<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File number 1-13832
TERRA NOVA (BERMUDA) HOLDINGS LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BERMUDA N/A
------- ---
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION NO)
INCORPORATION OR
ORGANISATION)
RICHMOND HOUSE
12 PAR LA VILLE ROAD
HAMILTON HM08
BERMUDA
----------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
TELEPHONE: (441) 292 7731
---------------------------------------------------
(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
The number of registrant's ordinary shares ($5.80 par value) outstanding as of
August 12, 1998 was 25,491,874.
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
------------------------------
Page No.
--------
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 1998 (Unaudited) and December 31, 1997 1
Consolidated Statements of Operations (Unaudited)
Three Months Ended June 30, 1998 and 1997
Six Months Ended June 30, 1998 and 1997 2
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months ended June 30, 1998 and 1997
Six Months Ended June 30, 1998 and 1997 3
Consolidated Statements of Shareholders' Equity (Unaudited)
Six Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 1998 and 1997 5
Notes to the Interim Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II - OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
At June 30, At December 31,
1998 1997
---------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments available for sale and cash, at fair value:
Fixed maturities:
Bonds (amortized cost $1,272,437 and $1,219,799, respectively) $1,318,314 $1,261,458
Common stocks (cost $55,142 and $69,781, respectively) 87,475 104,234
Cash and cash equivalents 78,057 109,864
---------------- ---------------
Total investments and cash 1,483,846 1,475,556
Accrued investment income 31,252 28,076
Insurance balances receivable 93,958 74,774
Reinsurance recoverable on paid losses 49,178 39,402
Reinsurance recoverable on unpaid losses 221,625 246,728
Accrued premium income 292,793 188,055
Prepaid reinsurance premiums 64,438 26,853
Deferred acquisition costs 125,207 76,380
Goodwill 26,454 26,918
Other assets 39,871 37,392
--------------- ---------------
Total assets $2,428,622 $2,220,134
================ ===============
LIABILITIES
Unpaid losses and loss adjustment expenses $1,131,613 $1,157,724
Unearned premiums 450,217 274,934
Insurance balances payable 68,048 33,833
Income taxes payable 14,032 10,274
Deferred income taxes 12,570 15,244
Long-term debt 175,000 175,000
Net liabilities of Aviation business in run-off 27,001 28,235
Other liabilities 32,633 43,002
---------------- ---------------
Total liabilities $1,911,114 $1,738,246
---------------- ---------------
SHAREHOLDERS' EQUITY
Common shares 150,602 150,142
Stock held in Trust (9,500) (9,500)
Deferred equity compensation 5,325 3,275
Additional capital 111,726 111,568
Retained earnings 200,388 169,861
Accumulated other comprehensive income 58,967 56,542
---------------- ---------------
Total shareholders' equity $517,508 $481,888
---------------- ---------------
---------------- ---------------
Total liabilities and shareholders' equity $2,428,622 $2,220,134
================ ===============
</TABLE>
See accompanying notes to the interim consolidated financial statements.
1
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three Months and Six Months Ended June 30, 1998 and 1997
(Unaudited)
(dollars in thousands except share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenues
Net written premiums $109,104 $95,154 $390,949 $278,320
Decrease (increase) in unearned premiums 5,604 767 (141,657) (103,936)
------------ ------------ ------------- -------------
Net earned premiums 114,708 95,921 249,292 174,384
Net investment income 23,681 21,074 46,263 41,063
Realized net capital gains on sales of investments 3,170 1,582 14,558 7,512
Foreign exchange gains 124 644 306 795
Agency income 7,303 3,303 10,484 6,564
------------ ------------ ------------- -------------
Total revenues 148,986 122,524 320,903 230,318
------------ ------------ ------------- -------------
Expenses
Losses and loss adjustment expenses, net 66,914 65,005 162,122 116,272
Acquisition costs 40,742 27,121 75,165 49,764
Other operating expenses 4,842 3,243 9,126 7,214
Interest expense 3,575 2,687 7,497 5,375
Agency expense 5,634 2,594 8,465 5,239
Other expenses 2,026 1,656 3,223 2,754
------------ ------------ ------------- -------------
Total expenses 123,733 102,306 265,598 186,618
------------ ------------ ------------- -------------
Income from operations before income taxes 25,253 20,218 55,305 43,700
Income tax expense 4,653 3,714 10,282 9,052
------------ ------------ ------------- -------------
Net income before extraordinary charge $20,600 $16,504 $45,023 $34,648
============ ============ ============= =============
Extraordinary charge after tax 11,641 - 11,641 -
------------ ------------ ------------- -------------
Net income after extraordinary charge $8,959 $16,504 $33,382 $34,648
============ ============ ============= =============
Basic earnings per common share
Net income before extraordinary charge $0.81 $0.64 $1.77 $1.34
Extraordinary charge (0.46) - (0.46) -
------------ ------------ ------------- -------------
Net income after extraordinary charge $0.35 $0.64 $1.31 $1.34
============ ============ ============= =============
Diluted earnings per common share
Net income before extraordinary charge $0.79 $0.63 $1.73 $1.32
Extraordinary charge (0.45) - (0.45) -
------------ ------------ ------------- -------------
Net income after extraordinary charge $0.34 $0.63 $1.28 $1.32
============ ============ ============= =============
</TABLE>
See accompanying notes to the interim consolidated financial statements.
