is a participant in
DTC's systems may make book-entry delivery of Old Notes by causing DTC to
transfer such Old Notes into the Exchange Agent's account in accordance with
DTC's Automated Tender Offer Program ("ATOP") procedures for transfer. However,
the exchange for the Old Notes so tendered will only be made after timely
confirmation of such book-entry transfer of Old Notes into the Exchange Agent's
account, and timely receipt by the Exchange Agent of an Agent's Message (as such
term is defined in the next sentence) and any other documents required by the
Letter of Transmittal. The term "Agent's Message" means a message, transmitted
by DTC and received by the Exchange Agent and forming a part of a Book-Entry
Confirmation, which states that DTC has received an express acknowledgment from
a participant tendering Old Notes that are the subject of such Book-Entry
Confirmation that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal, and that the Issuer or Bermuda Holdings may
enforce such agreement against such participant. Although delivery of Old Notes
may be effected through book-entry transfer into the Exchange Agent's account at
DTC, the Letter of Transmittal (or facsimile thereof), properly completed and
duly executed, with any required signature guarantees and any other required
documents, must in any case be delivered to and received by the Exchange Agent
at its address set forth under "--Exchange Agent" prior to the Expiration Date,
or the guaranteed delivery procedure set forth below must be complied with.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
GUARANTEED DELIVERY PROCEDURES
If the procedure for book-entry transfer cannot be completed on a timely
basis, a tender may be effected if (i) the tender is made by or through an
Eligible Institution, (ii) prior to the Expiration Date, the Exchange Agent
receives from such Eligible Institution a properly completed and duly executed
Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Issuer and Bermuda Holdings
(by telegram, telex, facsimile transmission, mail or hand delivery), setting
forth the name and address of the holder of Old Notes and the amount of Old
Notes tendered, stating that the tender is being made thereby and guaranteeing
that within five New York Stock Exchange ("NYSE") trading days after the date of
execution of the Notice of Guaranteed Delivery, a Book-Entry Confirmation and
any other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent, and (iii) the Book-Entry
Confirmation, and all other documents required by the Letter of Transmittal, are
received by the Exchange Agent within five NYSE trading days after the date of
execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent by the Exchange Date at one of the addresses set
forth below under "--Exchange Agent." Any such notice of withdrawal (which
notice may be by telegram, telex, facsimile transmission or letter) must specify
the name of the person having tendered the Old Notes to be withdrawn, the number
of the account at DTC from which the Old Notes were tendered, the principal
amount of the Old Notes to be withdrawn, and the name and number of the account
at DTC to be credited with the withdrawn Old Notes, and otherwise comply with
the procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such withdrawal notices will be
determined by the Issuer and Bermuda Holdings, whose determination shall be
final and binding on all parties. Any Old Notes so withdrawn will be deemed not
to have been validly tendered for exchange for purposes of the Exchange Offer.
Any Old Notes which have been tendered for exchange but which are not exchanged
for any reason will be credited to an account maintained with DTC for the Old
Notes as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "--Procedures for
Tendering Old Notes" at any time prior to the Expiration Date.
40
<PAGE>
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, neither the
Issuer nor Bermuda Holdings shall be required to accept for exchange, or to
issue Exchange Notes in exchange for, any Old Notes and may terminate or amend
the Exchange Offer, if at any time before the acceptance of such Old Notes for
exchange or the exchange of the Exchange Notes for such Old Notes, such
acceptance or issuance would violate applicable law or any interpretation of the
Staff of the Commission. Neither the Issuer or Bermuda Holdings has any
obligation, and will not knowingly, permit acceptances of tenders of Old Notes
from Affiliates of the Issuer or Bermuda Holdings or from any other holder or
holders of Old Notes who are not eligible to participate in the Exchange Offer
under applicable law or interpretations thereof by the Commission, or if the
Exchange Notes to be received by such holder or holders of Old Notes in the
Exchange Offer, upon receipt, will not be tradable by such holder without
restriction under the Securities Act and the Exchange Act and without material
restrictions under the blue sky or securities laws of substantially all of the
states of the United States.
The foregoing conditions are for the sole benefit of the Issuer and Bermuda
Holdings and may be asserted by the Issuer and Bermuda Holdings regardless of
the circumstances giving rise to any such condition. The failure by the Issuer
and Bermuda Holdings at any time to exercise the foregoing rights shall not be
deemed a waiver of any such right and each such right shall be deemed an ongoing
right which may be asserted at any time and from time to time.
