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 is located in space leased by Terra Nova in the London Underwriting Centre and in the Institute of London Underwriter's building. Octavian leases offices in London, Poole, Leeds and Chelmsford and also leases space in the Lloyd's building. Additionally Terra Nova leases offices in Brussels and Toronto. Management believes that its office space is adequate for the Company's current needs.
The following table sets forth selected consolidated financial information with respect to the Company and Terra Nova, its predecessor, for the periods indicated. This information should be read in conjunction with the Consolidated Financial Statements of the Company and Terra Nova and related notes thereto and "Management's Discussion and Analysis of Results of Operations and Financial Condition".
(1) Net operating earnings represents net income before discontinued operations, minority interests and realized gains on investments after tax. (2) Earnings per share and net operating earnings per share are calculated by using the weighted average number of common shares and common share equivalents outstanding during the period. (3) Book value per share is equal to total shareholders' equity divided by the number of common shares outstanding at the end of the period.
On January 5, 1996 the Company acquired the business and assets of Octavian. The Company's financial statements reflect premiums written by Terra Nova Capital through the Octavian Syndicates for the 1996 year of account totaling $36.8 million, representing approximately 11% of the total premiums written by the Syndicates. In addition to providing capacity to the Octavian Syndicates, the Company, through Octavian, has managed the syndicates for 1996 and will continue to manage them for subsequent years of account. In return it has and will receive management fees with a profit commission component based on the syndicates' results. The Company's 1995 financial statements do not reflect the Octavian Acquisition, or the participation of Terra Nova Capital in the Octavian Syndicates.
TERRA NOVA (BERMUDA) HOLDINGS LTD. TERRA NOVA INSURANCE COMPANY LIMITED AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS
Foreign Exchange Gains. Foreign exchange gains of $0.4 million in 1996 and $1.1 million in 1995 arose from foreign currency transactions during the year together with the translation of foreign currency assets and liabilities into U.S. dollars, the Company's functional currency.
Acquisition Costs. Acquisition costs, which are comprised of commission expenses and other underwriting expenses, increased 13.9% to $82.4 million in 1996 from $72.3 million in 1995. Acquisition costs as a percentage of net premiums earned increased to 29.6% in 1996 from 28.7% in 1995. The increase was a result of changes made to Terra Nova's mix of business in order to protect earnings from price weakness in certain lines of business, but this has been offset by lower claims costs.
Agency Expenses. These expenses consist of costs incurred in managing certain Lloyd's syndicates.
Combined Ratios. The Company's combined ratios were 97.2% for 1996 and 103.8% for 1995. This reduction is primarily due to stable results for prior years in 1996.
Gross Premiums Written; Net Premiums Written; Net Premiums Earned. Gross premiums written decreased 15.8% to $302.7 million in 1995 from $359.4 million in 1994. Gross premiums written for the current year increased by $2.8 million to $309.1 million in 1995 from $306.3 million in 1994. The overall decrease in gross premiums written of $56.7 million was due to the increase in current year gross premiums written of $2.8 million
The increase in gross premiums written on the current underwriting year of $2.8 million arose from an increase of $10.0 million and $1.4 million in the non-marine property and life business, respectively, offset by decreases of $1.9 million and $6.7 million in the non-marine casualty and marine classes, respectively. The increase in non-marine property gross premiums written on the current underwriting year of $10.0 million, to $136.3 million in 1995 from $126.3 million in 1994, was primarily attributable to increased volumes of writings at the Company's overseas offices, which write predominately proportional treaty and primary reinsurance business, and increased writings in primary business, mainly through the Company's United States surplus lines business. The decrease in marine gross premiums written on the current underwriting year of $6.7 million, to $113.7 million in 1995 from $120.4 million in 1994, arose from volume and rate reductions in the energy account.