2
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three Months and Six Months Ended June 30, 1998 and 1997
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
1998 1997 1998 1997
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Net income after extraordinary charge $8,959 $16,504 $33,382 $34,648
----------- ------------ ---------- ------------
Other comprehensive income (loss) net of tax:
Unrealized appreciation (depreciation) of investments before tax 2,818 28,408 2,098 (2,100)
Tax benefit (expense) (124) (7,291) 262 628
----------- ------------ ---------- ------------
Unrealized appreciation (depreciation) of investments after tax 2,694 21,117 2,360 (1,472)
Currency translation adjustments (4) 51 65 (44)
----------- ------------ ---------- ------------
Other comprehensive income (loss) 2,690 21,168 2,425 (1,516)
----------- ------------ ---------- ------------
----------- ------------ ---------- ------------
Comprehensive income $11,649 $37,672 $35,807 $33,132
=========== ============ ========== ============
</TABLE>
3
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Six Months Ended June 30, 1998 and 1997
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Common shares:
Balance, beginning of period $150,142 $149,933
Issued during the period 460 181
------------ ------------
Balance, end of period $150,602 $150,114
============ ============
Stock held in Trust:
Balance, beginning of period $(9,500) $-
Purchased during the period - (10,020)
Options exercised during the period - 200
------------ ------------
Balance, end of period $(9,500) $(9,820)
============ ============
Deferred equity compensation:
Balance, beginning of period $3,275 $-
Stock option compensation expense 2,050 2,022
Options exercised during the period - (142)
------------ ------------
Balance, end of period $5,325 $1,880
============ ============
Additional capital:
Balance, beginning of period $111,568 $111,544
Options exercised during the period 158 24
------------ ------------
Balance, end of period $111,726 $111,568
============ ============
Retained earnings:
Balance, beginning of period $169,861 $100,821
Net income after extraordinary charge 33,382 34,648
Dividends payable on ordinary shares (2,855) (1,811)
------------ ------------
Balance, end of period $200,388 $133,658
============ ============
Accumulated other comprehensive income:
Balance, beginning of period $56,542 $36,461
Unrealized appreciation (depreciation) of investments, net of tax 2,360 (1,472)
Currency translation adjustments 65 (44)
------------ ------------
Balance, end of period $58,967 $34,945
============ ============
------------ ------------
Total shareholders' equity $517,508 $422,345
============ ============
</TABLE>
See accompanying notes to the interim consolidated financial statements.
4
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1998 and 1997
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income after extraordinary charge $33,382 $34,648
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill 317 566
Stock option compensation expense 2,050 1,602
Realized capital gains (14,558) (7,512)
Change in unpaid losses and loss adjustment expenses (23,934) (33,076)
Change in unearned premiums and prepaid reinsurance 137,698 104,188
Change in insurance balances payable 34,215 (5,237)
Change in insurance balances receivable, accrued premium income and
reinsurance recoverable on paid and unpaid losses (108,541) (66,379)
Change in deferred acquisition costs (48,828) (40,983)
Change in accrued investment income (3,176) (975)
Change in current and deferred income taxes 754 6,966
Change in other assets and liabilities, net 4,082 14,202
Change in net liabilities of Aviation business in run-off (1,234) (2,978)
-------------- --------------
Total adjustments (21,155) (29,616)
-------------- --------------
Net cash provided by operating activities 12,227 5,032
-------------- --------------
Cash flows from investing activities:
Proceeds of fixed maturities matured 17,678 30,046
Proceeds of fixed maturities sold 221,259 232,479
Proceeds of equity securities sold 88,814 85,395
Purchase of fixed maturities (292,337) (246,710)
Purchase of equity securities (63,483) (88,216)
-------------- --------------
Net cash provided by (used in) investing activities (28,069) 12,994
-------------- --------------
Cash flows from financing activities:
Ordinary dividend paid (2,855) (1,811)
Redemption of public debt (113,053) -
Proceeds from public debt offering 99,899 -
Payment of fees for financing public debt offering (853) -
Repurchase of common shares - (10,020)
Stock options exercised 618 263
-------------- --------------
Net cash used in financing activities (16,244) (11,568)
-------------- --------------
Change in cash and cash equivalents (32,086) 6,458
Exchange on foreign currency cash balances 279 (363)
Cash and cash equivalents at beginning of period 109,864 50,544
-------------- --------------
Cash and cash equivalents at end of period $78,057 $56,639
============== ==============
Supplemental disclosure of cash flow information
Income taxes paid $3,800 $100
============== ==============
Interest paid $11,938 $5,375
============== ==============
</TABLE>
See accompanying notes to the interim consolidated financial statements.
