The principal offices of the Company are leased by the Company in Hamilton, Bermuda. Terra Nova's London executive offices are leased by Terra Nova and its underwriting and claims staff are located in space leased by Terra Nova in the London Underwriting Centre and in the Institute of London Underwriters' building. Octavian leases offices in London, Poole, Leeds and Chelmsford and also leases space in the Lloyd's building. Corifrance leases offices in Paris, France. Additionally, Terra Nova leases offices in Brussels and Toronto. Management believes that its office space is adequate for the Company's current needs.
- -SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 1999
The following table sets forth selected consolidated financial information with respect to the Company for the periods indicated. This information should be read in conjunction with the Consolidated Financial Statements of the Company and related notes and "Management's Discussion and Analysis of Results of Operations and Financial Conditions".
- -------- (1) 1998 net income, comprehensive income and net operating earnings and related per share figures are stated before the extraordinary charge of $11.6 million or $0.45 per share associated with the debt refinancing in May 1998. (2) Net operating (losses) earnings represents net (loss) income before extraordinary charges, discontinued operations, minority interests, and realized gains on investments after tax. Management believes this measure is relevant and useful to the investor as it shows income from core operations. It excludes non-recurring items and realized gains on investments which reflect management's decision to sell investments from time to time. The measure does not replace operating income or net income, computed in accordance with United States generally accepted accounting principles, as a measure of profitability. (3) Investment yield reflects net investment income as a percentage of average invested assets. (4) Total return includes net investment income, net realized investment gains and change in market value during the period as a percentage of average invested assets. (5) Book value per share is equal to shareholders' equity divided by the number of common shares outstanding at the end of the period. (6) Net (loss) income per share is calculated on a diluted basis by using the weighted average number of common shares outstanding during the period. 1996 and 1995 disclosures have been restated in order to comply with SFAS No.128--"Earnings per Share".
- -MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company's underwriting results in 1999 were affected by three main factors. First, 1999 was the worst year for international catastrophe losses in recent history. The Company's share of these catastrophes and large losses for the year was $59 million, including $42 million of catastrophe losses in the fourth quarter. Secondly, the Company was active in closing certain businesses, such as the decisions to exit the London Company Market marine hull and energy business at the beginning of the year and to exit high street motor business in the second quarter, and in re-structuring and combining others, such as the merger of aviation syndicate 959 into marine syndicate 1009. Underwriting losses in 1999 from businesses the Company is not continuing in 2000, together with associated closure costs and additional reinsurance costs incurred in protecting the aviation and satellite business written by Syndicate 959, totaled $122 million in the year. Finally, the Company experienced a significant amount of late reported claims relating to certain property loss events which occurred prior to December 31, 1998.
Gross written premiums increased 13.9% to $864.9 million in 1999, up from $759.4 million in 1998.
Terra Nova (Bermuda)'s gross written premiums were $46.0 million in 1999 compared to $80.5 million in 1998. The prior year figure includes $36.0 million of orphan syndicate business compared to $0.8 million written in the current year. Excluding orphan syndicate business, Terra Nova (Bermuda)'s gross written premiums were in line with last year.
As noted above, premiums rates remain low in most of the classes of business the Company writes. It is the Company's policy not to relax underwriting standards in order to maintain premium volume. Management is cautious about predicting any improvement in market conditions. However, there is evidence of premium rates rising in the retrocessional market. While good news, because the reinsurance markets historically are the first to move out of recession, and 31% of the Company's overall book is reinsurance, this will exert pressure on the Company's direct insurance business as margins get squeezed. It is also likely the heavy catastrophe loss experience in the fourth quarter of 1999 will add to the pressure for rate increases.
Net written premiums were $618.4 million in 1999 compared to $646.2 million in 1998. The decrease in 1999 is a result of higher reinsurance costs more than offsetting the increase in gross written premiums. Net earned premiums were $585.3 million in 1999 compared to $546.9 million in 1998.
portfolio, consistent with the longer term focus on growing book value of the Company. Invested assets at fair value declined to $1.4 billion at December 31, 1999, from $1.5 billion at December 31, 1998. The average annualized investment yield was 6.1% in both 1999 and 1998. The average duration of fixed maturity investments at December 31, 1999 and 1998, was 4.2 years and 4.8 years, respectively.
