<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT UNDER 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 NM08
Bermuda
----------------------------------------
(Address of principal executive offices)
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 registrant meets the conditions set out in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
The number of registrant's ordinary shares ($5.80 par value) outstanding on
November 6, 2000, was 40,002,069.
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page No.
--------
Part I - FINANCIAL INFORMATION
------------------------------
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 2000 (Unaudited) and December 31, 1999 (Audited) 2
Consolidated Statements of Operations (Unaudited)
Three months ended September 30, 2000 and 1999
Nine months ended September 30, 2000 and 1999 3
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three months ended September 30, 2000 and 1999
Nine months ended September 30, 2000 and 1999 4
Consolidated Statements of Shareholders' Equity (Unaudited)
Nine months ended September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 2000 and 1999 6
Notes to the Interim Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion of Results of Operations 12
Part II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
1
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
At September 30, At December 31,
2000 1999
(Unaudited) (Audited)
------------------ ------------------
<S> <C> <C>
ASSETS
Investments available for sale, at fair value:
Fixed maturities:
Bonds (amortized cost $1,140,715 and $1,321,888, respectively) $1,134,469 $1,306,110
Common stocks (cost $61,107 and $98,335, respectively) 72,845 109,900
------------------ ------------------
Total investments 1,207,314 1,416,010
Cash and cash equivalents 84,891 74,798
Accrued investment income 23,422 27,607
Insurance balances receivable 143,314 121,094
Reinsurance recoverable on paid losses 78,575 62,162
Reinsurance recoverable on unpaid losses 391,776 346,483
Accrued premium income 206,180 238,230
Prepaid reinsurance premiums 77,360 97,771
Deferred acquisition costs 80,302 99,683
Income taxes recoverable 7,303 4,422
Deferred income taxes 56,694 31,820
Other assets 97,261 111,620
------------------ ------------------
Total assets $2,454,392 $2,631,700
================== ==================
LIABILITIES
Unpaid losses and loss adjustment expenses $1,412,712 $1,409,968
Unearned premiums 432,864 468,178
Insurance balances payable 81,112 53,853
Long-term debt 175,000 175,000
Other liabilities 63,262 80,691
------------------ ------------------
Total liabilities 2,164,950 2,187,690
------------------ ------------------
SHAREHOLDERS' EQUITY
Common shares
"A" ordinary shares, 75,000,000 authorized, $5.80 par value
(40,002,069 issued and outstanding; 1999: 24,348,192) 232,012 141,219
"B" ordinary shares, convertible, 10,000,000 authorized, $5.80 par
value
(nil issued and outstanding; 1999: 1,796,217) - 10,418
Stock held in Trust, at cost - (16,787)
Deferred equity compensation - 7,564
Additional capital 34,153 113,855
Retained earnings 27,798 195,163
Accumulated other comprehensive loss (4,521) (7,422)
------------------ ------------------
Total shareholders' equity 289,442 444,010
------------------ ------------------
Total liabilities and shareholders' equity $2,454,392 $2,631,700
================== ==================
</TABLE>
See accompanying notes to the interim consolidated financial statements
2
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues
Net written premiums $ 93,298 $125,091 $ 443,390 $556,196
Decrease (increase) in unearned premiums 38,151 37,882 13,604 (96,825)
--------- -------- --------- --------
Net earned premiums 131,449 162,973 456,994 459,371
Net investment income 21,162 23,289 64,409 69,745
Realized net capital gains (losses) on sales of
investments 373 (1,654) 7,676 29,626
--------- -------- --------- --------
Total revenues 152,984 184,608 529,079 558,742
--------- -------- --------- --------
Expenses
Losses and loss adjustment expenses, net 109,196 112,063 416,218 313,934
Acquisition costs 44,692 55,597 184,532 170,665
Other operating expenses 4,611 4,444 17,423 16,966
