On March 24, 2000, the Company was acquired by Markel. As a result, Markel realigned its operations with the Company becoming its international division. The Company's operating segments have been changed in accordance with this realignment. The Company now includes three operating segments: the London Company Market, the Lloyd's Market and Investing. All investing activities are included in the Investing operating segment. Discontinued programs and non- strategic insurance subsidiaries are included in Other for purposes of segment reporting. Prior year amounts have been restated to conform with 2000 presentations.
Year ended December 31, -------------------------------------------- 2000 1999 Amount Percent Amount Percent (dollars in thousands) -------------------------------------------- Gross written premiums London Company Market $180,709 25.6% $246,219 28.5% Lloyd's Market 397,738 56.4 260,082 30.1 Other 126,958 18.0 358,632 41.4 -------- ------ -------- ------ Total $705,405 100.0% $864,933 100.0% ======== ====== ======== ====== Net written premiums London Company Market $150,213 27.6% $179,563 29.0% Lloyd's Market 310,597 57.0 188,750 30.5 Other 84,084 15.4 250,133 40.5 -------- ------ -------- ------ Total $544,894 100.0% $618,446 100.0% ======== ====== ======== ======
Net earned premiums London Company Market $186,655 30.9% $227,694 38.9% Lloyd's Market 248,213 41.1 141,022 24.1 Other 168,671 28.0 216,565 37.0 -------- ------ -------- ------ Total $603,539 100.0% $585,281 100.0% ======== ====== ======== ======
(b) Significant decreases in gross written premiums in discontinued lines due to the closure of motor Syndicate 554 in the second half of 1999, the closure of Terra Nova (Bermuda) on April 2, 2000, and the decision to cease underwriting at marine Syndicate 329 and non marine Syndicate 1227, and the cessation of certain unprofitable lines at motor Syndicate 1228 in the third quarter of 2000.
(c) These decreases have been partially offset by a 52.9% increase in gross written premiums at the Lloyd's Market in 2000. The increase is primarily due to Markel Capital increasing its participation on the continuing syndicates to approximately 87% in 2000 compared to approximately 68% in 1999 and increased writings at non marine Syndicate 702 and marine and aviation Syndicate 1009. The increased writings at non marine Syndicate 702 primarily arose on certain professional indemnity classes. The increased writings at marine and aviation Syndicate 1009 are a consequence of the syndicate writing $41.1 million of aviation business in 2000.
(c) A $2.5 million charge to record liabilities under an operating lease.
The $145.2 million underwriting loss from operations was due to poor performance on both continuing and discontinued lines of business including the cessation of business at Terra Nova (Bermuda), Syndicates 329 and 1227 and certain lines at 1228, and the adoption of the Markel reserving philosophy.
The Company is currently working to increase its focus on underwriting profitability in continuing programs. A run-off unit has been established to aggressively manage discontinued programs and allow the business units to focus on writing profitable business. These initiatives may lead to further re-pricing or discontinuance of poor performing lines of business, reorganisation of business units to achieve operating efficiencies and the review of reinsurance programs.
The Company had a pre-tax loss of $144.7 million in 2000 compared to pre- tax loss of $72.6 million in 1999, and was primarily a result of the $203.8 million underwriting loss and merger expenses of $18.4 million being partially offset by $84.9 million and $8.7 million of investment income and realized investment gains, respectively.
Shareholder's equity decreased by 37.2% to $278.7 million at December 31, 2000, compared to $444.0 million at December 31, 1999. The decrease of $156.3 million was primarily due to the net loss of $132.3 million and a $75.0 million dividend paid to Markel Corporation on March 28, 2000, partially offset by unrealized appreciation of investments after tax of $33.1 million and other comprehensive loss and deferred equity compensation movements of $17.9 million.
To the Shareholder and Board of Directors of Terra Nova (Bermuda) Holdings Ltd.