The reduction to prior year premiums written arose from decreases of $9.2 million, $5.6 million and $44.7 million on the non-marine property, non-marine casualty and marine business, respectively. The reduction in prior year reinstatement premiums arose on the discontinued marine LMX business, which also experienced a reduction in prior year losses, while the decline in prior year marine premiums written resulted principally from the proportional energy and cargo accounts, and was offset by correspondingly lower claim estimates.
Reinsurance ceded decreased by 27.6% to $55.7 million in 1995 from $76.9 million in 1994. The decrease was a consequence of prior year reinsurance premiums decreasing by $10.3 million, to $9.8 million in 1995 from $20.1 million in 1994, primarily due to the Company having paid reinstatement premiums arising from Hurricane Andrew and 1992 and prior year marine LMX business in 1994. The remaining decrease was a result of a reduction in marine reinsurance costs due to structural changes in the marine reinsurance programs, lower reinsurance costs experienced on the non-marine property account due to lower reinsurance rates and certain structural changes in the non-marine property reinsurance program.
Net premiums written decreased by $35.5 million, to $247.0 million in 1995 from $282.5 million in 1994, as a consequence of the decrease in gross premiums written referred to above offset by lower reinsurance costs. Net premiums earned increased 0.6%, to $251.9 million in 1995 from $250.4 million in 1994.
Foreign Exchange Gains. Foreign exchange gains of $1.1 million in 1995 and $4.8 million in 1994 arose from foreign currency transactions during the year together with the translation of foreign currency assets and liabilities into U.S. dollars, the Company's functional currency.
Losses and Loss Adjustment Expenses. Losses and LAE decreased 6.6%, to $179.1 million in 1995 from $191.7 million in 1994. The decrease in losses and LAE was due primarily to lower catastrophe loss severity and a lower level of adverse development related to prior years which declined to $3.2 million in 1995 from $26.9 million in 1994. The $3.2 million of adverse development in 1995 resulted from an increase in asbestos and pollution reserves of $9.7 million, offset by favorable development in all other lines of $6.5 million. As a percentage of net premiums earned, losses and LAE decreased 5.4%, to 71.1% in 1995 from 76.5% in 1994. The loss and LAE ratio for non-marine property business decreased to 62.5% in 1995 from 65.0% in 1994 largely as a result of lower catastrophe loss severity. The loss and LAE ratio for non-marine casualty business increased to
Acquisition Costs. Acquisition costs, which are comprised of commission expenses and other underwriting expenses, increased 7.6% to $72.3 million in 1995 from $67.2 million in 1994. Acquisition costs as a percentage of net premiums earned increased to 28.7% in 1995 from 26.9% in 1994. The increase was a result of changes in the business mix on the property and marine classes in 1995.
Net Interest Expense. Net interest expense in 1995 relates to interest of $4.0 million on the loan received pursuant to a credit facility related to the Terra Nova Acquisition, which became effective on December 21, 1994 and which was repaid in full out of the proceeds of the Senior Notes, and to interest of $5.4 million on the Senior Notes. No debt was outstanding during most of 1994.
Income from Continuing Operations before Income Taxes and Minority Interests. Income from continuing operations before income taxes and minority interests increased 23.1% to $62.4 million in 1995 from $50.7 million in 1994, primarily due to an increase in investment income and lower underwriting losses in 1995.
Income Tax Expense. Income tax expense increased $0.1 million, to $16.6 million in 1995 from $16.5 million in 1994, as a consequence of the increase in operating income of the United Kingdom subsidiaries.