Foreign exchange gains (1,428) (989) (4,343) (408)
Interest expense 3,100 3,100 9,300 9,300
Agency contribution (1,192) (1,325) (2,342) (1,574)
Other expenses 2,480 1,566 12,556 5,947
Merger expenses - - 18,416 -
--------- -------- --------- --------
Total expenses 161,459 174,456 651,760 514,830
--------- -------- --------- --------
(Loss) income from operations before income tax (8,475) 10,152 (122,681) 43,912
Income tax benefit (3,045) (1,816) (30,316) (2,355)
--------- -------- --------- --------
Net (loss) income $ (5,430) $ 11,968 $ (92,365) $ 46,267
========= ======== ========= ========
</TABLE>
See accompanying notes to the interim consolidated financial statements
3
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net (loss) income $(5,430) $ 11,968 $(92,365) $ 46,267
------- -------- -------- --------
Other comprehensive income (loss):
Unrealized appreciation (depreciation) of
investments before tax 19,601 (23,499) 19,568 (79,172)
Tax (expense) benefit (4,534) 3,271 (4,984) 14,766
------- -------- -------- --------
Unrealized appreciation (depreciation) of
investments after tax 15,067 (20,228) 14,584 (64,406)
------- -------- -------- --------
Less:
Reclassification adjustment for (gains)
losses included in net income (loss)
before tax (373) 1,654 (7,676) (29,626)
Tax (benefit) expense 425 (248) 659 6,755
------- -------- -------- --------
Reclassification adjustment for gains
included in net income (loss) after tax 52 1,406 (7,017) (22,871)
------- -------- -------- --------
Currency translation adjustments (3,480) (1,188) (4,666) (1,478)
------- -------- -------- --------
Other comprehensive income (loss) 11,639 (20,010) 2,901 (88,755)
------- -------- -------- --------
Comprehensive income (loss) $ 6,209 $ (8,042) $(89,464) $(42,488)
======= ======== ======== ========
</TABLE>
See accompanying notes to the interim consolidated financial statements
4
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
--------- --------
<S> <C> <C>
Common "A" shares:
Balance, beginning of period $ 141,219 $140,202
Cancellation of shares (141,207) -
Issue of shares 232,000 -
Exercise of stock options - 1,016
--------- --------
Balance, end of period 232,012 141,218
--------- --------
Common "B" shares:
Balance, beginning of period 10,418 10,418
Cancellation of shares (10,418) -
--------- --------
Balance, end of period - 10,418
--------- --------
Stock held in Trust, at cost:
Balance, beginning of period (16,787) (12,900)
Exercise of stock options 1,046 -
Cancellation of stock held in Trust 15,741 -
Repurchased during the period - (3,887)
--------- --------
Balance, end of period - (16,787)
--------- --------
Deferred equity compensation:
Balance, beginning of period 7,564 4,623
Exercise of stock options (4,839) -
Stock option compensation expense 9,850 3,075
Transfer to additional capital (12,575) -
--------- --------
Balance, end of period - 7,698
--------- --------
Additional capital:
Balance, beginning of period 113,855 111,727
Exercise of stock options 3,838 2,129
Cancellation of shares (80,374) -
Cancellation of stock held in Trust (15,741) -
Transfer from deferred equity compensation 12,575 -
--------- --------
Balance, end of period 34,153 113,856
--------- --------
Retained earnings:
Balance, beginning of period 195,163 236,292
Net (loss) income (92,365) 46,267
Dividends paid on ordinary shares (75,000) (4,693)
--------- --------
Balance, end of period 27,798 277,866
--------- --------
Accumulated other comprehensive loss:
Balance, beginning of period (7,422) 80,500
Unrealized appreciation (depreciation)
of investments, net of tax 7,567 (87,277)
Currency translation adjustments (4,666) (1,478)
--------- --------
Balance, end of period (4,521) (8,255)
--------- --------
--------- --------
Total shareholders' equity $ 289,442 $526,014
========= ========
</TABLE>
See accompanying notes to the interim consolidated financial statements
5
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (92,365) $ 46,267
Adjustments to reconcile net (loss) income to net cash and cash
equivalents (used in) provided by operating activities:
Amortization of goodwill 2,845 3,184
Bad debt expenses 1,630 -
Stock option compensation expense 10,063 2,756