In addition, neither the Issuer nor Bermuda Holdings will accept for
exchange any Old Notes tendered, and no Exchange Notes will be issued in
exchange for any such Old Notes, if at such time any stop order shall be
threatened or in effect with respect to the Registration Statement of which this
Prospectus constitutes a part or the qualification of the Indenture under the
Trust Indenture Act.
EXCHANGE AGENT
The Chase Manhattan Bank has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at one of the addresses set forth below. Questions and requests
for assistance, requests for additional copies of this Prospectus or of the
Letter of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent, addressed as follows:
Deliver To:
The Chase Manhattan Bank, Exchange Agent
By Mail or By Hand:
The Chase Manhattan Bank
450 West 33rd St.
15th Floor
New York, New York 10001
Attention: Corporate Trust Administration
By Facsimile:
(212) 946-8177
Confirm by Telephone:
(212) 946-3352
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
The principal solicitation is being made by mail; however, additional
solicitation may be made by telegraph, telephone or in person by officers and
regular employees of the Issuer, Bermuda Holdings and their affiliates. No
additional compensation will be paid to any such officers and employees who
engage in soliciting tenders. Neither the Issuer nor Bermuda Holdings will make
any payment to brokers, dealers, or others soliciting acceptances of the
Exchange
41
<PAGE>
Offer. The Issuer or Bermuda Holdings, however, will pay the Exchange Agent
reasonably customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection therewith.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Issuer and Bermuda Holdings and are estimated in the
aggregate to be $210,000.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith.
RESALES OF THE EXCHANGE NOTES
Under existing interpretations of the staff of the Division of Corporation
Finance of the Commission contained in several no-action letters to third
parties (including Exxon Capital Holdings Corporation (available May 13, 1988),
Morgan Stanley & Co. Incorporated (available June 5, 1991), K-III Communications
Corporation (available May 14, 1993) and Shearman & Sterling (available July 2,
1993)), the Exchange Notes would in general be freely transferable after the
Exchange Offer without further registration under the Securities Act. However,
any purchaser of Old Notes who is an "affiliate" of the Issuer or Bermuda
Holdings or who intends to participate in the Exchange Offer for the purpose of
distributing the Exchange Notes or any broker-dealer who purchased Old Notes
from the Issuer or Bermuda Holdings to resell pursuant to Rule 144A or any other
available exception under the Securities Act (i) will not be able to rely on the
interpretation of the staff of the Division of Corporation Finance of the
Commission, (ii) will not be able to tender its Old Notes in the Exchange Offer
and (iii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or transfer of the Old Notes
unless such sale or transfer is made pursuant to an exemption from such
requirements.
By executing, or otherwise becoming bound by, the Letter of Transmittal
each holder of the Old Notes (other than certain specified holders) will
represent that (i) it is not an "affiliate" of the Issuer or Bermuda Holdings,
(ii) any Exchange Notes to be received by it were acquired in the ordinary
course of its business and (iii) it has no arrangement or understanding with any
person to participate in the distribution (within the meaning of the Securities
Act) of the Exchange Notes. In addition, in connection with any resales of
Exchange Notes, any Participating Broker-Dealer who acquired the Exchange Notes
for its own account as a result of market-making or other trading activities
must acknowledge that it acquired the Old Notes for its own account as the
result of market-making activities or other trading activities and must agree
that it deliver a prospectus meeting the requirements of the Securities Act. A
broker-dealer that acquired Existing Notes in a transaction other than as part
of its market-making or other trading activities will not be able to participate
in the Exchange Offer. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. Based on the
position taken by the staff of the Division of Corporation Finance of the
Commission in the no-action letters referred to above, the Issuer believes that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to the Exchange Notes received upon exchange of such Old Notes
(other than Old Notes which represent an unsold allotment from the original sale
of the Old Notes) with a prospectus meeting the requirements of the Securities
Act, which may be a prospectus prepared for an exchange offer so long as it
contains a description of the plan of distribution with respect to the resale of
such Exchange Notes. Under the Registration Rights Agreement, the Issuer and
Bermuda Holdings is required to allow Participating Broker-Dealers and other
persons, if any, subject to similar prospectus delivery requirements, to use
this Prospectus as it may be amended or supplemented from time to time, in
connection with the resale of such Exchange Notes.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a Participating Broker-Dealer in connection with
resales of Exchange Notes received in exchange for Old Notes where such Old
Notes were acquired as a result of market-making activities or other trading
activities. The Issuer and Bermuda Holdings have agreed that it will make this
Prospectus, as amended or supplemented, available to any Participating Broker-
Dealer for use in connection with any such resale and Participating Broker-
Dealers shall be authorized to deliver this Prospectus for a period not
exceeding 180 days after the Expiration Date. In addition, until December 18,
1998 (180 days after the date of this Prospectus), all dealers effecting
transactions in the Exchange Notes may be required to deliver a prospectus.