Pursuant to a decision by Terra Nova's directors in February 1992 to cease writing aviation business ("Aviation"), Aviation has been accounted for as a discontinued operation in the financial statements of Terra Nova, the Company's predecessor. Insurance cover provided under Aviation policies issued by Terra Nova ceased upon the expiration of the last policy on December 31, 1992. Accordingly, Terra Nova has not been subject to any new Aviation risks since that date. However, Terra Nova may continue to receive payments from policyholders pursuant to existing contracts and to make payments under ceded reinsurance contracts. In addition, Terra Nova will continue to settle claims and make recoveries from its reinsurers. These future receipts and payments, together with the costs of running off the Aviation business, have been considered as part of estimating the loss from abandonment of Aviation for periods up to December 31, 1994. However, estimates of ultimate liabilities for losses and loss adjustment expenses may vary as a result of subsequent development. The net loss of $6.8 million in 1994 was related primarily to the increase in prior year reserves relating to an unexpected decision by a U.S. federal court concerning the 1988 Pan Am Lockerbie air disaster.
In addition, the Company in connection with the offerings completed on April 22, 1996 performed the following:
(b) converted 16,317,354 of the Company's convertible redeemable preferred shares into 989,697 ordinary shares of the Company, and redeemed for cash 17,058,455 of the Company's convertible redeemable preferred shares.
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 and Octavian. The payment of dividends and other payments by Terra Nova, Terra Nova Capital and Octavian are subject to restrictions under U.K. law and Terra Nova (Bermuda) is subject to restriction under Bermuda law.
(a) Cashflows from Terra Nova Capital of $5.3 million in 1996; (b) Increased writings in Terra Nova (Bermuda) in 1996 compared to 1995; and (c) Lower tax and interest payments in 1996 compared to 1995.
On September 11, 1996 A.M. Best assigned a group rating of "A-" to the Company reflecting the group's strong consolidated balance sheet, improved liquidity, disciplined exposure management, geographic risk spread, premium growth through acquisition and experienced management team.
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 and the Company accounts for foreign currency transactions. Certain other net translation adjustments are shown as a separate component of shareholders' equity.
On April 30, 1996 the Company declared a dividend of $0.02 per share paid on June 28, 1996, to shareholders of record as of June 7, 1996. On August 6, 1996 the Company declared a dividend of $0.02 per share paid on September 27, 1996, to shareholders of record as of September 6, 1996. On November 26, 1996 the Company declared a dividend of $0.02 per share paid on December 27, 1996, to shareholders of record as of December 6, 1996. On February 10, 1997 the Company declared a dividend of $0.02 per share payable on March 27, 1997, to shareholders of record as of March 6, 1997. 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.
. Consolidated Balance Sheets of Terra Nova (Bermuda) Holdings Ltd. ("the Company") as of December 31, 1996 and 1995. 49
. Consolidated Statements of Operations for the year ended December 31, 1994 of Terra Nova Insurance Company Limited ("Terra Nova" or the "Predecessor") and for the years ended December 31, 1996 and 1995 of the Company. 50
. Consolidated Statements of Shareholders' Equity for the year ended December 31, 1994 of Terra Nova and for the years ended December 31, 1996 and 1995 of the Company. 51
. Consolidated Statements of Cash Flows for the year ended December 31, 1994, of Terra Nova and for the years ended December 31, 1996 and 1995 of the Company. 52
Management is responsible for the integrity of the consolidated financial statements and related notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements include management's estimates for transactions not yet complete or for which the ultimate effects cannot be precisely determined.
The Company engages Coopers & Lybrand as independent accountants to audit the consolidated financial statements and express their opinion thereon. Their audit includes a review and evaluation of the Company's internal controls and systems, the testing of the accounting records and other procedures necessary to support the opinion. Coopers & Lybrand has the right of full access to all records and members of management in conducting their audit.
W.O. Bailey W.J. Wedlake Chairman, President and Chief Financial Officer Chief Executive Officer
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF TERRA NOVA (BERMUDA) HOLDINGS LTD. AND THE SHAREHOLDERS AND BOARD OF DIRECTORS OF TERRA NOVA INSURANCE COMPANY LIMITED.
We have audited (a) the accompanying consolidated balance sheets of Terra Nova (Bermuda) Holdings Ltd. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the two years in the period ended December 31, 1996 and (b) the consolidated statements of operations, shareholders' equity and cash flows of Terra Nova Insurance Company Limited (the Predecessor) and subsidiaries for the year ended December 31, 1994. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audits.