Realized net capital gains (7,676) (29,627)
Change in unpaid losses and loss adjustment expenses 29,575 19,824
Change in unearned premiums and prepaid reinsurance (14,903) 80,555
Change in insurance balances payable 27,260 37,501
Change in insurance balances receivable, accrued premium income
and reinsurance recoverable on paid and unpaid losses (50,555) (118,824)
Change in deferred acquisition costs 19,381 (25,781)
Change in accrued investment income 4,185 2,617
Change in current and deferred income taxes (29,488) (5,856)
Change in other assets and liabilities, net 2,011 (1,786)
--------- ---------
Total adjustments (5,672) (35,437)
--------- ---------
Net cash and cash equivalents (used in) provided by
operating activities (98,037) 10,830
--------- ---------
Cash flows from investing activities:
Proceeds of fixed maturities matured 24,200 9,170
Proceeds of fixed maturities sold 439,910 274,831
Proceeds of equity securities sold 88,646 152,533
Purchase of fixed maturities (318,088) (240,684)
Purchase of equity securities (45,043) (154,134)
Acquisition of capacity at Lloyd's (5,743) -
--------- ---------
Net cash and cash equivalents provided by investing activities 183,882 41,716
--------- ---------
Cash flows from financing activities:
Ordinary dividends paid to shareholders (75,000) (4,694)
Repurchases of stock - (3,887)
Proceeds from exercise of stock options 46 3,145
--------- ---------
Net cash and cash equivalents used in financing activities (74,954) (5,436)
--------- ---------
Change in cash and cash equivalents 10,891 47,110
Exchange on foreign currency cash balances (798) (18)
Cash and cash equivalents at beginning of period 74,798 40,394
--------- ---------
Cash and cash equivalents at end of period $ 84,891 $ 87,486
========= =========
Supplemental disclosure of cash flow information
Income taxes (repaid) paid $ (3,603) $ 250
========= =========
Interest paid $ 8,900 $ 8,900
========= =========
</TABLE>
See accompanying notes to the interim consolidated financial statements
6
<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 about Terra Nova (Bermuda) Holdings Ltd. (the "Company") and
have been prepared on the basis of United States generally accepted accounting
principles. All material intercompany transactions and balances 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 do not necessarily
indicate the results to be expected for the full year.
On March 24, 2000, the Company was acquired by Markel Corporation ("Markel")
for total consideration of approximately $658 million. Markel issued
approximately 1.75 million common shares and contingent value rights and paid
approximately $325 million in cash to the Company's shareholders in the
transaction. The Company's $175 million of public debt remained outstanding.
These Statements should be read with the audited consolidated financial
statements as of December 31, 1999.
2. Contingencies
The Company is involved regularly, directly or indirectly, in litigation in
the ordinary course of conducting its insurance and reinsurance business. In
some 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
management's judgment, none of these cases, individually or collectively, is
likely to result in judgments 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 as to whether or not such losses will materially affect the Company's
results of operations for any period.
3. Reinsurance
In the ordinary course of business, the Company cedes reinsurance to other
insurance companies. Ceded reinsurance arrangements provide greater
diversification of business and limit the net loss potential arising from large
risks. Certain of these arrangements consist of excess of loss contracts which
protect against losses over stipulated amounts. Reinsurance is effected under
reinsurance treaties and by negotiation on individual risks.
The Company cedes reinsurance to and assumes reinsurance from Lloyd's of
London ("Lloyd's") syndicates. At September 30, 2000, the aggregate exposure on
reinsurance ceded to Lloyd's syndicates for continuing operations, including
estimated reinsurance recoveries for losses incurred but not reported, was
approximately $104 million.
