Canopius Bermuda does not have audited consolidated income statements for the period ended December 31, 2008 or consolidated balance sheets as of December 31, 2009 and 2008. Canopius Bermuda has not provided audited consolidated income statements for the fiscal year ended December 31, 2008 because Canopius Bermuda has not been required to prepare such audited consolidated income statements under Bermuda law or regulation and, accordingly, has never done so and the preparation of such audited consolidated income statements would be difficult, time consuming and expensive.
(1) The consolidated income statement data for the year ended December 31, 2008 are derived from unaudited consolidated financial statements.
The following discussion and analysis of CHBL’s financial position and results of operations should be read in conjunction with CHBL’s consolidated audited financial statements and accompanying notes which appear elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. CHBL’s actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” included elsewhere in this Form 10-K.
CHBL is a Bermuda holding company that was incorporated on September 7, 2007. The Company’s wholly-owned subsidiary is Tower Reinsurance, Ltd. (formerly Canopius Bermuda Limited) (“TRL”), a class 3A licensed Bermuda insurance company. Canopius Bermuda, together with its subsidiary, is referred to as the “Company”. CHBL was also the holding company for Canopius Underwriting Bermuda Limited (“CUBL”), an insurance services company primarily underwriting excess of loss liability business and treaty property reinsurance business on behalf of Syndicate 4444 at Lloyd’s. CUBL provided certain administrative services to CBL. CUBL was transferred in connection with the restructuring described below and is no longer a subsidiary of CHBL.
The Company was organized to underwrite in global insurance markets principally by reinsuring various subsidiaries of Canopius that are Lloyd’s underwriting members participating in Syndicate 4444 at Lloyd’s (the “ceding affiliates”), through Quota Share Reinsurance Treaty Agreements (“QSRTs”). The Company reinsured each ceding affiliate, on similar terms, for 85% of its respective participation in the 2007 year of account (“YOA”) (from October 1, 2007) and each subsequent underwriting YOA. These contracts operate on a funds withheld basis so that, generally, no settlements will take place between the parties until each respective YOA closes. The 2007, 2008 and 2009 YOA were closed as at January 1, 2010, 2011 and 2012, respectively.
The Company provided Whole Account Aggregate Excess of Loss reinsurance cover for Acorn Corporate Capital Limited, a subsidiary of Canopius that was the sole underwriting member of Syndicate 839’s 2008 YOA (the “Acorn contract”). This contract was terminated by a Deed of Termination dated September 10, 2011.
In 2008, the Company entered into an intermediary agreement with Canopius Ireland Limited (“CIL”), a subsidiary of Canopius, to write certain structured reinsurance covers sourced by CIL. The Company wrote $1.5 million, $20.9 million and $22 million of premium in relation to such contracts in 2012, 2011 and 2010, respectively. Through its former subsidiary, CUBL, the Company was providing services to Syndicate 4444, principally underwriting excess casualty and property business on behalf of that syndicate, as well as administrative services to CBL.
The consolidated financial statements include amounts that, either by their nature or due to requirements of accounting principles generally accepted in the United States (“GAAP”), are determined using best estimates and
Loss and loss expense reserves comprise reserves for the cost of claims reported but not settled at the balance sheet date (“outstanding losses”), as well as reserves for the cost of claims incurred but not reported (“IBNR”) at the balance sheet date.
The estimation of claims IBNR is generally subject to a greater degree of uncertainty than the estimation of the cost of settling claims already notified to TRL, where more information about the claim event is generally available.
Under the QSRTs, premiums due to TRL are retained by the cedents and utilized in accordance with the terms of the applicable trust deeds for the settlement of claims and other underwriting liabilities. Settlement between the parties takes place following the closure of the underwriting year, which is generally after three years. Any profit will be released from the relevant trust fund and remitted to TRL. Any losses will be payable by TRL to Canopius Group Limited (“Canopius Group”) subsidiaries participating in Syndicate 4444.