5
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements ("Statements")
present information in relation to Terra Nova (Bermuda) Holdings Ltd. (the
"Company") and have been prepared on the basis of accounting principles
generally accepted in the United States of America. All material intercompany
accounts and transactions among the companies included in the Statements have
been eliminated. In the opinion of management, these unaudited Statements
reflect all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation of the financial position, results of operations and cash
flows of the Company. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year.
These Statements should be read in conjunction with the audited consolidated
financial statements as of December 31, 1997.
2. CONTINGENCIES
The Company is regularly involved, directly or indirectly, in litigation in the
ordinary course of conducting its insurance and reinsurance business. In a
number of cases, plaintiffs seek to establish coverage for liability under
environmental protection laws. While the nature and extent of insurance and
reinsurance coverage for environmental liability has widened since 1980, in the
judgement of management, none of these cases, individually or collectively, is
likely to result in judgements for amounts which, net of losses and loss
adjustment expense liabilities previously established and reinsurance
recoverables which management believes are probable of realization, would have a
material effect on the financial position of the Company. However, there is no
assurance that such losses will not materially effect the Company's results of
operations for any period.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No.133 "Accounting for Derivative Instruments and Hedging Activities". SFAS
No.133 is effective for fiscal years beginning after June 15, 1999. This
statement will require all derivatives to be recognized in the statement of
financial position as either assets or liabilities and measured at fair value.
In addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS No.133. The Company does not
anticipate that SFAS No.133 will have a significant impact on its financial
reporting.
4. COMPREHENSIVE INCOME
In June 1997, FASB issued SFAS No.130 "Reporting Comprehensive Income",
effective for financial statements issued for periods beginning after December
15, 1997. SFAS No.130 establishes standards for reporting and display of
comprehensive income and its components within a set of financial statements.
Comprehensive income consists of net income and other comprehensive income,
consisting for the Company of unrealised appreciation or depreciation of
investments and currency translation adjustments. Certain prior year amounts
have been reclassified to conform with the current year presentation.
6
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. REINSURANCE CEDED
In the ordinary course of business, Terra Nova Insurance Company Limited ("Terra
Nova"), Terra Nova (Bermuda) Insurance Company Ltd. ("Terra Nova (Bermuda)") and
Terra Nova Capital Limited ("Terra Nova Capital") cede reinsurance to other
insurance companies. Ceded reinsurance arrangements limit the net loss
potential arising from large risks. Reinsurance is effected under reinsurance
treaties and by negotiation on individual risks.
Terra Nova, Terra Nova (Bermuda) and Terra Nova Capital cede reinsurance to and
assume reinsurance from Lloyd's of London ("Lloyd's") syndicates. As of June
30, 1998, the aggregate exposure from reinsurance ceded to Lloyd's syndicates in
respect of continuing operations, including estimated reinsurance recoveries on
losses incurred but not reported, was approximately $84 million, the majority of
which was ceded into Equitas with effect from September 4, 1996.
(a) Net written premiums are comprised of the following:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1998 1997
------------- ------------
(dollars in thousands)
<S> <C> <C>
Direct business $230,240 $133,571
Reinsurance assumed 237,554 198,188
Reinsurance ceded (76,845) (53,439)
------------- ------------
Net written premiums $390,949 $278,320
============= ============
(b) Net earned premiums are comprised of the following:
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1998 1997
------------- ------------
(dollars in thousands)
<S> <C> <C>
Direct business $136,884 $73,466
Reinsurance assumed 152,654 124,948
Reinsurance ceded (40,246) (24,030)
------------- ------------
Net earned premiums $249,292 $174,384
============= ============
(c) Losses and loss adjustment expenses, net, are comprised of the following:
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1998 1997
------------- ------------
(dollars in thousands)
<S> <C> <C>
Losses and loss adjustment expenses $189,148 $130,683
Reinsurance ceded (27,026) (14,411)
------------- ------------
Losses and loss adjustment expenses, net $162,122 $116,272
============= ============
</TABLE>
7
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
6. EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT
Earnings per share ("EPS") are computed in accordance with SFAS No.128, which is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. All prior period EPS data presented is restated to
conform with the provisions of SFAS No.128.
Basic EPS are computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding during the period.
Diluted EPS considers all dilutive potential common shares that were outstanding
during the period.
The following EPS have been computed using SFAS No.128:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------------
1998 1997
--------------- ---------------
(dollars in thousands
except share amounts)
<S> <C> <C>
Income available to common stockholders $45,023 $34,648
--------------- ---------------
Shares outstanding for basic EPS calculation 25,464,398 25,770,172
--------------- ---------------
Basic EPS $1.77 $1.34
=============== ===============
Shares added for diluted EPS
calculation to reflect the effect of:
Stock options 631,563 388,163
--------------- ---------------
Shares outstanding for diluted EPS calculation 26,095,961 26,158,335
--------------- ---------------
Diluted EPS $1.73 $1.32
=============== ===============
</TABLE>
7. SUMMARIZED FINANCIAL INFORMATION FOR TERRA NOVA INSURANCE (UK) HOLDINGS PLC
("UK HOLDINGS")
Summarized consolidated balance sheet information as at June 30, 1998 and
December 31, 1997 and summarized consolidated statement of operations
information for the six months ended June 30, 1998 and 1997 relating to UK
Holdings is set out below. Separate financial statements of UK Holdings are not
presented because they would not be material to holders of UK Holdings 7.2%
Senior Notes due 2007 or to holders of UK Holdings 7.0% Senior Notes due 2008.