TERRA NOVA (BERMUDA) HOLDINGS LTD. TERRA NOVA INSURANCE COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS)
* The balance at December 31, 1994 represents the cash and cash equivalents of the predecessor and, therefore, does not agree to the cash and cash equivalents at the beginning of 1995 presented in this statement.
In connection with these Acquisitions, ordinary and preferred shares of Terra Nova and Terra Nova (Bermuda) were acquired or retained by certain shareholders of Bermuda Holdings. Dividend payments on such shares were restricted. In connection with the acquisitions of such shares, the shareholders entered into agreements whereby the shareholders could exchange some or all of their respective shares of Terra Nova and Terra Nova (Bermuda) for cash or, at the option of UK Holdings or Bermuda Holdings, shares of certain classes of the capital stock of UK Holdings or Bermuda Holdings. These interests have been treated as minority interests in the financial statements prior to the Offerings (see note 5) and in connection with the Offerings the minority interests were exchanged for shares in Bermuda Holdings.
(a) INVESTMENTS AND RELATED INCOME: Investments in fixed maturities and equity securities are classified as available for sale and held with the intention of selling such investments from time to time, and are carried at fair value. Unrealized gains and losses, net of related deferred income taxes and minority interests, are reflected directly in shareholders' equity. Realized gains and losses are reflected in operations and determined by specific identification. Investment income is recorded as earned.
(b) CASH AND CASH EQUIVALENTS: Cash and cash equivalents are comprised of cash and various short-term investments which have maturities when purchased of 90 days or less. Cash equivalents are stated at fair value which approximates cost.
(c) PREMIUMS: Premiums are earned on a pro-rata basis over the term of the related coverage. The balance of unearned premiums represents the portion of gross premiums written relating to the unexpired terms of coverage.
(e) LOSSES AND LOSS ADJUSTMENT EXPENSES: Losses and loss adjustment expenses are charged to income as incurred. The reserve for unpaid losses and loss adjustment expenses represents the accumulation of estimates for reported losses and includes provisions for losses incurred but not reported (`IBNR'). The adequacy of these estimates is assessed by reference to projections of the ultimate losses in respect of each accident year. The methods of determining such estimates and establishing reserves are continually reviewed and updated, and resulting adjustments are reflected in current operations.
(f) INCOME TAXES: Deferred income taxes are recorded with respect to temporary differences between financial reporting and tax bases of assets and liabilities in accordance with Statement of Financial Accounting Standard (SFAS) No. 109.
(h) INSURANCE BALANCES RECEIVABLE AND REINSURANCE RECOVERABLE ON PAID AND UNPAID LOSSES: Receivable balances are stated net of allowances for doubtful accounts. Reinsurance recoverable on unpaid losses represents the estimated portion of such liabilities that will be recovered from reinsurers, determined in a manner consistent with the related liabilities.
(i) ACCRUED PREMIUM INCOME: Accrued premium income represents the difference between the estimated cumulative ultimate written premiums and cumulative billed premiums.
(k) ACCOUNTING PRONOUNCEMENTS: In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 "Accounting for Stock-Based Compensation". SFAS No. 123 Established a fair value based method of accounting for stock-based compensation plans. It encourages, but does not require, entities to adopt that method in place of the provisions of APB Opinion No. 25, "accounting for stock issued to employees", for all arrangements under which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of its stock. It requires an entity that continues to apply APB No. 25 to comply with the disclosure requirements of SFAS No. 123.
(l) RISKS AND UNCERTAINTIES: Information about risks and uncertainties existing at the balance sheet date related to the following areas:
(n) GOODWILL: The goodwill in the Company's balance sheet has been calculated using the purchase method of accounting and is being amortized on a straight line basis over a 10 year period.
(o) RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform with the current year presentation.