7
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
Notes to the Interim Consolidated Financial Statements
(Unaudited)
(a) Net written premiums are comprised of the following:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---------------------- -----------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Direct business $124,204 $120,680 $ 433,602 $ 453,430
Reinsurance assumed 5,209 35,522 148,642 256,825
Reinsurance ceded (36,115) (31,111) (138,854) (154,059)
------- ------- -------- --------
Net written premiums $ 93,298 $125,091 $ 443,390 $ 556,196
======== ======== ========= =========
</TABLE>
(b) Net earned premiums are comprised of the following:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---------------------- -----------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Direct business $143,967 $137,086 $ 428,414 $ 335,599
Reinsurance assumed 48,056 68,608 177,204 237,137
Reinsurance ceded (60,574) (42,721) (148,624) (113,365)
------- ------- -------- --------
Net earned premiums $131,449 $162,973 $ 456,994 $ 459,371
======== ======== ========= =========
</TABLE>
(c) Losses and loss adjustment expenses, net, are comprised of the following:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---------------------- ----------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Losses and loss adjustment expenses $150,787 $132,140 $ 653,643 $411,488
Reinsurance ceded (41,591) (20,077) (237,425) (97,554)
------- ------- --------- --------
Losses and loss adjustment expenses, net $109,196 $112,063 $ 416,218 $313,934
======== ======== ========= ========
</TABLE>
4. Business Segments
On March 24, 2000, the Company was acquired by Markel. As a result, Markel
realigned its operations with the Company becoming its international division.
The Company's operating segments have been changed in accordance with this
realignment. The Company now includes three operating segments: the London
Company Market, the Lloyd's Market and Investing. All investing activities are
included in the Investing operating segment. Discontinued programs and non-
strategic insurance subsidiaries are included in Other for purposes of segment
reporting.
8
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
Notes to the Interim Consolidated Financial Statements
(Unaudited)
The Company considers many factors including the nature of the underwriting
units' insurance products, production sources, distribution strategies and
regulatory environment in determining how to aggregate operating segments.
Segment profit or loss is measured by underwriting profit or loss. Segment
profit for the Investing operating segment is measured by net investment income
and realized net gains or losses.
The Company does not allocate assets to the operating divisions for management
reporting purposes. The total investment portfolio and cash and cash
equivalents are allocated to the Investing operating segment. The Company does
not allocate capital expenditure for long-lived assets to any of its operating
segments for management reporting purposes.
(a) Following is a summary of segment disclosures:
<TABLE>
<CAPTION>
Segment Revenues
--------------------------------------------------------------------------------------------------------------
Three months ended September 30, Nine months ended September 30,
------------------------------------------ -------------------------------------------
2000 1999 (dollars in thousands) 2000 1999
--------------- -------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
$ 34,221 $ 57,976 London Company Market $141,660 $198,001
74,170 44,363 Lloyd's Market 178,557 93,833
21,535 21,636 Investing 72,085 99,372
23,058 60,633 Other 136,777 167,536
--------------- ------------------- ------------------ ------------------
$152,984 $184,608 Total $529,079 $558,742
=============== ==================== ================== ==================
</TABLE>
<TABLE>
<CAPTION>
Segment (Loss) Profit
-------------------------------------------------------------------------------------------
Three months ended September 30, Nine months ended September 30,
-------------------------------- ----------------------------------
2000 1999 (dollars in thousands) 2000 1999
--------------- -------- ----------------- ---------
<S> <C> <C> <C> <C>
$ (6,221) $(4,684) London Company Market $(71,493) $ 3,787
(10,666) (1,183) Lloyd's Market (37,155) (5,419)
21,535 21,636 Investing 72,085 99,372
(9,062) (1,517) Other (55,557) (41,344)
--------------- -------- ----------------- ---------
$ (4,414) $14,252 Total $(92,120) $ 56,396