42
<PAGE>
Neither the Issuer nor Bermuda Holdings will receive any proceeds from any
sales of the Exchange Notes by Participating Broker-Dealers. Exchange Notes
received by Participating Brokers-Dealers for their own account pursuant to the
Exchange Offer may be sold from time to time, in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the Exchange Notes or a combination of such methods of resale, at
market prices prevailing at the time of resale, at prices related to such
prevailing market prices or at negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
Participating Broker-Dealer that resells the Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer. Any broker or dealer
that participates in a distribution of such Exchange Notes may be deemed to be
an "underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any omissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will
deliver and by delivering a prospectus, a Participating Broker-Dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
The Issuer will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any Participating Broker-Dealer
that requests such documents in the Letter of Transmittal. See "The Exchange
Offer."
CERTAIN TAX CONSIDERATIONS
CERTAIN U.K., U.S. AND BERMUDA TAX CONSIDERATIONS
The following summary of certain U.S., U.K. and Bermuda tax consequences of
the acquisition, ownership and disposition of the Senior Notes by a "U.S.
Holder" (as defined below) is set forth with respect to U.S. federal income tax
matters based upon the opinion of Debevoise & Plimpton, U.S. tax counsel to the
Issuer, with respect to U.K. tax matters based upon the opinion of Clifford
Chance, U.K. tax counsel to the Issuer, and with respect to Bermuda tax matters
based upon the opinion of Conyers, Dill & Pearman, Bermuda tax counsel to the
Issuer. Such firms express no opinion as to, and have not independently
confirmed, any factual or accounting matters, determinations or conclusions
described below. The summary describes certain U.S. federal income, U.K. and
Bermuda tax consequences of the acquisition, ownership and disposition of the
Senior Notes as of the date of this Prospectus. The Summary is for general
information purposes only and does not purport to be a complete analysis of all
tax considerations that may be applicable to U.S. Holders of Senior Notes.
Except where noted, it deals only with Senior Notes beneficially owned as
capital assets by a purchaser that is, for U.S. federal income tax purposes, (1)
a citizen or resident of the United States, (2) a corporation, partnership or
other entity created or organized in, or under the laws of, the United States or
any political subdivision thereof or (3) an estate or trust the income of which
is subject to U.S. federal taxation regardless of its source (a "U.S. Holder")
and does not address the U.K. tax consequences to a holder that is resident (or,
in the case of an individual, who is either resident or ordinarily resident or
both) for U.K. tax purposes in the U.K., that is domiciled under U.K. law in the
U.K. or that carries on business in the U.K. through a branch or agency. It does
not deal with special situations, such as those of securities dealers, banks,
tax-exempt organizations, life insurance companies, persons that hold the Senior
Notes as part of a hedging transaction or straddle or conversion transaction or
persons whose functional currency is not the U.S. dollar. It also does not deal
with state or local taxes, or U.S. federal taxes other than income taxes.
The statements regarding U.S. federal income tax consequences set forth
below are based upon the provisions of the U.S. Internal Revenue Code of 1986,
as amended (the "Code"), and regulations, rulings and judicial decisions
thereunder as of the date of this Prospectus. The statements regarding U.K. and
Bermuda tax laws set forth below are based on those laws as in force on the date
of this Prospectus. Such authorities may be repealed, revoked or modified,
possibly with retroactive effect, in which case tax consequences different from
those discussed below could result. The statements regarding U.S. federal
income, U.K. and Bermuda tax consequences set forth below assume that the Senior
Notes were issued, and transfers thereof and payments thereon have been and will
continue to be made, in accordance with the Indenture and the Depositary
Agreement.
For purposes of the U.K. Treaty (as defined below) and the Code, U.S.
Holders of the Book-Entry Interests will be treated as owners of the Senior
Notes underlying such Book-Entry Interests and, except as noted below, the tax
consequences of owning the Book-Entry Interests will be the same as those
applicable to ownership of the Senior Notes.