On April 22, 1996 the Company completed an initial public offering of 6,600,000 Class A Ordinary Shares at a price to the public of $17, of which 5,280,000 Shares were initially offered for sale in the United States, Bermuda and Canada and 1,320,000 Shares were initially offered for sale outside the United States, Bermuda and Canada in concurrent offerings ("the Offerings"). In addition, the Company granted to the US underwriters for the Offerings an option to purchase up to 990,000 additional Shares of which 675,000 were purchased. The proceeds of the Offerings were $114 million after expenses. Of these net proceeds $16 million was used to redeem a portion of the Company's non-voting convertible redeemable preferred shares (see Note 11), $75 million was contributed to Terra Nova (Bermuda), to support its insurance operations, including increasing the capacity potentially available to the Octavian Syndicates (through its subsidiary company Terra Nova Investments Ltd. that provides a guarantee to Terra Nova Capital), and $15 million was contributed to Terra Nova, with the balance retained for general corporate purposes.
Cash and securities with a carrying value of $41,487,658 and $35,826,294 at December 31, 1996 and 1995 respectively, were held in trust for the benefit of the Company's Canadian cedents.
The Company has contingent liabilities in respect of irrevocable undrawn letters of credit of $156,327,255 and $18,361,200 supporting the Company's underwriting activities on the Octavian syndicates for the 1997 and 1996 years of account, respectively. The Company has deposited cash and investments with a carrying value of $171,959,981 and $22,748,770 at December 31, 1996 and 1995, respectively, as collateral to support this commitment.
Fixed maturities $71,365 $70,999 $47,503 Equity securities 1,373 1,273 1,571 Cash and cash equivalents 7,539 4,066 3,482 Deposits with reinsurers - - 405 ------- ------- ------- Total investment income 80,277 76,338 52,961 Investment expenses (2,147) (1,860) (1,386) ------- ======= ======= Net investment income $78,130 $74,478 $51,575 ======= ======= =======
(c) INVESTMENT GAINS AND LOSSES: The realized net capital gains and changes in net unrealized appreciation or depreciation of investments are summarized below:
Proceeds from sales of investments in equity securities during 1996, 1995 and 1994, respectively, were $163,173,000, $118,340,000 and $174,884,000. Realized net capital gains on sale of equity securities for the years ended December 31, 1996, 1995 and 1994, included gross capital gains of $22,512,000, $13,209,000 and $25,871,000 and gross capital losses of $12,271,000, $4,758,000 and $8,404,000, respectively.
The amortized cost and estimated fair value of the Company's fixed maturities at December 31, 1996, by contractual maturity date, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay certain obligations with or without call or prepayment penalties.
Not Rated securities consist primarily of securities issued by municipalities located in countries other than the U.S. or the U.K. and are generally considered by management to be at least the equivalent in quality of AA rated investments.
(a) The U.K. corporation tax rate applicable to ordinary income was 33%. The difference between the actual tax expense on income from continuing operations and the "expected" amount computed by applying the U.K. corporation tax rate is explained as follows:
liabilities using enacted rates in effect for the years in which the differences are expected to reverse. The measurement of a deferred tax asset, if any, is subject to the expectation of future realization. The components of net deferred tax assets (liabilities) of the Company as at December 31, 1996 and 1995 were as follows:
(e) The Company does not consider itself to be engaged in trade or business in the U.S. and accordingly does not expect to be subject to U.S. income taxation.
TERRA NOVA (PREDECESSOR) YEAR ENDED DECEMBER 31, DOLLARS IN THOUSANDS 1996 1995 1994 - -----------------------------------------------------------------------------
Balance at beginning of year $36,950 $31,521 $21,917 ------------ ----------- -----------
Terra Nova provides pension and related benefits for the employees of its branch offices in Belgium and Canada. 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 regarding pension and related benefits and has negotiated for a plan on the same cost basis.
