Net Investment Income. Net investment income increased 9.0% to $85.1 million in 1997 from $78.1 million in 1996. The increase arose from an increase of 11.0% in average invested assets, primarily attributable to the higher operating cash flows in 1997 compared to 1996, $75 million debt issue in August 1997 and the acquisition of Corifrance in the following month partially offset by lower investment yields. The average investment yield before realized gains and losses was 6.2% and 6.3% in 1997 and 1996, respectively. The average duration of fixed maturity investments at December 31, 1997 and 1996 was 4.9 years and 4.2 years, respectively.
65.8% in 1997 from 61.6% in 1996, due to a movement away from property catastrophe reinsurance towards less volatile, but lower margin, primary business. The loss and LAE ratio for non-marine casualty business decreased to 74.9% in 1997 from 82.0% in 1996 as a result of stable results for prior years in 1997. The increase in the marine loss and LAE ratio to 64.6% in 1997 from 55.9% in 1996 was a consequence of the competitive market conditions that existed in 1997 compared to 1996.
The Company's assets consist mainly of the capital stock of UK Holdings and Terra Nova (Bermuda), and UK Holdings' assets consist mainly of the capital stock of Terra Nova, Terra Nova Capital and Octavian. The Company's ability to pay dividends on its capital stock and to pay its obligations depends on dividends or other payments from Terra Nova, Terra Nova (Bermuda), Terra Nova Capital, Octavian and Corifrance. Dividend and other payments by Terra Nova, Terra Nova Capital and Octavian are subject to limits under U.K. law, Terra Nova (Bermuda), Bermuda law and Corifrance, French law.
On May 5, 1998, AM Best raised its claims-paying ability rating of Terra Nova and Terra Nova (Bermuda) to "A" from "A-". AM 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".
Other internally-supported software that was not identified as business critical was deemed compliant by December 31, 1998, after testing and implementation work. Externally supported packages and services were assessed. All suppliers and manufacturers were contacted for their compliance status. Where possible, all essential packages are also being tested. The target for completion of this work is April 30, 1999.
Given the breadth and ambiguity of the Year 2000 issues for the Company, largely as a result of uncertainty about the Year 2000 readiness of third party suppliers, customers and trading partners, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on its future results of operations, liquidity or financial condition. The Company considers that the work already done on its internal systems and the continuing assessment and remediation in other areas, should significantly reduce the possible effect of the Year 2000.
(n) Goodwill: The goodwill in the Company's balance sheet has been calculated using the purchase method of accounting and is amortized on a straight line basis over periods not exceeding 40 years.
The Company has contingent liabilities regarding irrevocable undrawn letters of credit of $248,212,339 and $199,334,500 supporting the Company's underwriting activities on the Octavian syndicates at December 31, 1998 and, 1997, respectively. The Company has deposited cash and investments with a carrying value of $250,553,300 and $221,670,000 at December 31, 1998 and 1997, respectively, as collateral to support this commitment. Cash and securities with a carrying value of $149,076,000 and $66,246,000 at December 31, 1998 and 1997, respectively, were held in trust for the benefit of the Octavian syndicates' policyholders.
During 1998, the Company issued 82,382 ordinary shares to satisfy options exercised under the Company's stock option plan (see Note 10). Also during the year, the Company repurchased 132,200 shares at a total cost of $3,395,670, excluding commissions. As at December 31, 1998, the Company had purchased a total of 632,800 shares at a total cost of $13,395,670, leaving a further $6,604,330 available for future repurchases under the Board of Directors' authorization, dated May 5, 1997. The shares are to be held in trust for the satisfaction of employees' and directors' long-term compensation plans and any other corporate purposes.
Management has considered environmental and latent injury claims and claims expenses in establishing the Company's reserve for unpaid losses and loss adjustment expenses. The Company continues to be advised of claims asserting injuries from hazardous materials and alleged damages to cover various clean- up costs affecting policies written in prior years. Coverage and claim settlement issues, such as determining that coverage exists and defining an occurrence, may cause the actual loss development to show more variation than the rest of the Company's book of business. Traditional reserving techniques cannot be used to estimate asbestos-related and environmental pollution claims and so the uncertainty about the ultimate cost of these types of claims is greater than the uncertainty relating to standard lines of business. The Company believes it has made reasonable provisions for claims, although the ultimate liability may be more or less than held reserves. The Company believes that future losses associated with these claims will not have a material adverse effect on its financial position. Still, there is no assurance that such losses will not materially affect the Company's results of operations for any period. Management is not able to estimate the additional loss, or range of loss, that is reasonably possible.
(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.
Fees of $838,750, $487,500 and $3,216,004 were paid to a related party, who is a significant shareholder, in 1998, 1997 and 1996, respectively. The fees related to the issue of the Senior Notes and the capitalization of the Company.
UK Holdings was incorporated in the United Kingdom on November 7, 1994, to acquire Terra Nova. UK Holdings is the issuer of Senior Notes as described in Note 16. Bermuda Holdings is the guarantor of such notes. The Guarantee is full and unconditional.