PERSONS CONSIDERING THE ACQUISITION, OWNERSHIP OR DISPOSITION OF THE SENIOR
NOTES SHOULD CONSULT THEIR OWN TAX ADVISERS CONCERNING THE U.S. FEDERAL INCOME,
43
<PAGE>
U.K. AND BERMUDA TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS
WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN
TAXING JURISDICTIONS.
CERTAIN TAX CONSEQUENCES OF THE EXCHANGE OFFER
United States. The exchange of Old Notes for Exchange Notes pursuant to the
Exchange Offer will not result in any federal income tax consequences to
holders. When a holder exchanges an Old Note for an Exchange Note pursuant to
the Exchange Offer, such holder will have the same adjusted basis and holding
period in the Exchange Note as in the Old Note immediately before the Exchange.
United Kingdom. The exchange of Old Notes for Exchange Notes pursuant to the
Exchange Offer will not result in any liability to United Kingdom taxation for
holders of Old Notes who are neither resident nor, in the case of a holder who
is an individual, ordinarily resident in the United Kingdom for the purposes of
United Kingdom taxation, and further who do not carry on a trade, profession or
vocation in the United Kingdom through a branch or agency in the United Kingdom
to which the Old Notes or the Exchange Notes are attributable.
Bermuda. The exchange of Old Notes for Exchange Notes pursuant to the Exchange
Offer will not result in any Bermuda tax consequences.
TAXATION OF U.S. HOLDERS OF THE SENIOR NOTES
Bermuda
Payments under the Guarantee. Under Bermuda law, no withholding or
deduction will be required to be made on account of payments made by Bermuda
Holdings under the Guarantee.
United Kingdom
Payments on the Senior Notes.
(a) The Senior Notes will constitute "quoted Eurobonds" provided they
continue to carry a right to interest and provided that they are and
continue to be in bearer form and quoted on a recognized stock exchange
(the New York Stock Exchange, Inc. is a recognized stock exchange for this
purpose).
(b) Payments of interest on Senior Notes which are and continue to be
quoted Eurobonds and are in global form and are held in a "recognized
clearing system" (DTC is so recognized) may be made without withholding or
deduction for or on account of UK income tax, provided that:
(i) payment is made direct to the recognized clearing system; or
(ii) payment is made to, or at the direction of, a depositary for
the recognized clearing system and the paying agent has obtained a
valid declaration PA 3 from the depositary; or
(iii) the paying agent has obtained a notice from the Inland
Revenue instructing the paying agent to pay the interest with no tax
deducted.
(c) If the Senior Notes are issued in definitive form and are and
continue to be quoted Eurobonds, then payments of interest on the Senior
Notes may be made without such withholding or deduction where:
(i) the person by or through whom the payment is made is not in
the UK; or
(ii) the payment is made by or through a person who is in the UK
and
(aa) the interest is paid on a Senior Note held in a recognized clearing
system as defined for the relevant purpose and one of the conditions set out in
paragraph (b)(i), (ii) and (iii) above is satisfied; or
(bb) a person who is not resident in the UK is beneficially entitled to the
interest and is the beneficial owner of the Senior Note on which the interest is
paid and either:
44
<PAGE>
(1) the paying agent obtains a valid declaration PA1 from the said
person on the occasion of each payment; or
(2) the paying agent obtains on the occasion of each payment a valid
declaration PA2 from another person who holds the Senior Notes for the non-
resident person and who is entitled to arrange for the interest to be paid
with no UK tax deducted; or
(iii) the paying agent has obtained a notice from the Inland Revenue
instructing the paying agent to pay the interest with no tax deducted.
