<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 jurisdiction of (I.R.S. EMPLOYER
incorporation or organisation) IDENTIFICATION NO)
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
May 8, 1998 was 25,475,501.
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
- ------------------------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets
March 31, 1998 (Unaudited) and December 31, 1997 1
Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, 1998 and 1997 2
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended March 31, 1998 and 1997 2
Consolidated Statements of Shareholders' Equity (Unaudited)
Three Months Ended March 31, 1998 and 1997 3
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 1998 and 1997 4
Notes to the Interim Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II - OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
1998 1997
------------ ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments available for sale and cash, at
fair value:
Fixed maturities:
Bonds (amortized cost $1,291,690 and
$1,219,799 respectively) $1,333,493 $1,261,458
Common stocks (cost $56,585 and $69,781
respectively) 90,173 104,234
Cash and cash equivalents 73,564 109,864
---------- ----------
Total investments and cash 1,497,230 1,475,556
Accrued investment income 30,714 28,076
Insurance balances receivable 102,396 74,774
Reinsurance recoverable on paid losses 41,323 39,402
Reinsurance recoverable on unpaid losses 230,200 246,728
Accrued premium income 332,378 188,055
Prepaid reinsurance premiums 62,578 26,853
Deferred acquisition costs 121,083 76,380
Goodwill 26,686 26,918
Other assets 37,051 37,392
---------- ----------
Total assets $2,481,639 $2,220,134
========== ==========
LIABILITIES
Unpaid losses and loss adjustment expenses $1,184,709 $1,157,724
Unearned premiums 450,080 274,934
Insurance balances payable 71,352 33,833
Income taxes payable 13,650 10,274
Deferred income taxes 13,162 15,244
Long-term debt 175,000 175,000
Net liabilities of Aviation business in run-off 27,658 28,235
Other liabilities 40,070 43,002
---------- ----------
Total liabilities $1,975,681 $1,738,246
---------- ----------
SHAREHOLDERS' EQUITY
Common shares 150,452 150,142
Stock held in Trust (9,500) (9,500)
Deferred equity compensation 4,025 3,275
Additional capital 111,718 111,568
Retained earnings 192,986 169,861
Accumulated other comprehensive income 56,277 56,542
---------- ----------
Total shareholders' equity $ 505,958 $ 481,888
---------- ----------
---------- ----------
Total liabilities and shareholders'
equity $2,481,639 $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 SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
REVENUES
Net written premiums $ 281,845 $ 183,166
Increase in unearned premiums (147,261) (104,703)
--------- ---------
Net earned premiums 134,584 78,463
Net investment income 22,582 19,989
Realized net capital gains on sales of investments 11,388 5,930
Foreign exchange gains 182 151
Agency income 3,181 3,802
--------- ---------
Total revenues 171,917 108,335
--------- ---------
EXPENSES
Losses and loss adjustment expenses, net 95,208 51,267
Acquisition costs 34,423 22,643
Other operating expenses 4,284 3,971
Interest expense 3,922 2,688
Agency expense 2,831 3,186
Other expenses 1,197 1,098
--------- ---------
Total expenses 141,865 84,853
--------- ---------
Income from operations before income taxes 30,052 23,482
Income tax expense 5,629 5,338
--------- ---------
Net income $ 24,423 $ 18,144
========= =========
Basic earnings per common share $ 0.96 $ 0.70
Diluted earnings per common share $ 0.94 $ 0.69
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Net income $ 24,423 $ 18,144
Other comprehensive income (loss) net of tax:
Unrealized depreciation of investments (tax
benefits $386 and $7,919 respectively) (334) (22,589)
Currency translation adjustments 69 (95)
--------- ---------
Other comprehensive loss (265) (22,684)
--------- ---------
Comprehensive income (loss) $ 24,158 $ (4,540)
========= =========
</TABLE>
See accompanying notes to the interim consolidated financial statements.