Premiums-Assumed premiums written for the year ended December 31, 2012 were $383.3 million as compared to $444.9 million for 2011 for a decrease of $61.6 million, or 13.8%. This decrease is primarily attributed to (i) changes in quota share interests in Syndicate 4444, which were 70.6%, 72.6% and 67.7%, respectively, in the 2009, 2010 and 2011 underwriting years of Syndicate 4444 and 58.1% in the 2012 underwriting year of Syndicate 4444; and (ii) a reduction in the average exchange rate of British Pounds Sterling to US Dollars from 1.60 in the year ended December 31, 2011 to 1.59 in the year ended December 31, 2012. Assumed premiums earned decreased $70.5 million, or 15.5%, to $383.9 million for the year ended December 31, 2012 from $454.4 million for the same period in 2011. This decrease is attributed to similar reasons given for assumed premiums written.
General and administrative expenses (“G&A expenses”)-G&A expenses decreased by $0.5 million to $5.0 million for the year ended December 31, 2012 compared to $5.5 million in the same period in the prior year. This modest decline is associated with the decline in overall assumed premium volume from 2011 to 2012.
Premiums-The Company’s assumed premiums written for 2011 were $444.9 million as compared to $516.0 million for 2010 for a decrease of $71.1 million, or 13.8%. This decrease is attributed to excess of loss reinsurance written in 2010 of Lloyd’s Syndicate 839 (predecessor syndicate to Syndicate 4444 in 2001 and prior underwriting years and reinsured to close into Syndicate 4444 in 2011) that was not written in 2011 offset slightly by an increase in premiums in 2011 over 2010 arising from some growth in the business and, in particular, reinstatement premiums receivable on very significant catastrophe claims which occurred in 2011. Assumed premiums earned decreased $81.8 million, or 15.3%, to $454.4 million in 2011 from $536.2 million in 2010. This decrease is mainly attributed to the reasons given above for assumed premiums written.
Net investment income-Net investment income was $1.1 million in 2011 compared to $30.5 million in 2010, for a decrease of $29.4 million, or 96.4%. The interest on funds withheld reduced significantly due largely to the monies being invested heavily in short dated corporate bonds, prices of which fell in the second half of 2011.
Policy acquisition costs-Policy acquisition costs for 2011 were higher than policy acquisition costs in 2010, increasing $10.4 million, or 17.0%, to $71.4 million in 2011 from $61.0 million in 2010. This increase is primarily attributed to higher commissions charged on business assumed from Canopius Group.
Net income-Net loss was $76.9 million in 2011 compared to net income of $54.2 million in 2010. This change of $131.1 million is due to significant catastrophe losses incurred by the Company in 2011, as discussed above. The combined ratio, which is the sum of the loss ratio, calculated as losses and loss expenses divided by net premiums earned, and the underwriting expense ratio, which consists of acquisition costs divided by assumed premiums earned, was 117.0% in 2011, compared to 95.3% for 2010.
The Company is a holding company, and as such, has no operations of its own. Substantially all of its operations are conducted by its insurance subsidiary, TRL. The holding company has no outstanding commitments to fund, and has no immediate needs for, cash, such as debt obligations.
TRL’s obligations relate primarily to the payment of claims and operating expenses. Nearly all of TRL’s reinsurance contracts are executed on a funds withheld basis and, accordingly, almost all assumed premiums, less commissions, are retained by the cedant insurers. These funds withheld balances are reduced as losses are paid on the assumed business. TRL’s sources of cash are derived from assumed written premium contracts that are not executed on a funds withheld basis, investment income on the investments held in its investment portfolio, remittance of net underwriting results from funds withheld balances and from proceeds on sales, redemptions and the maturing of its investment securities.
At December 31, 2012, TRL was required to maintain relevant assets of $738.7 million. At that date, relevant assets were $1,401.8 million and the minimum liquidity ratio was met.
The Company’s and CUBL’s functional currencies are the U.S. Dollar (“USD”). TRL’s functional currency is the British Pound Sterling (“GBP”).