In other cases, and in particular if either (A) payments on the Senior Notes
are made at a time they are not quoted on a recognized stock exchange or (B)
Definitive Senior Notes in registered form are issued, interest and Additional
Amounts, if any, will be paid after deduction of U.K. income tax at the lower
rate (currently 20%). A U.S. Holder of a Senior Note will normally be eligible
to recover in full any U.K. tax withheld from payments of interest to which such
U.S. Holder is beneficially entitled by making a claim for refund under the
U.S./U.K. Treaty on the appropriate form filed in duplicate with the Internal
Revenue Service Center Director with which such U.S. Holder's last U.S. federal
income tax return was filed. Alternatively, a claim may be made by a U.S. Holder
in advance of a payment of interest. If the claim is accepted by the U.K. Inland
Revenue, they will authorize subsequent payments to that U.S. Holder to be made
without the withholding of U.K. tax. Claims for refund must be made within six
years of the end of the U.K. year of assessment (generally April 5th in each
year) to which the interest related and must be accompanied by the original
statement provided by the Company (or any nominee holding the Senior Notes on
the U.S. Holder's behalf) when the interest payment was made showing the amount
of income tax deducted and when the interest payment was made. Because a claim
for refund is not considered until the U.K. Inland Revenue receives the
appropriate form from the IRS, forms should be sent to the IRS well before the
end of the applicable limitation period,
In the case of Senior Notes which are quoted Eurobonds, a person in the UK
who in the course of a trade or profession:
(i) by means of coupons, warrants or bills of exchange, collects or
secures payment of or receives interest on Senior Notes for a Noteholder;
or
(ii) arranges to collect or secure payment of interest on Senior
Notes for a Noteholder; or
(iii) acts as a custodian of such Notes and receives interest on such
Senior Notes or directs that interest on such Senior Notes be paid to
another person or consents to such payment will be required to withhold UK
income tax at the lower rate (currently 20%), subject to certain
exceptions, including the following:
(a) the Senior Notes are held in a recognized clearing system
and either:
(i) the collecting agent pays or accounts for the
interest directly or indirectly to the recognized clearing
system and where such payment or account is made to, or at the
direction of, a depositary for the recognized clearing system,
the collecting agent holds a valid declaration CA3 from the
depositary; or
(iii) the collecting agent is acting as depositary for the
recognized clearing system in respect of the Senior Notes; or
(b) the person beneficially entitled to the interest beneficially owns
the Senior Notes and is not resident in the UK and the collecting agent
either
(i) holds a valid declaration CA1 from the said person; or
(ii) holds a valid declaration CA2 from a person (other than
the beneficial owner of the Notes) to whom the interest is payable or
who is entitled to arrange for the interest to be collected without
deduction of UK tax and who is not a collecting agent in the UK.
Holders of Senior Notes who request Definitive Senior Notes in registered
form will not be entitled to the payment of any Additional Amounts in respect of
the U.K. tax withheld. In certain other cases in which Senior Notes are
exchanged for Definitive Senior Notes, U.S. Holders of Definitive Senior Notes
will be entitled to the payment of Additional Amounts in respect of the U.K. tax
withheld. See "Description of Senior Notes--Payment of Additional Amounts."
45
<PAGE>
Under provisions of the U.K. Finance Act 1995, interest on the Senior Notes
received without deduction or withholding will not be subject to U.K. tax by
direct assessment in the hands of a holder of Senior Notes who is not resident
for tax purposes in the U.K. unless that holder carries on a trade, profession
or vocation within the U.K. through a U.K. branch or agency in connection with
which the interest is received or to which the Senior Notes are attributable (in
which case certain exemptions may be available).
Sale or Disposition (including Redemption). A U.S. Holder (not resident or
ordinarily resident in the U.K. and not engaging in business in the U.K. through
a branch or agency) will not be subject to U.K. tax (including withholding tax)
on the sale, redemption (other than redemption at a premium), retirement or
other disposition of a Senior Note. Similarly, such a U.S. Holder will not be
subject to U.K. tax where an interest in the Global Note is exchanged for a
Definitive Senior Note.
For U.K. tax purposes, a disposal of a Senior Note by an individual holder
resident or ordinarily resident for U.K. tax purposes in the U.K. or who carries
on a trade, profession or vocation in the U.K. through a branch or agency to
which the Senior Note is attributable may give rise to a chargeable gain or
allowable loss for the purposes of taxation of capital gains. It should be noted
that, to calculate any gain on a disposal of Senior Notes, sterling values are
compared at acquisition and disposal. Accordingly, a taxable gain can arise on
maturity, for example, even where the amount of foreign currency received is
less than, or the same as, the amount paid for the Senior Notes. A transfer of a
Senior Note by an individual holder resident or ordinarily resident for U.K. tax
purposes in the U.K. or who carries on a trade in the U.K. through a branch or
agency to which the Senior Note is attributable may give rise to a charge to tax
on income in respect of an amount representing interest on the Senior Note which
has accrued since the preceding interest payment date.