2
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Common shares:
Balance, beginning of period $150,142 $149,933
Issued during the period 310 13
-------- --------
Balance, end of period $150,452 $149,946
======== ========
Stock held in Trust:
Balance, beginning and end of period $ (9,500) $ --
======== ========
Deferred equity compensation:
Balance, beginning of period $ 3,275 $ --
Stock option compensation expense 750 --
-------- --------
Balance, end of period $ 4,025 $ --
======== ========
Additional capital:
Balance, beginning of period $111,568 $111,544
Stock option compensation expense 150 1,211
-------- --------
Balance, end of period $111,718 $112,755
======== ========
Retained earnings:
Balance, beginning of period $169,861 $100,821
Net income 24,423 18,144
Dividends payable on ordinary shares (1,298) (517)
-------- --------
Balance, end of period $192,986 $118,448
======== ========
Accumulated other comprehensive income:
Balance, beginning of period $ 56,542 $ 36,461
Unrealized depreciation of investments, net of tax (334) (22,589)
Currency translation adjustments 69 (95)
-------- --------
Balance, end of period $ 56,277 $ 13,777
======== ========
-------- --------
Total shareholders' equity $505,958 $394,926
======== ========
</TABLE>
See accompanying notes to the interim consolidated financial statements.
3
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 24,423 $ 18,144
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill 232 276
Stock option compensation expense 750 811
Realized capital gains (11,388) (5,930)
Change in unpaid losses and loss adjustment expenses 25,544 (25,401)
Change in unearned premiums and prepaid reinsurance 139,420 104,596
Change in insurance balances payable 37,519 21,285
Change in insurance balances receivable, accrued
premium income and reinsurance recoverable on paid
and unpaid losses (157,986) (84,355)
Change in deferred acquisition costs (44,702) (41,466)
Change in accrued investment income (2,638) (713)
Change in current and deferred income taxes 1,591 2,932
Change in other assets and liabilities, net (2,445) 409
Change in net liabilities of Aviation business in run-off (577) (151)
-------- --------
Total adjustments (14,680) (27,707)
-------- --------
Net cash provided by (used in) operating activities 9,743 (9,563)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds of fixed maturities matured 3,556 10,048
Proceeds of fixed maturities sold 184,735 164,938
Proceeds of equity securities sold 54,419 41,768
Purchase of fixed maturities (255,831) (136,207)
Purchase of equity securities (32,437) (43,091)
-------- --------
Net cash provided by (used in) investing activities (45,558) 37,456
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Ordinary divided paid (1,298) (517)
Stock options exercised 460 13
-------- --------
Net cash used in financing activities (838) (504)
-------- --------
Change in cash and cash equivalents (36,653) 27,389
Exchange on foreign currency cash balances 353 (526)
Cash and cash equivalents at beginning of period 109,864 50,544
-------- --------
Cash and cash equivalents at end of period $ 73,564 $ 77,407
======== ========
Supplemental disclosure of cash flow information
Income taxes paid $ 3,712 $ 100
======== ========
Interest paid $ 7,910 $ 5,375
======== ========
</TABLE>
See accompanying notes to the interim consolidated financial statements.
4
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements present information
in relation to Terra Nova (Bermuda) Holdings Ltd. (the "Company") and have been
prepared on the basis of accounting principles generally accepted in the United
States of America. All material intercompany accounts and transactions among
the companies included in the interim consolidated financial statements have
been eliminated. In the opinion of management, these unaudited interim
consolidated financial statements reflect all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the financial position,
results of operations and cash flows of the Company. The results of operations
for interim periods are not necessarily indicative of the results to be expected
for the full year.
These financial statements should be read in conjunction with the audited
consolidated financial statements as of December 31, 1997 and for each of the
three years for the period ended December 31, 1997, and related notes thereto
included in the Company's Annual Report as filed with the Securities and
Exchange Commission.