=============== ======== ================= =========
</TABLE>
<TABLE>
<CAPTION>
Combined Ratio
---------------------------------------------------------------------------------------------------------------
Three months ended September 30, Nine months ended September 30,
------------------------------------------ -------------------------------
2000 1999 2000 1999
--------------- -------- ---------- -------
<S> <C> <C> <C>
118% 108% London Company Market 150% 98%
114% 103% Lloyd's Market 121% 106%
- - Investing - -
139% 102% Other 141% 125%
----- -------- ---------- -------
120% 105% Total 136% 109%
===== ======== ========== =======
</TABLE>
9
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
Notes to the Interim Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
Segment Assets
--------------------------------------------------------------------------------------------------------------------
At September 30,
--------------------------------------------
2000 1999
------------------ ------------------
(dollars in thousands)
<S> <C> <C>
London Company Market $ - $ -
Lloyd's Market - -
Investing 1,292,205 1,497,336
Unallocated assets 1,162,187 1,110,406
------------------ ------------------
Total $2,454,392 $2,607,742
================== ==================
</TABLE>
(b) The following summary reconciles segment (loss) profit to the Company's
consolidated financial statements:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------------------------ ---------------------------------------------
2000 1999 (dollars in thousands) 2000 1999
--------------- -------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
$(4,414) $14,252 Segment (loss) profit $ (92,120) $56,396
Reconciling items:
(3,100) (3,100) Interest expense (9,300) (9,300)
- - Merger expenses (18,416) -
(961) (1,000) Amortization expense (2,845) (3,184)
--------------- -------------------- ------------------ ------------------
$(8,475) $10,152 Net (loss) income before tax $(122,681) $43,912
=============== ==================== ================== ==================
</TABLE>
5. Summarized Financial Information for Markel International plc ("Markel
International")
Markel International changed its name from Terra Nova Insurance (UK) Holdings
plc on April 20, 2000. Markel International's summarized consolidated balance
sheet information as at September 30, 2000, and December 31, 1999, and
summarized consolidated statement of operations information for the nine months
ended September 30, 2000, and 1999, is set out below.
Markel International is the issuer of $75 million 7.2% Senior Notes due 2007
and $100 million 7.0% Senior Notes due 2008. The Senior Notes are guaranteed
fully and unconditionally by the Company.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- -------------
(dollars in thousands)
<S> <C> <C>
Investments and cash $ 829,793 $ 803,070
Reinsurance recoverable on unpaid losses 549,760 530,102
Accrued premium income 187,755 215,225
Other assets 469,031 485,555
-------------- ------------
Total assets $2,036,339 $2,033,952
============== ============
Unpaid losses and loss adjustment expenses $1,309,591 $1,291,312
Unearned premiums 423,102 446,224
Long-term debt 175,000 175,000
Other liabilities 95,411 88,071
-------------- ------------
Total liabilities 2,003,104 2,000,607
-------------- ------------
Total shareholders' equity 33,235 33,345
-------------- ------------
Total liabilities and shareholders' equity $2,036,339 $2,033,952
============== ============
</TABLE>
10
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
Notes to the Interim Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
---------- ---------
(dollars in thousands)
<S> <C> <C>
Net earned premiums $ 426,019 $413,690
Net investment income 38,785 40,763
Realized investment gains 2,192 22,108
Foreign exchange gains 4,110 450
Agency income 8,899 9,702
---------- ---------
Total revenues 480,005 486,713
---------- ---------
Underwriting costs and expenses 589,545 499,657
---------- ---------
Loss from operations before income tax (109,540) (12,944)
---------- ---------
Net loss $ (79,225) $(10,589)
========== =========
</TABLE>
11
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS
Safe Harbor Statement
This is a Safe Harbor Statement under the Private Securities Litigation Reform
Act of 1995. Any written or oral statements made by or on behalf of the Company
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to uncertainties and
inherent risks that could cause actual results to differ materially from those
contained in any forward-looking statement.