Realized net capital gains on sales of investments increased $8.9 million to $26.9 million in 1999 from $18.0 million in 1998. The net gains in 1999 comprise $32.9 million of gains on sales of equity securities and $6.0 million of losses on sales of fixed maturities. The variability in realized gains is largely a result of interest rate volatility which influences the market value of the Company's investments. The Company's investment strategy is to focus on maximizing long-term total investment returns.
The net contribution from managing agency income was $0.1 million for 1999 compared to $3.3 million in 1998. The current year movement is due to lower profit commission from the syndicates managed by Octavian and a change in the stock option compensation expense estimate for the Octavian Stock Option Plan. The Plan provides for the grant of options based on profit commissions received by Octavian for the 1996 to 2000 Lloyd's underwriting years. The compensation expense is calculated using APB No.25 and is dependent on both the share price at the grant date for each underwriting year and the projected number of options to be granted. Any change in these variables gives rise to a change in the compensation expense. The current year charge consists of an accrual for part of the estimated cost of options to be granted in respect of the 1997, 1998 and 1999 underwriting years.
The Company's combined ratio was 129.4% in 1999 against 98.8% in 1998. The combined ratio measures the relationship of losses and loss adjustment expenses, policy acquisition costs and other operating expenses to net earned premiums.
Interest expense in 1999 related to interest on the $100 million 7.0% Senior Notes issued on May 18, 1998 and interest on the $75 million 7.2% Senior Notes issued on August 26, 1997. The interest expense in 1998 related to the $100 million and $75 million Senior Notes issues and the $100 million 10.75% Senior Notes extinguished in the second quarter of that year.
Gross written premiums increased 38.0% to $759.4 million in 1998 from $550.2 million in 1997. The increase in gross written premiums of $209.2 million was primarily due to:
The increases in premium volumes were partly offset by the effect of a fall in premium rates since 1997 as a result of competition in the markets in which the Company operates, with the exception of motor business which experienced rate increases of approximately 15% in 1998.
Net written premiums increased 33.7% to $646.2 million in 1998 from $483.5 million in 1997, as a result of the increase in gross written premiums, partially offset by higher reinsurance costs. Net earned premiums increased 30.5%, to $546.9 million in 1998 from $419.1 million in 1997.
Net investment income increased 9.6% to $93.3 million in 1998 from $85.1 million in 1997. The increase was due to average invested assets being 10.3% higher in 1998 than 1997. The average investment yield before realized gains and losses was 6.1% in 1998 and 6.2% in 1997. The investment yield was similar to 1997, as the Company had a lower proportion of equities in 1998 and a larger proportion of single A and BBB bonds in 1998 compared to 1997. The effect of these factors was offset by the lower interest rates in 1998 compared to 1997. The average duration of fixed maturity investments at December 31, 1998 and 1997, was 4.8 years and 4.9 years, respectively.
The Company's combined ratio was 98.8% in 1998 against 98.2% in 1997.
(c) The decrease in the marine loss and LAE ratio to 55.8% in 1998 from 64.6% in 1997 was partly a result of Terra Nova (Bermuda) recognizing reserve redundancies on the business written prior to its acquisition by the Company and Terra Nova recognizing reserve redundancies on marine LMX business written prior to 1992. Terra Nova (Bermuda), formerly Underwriters Capital (Merrett) Ltd. ("UCM"), was organized in Bermuda in 1993 to provide reinsurance to certain Lloyd's syndicates. These decreases were partially offset by an increase in losses on the Company's aviation business due to weaker prices and higher losses in 1998 compared to 1997.
Acquisition costs, which consist of commission expenses and other underwriting expenses, increased 39.0% to $160.4 million in 1998 from $115.4 million in 1997. Acquisition costs as a percentage of net earned premiums increased to 29.3% in 1998 from 27.5% in 1997. The increase in the ratio was caused by a change in the Company's mix of business resulting from its greater participation in the Octavian syndicates. Octavian business carries a higher expense ratio due to a higher level of reinsurance ceded.
Other operating expenses increased 48.2% to $20.3 million in 1998 from $13.7 million in 1997. As a percentage of net earned premiums, they increased to 3.7% in 1998 from 3.3% in 1997, reflecting Lloyd's charges incurred by the Octavian syndicates.