The Company’s reporting currency is the USD. In translating all CBL amounts to USD, management utilized the rates of exchange prevailing at the balance sheet date for assets and liabilities and average rates of exchange to USD were used to translate income and expense transactions. Translation adjustments to the USD reporting currency are reported in comprehensive income and accumulated other comprehensive income. The Company manages its currency risk in TRL with foreign currency exchange contracts.
The cost, gross unrealized gains and losses and estimated fair value of investments in fixed maturity securities at December 31, 2012 and December 31, 2011 were as follows:
The multi asset mutual fund is a GBP sterling denominated fund invested in a variety of equity and bond securities as well as cash and cash equivalents. The multi asset mutual fund may be redeemed on a daily basis at their net asset value.
A summary of significant contractual obligations as of December 31, 2012, for the Company is as follows. Changes in loss reserve payout assumptions, business needs and other factors may cause these estimates to change.
The Company has collateral on deposit with Lloyd’s. Lloyd’s may potentially draw on these funds provided by the Company in relation to insurance business that the Company itself has not assumed. The Company’s management believes that the probability of a liability is remote, since contractual clauses are in place to ensure that the appropriate Canopius Group affiliate reimburses the Company for the draw on collateral. Further, in the event of such a drawdown, and if such obligations are not honored by any such affiliate, Canopius has guaranteed, unconditionally and irrevocably, the punctual payment, performance and discharge of such payment obligations.
TRL’s functional currency is the GBP. The company’s policy is to hedge foreign exchange risk, so its policy is to hold USD assets to match USD liabilities. When any mismatch is identified, the Company hedges its exposure, using forward foreign exchange contracts. When any currency mismatch is identified, the Company may take action such as selling or buying currency surpluses or deficits, or entering into forward currency sale or purchase contracts. In determining the action to be taken, the Company will consider the potential for the currency imbalance to correct itself in the short term from future expected profits arising, or the risk of large losses occurring, from business written.
On March 13, 2013, the merger contemplated by an Agreement and Plan of Merger, dated as of July 30, 2012, as amended, was consummated in connection with which an indirect wholly owned subsidiary of Canopius Holdings Bermuda Limited (“Canopius Bermuda”) merged with and into Tower Group, Inc. (“TGI”), with TGI surviving the merger and becoming an indirect wholly owned subsidiary of Canopius Bermuda. In connection with the merger, Canopius Bermuda changed its name to Tower Group International, Ltd. (“TGIL” or the “Company”) and became the successor to TGI under the Exchange Act. In the merger, each share of the common stock, par value $0.01 per share, of TGI issued and outstanding immediately prior to the effective time of the merger was canceled and automatically converted into and became the right to receive 1.1330 of common shares, par value $0.01 per share, of TGIL. Immediately after giving effect to the issuance of our common shares to the former TGI stockholders in the merger, 57,191,857 million of our common shares were outstanding, of which approximately 76% were held by the former TGI stockholders. The remaining 24% of our common shares outstanding immediately after giving effect to the merger were held by persons and entities who acquired our common shares prior to the merger, all of whom acquired such shares from Canopius Group Limited in a private placement transaction.
For the Three Years Ended December 31, 2012, 2011 and 2010
Tower Group International, Ltd. (“TGIL” or the “Company”) (formerly named Canopius Holdings Bermuda Limited) is a Bermuda holding company that was incorporated on September 6, 2007. As of December 31, 2012, TGIL’s sole subsidiary was Tower Reinsurance Limited (“TRL”) (formerly named Canopius Bermuda Limited), a class 3A licensed Bermuda insurance company. Canopius Underwriting Bermuda Limited (“CUBL”), another subsidiary of TGIL, was transferred to TGIL’s parent, Canopius Group Limited (“Canopius Group”), a company incorporated in Guernsey, Channel Islands, on November 21, 2012.