2. CONTINGENCIES
The Company is regularly involved, directly or indirectly, in litigation in the
ordinary course of conducting its insurance and reinsurance business. In a
number of cases, plaintiffs seek to establish coverage for liability under
environmental protection laws. While the nature and extent of insurance and
reinsurance coverage for environmental liability has widened since 1980, in the
judgement of management, none of these cases, individually or collectively, is
likely to result in judgements for amounts which, net of losses and loss
adjustment expense liabilities previously established and reinsurance
recoverables which management believes are probable of realization, would have a
material effect on the financial position of the Company, although there is no
assurance that such losses will not materially effect the Company's results of
operations for any period.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No.132 "Employers' Disclosures about Pensions and Other Postretirement
Benefits". SFAS No.132 is effective for fiscal years beginning after December
15, 1997. This statement significantly changes current annual financial
statement disclosure requirements from those that were required under FAS No.87,
"Employers' Accounting for Pensions", SFAS No.88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", and SFAS 106, "Employers' Accounting for Postretirement
Benefits other than Pensions". However, SFAS No.132 does not change the
existing measurement or recognition provisions of FASB Statement Nos. 87, 88 or
106. In view of this, the Company does not consider that SFAS No.132 has an
impact on these interim consolidated financial statements.
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.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
5
<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)"),
Terra Nova Capital Limited ("Terra Nova Capital") and Compagnie de Reassurance
d'Ile de France ("Corifrance") cede reinsurance to other insurance companies.
Ceded reinsurance arrangements provide greater diversification of business and
limit the net loss potential arising from large risks. Reinsurance is effected
under reinsurance treaties and by negotiation on individual risks.
Terra Nova, Terra Nova (Bermuda) and Terra Nova Capital cede reinsurance to and
assume reinsurance from Lloyd's of London ("Lloyd's") syndicates. As of March
31, 1998 the aggregate exposure in respect of reinsurance ceded to Lloyd's
syndicates in respect of continuing operations, including estimated reinsurance
recoveries in respect of losses incurred but not reported, was approximately $84
million, the majority of which was ceded into Equitas with effect from September
4, 1996.
<TABLE>
<CAPTION>
(A) NET WRITTEN PREMIUMS ARE COMPRISED OF THE
FOLLOWING:
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Direct business $144,916 $ 83,489
Reinsurance assumed 193,321 144,167
Reinsurance ceded (56,392) (44,490)
-------- --------
Net written premiums $281,845 $183,166
======== ========
<CAPTION>
(B) NET EARNED PREMIUMS ARE COMPRISED OF THE
FOLLOWING:
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Direct business $ 65,773 $ 31,381
Reinsurance assumed 90,422 61,034
Reinsurance ceded (21,611) (13,952)
-------- --------
Net earned premiums $134,584 $ 78,463
======== ========
<CAPTION>
(B) LOSSES AND LOSS ADJUSTMENT EXPENSES, NET, ARE
COMPRISED OF THE FOLLOWING:
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Losses and loss adjustment expenses $103,762 $ 54,938
Reinsurance ceded (8,554) (3,671)
-------- --------
Losses and loss adjustment expenses, net $ 95,208 $ 51,267
======== ========
</TABLE>
6
<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>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
Income available to common stockholders $ 24,423 $ 18,144
----------- -----------
Shares outstanding for basic EPS calculation 25,451,043 25,852,473
----------- -----------
Basic EPS $ 0.96 $ 0.70
=========== ===========
Shares added for diluted EPS calculation to reflect
the effect of:
Stock options 617,309 441,194
----------- -----------
Shares outstanding for diluted EPS calculation 26,068,352 26,293,667
----------- -----------
Diluted EPS $ 0.94 $ 0.69
=========== ===========
</TABLE>
7. SUMMARIZED FINANCIAL INFORMATION FOR TERRA NOVA INSURANCE (UK) HOLDINGS PLC
("UK HOLDINGS")
Summarized consolidated balance sheet information as at March 31, 1998 and
December 31, 1997 and summarized consolidated statement of operations
information for the three months ended March 31, 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 10.75%
Senior Notes due 2005 or to holders of UK Holdings 7.2% Senior Notes due 2007.