Net income decreased $1.0 million, to $72.4 million in 1998 from $73.4 million in 1997, after the $11.6 million extraordinary charge recognized in the second quarter of 1998.
reinsurance costs and operating expenses. Long-term investments are held to meet longer-tail claims and to support statutory and other capital requirements. The holding companies, U.K. Holdings and Bermuda Holdings, receive cash from their subsidiaries as reimbursement for operating and other administrative expenses they incur according to the terms of various management agreements between the companies. U.K. Holdings has to maintain sufficient liquidity to fund interest payments on its debt.
For the year ended December 31, 1999, the cash flow provided by operating activities of the Company was $20.1 million compared to $75.9 million in 1998. The movement reflects the higher level of loss activity in 1999 compared to 1998 and costs incurred in 1999 in restructuring the Company's businesses. The cash flow provided by investing activities of the Company was $21.2 million compared to $122.8 million used in investing activities in 1998. The movement reflects the investment of higher operating cash flows in 1998 compared to 1999 and the Company maintaining a high cash balance at the end of 1999 in anticipation of the Markel transaction. The cash flow used in financing activities of the Company was $6.9 million compared to $22.8 million provided by financing activities in 1998. The movement primarily reflects the debt refinancing in 1998.
On December 23, 1999, Terra Nova (Bermuda) paid a dividend of $180 million to Bermuda Holdings. The dividend was settled by transferring Terra Nova (Bermuda)'s full equity portfolio, with the balance made up of cash and fixed interest securities. Bermuda Holdings also received a dividend of $33 million from U.K. Holdings in December 1999.
Total assets were $2.6 billion at December 31, 1999 compared to $2.5 billion at December 31, 1998.
On January 26, 2000, Markel and the Company announced that they had agreed to revised terms for the merger and scheme of arrangement. Under the revised agreement, the Company's shareholders would be entitled to receive for each ordinary share, $13.00 in cash, 0.07027 of a common share in a new holding
Terra Nova Capital's participation in the Lloyd's Capacity Auctions for the 2000 underwriting year resulted in the acquisition of additional capacity in the syndicates managed by Octavian. This will bring the Company's share of aggregate capacity on the Octavian syndicates to about 90% for the 2000 underwriting year, up from about 77% for the 1999 underwriting year.
Certain information included here 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.
The Company's assets, liabilities, revenues and expenses, except for most corporate overheads which are paid in British pounds, are chiefly in U.S. dollars. Therefore, the Company's principal functional currency is the U.S. dollar. Certain other net translation adjustments are shown as a separate item of accumulated other comprehensive income.
On January 1, 1999, the Economic and Monetary Union ("EMU") and a new currency, the "euro", were adopted by eleven of the fifteen member states of the European Union ("EU"). Other member states, including the United Kingdom, currently remain outside the EMU, but may join in the future. Today, Corifrance is the Company's only operation in EMU countries.
The Company has addressed Year 2000 as both an IT issue and a business issue.
At March 20, 2000, the Company had received no claims in respect of Year 2000 related losses. The Company takes the position that Year 2000 exposures are not fortuitous losses and thus are not covered under insurance policies even without specific exclusions. However, in certain sectors of the Company where there may be a perceived exposure to Year 2000 claims, the Company has bought reinsurance to protect itself. For these reasons, the Company believes that its exposure to Year 2000 claims will not be material. However, as was the case with the environmental exposures, changing social and legal trends may create unintended coverage for exposures by reinterpreting insurance contracts and exclusions. It is impossible to predict what, if any, exposure insurance companies may ultimately have for Year 2000 claims whether coverage for the issue is specifically excluded or included.
J.J. Dwyer W.J. Wedlake Chairman Senior Vice President and Chief Financial Officer
Year Ended December 31, (dollars in thousands except per share amounts)
Consolidated Statements of Comprehensive Income Year Ended December 31, (dollars in thousands)
Terra Nova (Bermuda) Holdings Ltd. ("Bermuda Holdings") is incorporated in Bermuda. All references here to the "Company" are to Bermuda Holdings and all of its direct and indirect subsidiaries. These include Terra Nova Insurance (U.K.) Holdings plc ("U.K. Holdings"), Terra Nova Insurance Company Limited ("Terra Nova"), Terra Nova (Bermuda) Insurance Company Ltd. ("Terra Nova (Bermuda)"), Octavian Syndicate Management Limited ("Octavian"), Terra Nova Capital Limited ("Terra Nova Capital") and Compagnie de Reassurance d'Ile de France ("Corifrance").