In relation to a holder which is a company that is subject to U.K.
corporation tax (other than a company established for charitable purposes only,
authorized unit trusts and approved investment trusts and certain other
categories of company which are not taxable on chargeable gains), the Senior
Notes will be treated on disposal as "qualifying corporate bonds" with the
result that on a disposal of the Senior Notes by such a company, neither
chargeable gains nor allowable losses will arise for the purposes of taxation of
chargeable gains. Holders of Senior Notes who are within the charge to United
Kingdom corporation tax will be charged to tax generally on all profits and
gains (including interest and other accruals or, as the case may be, movements
in value, gains made on disposals and profits attributable to exchange rate
fluctuations) arising from the Senior Notes broadly in accordance with their
statutory accounting treatment. Such profits and gains will be charged to tax as
income in respect of each accounting period to which they are allocated for
accounting purposes. Relief may be available for related expenses and losses on
a similar basis.
U.K. Stamp Duty and Stamp Duty Reserve Tax. No U.K. Stamp Duty or Stamp
Duty Reserve Tax is payable on the issue of the Global Note or on the issue or,
once the Senior Notes are listed on the New York Stock Exchange, Inc. the
transfer by delivery of a Senior Note or on its redemption except that stamp
duty reserve tax (currently at the rate of 0.5%) could be payable on an
agreement to transfer any Senior Note issued after 25 November 1996 unless,
inter alia, the Senior Note is listed on a recognized stock exchange, does not
carry a right of conversion into securities not so listed and the agreement to
transfer the Senior Note is not made in contemplation of, or as part of an
arrangement for, a takeover of the Company.
Although the Issuer intends to list the Exchange Notes on the New York
Stock Exchange, Inc. it is not expected that the Exchange Notes will be listed
on the date of issue. During the period prior to such listing of the Exchange
Notes and the Old Notes, any agreement to transfer the Global Note or Senior
Note or any interest therein may be subject to Stamp Duty Reserve Tax if made
before such Senior Notes are so listed, unless it can be shown that (i) the
amount of interest and Additional Amounts payable on the Senior Notes neither
exceeds a reasonable commercial return on the nominal amount of the capital nor
falls to be determined to any extent by reference to the results of, or any part
of, a business or to the value of any property; (ii) the Senior Notes carry a
right on repayment to an amount which does not exceed the nominal value of the
capital (or if it does, such amount is reasonably comparable with what is
generally repayable (in respect of a similar nominal amount of capital) under
the terms of issue of loan capital listed in the Official List of The London
Stock Exchange); and (iii) the Senior Notes do not carry a right (exercisable
then or later) of conversion into shares or other securities, or to the
acquisition of shares or other securities, including loan capital of the same
description.
U.K. Inheritance Tax. Senior Notes represented by the Global Note that are
not treated as situated in the U.K. and are beneficially owned by an individual
domiciled outside the U.K. will not be subject to U.K. inheritance tax. If a
Senior Note is subject to U.K. inheritance tax and U.S. federal estate tax, the
U.S./U.K. convention for the avoidance of double taxation with respect to estate
and gift taxes may entitle a U.S. Holder to credit or relief in respect of the
U.K. tax.
46
<PAGE>
United States
Payments on the Senior Notes. For U.S. federal income tax purposes, a U.S.
Holder will include interest and Additional Amounts, if any, payable on the
Senior Notes in income when received or accrued in accordance with the U.S.
Holder's method of accounting. Such interest will constitute "foreign source
income" for foreign tax credit purposes.
Subject to certain limitations, a U.S. Holder would generally be required
to include the full amount of the interest payment (without reduction for the
U.K. withholding tax, if any) and Additional Amounts, if any, and would be
entitled to a credit against its U.S. federal income tax liability, or a
deduction in computing its U.S. federal taxable income, for U.K. taxes withheld
from payments of interest to which such U.S. Holder is beneficially entitled. In
the case of a U.S. Holder entitled to claim a refund of any U.K. tax withheld,
no U.S. foreign tax credit or deduction may be claimed for the amount of U.K.
tax eligible for a refund, whether or not such refund is sought, to the extent
that it is reasonably certain that such U.K. tax will be refunded. If a U.S.
Holder receives a refund of U.K. tax for which a deduction or foreign tax credit
was previously claimed, the U.S. Holder generally must (i) in the case of a
deduction, include the refund in gross income or (ii), in the case of a foreign
tax credit, notify the Service of the receipt of the refund, according to the
requirements of Section 1.905-4T of the Treasury Regulations or any successor
provisions, and the Service will redetermine the U.S. Holder's U.S. federal
income tax liability for the taxable year in which the credit was originally
claimed.