8
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------------- ----------------
(dollars in thousands)
<S> <C> <C>
Investments and cash $949,744 $960,191
Reinsurance recoverable on unpaid losses 372,806 407,560
Accrued premium income 267,235 170,006
Other assets 395,244 288,077
---------------- ----------------
Total assets $1,985,029 $1,825,834
================ ================
Unpaid losses and loss adjustment expenses $1,040,686 $1,077,327
Unearned premiums 416,184 254,833
Net liabilities of Aviation business in run-off 20,686 21,985
Long-term debt 175,000 175,000
Other liabilities 143,575 119,971
---------------- ----------------
Total liabilities 1,796,131 1,649,116
---------------- ----------------
Total shareholders' equity 188,898 176,718
---------------- ----------------
Total liabilities and shareholders' equity $1,985,029 $1,825,834
---------------- ----------------
<CAPTION>
Six Months Ended June 30,
1998 1997
---------------- ----------------
(dollars in thousands)
<S> <C> <C>
Net earned premiums $210,768 $146,694
Net investment income 28,366 27,221
Realized investment gains 11,744 7,276
Foreign exchange gains 302 647
Agency income 10,484 6,564
---------------- ----------------
Total revenues 261,664 188,402
---------------- ----------------
Underwriting costs and expenses 219,161 154,889
Agency expenses 8,465 5,239
---------------- ----------------
Income from operations before income taxes 34,038 28,274
---------------- ----------------
Net income before extraordinary charge $23,756 $19,222
================= ================
Extraordinary charge after tax 11,641 --
---------------- ----------------
Net income after extraordinary charge $12,115 $19,222
================ ================
</TABLE>
8. EXTRAORDINARY CHARGE ARISING ON EXTINGUISHMENT OF DEBT
An extraordinary charge of $11.6 million arose during the second quarter as a
result of UK Holdings extinguishing all of its $100 million 10.75% Senior Notes
due 2005 (the "Senior Notes" ). The charge was net of a $5.2 million income
tax benefit.
The Senior Notes were extinguished as follows:
(a) On April 1, 1998, UK Holdings repurchased $4.5 million of the Senior Notes
for consideration of $5.2 million, including accrued interest.
9
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
(b) On May 18, 1998, UK Holdings completed a cash tender for the remaining $95.5
million of the Senior Notes for consideration of $111.9 million, including
accrued interest.
The extraordinary charge has been recognised in the period of extinguishment in
accordance with SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities."
9. ISSUE OF LONG TERM DEBT
On May 18, 1998, UK Holdings completed an issue of $100 million 7.0% Senior
Notes due 2008, fully and unconditionally guaranteed by Bermuda Holdings. The
net proceeds were used to finance the tender for $95.5 million 10.75% Senior
Notes due 2005, as described in Note 8 to these Statements.
10
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
The following discussion addresses the principal factors affecting the earnings
and financial condition of the Company. All references herein to the "Company"
are to Terra Nova (Bermuda) Holdings Ltd. ("Bermuda Holdings") and all of its
direct and indirect subsidiaries, including Terra Nova Insurance (UK) Holdings
plc ("UK Holdings"), Terra Nova Insurance Company Limited ("Terra Nova"), Terra
Nova (Bermuda) Insurance Company Ltd. ("Terra Nova (Bermuda)"), Compagnie de
Reassurance d'Ile de France ("Corifrance"), Octavian Syndicate Management
Limited ("Octavian") and Terra Nova Capital Limited ("Terra Nova Capital").
This discussion should be read in conjunction with the audited consolidated
financial statements of Bermuda Holdings as of December 31, 1997.