The Company is a specialty property, casualty, marine and aviation insurance and reinsurance company. It operates in the London market through its London based subsidiary, Terra Nova, in the Continental European market through its French subsidiary, Corifrance, in the Bermuda market through its Bermuda based subsidiary, Terra Nova (Bermuda) and in the Lloyd's market through its London based subsidiary, Terra Nova Capital. Writings originate worldwide. It writes most insurance and reinsurance business through brokers authorized to place business at Lloyd's. It also writes through non-Lloyd's brokers and with individual ceding companies. The broker is regarded as the agent of the insured or reinsured in placing the business. The Company also owns the business and assets of Octavian, a Lloyd's managing agent, consisting of the rights to manage certain Lloyd's syndicates (the "Octavian syndicates").
A managing agent is permitted by the Council of Lloyd's to perform, on behalf of an underwriting member of any one of the syndicates which it manages, one or more of the following functions:
The standard Lloyd's contract between a managing agent and the members of a syndicate managed by that agent, identifies the following services to be provided by the managing agent on behalf of the members:
(c) accept underwriting risks and settle and pay claims on behalf of the syndicate;
A managing agent charges an annual fee which will be complimented, in profitable years, by a profit commission. The managing agent employs management and underwriting staff, recharging the costs of employment and resourcing the syndicate's activities to the syndicate and retaining costs incurred in respect of the management functions.
(e) Deferred acquisition costs: Acquisition costs, which represent net commission and other expenses incurred in producing business, are deferred and amortized over the period in which the related premiums are earned. Deferred acquisition costs are limited to the amounts estimated as recoverable from the applicable unearned premiums and the related expected investment income, after giving effect to anticipated losses, loss adjustment expenses and expenses necessary to maintain the contracts in force.
(h) Foreign currency translation: The U.S. dollar is the reporting currency and principal functional currency, as most of the policies written are denominated in U.S. dollars. Revenues and expenses in non-U.S. dollar currencies are translated at the average rates of exchange. Monetary assets and liabilities are translated at the rate of exchange in effect at the close of the period. Non-monetary assets and liabilities, primarily deferred revenue and expenses, are translated at historical rates of exchange. Gains or losses resulting from non-U.S. dollar transactions are included in net income. Certain other net translation adjustments are shown as a separate item of shareholders' equity.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(n) Fair value of financial instruments: The following methods and assumptions were used by the Company in estimating the fair value of the financial instruments presented:
(p) Reclassifications: Certain prior year amounts have been reclassified to conform with the current year presentation.
(a) Deposits: Securities with a carrying value of $122,105,666 and $103,731,433 at December 31, 1999 and 1998, respectively, were held in trust for the benefit of the Company's U.S. cedents and to facilitate the Company's accreditation as an alien reinsurer by certain States.
Cash and securities with a carrying value of $20,994,932 and $21,100,926 at December 31, 1999 and 1998, respectively, were held in trust for the benefit of the Company's U.S. surplus lines policyholders.
Cash and securities with a carrying value of $49,607,415 and $50,929,708 at December 31, 1999 and 1998, respectively, were held in trust for the benefit of the Company's Canadian cedents.
Net unrealized appreciation of equities (before income tax) of the Company at December 31, 1999, included gross unrealized appreciation of $12,894,000 and gross unrealized depreciation of $1,329,000. Net unrealized appreciation of equities of the Company at December 31, 1998, included gross unrealized appreciation of $38,551,000 and gross unrealized depreciation of $7,453,000.
Mortgage and asset backed securities which are not due at a single maturity date have been allocated according to their expected final payment date as at year-end.
(f) At December 31, 1999, the estimated fair value of the following investments exceeded 10% of shareholders' equity:
(d) Under current Bermuda law, Terra Nova (Bermuda) and Bermuda Holdings are not required to pay any taxes in Bermuda on either income or capital gains. Terra Nova (Bermuda) and Bermuda Holdings have received an undertaking from the Minister of Finance in Bermuda that in the event of any such taxes being imposed, they will be exempted from such taxation until the year 2016.
(e) The Company does not consider itself to be engaged in trade or business in the U.S. and so does not expect to be subject to U.S. income taxation.
The following reflects the acquisition costs deferred for amortization against future income and the amortization charged to income, including amounts deferred and amortized in the same period:
Mandatory employee contributions to the Terra Nova Plan ceased in 1988. There are no present plans to reintroduce such contributions. Employees may elect to make voluntary contributions to supplement their pension benefits when payable.