The Company was organized to underwrite in global insurance markets by reinsuring various subsidiaries of Canopius Group that are Lloyd’s underwriting members (the “ceding affiliates”) that participate in Syndicate 4444 at Lloyd’s, through Quota Share Reinsurance Treaty Agreements (“QSRTs”). The Company reinsures each ceding affiliate for 85% of its respective participation in the 2007 year of account (“YOA”) (from October 1, 2007) and the 2008, 2009, 2010 and 2011 YOA. The Company renewed the QSRTs on similar terms for the 2012 YOA. These contracts operate on a funds withheld basis so that, generally, no settlements will take place between the parties until the YOA closes.
The Company provided Whole Account Aggregate Excess of Loss reinsurance cover for Acorn Corporate Capital Limited, a subsidiary of Canopius Group that was the sole underwriting member of Syndicate 839’s 2008 year of account (“the Acorn contract”). This contract was terminated by a Deed of Termination dated 10 June 2011.
In 2008, the Company entered into an intermediary agreement with Canopius Ireland Limited (“CIL”), a subsidiary of Canopius Group, to write certain structured reinsurance covers sourced by CIL.
Through its subsidiary CUBL, the Company also provided certain underwriting services to Syndicate 4444. The Company transferred CUBL to Canopius Group on November 21, 2012.
The accompanying consolidated financial statements include the accounts of TGIL and its subsidiaries TRL and CUBL (through November 2012, the date of CUBL’s transfer to Canopius Group).
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which require management to make estimates and assumptions that 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. All inter-company accounts and transactions have been eliminated in consolidation. The following are the significant accounting policies adopted by the Company:
On July 28, 2012, Canopius Group, TGIL’s sole shareholder approved a one-for-one hundred common stock split, which became effective on that date. All references to common shares for all periods presented in the accompanying financial statements have been adjusted to give effect to this common stock split. A change from $1 to $0.01 was made to the par value of the common shares.
be repaid in full in cash prior to the merger closing with Tower Group, Inc. (“Tower”), except as otherwise expressly agreed in writing by Tower and Canopius Group in connection with the restructuring of the Company’s business prior to the merger. As of December 31, 2012, the Company had approximately $93 million outstanding from Canopius Group relating to this loan, which is reported as a reduction in equity in these consolidated financial statements.
In November 2012, TGIL transferred CUBL to Canopius Group. Since this was a non-recurring transaction between entities under common control, assets are transferred at historical book value and any difference in the consideration received and the book value of the assets transferred is treated as an adjustment to equity. TGIL received $1 from Canopius Group and recognized an increase to contributed capital for approximately $1.3 million as a result of the transfer. See “Note 5-Related Party Transactions” for detail of other related party transactions.
Initial estimates of written premiums are based on information received from the cedants and relate to business incepted during the period of cover. Subsequent adjustments, based on reports of actual premium by the cedants, are recorded in the period they are determined.
For multi-year policies written which are payable in annual installments, and where the insured or reinsured has the ability to commute or cancel coverage with the terms of the policy, only the annual premium is included as written premium at policy inception. Annual installments are included as written premium at each successive anniversary date within the multi-year term.
Large claims impacting each relevant business class are generally assessed separately, being measured on a case by case basis or projected separately in order to allow for the possible distortive effect of the development and incidence of these large claims.
Direct commission revenue from the Company’s underwriting services is recognized and earned as insurance and reinsurance policies are placed with the issuing companies.
Cash equivalents are carried at cost, which approximates fair value, and include all investments with original maturities of 90 days or less.
Fixed-maturity securities: Fair value for fixed-maturity securities is primarily based on quoted market prices or a matrix pricing using observable inputs, with limited exceptions as discussed in “Note 4-Fair Value Measurements”. Purchases and sales of fixed maturity securities are accounted for at their fair values (normally their cost of acquisition or proceeds of disposal) less accrued interest. Realized gains or losses are determined on the specific identification method. Interest income is recognized when earned in net investment income. All gains or losses on fixed income securities are included in net investment income.