MIX OF BUSINESS
The Company's mix of business and combined ratios for the three and six months
ended June 30, 1998 and 1997 are set forth in the following table:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------------- ------------------------------------------------
1998 1997 1998 1997
Amount Percent Amount Percent Amount Percent Amount Percent
----------- --------- ----------- --------- ----------- --------- ------------ ---------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Written Premiums
Non-marine property $51,861 40.0% $35,077 33.7% $225,341 48.2% $154,150 46.4%
Non-marine casualty 24,928 19.3 38,683 37.2 125,065 26.7 74,880 22.6
Marine & Aviation 52,768 40.7 30,343 29.1 117,388 25.1 102,729 31.0
----------- --------- ----------- --------- ----------- --------- ------------ ---------
Total $129,557 100.0% $104,103 100.0% $467,794 100.0% $331,759 100.0%
=========== ========= =========== ========= =========== ========= ============ =========
Net Written Premiums
Non-marine property $51,133 46.9% $35,490 37.3% $202,235 51.7% $136,488 49.0%
Non-marine casualty 21,180 19.4 35,914 37.7 114,132 29.2 67,578 24.3
Marine & Aviation 36,791 33.7 23,750 25.0 74,582 19.1 74,254 26.7
----------- --------- ----------- --------- ----------- --------- ------------ ---------
Total $109,104 100.0% $95,154 100.0% $390,949 100.0% $278,320 100.0%
=========== ========= =========== ========= =========== ========= ============ =========
Net Earned Premiums
Non-marine property $54,832 47.8% $41,846 43.6% $107,184 43.0% $82,953 47.6%
Non-marine casualty 25,525 22.3 28,074 29.3 77,042 30.9 41,497 23.8
Marine & Aviation 34,351 29.9 26,001 27.1 65,066 26.1 49,934 28.6
----------- --------- ----------- --------- ----------- --------- ------------ ---------
Total $114,708 100.0% $95,921 100.0% $249,292 100.0% $174,384 100.0%
=========== ========= =========== ========= =========== ========= ============ =========
Losses and Loss Adjustment Expense Ratios
Non-marine property 66.0 65.1 66.0 64.5
Non-marine casualty 58.2 84.0 76.2 82.1
Marine & Aviation 46.2 54.6 50.3 57.5
--------- --------- --------- ---------
Total 58.3% 67.8% 65.0% 66.7%
========= ========= ========= =========
Underwriting Expense Ratios
Non-marine property 36.3 30.8 35.2 32.3
Non-marine casualty 40.2 21.0 24.7 24.3
Marine & Aviation 44.9 44.5 42.3 40.3
--------- --------- --------- ---------
Total 39.7% 31.7% 33.8% 32.7%
========= ========= ========= =========
Combined Ratios
Non-marine property 102.3 95.9 101.2 96.8
Non-marine casualty 98.4 105.0 100.9 106.4
Marine & Aviation 91.1 99.1 92.6 97.8
--------- --------- --------- ---------
Total 98.0% 99.5% 98.8% 99.4%
========= ========= ========= =========
</TABLE>
11
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1997
Gross Written Premiums; Net Written Premiums; Net Earned Premiums. Gross
written premiums increased 24.5%, to $129.6 million in 1998 from $104.1
million in 1997. The overall increase in gross written premiums of $25.5
million was mainly a consequence of Terra Nova Capital's increased
participation on syndicates managed by Octavian from 47% in 1997 to
approximately 60% in 1998. The majority of the business written by Terra Nova
Capital is UK property, UK casualty, marine and aviation business.
Premium rates have declined since 1997. Management believes the decline is
primarily due to the absence of a major catastrophe event, favorable loss
experience on non-catastrophe business and an overall increase in competition in
the markets in which the Company operates. UK auto rates have increased in 1998
because of poor loss experience in recent years and the withdrawal from the
market of certain companies that wrote UK auto business.
Reinsurance ceded increased by 129.6%, to $20.5 million in 1998 from $8.9
million in 1997. The increase reflects the increase in gross written premiums
at Octavian where a higher level of reinsurance is ceded.
Net written premiums increased by 14.7%, to $109.1 million in 1998 from $95.2
million in 1997, as a consequence of the increase in gross written premiums,
largely offset by the increase in reinsurance ceded. Net earned premiums
increased 19.6%, to $114.7 million in 1998 from $95.9 million in 1997.
Net Investment Income. Net investment income increased by 12.4%, to $23.7
million in 1998 from $21.1 million in 1997. The increase resulted from growth in
average invested assets, the Company reducing the amount of equities it holds,
the Company investing in lower grade fixed income securities and investment
income from orphan syndicate business written in the last quarter of 1997 and
the first quarter of 1998. The average investment yield before realized gains
and losses was 6.4% and 6.5% in 1998 and 1997, respectively. The average
duration of fixed maturity investments was 4.7 years and 4.9 years at June 30,
1998 and 1997, respectively.
Realized Net Capital Gains on Sales of Investments. Realized net capital gains
on sales of investments increased $1.6 million to $3.2 million in 1998 from $1.6
million in 1997. The majority of realized gains in 1998 arose from equity
securities sold during the period.
Losses and Loss Adjustment Expenses. Losses and LAE increased 2.9%, to $66.9
million in 1998 from $65.0 million in 1997. As a percentage of net earned
premiums, losses and LAE decreased 9.5%, to 58.3% in 1998 from 67.8% in 1997.
Second quarter 1998 ratios reflect the Company's changed mix of business
resulting from its greater participation in the Octavian syndicates, partially
offset by the impact of the orphan syndicate business written in 1997. The
orphan syndicate business recorded a loss ratio in excess of 90% but an expense
ratio below 10%. Excluding the effect of orphan syndicate business written in
1997, the loss ratio in 1997 would have been 63.1%.
Acquisition Costs. Acquisition costs, consisting of commissions and other
underwriting expenses, increased 50.2%, to $40.7 million in 1998 from $27.1
million in 1997. Acquisition costs as a percentage of net earned premiums
increased 7.2%, to 35.5% in 1998 from 28.3% in 1997. The increase was a result
of the increased participation in Octavian business in 1998 the additional
earned premiums from the orphan syndicate business written during 1997 with
lower acquisition costs. Excluding the effect of the orphan syndicate business,
acquisition costs would have been 32.4% of net earned premiums in 1997.