Terra Nova provides pension and related benefits for the employees of its branch office in Canada and its former branch office in Belgium. Benefit plans are in line with local market terms and conditions of employment and are generally costed to be within 10% of basic salaries of the participating employees. Neither of the plans is a defined benefit plan. The Company has adopted, for its Bermuda employees, a similar policy on pension and related benefits and has negotiated for a plan on the same cost basis.
Each "B" ordinary share at the Company is convertible at the choice of the holder into an "A" ordinary share without payment or adjustment for accrued dividends.
The Company established the Octavian Stock Option Plan in 1996. It provides for the grant of options to certain individual members of management of Octavian based on profit commissions receivable by Octavian for the 1996 to 2000 years of account. Under the Octavian Stock Option Plan, such members of management will receive annual option grants to purchase a number of shares equal in the aggregate to: (i) 90% of the profit commission received by Octavian from the Octavian syndicates (less related underwriters' and management bonuses and corporate taxes) for each year of account (the "Profit Commission Component"): divided by (ii) the fully diluted net asset value (as defined in the Octavian Stock Option Plan) per ordinary share of the Company as at the end of the applicable year of account. The aggregate Profit Commission Component for the 1996 to 2000 years of account is subject to a maximum of (Pounds)10 million ($16 million) and no further options shall be issued once such maximum has been reached. The options are to be issued on receiving the profit commissions on closure of each year of account under applicable Lloyd's regulations, which currently are 1999 to 2003 for each of the years 1996 to 2000, respectively. The options have a nominal exercise price and become exercisable from the January next succeeding the date of grant, beginning January 1, 2000, except that all options issued after January 1, 2002 become immediately exercisable.
The compensation expense is recognized over the three year service period which represents the period over which the profit commission for each year of account is earned.
At December 31, 1999, the 263,066 options outstanding under the Octavian Stock Option Plan all had exercise prices of $nil and a weighted-average remaining contractual life of 6.82 years.
The weighted average fair value per share of options granted in the Company's stock-based compensation plans during 1999 was $10.20 (1998: $13.32; 1997: $8.15).
The Company cedes reinsurance to and assumes reinsurance from Lloyd's syndicates. At December 31, 1999, the aggregate exposure in respect of reinsurance ceded to Lloyd's syndicates in respect of continuing operations, including estimated reinsurance recoveries for losses incurred but not reported, was approximately $106,542,000. The majority was ceded into Equitas with effect from September 4, 1996. Equitas is a company with limited liability established by the Lloyd's syndicates. Therefore, ultimate recoveries under the reinsurance contracts ceded into Equitas will be dependent on Equitas being able to fulfil its commitment to the syndicates. No specific bad debt provision has been established for amounts due from Lloyd's syndicates.
(c) Losses and loss adjustment expenses, net, are comprised of the following:
In the 1997 financial year, the reinsurance to close premium for the 1995 year of account of $17,910,000 and losses associated with this premium of $17,910,000 were included in the revenue statement in accordance with the current recommended accounting practice in the London Market. In the 1999 and 1998 financial years, following further deliberation by management on the appropriate U.S. GAAP accounting treatment, the reinsurance to close premium for the 1997 and 1996 years of account of $33,257,000 and $43,988,000 were included as an asset in the balance sheet and the liabilities of $33,257,000 and $43,988,000 associated with this asset were included in unpaid losses in the balance sheet. There was no impact to net income within 1999 and 1998 as a consequence of this change in the Company's practice.
Environmental Losses and Loss Adjustment Expenses Incurred and Reserves Outstanding (net of reinsurance)
The reinsurance recoverables netted against the asbestos-related and environmental pollution loss reserves for each of the years 1999, 1998 and 1997, are as follows:
The incurred asbestos and pollution losses in 1999 reflect better than expected loss development patterns during the year. In 1998, Terra Nova had reallocated general IBNR specifically to cover asbestos-related claims.