Sale or Disposition (including Redemption). For U.S. federal income tax
purposes, taxable gain or loss generally will be recognized by a U.S. Holder on
the sale, redemption, retirement or other disposition of the Senior Notes
measured by the difference between (1) the sum of (a) any cash and (b) the fair
market value of any property received (except in the case of a cash basis
taxpayer, to the extent the cash or property received is attributable to accrued
interest, which will be taxable as such) and (2) the U.S. Holder's tax basis in
the Senior Notes. Subject to the market discount rules discussed below, any gain
or loss recognized generally will be capital gain or loss. Any such gain
generally will constitute "U.S. source income" for foreign tax credit purposes.
Market Discount. A U.S. Holder (other than a U.S. Holder that makes the
election described below) that purchases a Senior Note at a market discount that
is not de minimis generally will be required to treat any gain realized upon the
disposition of such Senior Note as interest income to the extent of the market
discount accruing during the period such holder held such Senior Note. A U.S.
Holder may also be required to recognize as ordinary income any principal
payments with respect to a Senior Note to the extent such payments do not exceed
the accrued market discount on the Senior Note. For this purpose, market
discount generally equals the excess of the stated redemption price of the
Senior Note over the basis of the Senior Note in the hands of the holder
immediately after its acquisition. However, market discount is deemed not to
exist if the market discount is less than a statutorily defined de minimis
amount equal to 1/4 of 1 percent of the Senior Note's stated redemption price
multiplied by the number of complete years to the Senior Note's maturity after
the holder acquired the Senior Note.
The market discount rules also provide that a U.S. Holder of Senior Notes
that were acquired at a market discount may be required to defer the deduction,
until the Senior Notes are disposed of, of a portion of the interest on any
indebtedness incurred or maintained to acquire or carry the Senior Notes.
A U.S. Holder of a Senior Note acquired at a market discount may elect to
include market discount in income as the discount accrues. In such a case, the
foregoing rules with respect to the recognition of ordinary income on
dispositions and with respect to the deferral of interest deductions on
indebtedness related to such Senior Note would not apply. The current inclusion
election applies to all market discount obligations acquired on or after the
first day of the first taxable year to which the election applies, and may not
be revoked without the consent of the Service.
Amortizable Bond Premium. Generally, if the tax basis of an obligation held
as a capital asset exceeds the amount payable at maturity of the obligation,
such excess may constitute amortizable bond premium that the holder of such
obligation may elect to amortize under the constant interest rate method and
deduct over the period from the holder's acquisition date to the obligation's
maturity date. The amortizable bond premium deduction is treated as a reduction
of interest on the bond instead of as a deduction, except as Treasury
Regulations may otherwise provide. A holder that elects to amortize bond premium
must reduce its tax basis in the related obligation by the amount of the
aggregate deductions allowable for the amortizable bond premium. Any election to
amortize bond premium will apply to all bonds (other than bonds the interest on
which is excludible from gross income) held by the holder at the beginning of
the first taxable year
47
<PAGE>
to which the election applies or thereafter acquired by the holder. The election
may not be revoked without the consent of the Service.
In the case of an obligation, such as a Senior Note, that may be called at
a premium prior to maturity, an earlier call date is treated as its maturity
date, and the amount of bond premium is determined by treating the amount
payable on such call date as the amount payable at maturity if such a
calculation produces a smaller amortizable bond premium for the period ending on
such call date. If a U.S. Holder of a Senior Note is required to amortize and
deduct bond premium by reference to a call date, the Senior Note will be treated
for this purpose as maturing on such date for the amount payable, and, if not
redeemed on such date, as reissued on such date for the amount so payable. If a
Senior Note purchased at a premium is redeemed pursuant to a call prior to such
early call date or its maturity, a U.S. Holder that has elected to deduct bond
premium may deduct the excess of its adjusted basis in the Senior Note over the
amount received on redemption (or, if greater, the amount payable on maturity)
as an ordinary loss in the taxable year of redemption.
United States Information Reporting and Backup Withholding. In general,
U.S. information reporting requirements will apply to payments of principal,
premium and interest on a Senior Note and on the proceeds of the sale of a
Senior Note before maturity to a non-corporate U.S. Holder, and U.S. "backup
withholding" at a rate of 31% will apply to such payments if the U.S. Holder
fails to provide an accurate taxpayer identification number or to report all
interest and dividends required to be shown on its federal income tax returns.