Other Operating Expenses. Other operating expenses increased 49.3%, to $4.8
million in 1998 from $3.2 million in 1997. Other operating expenses as a
percentage of net earned premiums increased to 4.2% in 1998 from 3.4% in 1997.
Combined Ratios. The Company's combined ratios were 98.0% for 1998 and 99.5%
for 1997.
12
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net Interest Expense. Net interest expense in 1998 relates to interest on the
$100 million 10.75% Senior Notes issued on June 30, 1995, interest on the $75
million 7.2% Senior Notes issued on August 26, 1997, and interest on the $100
million 7.0% Senior Notes issued on May 18, 1998. The interest expense in
1997 relates solely to the $100 million 10.75% Senior Notes issue.
Income from Operations before Income Taxes and Extraordinary Charge. Income
from operations before income taxes and an extraordinary charge increased 24.9%,
to $25.3 million in 1998 from $20.2 million in 1997. This increase was mainly
due to higher realized gains on disposal of equities in 1998 and the increase in
investment income.
Income Tax Expense. Income tax expense increased 25.3%, to $4.7 million in
1998 from $3.7 million in 1997, as a consequence of the increase in operating
income of the UK subsidiaries.
Net Income. Net income increased $4.1 million to $20.6 million in 1998 from
$16.5 million in 1997 as a result of the factors described above.
Extraordinary charge. In May 1998, UK Holdings issued $100 million 7.0%
Senior Notes due 2008. The refinancing resulted in a second quarter non-
recurring, non-operating charge of $16.9 million before income taxes, or $11.6
million after income taxes. The reduced interest costs and fee amortization are
expected to save $2.4 million on an annual basis.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
Gross Written Premiums; Net Written Premiums; Net Earned Premiums. Gross
written premiums increased 41.0%, to $467.8 million in 1998 from $331.8
million in 1997. The overall increase in gross written premiums of $136.0
million was attributable to:
(a) Terra Nova Capital's writing gross premiums of $173.3 million (before
orphan syndicate business, which the Company does not reinsure) in 1998 compared
to $85.2 million in 1997, as a consequence of Terra Nova Capital's increased
participation on syndicates managed by Octavian from 47% in 1997 to
approximately 60% in 1998. The majority of the business written by Terra Nova
Capital is UK property, UK casualty, marine and aviation business;
(b) $27.9 million of casualty premiums related to reinsurance to close of
orphan Lloyd's syndicates from the 1993 year of account compared to $12.1
million in 1997; and
(c) $18.7 million of premiums from Corifrance, which was acquired in September
1997, and writes primarily property business on a reinsurance basis.
Premium rates have declined since 1997. Management believes the decline is
primarily due to the absence of a major catastrophe event, favorable loss
experience on non-catastrophe business and an overall increase in competition in
the markets in which the Company operates. UK auto rates have increased in 1998
due to poor loss experience in recent years and the withdrawal by certain
companies who wrote UK auto business.
Reinsurance ceded increased by 43.8%, to $76.8 million in 1998 from $53.4
million in 1997. The increase reflects the increase in gross written premiums
at Octavian. As a consequence, reinsurance ceded as a percentage of gross
written premiums (excluding the orphan syndicate business which has no
reinsurance) was 17.5% in 1998 compared to 16.7% in 1997.
13
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net written premiums increased by 40.5%, to $390.9 million in 1998 from $278.3
million in 1997, as a consequence of the increase in gross written premiums
referred to above largely offset by the increase in reinsurance ceded. Net
earned premiums increased 43.0%, to $249.3 million in 1998 from $174.4 million
in 1997.
Net Investment Income. Net investment income increased by 12.7%, to $46.3
million in 1998 from $41.1 million in 1997 resulting from an increase of 14.7%
in average invested assets, the Company reducing the amount of equities it
holds, the Company investing in lower grade fixed income securities and
investment income from orphan syndicate business. The average investment yield
before realized gains and losses was 6.3% and 6.4% in 1998 and 1997,
respectively. The average duration of fixed maturity investments was 4.7 years
and 4.9 years at June 30, 1998 and 1997, respectively.
Realized Net Capital Gains on Sales of Investments. Realized net capital
gains on sales of investments increased $7.1 million to $14.6 million in 1998
from $7.5 million in 1997. The majority of gains in 1998 arose from equity
securities sold during the period.
Losses and Loss Adjustment Expenses. Losses and LAE increased 39.4%, to
$162.1 million in 1998 from $116.3 million in 1997. As a percentage of net
earned premiums, losses and LAE decreased 1.7%, to 65.0% in 1998 from 66.7% in
1997. The ratios reflect the Company's changed mix of business resulting from
its greater participation in the Octavian syndicates, partially offset by the
impact of the orphan syndicate business. The orphan syndicate business recorded
a loss ratio in excess of 90% but an expense ratio below 10%. Excluding orphan
syndicate business, losses and LAE as a percentage of net earned premiums
decreased to 61.0% in 1998 from 64.2% in 1997.