The Company has identified certain factors that could cause actual plans or
results to differ substantially from those included in any forward-looking
statements. These risk factors include, but are not limited to, the following:
(i) uncertainties and changes in government policy and law (both statute and
case law) with respect to the Company, its brokers or customers (for example,
the Company is subjected to taxation in an additional jurisdiction, there is a
change in the way insurance contracts are interpreted by a court of law, etc.);
(ii) uncertainties and changes in regulatory policy and law (for example, the
Company is subjected to insurance regulation in an additional jurisdiction);
(iii) the occurrence of man-made or natural catastrophic events with a frequency
or severity exceeding the estimates of the Company; (iv) the uncertainties of
the reserving process; (v) changing rates of inflation and other economic
conditions; (vi) losses due to foreign currency exchange rate fluctuations;
(vii) ability to collect reinsurance recoverables; (viii) changes in the
availability, cost or quality of reinsurance; (ix) developments in global
financial markets that could affect the Company's investment portfolio; (x)
risks associated with the introduction of new products and services; (xi)
increased competition on the basis of pricing, capacity, coverage terms or other
factors; (xii) changes in the distribution or placement of risks due to
increased consolidation of insurance and reinsurance brokers; (xiii) the impact
of Year 2000 related issues on the Company's underwriting exposures; (xiv) the
effects of mergers, acquisitions and divestitures; (xv) ineffectiveness or
obsolescence of the Company's business strategy due to changes in present or
future market conditions; and (xvi) the legal environment and social trends.
The Company undertakes no obligation to publicly update or revise any forward-
looking statement, whether as a result of new information, future events or
otherwise. Readers are cautioned not to place undue reliance on any forward-
looking statements, which speak only as at their dates.
The Company is currently working to increase its focus on underwriting
profitability in continuing programs. These initiatives may lead to the
repricing or discontinuance of poor performing lines of business, reorganization
of business units to achieve operating efficiencies and a review of reinsurance
programs and exposures. These initiatives could lead to further charges and
expense for the Company. The Company's premium growth, underwriting and
investment results have been and will continue to be potentially and materially
affected by the above factors.
The Company
The following is a summary explanation of the material changes in the
Company's revenue and expenses. All references to the "Company" are to Terra
Nova (Bermuda) Holdings Ltd. and all of its direct and indirect subsidiaries,
including Markel International plc ("Markel International"), Terra Nova
Insurance Company Limited ("Terra Nova"), Terra Nova (Bermuda) Insurance Company
Ltd. ("Terra Nova (Bermuda)"), Compagnie de Reassurance d'Ile de France
("Corifrance"), Markel Syndicate Management Limited ("Markel Syndicate
Management") and Markel Capital Limited ("Markel Capital"). On April 20, 2000,
Markel International changed its name from Terra Nova Insurance (UK) Holdings
plc, Markel Syndicate Management changed its name from Octavian Syndicate
Management Limited and Markel Capital changed its name from Terra Nova Capital
Limited. This discussion should be read with the audited consolidated financial
statements of the Company as of December 31, 1999.
12
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS
Business Operations
The London Company Market consists of the operations of Terra Nova. The
Lloyd's Market includes Markel Capital, which is the corporate capital provider
for six Lloyd's syndicates for the 2000 year of account managed by Markel
Syndicate Management. Of the six syndicates, Non-Marine Syndicate 702, Marine
Syndicate 1009, the continuing lines of Motor Syndicate 1228 and Non-Marine
Syndicate 1239 are included in the Lloyd's Market segment while Marine Syndicate
329, Non-Marine Syndicate 1227 and the discontinued lines of Motor Syndicate
1228 are included in Other as they are discontinued lines of business. Markel
International's operating units write specialty property, casualty, marine and
aviation insurance and reinsurance on a worldwide basis. The majority of Markel
International's business comes from the United Kingdom and the United States.
Discontinued lines of business and non-strategic insurance subsidiaries are
included in Other for segment reporting purposes.