The amount of any backup withholding from a payment to a U.S. Holder will
be allowed as a credit against such U.S. Holder's U.S. federal income tax
liability and may entitle such U.S. Holder to a refund, provided that the
required information is furnished to the Service.
ERISA CONSIDERATIONS
The Company, the obligor with respect to the Senior Notes, and its
affiliates may be considered a "party in interest" (within the meaning of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")) or a
"disqualified person" (within the meaning of Section 4975 of the Code) with
respect to any employee benefit plans ("Plans") that are subject to ERISA. Any
purchaser proposing to acquire Senior Notes with assets of any Plan should
consult with its counsel. The purchase and/or holding of Senior Notes by a Plan
that is subject to the fiduciary responsibility provisions of ERISA or the
prohibited transaction provisions of Section 4975 of the Code (including
individual retirement arrangements and other plans described in Section
4975(e)(1) of the Code) and with respect to which the Issuer, Bermuda Holdings
or any affiliate is a service provider (or otherwise is a party in interest or a
disqualified person) may constitute or result in a prohibited transaction under
ERISA or Section 4975 of the Code, unless such Senior Notes are acquired
pursuant to and in accordance with an applicable exemption, such as Prohibited
Transaction Class Exemption ("PTCE") 84-14 (an exemption for certain
transactions determined by an independent qualified professional asset manager),
PTCE 91-38 (an exemption for certain transactions involving bank collective
investment funds), PTCE 90-1 (an exemption for certain transactions involving
insurance company pooled separate accounts), PTCE 95-60 (an exemption for
transactions involving certain insurance company general accounts) or PTCE 96-23
(an exemption for certain transactions determined by an in-house professional
asset manager).
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Issuer and Bermuda Holdings by Clifford Chance, United Kingdom counsel for
the Issuer and Bermuda Holdings, and by Conyers, Dill & Pearman, Bermuda counsel
for the Issuer and Bermuda Holdings.
EXPERTS
The consolidated financial statements of Bermuda Holdings and its
subsidiaries as of December 31, 1996 and 1997 and for each of the three years in
the period ended December 31, 1997, incorporated by reference in this
Prospectus, have been incorporated herein in reliance upon the report of Coopers
& Lybrand (Hamilton, Bermuda), independent accountants, given on the authority
of that firm as experts in accounting and auditing.
48
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations in connection with this offering
other than those contained in this Prospectus, and if given or made, such
information or representations must not be relied upon as having been authorized
by the Issuer or Bermuda Holdings. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, any of the Senior Notes in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create an implication
that the information contained herein is correct as of any time subsequent to
its date or that there has been no change in the affairs of the Issuer or
Bermuda Holdings since such date.
_____________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Available Information....................................................... 1
Incorporation of Certain Documents by Reference............................. 1
Enforceability of Civil Liabilities......................................... 2
Currency.................................................................... 2
Prospectus Summary.......................................................... 3
Company Overview............................................................ 3
The Exchange Offer.......................................................... 7
The Exchange Notes.......................................................... 10
Certain Consequences of a Failure to Exchange Old Notes..................... 11
Risk Factors................................................................ 13
Summary Consolidated Financial Data......................................... 18
Ratio of Earnings to Fixed Charges.......................................... 19
Use of Proceeds............................................................. 20
Capitalization.............................................................. 20
Description of Exchange Notes............................................... 21
Description of Depositary Agreement......................................... 33
Description of Old Notes.................................................... 37
The Exchange Offer.......................................................... 37
Plan of Distribution........................................................ 42
Certain Tax Considerations.................................................. 43
Erisa Considerations........................................................ 48
Legal Matters............................................................... 48
Experts..................................................................... 48
</TABLE>
Terra Nova Insurance (UK)
Holdings plc
OFFER TO EXCHANGE 7% SENIOR NOTES DUE
2008, WHICH WILL BE FULLY AND
UNCONDITIONALLY GUARANTEED ON A SENIOR
BASIS BY TERRA NOVA (BERMUDA) HOLDINGS
LTD. AND WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, FOR ANY AND ALL OUTSTANDING
7% SENIOR NOTES DUE 2008
______________
PROSPECTUS
______________
June 22, 1998
================================================================================