Acquisition Costs. Acquisition costs, consisting of commissions and other
underwriting expenses, increased 51.0%, to $75.2 million in 1998 from $49.8
million in 1997. Acquisition costs as a percentage of net earned premiums
increased 1.7%, to 30.2% in 1998 from 28.5% in 1997. The increase over 1997
reflects the Company's increased participation in Octavian business which
carries a higher expense ratio due to a higher level of reinsurance ceded and
Lloyd's charges, partially offset by the impact of the orphan syndicate business
which has lower acquisition costs. Excluding orphan syndicate business,
acquisition costs as a percentage of net earned premiums increased to 33.8% in
1998 from 30.7% in 1997.
Other Operating Expenses. Other operating expenses increased 26.5%, to $9.1
million in 1998 from $7.2 million in 1997. Other operating expenses as a
percentage of net earned premiums decreased to 3.7% in 1998 from 4.1% in 1997.
Combined Ratios. The Company's combined ratios were 98.8% for 1998 and 99.4%
for 1997.
Net Interest Expense. Net interest expense in 1998 relates to interest on the
$100 million 10.75% Senior Notes issued on June 30, 1995, interest on the $75
million 7.2% Senior Notes issued on August 26, 1997, and interest on the $100
million 7.0% Senior Notes issued on May 18, 1998. The interest expense in
1997 relates solely to the $100 million 10.75% Senior Notes issue.
Income from Operations before Income Taxes and Extraordinary Charge. Income
from operations before income taxes and an extraordinary charge increased 26.6%,
to $55.3 million in 1998 from $43.7 million in 1997. This increase was mainly
due to higher realized gains on disposal of equities in 1998 and the increase in
investment income.
Income Tax Expense. Income tax expense increased 13.6%, to $10.3 million in
1998 from $9.1 million in 1997, as a consequence of the increase in operating
income of the UK subsidiaries, partially offset by a reduction in the rate of UK
Corporation Tax from 33% to 31% from April 1997.
Net Income before Extraordinary Charge. Net income before an extraordinary
charge increased $10.4 million to $45.0 million in 1998 from $34.6 million in
1997 as a result of the factors described above.
Extraordinary Charge. An extraordinary charge of $11.6 million arose during
the second quarter as a result of UK Holdings extinguishing all of its $100
million 10.75% Senior Notes due 2005. The charge was net of a $5.2 million
income tax benefit.
14
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets consist primarily of the capital stock of UK Holdings and
Terra Nova (Bermuda), and UK Holdings' assets consist primarily of the capital
stock of Terra Nova, Terra Nova Capital, Octavian and Terra Nova SAS (the
holding company for Corifrance). The ability of the Company to pay dividends on
its capital stock and to pay its obligations depends primarily on dividends or
other payments from Terra Nova, Terra Nova (Bermuda), Terra Nova Capital,
Octavian and Corifrance. The payment of dividends and other payments by Terra
Nova, Terra Nova Capital and Octavian are subject to restrictions under UK law
and Terra Nova (Bermuda), Bermuda law and Corifrance, French law.
The sources of funds for the Company's subsidiaries consist primarily of net
premiums, investment income and proceeds from sales and redemptions of
investments. The funds are used primarily to pay claims and operating expenses
and for the purchase of investments, largely fixed income securities.
The shareholders' equity of Terra Nova at June 30, 1998 was $276.0 million.
The increase of $7.4 million in the first six months to June 30, 1998 was due
largely to $6.1 million of retained earnings for the period. The shareholders'
equity of Terra Nova (Bermuda) at June 30, 1998 was $294.0 million. The increase
of $23.9 million during 1998 was due largely to $21.6 million of retained
earnings for the period.
For the six months ended June 30, 1998, the cash flow provided by operating
activities of the Company was $12.2 million compared to $5.0 million in 1997.
Excluding debt interest payments and advance corporation tax payments, operating
cash flows were $28.0 million in 1998 compared to $10.5 million in 1997. The
increase of $17.5 million was primarily a consequence of Terra Nova Capital and
Terra Nova (Bermuda) receiving cash from orphan syndicate business written both
in the last quarter of 1997 and the first half of 1998. The net cash used in
financing activities in respect of the debt refinancing in 1998 was $13.2
million.
Total investments and cash were $1,483.8 million at June 30, 1998. At June
30, 1998, 88.8%, 5.9% and 5.3% of total investments and cash were held in fixed
maturities, common stocks and cash and cash equivalents, respectively. At June
30, 1998, approximately 88.6% of the Company's fixed income investments were
rated "A" or better by Moody's or S&P. The Company's investment portfolio
earned interest and dividend income, net of investment management fees, of 6.3%
and 6.4% in the six months ended June 30, 1998 and 1997, respectively. The
Company had realized investment gains of $14.6 million and $7.5 million in the
six months ended June 30, 1998 and 1997, respectively.