Insurance balances receivable and reinsurance recoverable on paid and unpaid losses are stated after deduction of an allowance for doubtful accounts at December 31, 1999 and 1998, of $46,440,000 and $38,823,000, respectively. Doubtful accounts against which provisions of $880,000 had previously been made were written off during 1999. The charge to doubtful accounts was $8,497,000, $9,464,000 and $1,238,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The charge in 1999 was primarily in connection with the Company establishing a bad debt provision in respect of New Cap Reinsurance Corporation and Reinsurance Australia Corporation which got into financial difficulties during 1999. The charge in 1998 included $5,558,000 in respect of the provision which had previously been included in unpaid losses and was transferred to the bad debt provision during 1998 due to additional information received by the Company in the year. The transfer of $5,558,000 concerned an insolvent reinsurer. Prior to December 31, 1998, the liability of $5,558,000 was included in unpaid losses while the reinsurance recovery of $5,558,000 was included in reinsurance recoveries on unpaid losses as an asset. At December 31,1998, the liability previously in unpaid losses was reclassified as a bad debt and deducted from reinsurance recoveries on unpaid losses. This balance sheet reclassification had no effect on net income.
(a) The Company is involved regularly, directly or indirectly, in litigation in the ordinary course of conducting 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, there has been no final judgment which would result in the wholesale transfer of environmental liability from insureds to insurers and reinsurers. In management's opinion, none of these cases, individually or collectively, is likely to result in judgments for amounts which, net of loss 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 affect the Company's results of operations for any period.
(c) The Company entered into various lease agreements for office space. Certain leases have options permitting renewals for additional periods. As well as minimum fixed rentals, certain leases contain escalation clauses related to the cost of living in future years. The future minimum aggregate rental commitments for office space at December 31, 1999, under non-cancelable operating leases are as follows:
Rental expense on property leases of $4,467,000, $4,246,000 and $4,102,000 was incurred for the periods to December 31, 1999, 1998 and 1997, respectively.
An extraordinary charge of $11.6 million arose during the second quarter of 1998 as a result of U.K. 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.
(a) On April 1, 1998, U.K. Holdings repurchased $4.5 million of the Senior Notes for consideration of $5.2 million, including accrued interest.
(b) On May 18, 1998, U.K. 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 Company's total outstanding consolidated indebtedness at December 31, 1999, was made up of $100 million of 7.0% Senior Notes due 2008, issued in 1998, and $75 million 7.2% Senior Notes due 2007, issued in 1997. The estimated fair value of these Senior Notes at December 31, 1999, was $162.8 million, comprising $92.0 million of 7.0% Senior Notes due 2008 and $70.8 million of 7.2% Senior Notes due 2007.
The purpose of the make-whole amount payment is to compensate the holder for the lost interest payments that it would otherwise receive had the Senior Notes not been redeemed. Thus, the make-whole amount is the
difference between "x', the sum of the present values of the principal amount of such Senior Notes together with scheduled interest payments, in each case discounted at an adjusted treasury rate to the redemption date, and "y', the principal amount of such Senior Notes to be redeemed.
The Company's core operations are conducted through four reportable segments: Terra Nova, Terra Nova (Bermuda), Terra Nova Capital and Corifrance. The segments are strategic business units that operate in different markets.
A reconciliation of the total reportable segments' profit to the Company's consolidated income from operations before tax and extraordinary charge is provided below. The main components of the reconciling item are investment income, foreign exchange losses and other expenses in the non-operating companies, agency income in Octavian and debt interest paid on the Senior Notes.
Summarized consolidated balance sheet information as at December 31, 1999, and 1998, and summarized consolidated statements of operations information for the years December 31, 1999, 1998 and 1997, about U.K. Holdings is set out below:
The Company entered into an Agreement and Plan of Merger and Scheme of Arrangement, dated as of August 15, 1999, and amended on September 10, 1999, and January 28, 2000, with Markel Corporation ("Markel"). The Agreement provides for the merger of a wholly-owned subsidiary of Markel Holdings into Markel and a scheme of arrangement between the Company and its shareholders. After completion of the merger and the scheme of arrangement, each of the Company and Markel will be a wholly-owned subsidiary of Markel Holdings, which will change its name to "Markel Corporation." At the effective time of the merger and scheme of arrangement each outstanding Class A ordinary share, other than 2,069 shares held by Markel or its transferee, and each outstanding Class B ordinary share of the Company will be cancelled and the holders thereof, other than Markel, the Company or its subsidiaries, will be entitled to receive $13.00 in cash, 0.07027 of a Markel Holdings common share and 0.07027 of Markel Holdings contingent value right per share. On March 16, 2000, the Company's and Markel's shareholders approved the merger and scheme of arrangement at special shareholder meetings called for the purpose. Subject to approval by the Bermuda Supreme Court and completion or waiver of all closing conditions, the merger and scheme of arrangement are expected to be completed on March 24, 2000.