Octavian provides certain of its employees with one of two defined benefit pension schemes run in conjunction with the Lloyd's Superannuation Scheme ("Octavian Plan"). The Octavian Plan is similar in operation to the Terra Nova Plan though the benefit structure differs.
Cost of benefits earned during the year $1,864 $1,468 $1,542 Interest costs on the projected benefit obligation 2,337 1,672 1,392 Actual return on all retirement plan assets (2,905) (2,109) (2,131) Amortization of the initial transition amount - - (88) ========= ======= ======== Net pension expense $1,296 $1,031 $715 ========= ======= ========
Primary earnings per share are computed using the weighted average number of common shares and common share equivalents outstanding during the period. Common share equivalents consist of shares issuable upon
In accordance with the SEC Staff Accounting Bulletin Topic 4-D, for purposes of the earnings per share calculations reflected in these consolidated financial statements, all shares of common stock issued and stock options granted prior to the date of the Registration Statement filed with the SEC on March 19, 1996 have been deemed to be outstanding since January 1, 1995. With respect to common stock issued and options granted which are not outstanding for the entire period of January 1, 1995 to December 31, 1995, the treasury stock method has been applied and resulted in an approximately 1,909,766 share increase in the number of shares outstanding utilized in the calculation of earnings per share as presented in the accompanying statement of operations.
Each `B' ordinary share of the Company is convertible, at the option of the holder into an `A' ordinary share without payment or adjustment for accrued dividends.
In addition, the Company, in connection with the Offerings completed on April 22, 1996, performed the following:
(a) issued 2,038,869 ordinary shares in exchange for the ordinary shares and preferred shares of Terra Nova and Terra Nova (Bermuda) which were held by minority interests; and
(b) converted 16,317,354 of the Company's convertible redeemable preferred shares into 989,697 ordinary shares of the Company, and redeemed for cash 17,058,455 of the Company's convertible redeemable preferred shares at a redemption price of $16,034,948 out of the proceeds of the Offerings.
At December 31, 1996 the Company has three stock-based compensation plans, which are described below. The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, compensation cost of $400,701 has been charged against income for 1996. The compensation expense for 1996 determined using the fair value methodology of SFAS No. 123 is not materially different from the expense calculated in accordance with APB No. 25 and therefore pro forma net income and earnings per share, as required by SFAS No. 123, are not shown.
OUTSTANDING AT JANUARY 1, 1995 - - Granted 685,047 $6.25 Exercised - - Forfeited (24,138) 5.80 ---------
As of December 31, 1996, the 816,544 fixed options outstanding under the Plan have exercise prices between $5.80 and $16.83 and a weighted-average remaining contractual life of 8.25 years.
In connection with the Octavian Acquisition, the Company established the Octavian Stock Option Plan providing for the grant of options to certain individual members of management of Octavian based on profit commissions received 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 underwriters' and management bonuses relating thereto 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 shares 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 will be issued upon receipt of 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 on or after the January, next succeeding the date of grant, commencing January 1, 2000, provided that all options issued after January 1, 2002 become immediately exercisable.
The current reinsurance protections consists almost entirely of non- proportional excess of loss reinsurance (with the balance being proportional and facultative reinsurance). Specific excess of loss reinsurance is purchased for marine and non-marine business. The availability of reinsurance at reasonable cost and under favorable terms is one of the key determinants in the decision as to which categories of business to emphasize at any given time.
A contingent liability exists with respect to reinsurance ceded to the extent that any reinsurer is unable to meet the obligations assumed under the reinsurance arrangements. As is customary in the London Market, collateral is not generally obtained from reinsurers. Reinsurance contracts do not relieve the ceding company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses; consequently allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from its exposure to individual reinsurers.