Following, is a comparison of gross premium volume by significant underwriting
area:
<TABLE>
<CAPTION>
Three months ended September 30, Gross Premium Volume Nine months ended September 30,
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
$ 12,533 $ 32,916 London Company Market $154,941 $240,275
110,906 58,433 Lloyd's Market 318,951 205,446
5,974 64,853 Other 108,352 264,534
-----------------------------------------------------------------------------------------------------------------------
$129,413 $156,202 Total $582,244 $710,255
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
Gross written premiums decreased 17.2% to $129.4 million in the third quarter
of 2000 from $156.2 million written in 1999. In the first nine months of 2000,
gross written premiums decreased by 18.0% to $582.2 million from $710.3 million
in 1999. The decreases are primarily a result of:
(a) A 62% decrease in gross written premiums at the London Company Market to
$12.5 million in the third quarter of 2000 from $32.9 million in 1999. In
the nine months ended September 30, 2000, gross written premiums at the
London Company Market fell 35.5% to $154.9 million from $240.3 million in
1999. The decrease was predominantly the result of Terra Nova reducing its
property writings by 45.0% in the nine months to September 30, 2000,
compared to 1999. The decrease on the property account arose primarily
from Terra Nova reducing its writings on the property pro rata business by
76.6% to $13.3 million in the first nine months of 2000 from $56.8 million
in 1999 as a consequence of a detailed review of poor performing accounts.
In addition, Terra Nova reduced writings on marine and casualty lines to
increase its focus on underwriting profitability.
(b) Significant decreases in gross written premiums in discontinued lines due
to the closure of Motor Syndicate 554 in the second half of 1999, the
closure of Terra Nova (Bermuda) on April 2, 2000, and the decision to cease
underwriting at Marine Syndicate 329 and Non Marine Syndicate 1227 in the
third quarter of 2000.
13
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS
(c) These decreases have been partially offset by a 89.8% and 55.2% increase in
gross written premiums at the Lloyd's Market for the three months and nine
months to September 30, 2000, respectively. The increase is primarily due to
Markel Capital increasing its participation on the continuing syndicates to
approximately 89% in 2000 compared to approximately 71% in 1999 and
increased writings at Non Marine Syndicate 702 and Marine and Aviation
Syndicate 1009. The increased writings at Non Marine Syndicate 702 primarily
arose on certain professional indemnity classes. The increased writings at
Marine and Aviation Syndicate 1009 is a consequence of the syndicate writing
$26.3 million of aviation business in 2000. In 1999, aviation business was
written by Aviation Syndicate 959 which was merged into Syndicate 1009 for
2000.
Net written premiums decreased 25.4% to $93.3 million in the third quarter of
2000 from $125.1 million in 1999. In the first nine months of 2000, net written
premiums decreased by 20.3% to $443.4 million from $556.2 million in 1999. This
reflects the fall in gross written premiums as the retention rates remained at
similar levels in both the first nine months of 2000 and 1999.
Net earned premiums decreased by 19.3% in the third quarter of 2000 to $131.5
million from $163.0 million in 1999. Net earned premiums decreased by 0.5% to
$457.0 million in the first nine months of 2000 from $459.4 million in 1999.
The decrease reflects the decreased writings in 2000.
Following, is a comparison of selected data from the Company's operations:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Gross premium volume $129,413 $156,202 $ 582,244 $710,255
Net written premiums 93,298 125,091 443,390 556,196
Net retention 72% 80% 76% 78%
Net earned premiums 131,449 162,973 456,994 459,371
Losses and loss adjustment expenses 109,196 112,063 416,218 313,934
Underwriting, acquisition and insurance expenses 48,204 58,291 204,981 188,410
Underwriting loss (25,950) (7,381) (164,204) (42,973)
GAAP ratios
Loss ratio 83% 69% 91% 68%
Expense ratio 37% 36% 45% 41%
-----------------------------------------------------------------------------------------------------------------------
Combined ratio 120% 105% 136% 109%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
The underwriting loss increased to $26.0 million in the third quarter of 2000
from $7.4 million in 1999. The underwriting loss in 2000 was primarily the
result of inadequate pricing, poor underwriting controls on the discontinued
lines and portions of the continuing programs. The underwriting loss for the
nine months to September 30, 2000, increased to $164.2 million from $43.0
million in 1999. The increased underwriting loss reflects non-recurring
transaction related expenses of $58.6 million in the first quarter and $105.6
million of underwriting losses from operations.