On April 29, 1998, Moody's Investor Services raised its debt rating on the
Company's Senior Notes to "Baa1" from "Baa3". The rating increase reflects the
improved strength of the Company's financial position.
On May 5, 1998, A M Best raised its claims-paying ability rating of
Terra Nova and Terra Nova (Bermuda) to "A" from "A-". A M Best stated that, "The
rating increase reflects the Company's excellent financial performance,
liquidity and conservative investment strategy. The rating also reflects its
experienced management team, which has expanded the business profitably since
Bermuda Holdings was established in 1994."
Certain information contained herein is based on management's estimates,
assumptions and projections. Important factors that could cause actual results
to differ materially from those estimated by management include, among other
things, an unexpected increase in competition, unfavorable government
regulation, the pricing environment and other industry developments.
15
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOREIGN CURRENCY
The Company's assets, liabilities, revenues and expenses, except for the
majority of corporate overhead which is paid in British pounds, are
predominantly in U.S. dollars. Accordingly, the Company's functional currency
is the U.S. dollar. Certain other net translation adjustments are shown as a
separate component of accumulated other comprehensive income.
YEAR 2000
The Company has conducted an analysis of the impact of the year 2000 and is
developing solutions to the issues arising therefrom. This analysis has
included a review of the expected and possible impact on the business of the
year 2000 issue and, in particular, the impact on amounts and disclosures in the
financial statements and any other related public information.
The cost to address year 2000 issues is not expected to be material and is
being expensed as incurred.
DIVIDEND POLICY
On February 6, 1998, the Company declared a dividend of $0.05 per share
payable on March 27, 1998 to shareholders of record as of March 6, 1998.
On May 4, 1998, the Company declared a dividend of $0.06 per share payable on
June 26, 1998 to shareholders of record as of June 5, 1998.
On August 6, 1998, the Company declared a dividend of $0.06 per share payable
on September 25, 1998 to shareholders of records as of September 4, 1998.
The declaration and payment of dividends is at the discretion of the Board of
Directors of the Company and will depend upon the Company's results of
operations, the financial position and capital requirements of the Company's
operating subsidiaries, general business conditions, legal, tax and regulatory
restrictions on the payment of dividends and other factors the Board of
Directors of the Company deems relevant. While the Company is not itself
subject to any contractual restrictions or significant legal prohibitions on
dividend payments, the Company's subsidiaries are subject to regulatory and
legal constraints on their respective abilities to pay dividends. Accordingly,
there is no assurance that dividends will be declared or paid in the future.
16
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS 27 - Financial Data Schedule
b) FORM 8-K Date of Report May 28, 1998
News Release
17
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Date: August 12, 1998 By: /s/JOHN J. DWYER
--------------- ----------------
John J. Dwyer
Chairman
Date: August 12, 1998 By: /s/WILLIAM J. WEDLAKE
--------------- ---------------------
William J. Wedlake
Chief Financial Officer, Senior Vice
President and
Principal Accounting Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<DEBT-HELD-FOR-SALE> 1,318,314 1,318,314
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 87,475 87,475
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 1,405,789 1,405,789
<CASH> 78,057 78,057
<RECOVER-REINSURE> 49,178 49,178
<DEFERRED-ACQUISITION> 125,207 125,207
<TOTAL-ASSETS> 2,428,621 2,428,621
<POLICY-LOSSES> 1,131,613 1,131,613
<UNEARNED-PREMIUMS> 450,217 450,217
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 175,000 175,000
0 0
0 0
<COMMON> 150,602 150,602
<OTHER-SE> 366,906 366,906
<TOTAL-LIABILITY-AND-EQUITY> 2,428,621 2,428,621
114,708 249,292
<INVESTMENT-INCOME> 23,681 46,263
<INVESTMENT-GAINS> 3,170 14,558
<OTHER-INCOME> 7,427 10,790
<BENEFITS> 66,914 162,122
<UNDERWRITING-AMORTIZATION> 40,742 75,165
<UNDERWRITING-OTHER> 4,842 9,126
<INCOME-PRETAX> 25,253 55,305
<INCOME-TAX> 4,653 10,282
<INCOME-CONTINUING> 20,599 45,023
<DISCONTINUED> 0 0
<EXTRAORDINARY> 11,641 11,641
<CHANGES> 0 0
<NET-INCOME> 8,959 33,382
<EPS-PRIMARY> 0.35 1.31
<EPS-DILUTED> 0.34 1.28
<RESERVE-OPEN> 954,509 910,996
<PROVISION-CURRENT> 72,314 169,722
<PROVISION-PRIOR> (5,400) (7,600)
<PAYMENTS-CURRENT> 23,597 25,000
<PAYMENTS-PRIOR> 87,838 138,130
<RESERVE-CLOSE> 909,988 909,988
<CUMULATIVE-DEFICIENCY> 0 0
<FN>
<F1>FOREIGN EXCHANGE MOVEMENT DURING THE YEAR HAS BEEN ALLOCATED TO PRIOR YEAR PAID
CLAIMS.
</FN>
</TABLE>