The Company cedes reinsurance to and assumes reinsurance from Lloyd's syndicates. As of December 31, 1996, the aggregate exposure in respect of reinsurance ceded to Lloyd's syndicates in respect
Movement in unpaid losses and loss adjustment expenses for the years ended December 31, 1996, 1995 and 1994 is summarized as follows:
Management has considered environmental and latent injury claims and claims expenses in establishing the liability 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 relating to policies written in prior years. Coverage and claim settlement issues, such as the determination that coverage exists and the definition of an occurrence, may cause the actual loss development to show more variation than the remainder of the Company's book of business. Traditional reserving techniques cannot be used to estimate asbestos-related and environmental pollution claims and, accordingly, the uncertainty in respect of 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, although there is no assurance that such losses will not materially affect the Company's results of operations for any period. However, management is not able to estimate the additional loss, or range of loss, that is reasonably possible.
The following table presents selected data on asbestos-related and environmental pollution losses and loss adjustment expenses incurred and reserves outstanding, net of amounts recoverable from reinsurers:
Rental expense on property leases of $3,802,000, $2,257,000 and $ 2,703,000 was incurred for the periods to December 31, 1996, 1995 and 1994 respectively.
Details of the operating results of Aviation business in run-off are as follows:
The after tax loss in 1994 of $6,830,000 was related primarily to an increase in prior years reserves relating to an unexpected decision in 1994 by a U.S. federal court concerning the 1988 Pan Am Lockerbie air disaster.
Reinsurance recoverable on paid and unpaid losses in relation to Aviation are stated after deduction of an allowance for doubtful accounts as of December 31, 1996, 1995 and 1994 of $5,261,000, $7,294,990 and $7,430,000 respectively.
In determining the net liabilities and net loss of Aviation, Terra Nova has identified to Aviation all assets, liabilities, revenues and expenses directly related to the Aviation operations. The net cumulative cash flow from Aviation has been negative since the year ended December 31, 1990, and Terra Nova has provided cash to Aviation out of corporate assets to enable Aviation to meet its obligation on a cash basis. Because Aviation has been operating on a negative cash flow basis and has not generated investment assets in the periods presented in these financial statements, no investment income has been allocated to Aviation. Income tax benefits have been allocated to Aviation by applying the relevant U.K. corporation tax rates to the pre-tax loss on Aviation operations.
The Company wrote reinsurance through a related party for which a brokerage fee was paid. Gross premiums written through the related broker in the years ended December 31, 1996, 1995 and 1994 amounted to $33,568,000, $38,383,000 and $46,285,000 respectively. The brokerage relating to gross premiums written through the related broker in years ended December 31, 1996, 1995 and 1994 amounted to $2,101,000, $2,078,000 and $3,095,000, respectively. Fees of $3,216,004, $2,500,000 and $2,300,000 were paid to a related party in 1996, 1995 and 1994 respectively, relating to the Offerings, the issue of the Senior Notes, and the Acquisitions and the capitalization of the Company.
The Company's operations are conducted principally through four segments: Marine & Aviation, Non-marine, Agency and the Corporate operations. The Corporate segment holds the assets, principally investments not allocable to the insurance underwriting and agency operations.
Substantially all of the revenues are derived from business within the London Market. Additional operations are conducted in Belgium, Bermuda and Canada.
The following table is a summary of the operations of the four segments for the years ended December 31, 1996, 1995 and 1994:
Terra Nova's ability to pay dividends is limited by a Notice of Requirements issued by the DTI, which requires Terra Nova to give 14 days' advance notice to the DTI of its intention to declare and pay a dividend. In addition, Terra Nova must comply with the Companies Act 1985, which provides that dividends may only be paid out of distributable profits.
Terra Nova (Bermuda)'s statutory capital and surplus and minimum required statutory capital and surplus at December 31, 1996 and 1995 respectively were:
The Company's net income per share amounts are based on the weighted average number of shares and common share equivalents outstanding during the periods (see Note 10). The quarterly 1995 per share data shown above, do not agree to those previously reported on form 10Q due to the reverse stock split which took place in the first quarter of 1996.