Charges which are expected to be non-recurring include:
(a) A $36.5 million charge against deferred acquisition costs due to poor
experience on property business and certain marine, casualty and auto
lines.
14
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS
(b) $19.6 million of reserve strengthening required on property, casualty and
auto accounts.
(c) A $2.5 million charge to record liabilities under an operating lease.
The $105.6 million underwriting loss from operations was due to poor
performance on both continuing and discontinued lines of business including the
closing of Terra Nova (Bermuda) and the adoption of the Markel reserving
philosophy.
The Company is currently working to increase its focus on underwriting
profitability in continuing programs. These initiatives may lead to the re-
pricing or discontinuance of poor performing lines of business, reorganisation
of business units to achieve operating efficiencies and the review of
reinsurance programs.
As a consequence of the above, the Company's combined ratio increased to 136%
in the nine months to September 30, 2000, compared to 109% in 1999. For the
three months to September 30, 2000, and 1999, the combined ratios were 120% and
105%, respectively.
The Company had a pre-tax loss of $122.7 million in the first nine months of
2000 compared to pre-tax profit of $43.9 million in 1999. The pre-tax loss of
$122.7 million in 2000 was primarily a result of the $164.2 million underwriting
loss and merger expenses of $18.4 million being partially offset by $64.4
million and $7.7 million of investment income and realized investment gains,
respectively. The pre-tax profit of $43.9 million in 1999 was primarily a
result of the $43.0 million underwriting loss being offset by $69.7 million and
$29.6 million of investment income and realized investment gains, respectively.
The Company had a pre-tax loss of $8.5 million in the third quarter of 2000
compared to pre-tax profit of $10.2 million in 1999. The pre-tax loss of $8.5
million in 2000 was primarily a result of the $26.0 million underwriting loss
being partially offset by $21.2 million and $0.4 million of investment income
and realized investment gains, respectively. The pre-tax profit of $10.2
million in 1999 was primarily a result of the $7.4 million underwriting loss
being offset by $23.3 million and $1.7 million of investment income and realized
investment losses, respectively.
The post-tax loss was $5.4 million in the third quarter of 2000 compared to a
post-tax profit of $12.0 million in 1999. For the first nine months of 2000,
the post-tax loss was $92.4 million compared to a post-tax profit of $42.3
million in 1999.
Shareholders' equity decreased by 34.8% to $289.4 million at September 30,
2000, compared to $444.0 million at December 31, 1999. The decrease of $154.6
million was primarily due to the net loss of $92.4 million and a $75.0 million
dividend paid to Markel Corporation on March 28, 2000, partially offset by
unrealized appreciation of investments after tax of $7.6 million and other
comprehensive loss and deferred equity compensation movements of $5.4 million.
15
<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
16
<PAGE>
TERRA NOVA (BERMUDA) HOLDINGS LTD.
AND SUBSIDIARIES
SIGNATURES
----------
Under the requirements of the Securities Exchange Act of 1934, the registrant
has had this report signed on its behalf by the undersigned who are so
authorized.
Date: November 6, 2000 By: /s/JEREMY D. COOKE
---------------- ------------------
Jeremy D. Cooke
Chief Operating Officer
Date: November 6, 2000 By: /s/ANDREW J. DAVIES
---------------- -------------------
Andrew J. Davies
Finance Director and
Principal Accounting Officer
17