7
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Investments and cash $ 976,365 $ 960,191
Reinsurance recoverable on unpaid losses 386,281 407,560
Accrued premium income 296,503 170,006
Other assets 394,978 288,077
---------- ----------
Total assets $2,054,127 $1,825,834
========== ==========
Unpaid losses and loss adjustment expenses $1,091,563 $1,077,327
Unearned premiums 416,122 254,833
Net liabilities of Aviation business in run-off 21,315 21,985
Long-term debt 175,000 175,000
Other liabilities 159,347 119,971
---------- ----------
Total liabilities 1,863,347 1,649,116
---------- ----------
Total shareholders' equity 190,780 176,718
---------- ----------
Total liabilities and shareholders' equity $2,054,127 $1,825,834
========== ==========
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net earned premiums $ 112,206 $ 66,692
Net investment income 14,204 13,144
Realized investment gains 9,684 6,148
Foreign exchange gains (losses) 658 (117)
Agency income 3,181 3,802
---------- ----------
Total revenues 139,993 89,669
---------- ----------
Underwriting costs and expenses (116,596) (70,360)
Agency expenses (2,831) (3,186)
---------- ----------
Income from operations before income taxes 20,506 16,123
---------- ----------
Net income $ 14,877 $ 10,785
========== ==========
</TABLE>
8. DIVIDENDS DECLARED
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.
9. DEBT REFINANCING
On March 27, 1998 the Board of Directors of UK Holdings authorized the
repurchase of $4.5 million of the 10.75% Senior Notes due 2005. The total
payment of $5,165,348, including accrued interest, was settled on April 1, 1998.
On April 20, 1998 the Company announced that UK Holdings had initiated a cash
tender offer to redeem the remaining $95.5 million of its 10.75% Senior Notes
due 2005 as part of a refinancing plan. The terms of the tender offer are
described in the Offer to Purchase and Consent Solicitation Statement dated
April 20, 1998.
On May 4, 1998 the Company announced that all outstanding Senior Notes due 2005
had been validly tendered.
The tender offer is part of a refinancing plan that is designed to take
advantage of the current low interest rate environment to reduce the Company's
interest expense. Subsequently, the Company intends to reissue $100 million
of Senior Notes at a price to be determined. It is anticipated that the
refinancing will give rise to an extraordinary loss of approximately $11.8
million, net of tax, in the second quarter of 1998.
8
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
The following discussion addresses the principal factors affecting the earnings
and financial condition of the Company. All references herein to the "Company"
are to Terra Nova (Bermuda) Holdings Ltd. ("Bermuda Holdings") and all of its
direct and indirect subsidiaries, including Terra Nova Insurance (UK) Holdings
plc ("UK Holdings"), Terra Nova Insurance Company Limited ("Terra Nova"), Terra
Nova (Bermuda) Insurance Company Ltd. ("Terra Nova (Bermuda)"), 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 and for each
of the three years for the period ended December 31, 1997 and related notes
thereto included in the Company's Annual Report as filed with the Securities and
Exchange Commission.