Other invest assets: The Company initially estimates fair value of its investments in funds and its structured deposit by reference to transaction price. Subsequently, for investments in funds, the Company obtains the fair value from net asset information provided by the fund manager, the financial statements of which are audited annually. For structured deposits, the subsequent fair values are obtained from the sponsor of the deposit, and are calculated according to pre-defined baskets of market indices.
The Company’s functional currency is the U.S. Dollar (“USD”). TRL’s functional currency is the British Pound Sterling (“GBP”).
The Company’s reporting currency is the USD. In translating all TRL amounts to USD, management utilized the rates of exchange prevailing at the balance sheet date for assets and liabilities and average rates of exchange to USD were used to translate income and expense transactions. Translation adjustments to the USD reporting currency are reported in comprehensive income and accumulated other comprehensive income. TRL writes certain business denominated in other currencies. These transactions are remeasured to British Pound Sterling with transactional gains and losses reported in earnings.
In June 2011 (and as amended in December 2011), the FASB issued new guidance concerning the presentation of comprehensive income. The Company adopted this new guidance retrospectively on January 1, 2011 and now reports its statements of operations and other comprehensive income in a single continuous statement.
The following table shows the fair values of fixed maturities by ratings assigned by rating agencies at December 31, 2012 and December 31, 2011:
The credit securities funds are funds that invest mainly in credit and credit related securities, cash and financial derivative instruments. The fund aims to manage currency exposure against GBP sterling. The credit securities fund may be redeemed on a daily basis.
The Company’s process to validate the market prices obtained from the outside pricing sources include, but are not limited to, periodic evaluation of model pricing methodologies and analytical reviews of certain prices. The Company may also periodically perform back-testing of selected sales activity to determine whether there are any significant differences between the market price used to value the security prior to sale and the actual sale price.
Level 2-Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs. Included are investments in Corporate securities and the Company’s other investments, and the foreign currency derivatives.
Level 3-Inputs to the valuation methodology are unobservable in the market for the asset or liability and are significant to the fair value measurement. Material assumptions and factors considered in pricing investment securities may include projected cash flows, collateral performance including delinquencies, defaults and recoveries, and any market clearing activity or liquidity circumstances in the security or similar securities that may have occurred since the prior pricing period.
As disclosed in Note 1, the Company has entered into QSRTs with various affiliates of Canopius Group. The Company assumed net earned premiums of $378,930 thousand, $431,897 thousand and $372,771 thousand in 2012, 2011 and 2010, respectively, from the QRSTs and received $32,559 thousand, $7,689 thousand and $23,532 thousand in 2012, 2011 and 2010, respectively of the Company’s proportion of balances held on trust funds maintained by the managing agent of S4444 and by Lloyd’s in respect of the QSRTs.
funds withheld by cedants of $877,665 thousand and $815,131 thousand for 2012 and 2011, respectively included in reinsurance balances receivable;
income on deposit contracts of $0 thousand, $480 thousand and $11,049 thousand in 2012, 2011 and 2010, respectively;
Beginning in 2012, the Company entered into an Aggregate Excess of Loss Reinsurance contract with Syndicate 4444. The contract was novated to Omega Specialty Insurance Company Limited (OSIL), an indirect subsidiary of Canopius Group, on November 16, 2012. OSIL agreed to pay the sum of $621,000, which equals the unearned premium as at September 30, 2012 to the Company.
profit commission expense of $568 thousand and $1,845 thousand in 2012 and 2011, respectively;
funds withheld interest income of $1,143 thousand and $754 thousand in 2012 and 2011, respectively.
Outstanding losses and loss expenses of $57,337 thousand and $77,269 thousand in 2012 and 2011, respectively.
Canopius Services Limited, an affiliate, charged a fee of $249 thousand, $311 thousand and $533 thousand to the Company for director services and consulting advice in 2012, 2011 and 2010, respectively. The Company owed $882 thousand and $195 thousand at the end of 2012 and 2011, respectively, to Canopius Services Limited.