MIX OF BUSINESS
The Company's mix of business and combined ratios for the three months ended
March 31, 1998 and 1997 are set forth in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------
1998 1997
AMOUNT PERCENT AMOUNT PERCENT
----------- ------------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Gross Written Premiums
Non-marine property $173,480 51.3% $119,073 52.3%
Non-marine casualty 100,137 29.6 36,197 15.9
Marine & Aviation 64,620 19.1 72,386 31.8
----------- ------------- ------------ -----------
Total $338,237 100.0% $227,656 100.0%
=========== ============= ============ ===========
Net Written Premiums
Non-marine property $151,102 53.6% $100,998 55.1%
Non-marine casualty 92,952 33.0 31,664 17.3
Marine & Aviation 37,791 13.4 50,504 27.6
----------- ------------- ------------ -----------
Total $281,845 100.0% $183,166 100.0%
=========== ============= ============ ===========
Net Earned Premiums
Non-marine property $ 52,352 38.9% $ 41,107 52.4%
Non-marine casualty 51,517 38.3 13,423 17.1
Marine & Aviation 30,715 22.8 23,933 30.5
----------- ------------- ------------ -----------
Total $134,584 100.0% $ 78,463 100.0%
=========== ============= ============ ===========
Loss and Loss Adjustment Expense Ratios
Non-marine property 65.9% 63.9%
Non-marine casualty 85.1 78.2
Marine & Aviation 54.8 60.6
------------- -----------
Total 70.7% 65.3%
============= ===========
Underwriting Expense Ratios
Non-marine property 34.1% 33.7%
Non-marine casualty 17.0 31.3
Marine & Aviation 39.4 35.7
------------- -----------
Total 28.8% 33.9%
============= ===========
Combined Ratios
Non-marine property 100.0% 97.6%
Non-marine casualty 102.1 109.5
Marine & Aviation 94.2 96.3
------------- -----------
Total 99.5% 99.2%
============= ===========
</TABLE>
9
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results Of Operations
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
Gross Written Premiums; Net Written Premiums; Net Earned Premiums. Gross
written premiums increased 48.6%, to $338.2 million in 1998 from $227.7
million in 1997. The overall increase in gross written premiums of $110.5
million was mainly a consequence of:
(A) Terra Nova Capital writing gross premiums of $101.0 million (before
"orphan" syndicate business) in 1998 from $50.3 million in 1997, as a
consequence of Terra Nova Capital increasing its 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 auto, 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; and
(C) $13.5 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 26.8%, to $56.4 million in 1998 from $44.5
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 18.2% in 1998 compared to 19.5% in 1997.
Net written premiums increased by 53.9%, to $281.8 million in 1998 from $183.2
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 71.5%, to $134.6 million in 1998 from $78.5 million in
1997.
Net Investment Income. Net investment income increased by 13.0%, to $22.6
million in 1998 from $20.0 million in 1997 resulting from an increase of 17.1%
in average invested assets, partially offset by lower portfolio yields. The
average investment yield before realized gains and losses was 6.1% and 6.3% in
1998 and 1997, respectively. The average duration of fixed maturity investments
was 4.7 years and 4.9 years at March 31, 1998 and 1997 respectively.
Realized Net Capital Gains on Sales of Investments. Realized net capital
gains on sales of investments increased $5.5 million to $11.4 million in 1998
from $5.9 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 85.7%, to
$95.2 million in 1998 from $51.3 million in 1997. As a percentage of net
earned premiums, losses and LAE increased 5.4 percentage points, to 70.7% in
1998 from 65.3% in 1997. First quarter 1998 ratios reflect the Company's
changed mix of business resulting from its greater participation in the Octavian
syndicates and the impact of the orphan syndicate business. The orphan syndicate
business has a loss ratio in excess of 90% but an expense ratio below 10%.
Acquisition Costs. Acquisition costs, comprising commissions and other
underwriting expenses, increased 52.0%, to $34.4 million in 1998 from $22.6
million in 1997. Acquisition costs as a percentage of net earned premiums
decreased 3.3 percentage points, to 25.6% in 1998 from 28.9% in 1997. The
decrease was a result of the earned premiums from the orphan syndicate business
written during 1998 with very low acquisition costs.
10
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Other Operating Expenses. Other operating expenses increased 7.9%, to $4.3
million in 1998 from $4.0 million in 1997. Other operating expenses as a
percentage of net earned premiums decreased to 3.2% in 1998 from 5.1% in 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 and interest on the $75
million 7.2% Senior Notes issued on August 26, 1997. The interest expense in
1997 relates solely to the $100 million Senior Notes issue.