The summary of changes in outstanding losses and loss expenses for the year ended December 31, 2012 and 2011 is as follows:
In the event that Lloyd’s draws on the Company’s funds at Lloyd’s in relation to insurance business that the Company itself has not assumed, contractual clauses are in place to ensure that the appropriate Canopius Group affiliate reimburses the Company for the draw on collateral. Should reimbursement not take place for any reason, and if that affiliate is reinsured by the Company under the QSRTs (i.e. a ceding affiliate), the Company is able to offset the value of such a drawdown against its own obligations under the QSRTs. If the above such obligations are not honored by any such affiliate, Canopius Group has guaranteed, unconditionally and irrevocably, the punctual payment, performance and discharge of such payment obligations. Based on these terms the Company has assessed any potential exposure to the loss of collateral as remote.
In accordance with the terms of reinsurance contracts written with third parties, the Company has established insurance trusts and arranged letters of credit for the benefit of ceding insurers to provide collateral in respect of net obligations to the ceding insurers under the reinsurance contracts. As at December 31, 2012 and 2011, the Company had placed cash and cash equivalents of $29,894 thousand and $25,086 thousand, respectively, and other investments in the amount of $11,768 thousand and $27,325 thousand, respectively, in such trusts and as collateral to support the letters of credit.
As of December 31, 2012, TRL was registered as a Class 3A insurer and is required by the terms of its license granted under the Insurance Act, 1978 of Bermuda and related regulations (the “Act”) to maintain a solvency margin in accordance with the provisions of the Act. In 2013, TRL requested and received approval to become registered as a Class 3B insurer.
At December 31, 2012, TRL was required to maintain a minimum statutory capital and surplus of $119,727 thousand. TRL’s statutory capital and surplus at December 31, 2012 was $431,353 thousand. TRL met the minimum solvency margin at December 31, 2012.
Lloyd’s may potentially draw on the funds at Lloyd’s collateral (see “Note 7-Reinsurance Collateral”) provided by the Company in relation to insurance business that the Company itself has not assumed. The Company’s management believes that
the probability of a liability crystallizing is remote, since contractual clauses are in place to ensure that the appropriate Canopius affiliate reimburses the Company for the draw on collateral, and (if the affiliate is a reinsured under the QSRTs), the Company is able to offset the value of such a drawdown against its own obligations under the QSRT. Further, in the event of such a drawdown, and if such obligations are not honored by any such affiliate, Canopius has guaranteed, unconditionally and irrevocably, the punctual payment performance and discharge of such payment obligations. Lastly, under the terms of the QSRT, the Company’s insurance obligations are limited to the amount the Company has placed as collateral. Accordingly, management has not recorded any liability in respect of this contingency.
On March 13, 2013, Canopius Group announced that it had completed the private sale of shares of the Company to a limited number of third party institutional investors. Canopius Group received $216,697,637 in gross proceeds from the sale of 14,025,737 shares (such shares representing 100% of its ownership) of the Company. The gross purchase price per share was $15.45.
In March 2013, prior to the sale, the Company entered into a series of reinsurance transactions with affiliates of Canopius Group, the purpose of which was to reinsure, commute or novate certain of its assumed reinsurance business. In total, the Company’s December 31, 2012 net reserves, unearned premiums and deposit liabilities were reduced by approximately $624 million, $159 million and $12 million, respectively, resulting from these events. The net reinsurance balances receivable and other liability balances were reduced by approximately $791 million and $2 million, respectively. The net impact to shareholder’s equity from these reinsurance transactions was approximately $1 million.
In March 2013, the Company declared a dividend to Canopius Group for 83 million British pound sterling. A final distribution will be made on finalization of the closing balance sheet on the date of merger. In addition, TRL received approval to reduce its statutory contributed surplus by an amount not to exceed 70 million British pounds sterling which was obtained, in part, to effectuate the settlement of the Company’s outstanding loan to Canopius Group. These transactions were executed in contemplation of and conditional on the completion of the merger transaction with Tower Group, Inc. (“TGI”).