Income From Operations Before Income Taxes. Income from operations before
income taxes increased 28.0%, to $30.0 million in 1998 from $23.5 million in
1997. This increase was mainly due to a high level of realized gains on disposal
of equities in 1998 and to the increase in investment income.
Income Tax Expense. Income tax expense increased 5.5%, to $5.6 million in
1998 from $5.3 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. Net income increased $6.3 million to $24.4 million in 1998 from
$18.1 million in 1997 as a result of the factors described above.
Combined Ratios. The Company's combined ratios were 99.5% for 1998 and 99.2%
for 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets consist primarily of the capital stock of UK Holdings and
Terra Nova (Bermuda), and UK Holdings' assets consist primarily of the capital
stock of Terra Nova, Terra Nova Capital and Octavian. The ability of the
Company to pay dividends on its capital stock and to pay its obligations depends
primarily on dividends or other payments from Terra Nova, Terra Nova (Bermuda),
Terra Nova Capital, 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 March 31, 1998 was $277.6 million.
The increase of $9.0 million in the first three months to March 31, 1998 was due
largely to $9.2 million of net income. The shareholders' equity of Terra Nova
(Bermuda) at March 31, 1998 was $280.7 million. The increase of $10.5 million
during 1998 was due largely to $9.8 million of net income.
For the three months ended March 31, 1998 the cashflow provided by operating
activities of the Company was $9.7 million compared to cashflow used in
operating activities of $9.6 million in 1997. The increase in cash flows
provided by operating activities in 1998 compared to 1997 was primarily a
consequence of:
a) Terra Nova Capital receiving cash from orphan syndicate business written
both in the last quarter of 1997 and the first quarter of 1998; and
b) lower payments to reinsurers in the first quarter of 1998, primarily due
to timing differences in the payment of reinsurance premiums by Terra Nova
Capital.
11
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Total investments and cash were $1,497.2 million at March 31, 1998. At March
31, 1998, 89.1%, 6.0% and 4.9% of total investments and cash were held in fixed
maturities, common stocks and cash and cash equivalents, respectively. At March
31, 1998, approximately 89.9% 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 6.1%
and 6.3% in the three months ended March 31, 1998 and 1997, respectively. The
Company had realized investment gains of $11.4 million and $5.9 million in the
three months ended March 31, 1998 and 1997, respectively.
On January 15, 1998 Fitch IBCA, the international rating agency, raised its
claims-paying ability rating of Corifrance to "A" from "A-". The rating
increase reflects Corifrance's continued underwriting excellence and improved
corporate and financial standing following its acquisition by the Company in
September 1997.
On May 5, 1998 A M Best raised its claims-paying ability rating of the company
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.
FOREIGN CURRENCY
The Company's assets, liabilities, revenues and expenses, except for the
majority of corporate overheads which are paid in British pounds, are
predominantly in U.S. dollars. Accordingly, the Company's functional currency
is the U.S. dollar. Certain other net translation adjustments are shown as a
separate component of 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.
The declaration and payment of dividends is at the discretion of the Board of
Directors of the Company and will depend upon the Company's results of
operations, the financial position and capital requirements of the Company's
operating subsidiaries, general business conditions, legal, tax and regulatory
restrictions on the payment of dividends and other factors the Board of
Directors of the Company deems relevant. While the Company is not itself
subject to any contractual restrictions or significant legal prohibitions on
dividend payments the Company's subsidiaries are subject to regulatory and legal
constraints on their respective abilities to pay dividends. Accordingly, there
is no assurance that dividends will be declared or paid in the future.
12
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS 27 -- FINANCIAL DATA SCHEDULE
b) FORM 8-K None
13
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Date: May 8, 1998 By: /s/JOHN J. DWYER
----------- ----------------
John J. Dwyer
Chairman
Date: May 8, 1998 By: /s/WILLIAM J. WEDLAKE
----------- ---------------------
William J. Wedlake
Chief Financial Officer, Senior Vice President and
Principal Accounting Officer
14
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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