In our opinion, the consolidated financial statements for the years ended December 31, 1999 and December 31, 1998 included on page 12 present fairly, in all material respects, the financial position of Terra Nova (Bermuda) Holdings Ltd. and subsidiaries at December 31, 1999, and the result of their operations and their cash flows for each of the two years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 14(a) on page 39 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements or financial statement schedules of Terra Nova (Bermuda) Holdings Ltd. and subsidiaries for any period subsequent to December 31, 1999.
On March 24, 2000, the Company was acquired by Markel Corporation ("Markel") for total consideration of approximately $658 million. Markel issued approximately 1.75 million common shares and contingent value rights and paid approximately $325 million in cash to the Company's shareholders in the transaction. The Company's $175 million of public debt remained outstanding.
a) underwriting contracts of insurance at Lloyd's; b) obtaining reinsurance for such contracts in whole or in part; c) paying claims on such contracts.
The managing agency manages but does not participate in its own syndicates and has no liability under contracts of insurance. However, Markel Capital, a subsidiary of Markel International, is a corporate member of Lloyd's and a member of each of the syndicates managed by Markel Syndicate Management. Markel Capital therefore participates in the underwriting results of the Markel Syndicate Management syndicates.
(b) Cash and cash equivalents: Cash and cash equivalents consist of cash and various short-term investments which have maturities when bought of 90 days or less. Cash equivalents are stated at fair value which approximates cost.
(c) Premiums: Premiums are earned pro-rata over the term of the related coverage. The balance of unearned premiums represents the portion of gross written premiums relating to the unexpired terms of coverage.
(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. If it is determined that future policy revenues on existing policies are not adequate to cover related costs and expenses, deferred policy acquisition costs are charged to earnings.
(l) Stock-based compensation: The Company has adopted SFAS No.123 "Accounting for Stock-Based Compensation". As allowed under this standard, the Company accounts for stock option grants in accordance with APB Opinion No.25 "Accounting for Stock Issued to Employees".
Compensation expense for stock option grants is recognized to the extent that the fair value of the stock exceeds the exercise price of the option at the measurement date. Any resulting compensation expense is accrued over the shorter of the vesting or service period.
Deferred compensation, recorded as a component of shareholder's equity, represents options the Company expected to be settled in stock.
Cash and securities with a carrying value of $50,184,172 and $49,607,415 at December 31, 2000 and 1999, respectively, were held in trust for the benefit of the Company's Canadian cedents.
The Company has deposits at Lloyd's with a carrying value of $42,909,618 in support of the Company's underwriting activities on the Markel Syndicate Management syndicates. The Company also has contingent liabilities regarding irrevocable undrawn letters of credit of $187,014,278 and $246,886,653 supporting the Company's underwriting activities on the Markel Syndicate Management syndicates at December 31, 2000 and 1999, respectively. The Company has deposited cash and investments with a carrying value of $208,030,000 at December 31, 2000 and $251,527,716 at December 31, 1999, respectively, as collateral to support this commitment. Cash and securities with a carrying value of $303,193,000 and $202,931,000 at December 31, 2000 and 1999, respectively, were held in trust for the benefit of the Markel Syndicate Management syndicates' policyholders.
Realized net capital gains (losses) on sale of fixed maturities for the years ended December 31, 2000, 1999 and 1998, included gross capital gains of $11,937,000, $5,754,000 and $9,420,000, and gross capital losses of $18,863,000, $11,820,000 and $566,000, respectively.
Net unrealized appreciation of equities (before income tax) of the Company at December 31, 2000, included gross unrealized appreciation of $14,419,000 and gross unrealized depreciation of $2,346,000. Net unrealized appreciation of equities of the Company at December 31, 1999, included gross unrealized appreciation of $12,894,000 and gross unrealized depreciation of $1,329,000.
The amortized cost and estimated fair value of the Company's fixed maturities at December 31, 2000, 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.
(e) At December 31, 2000, the Company's portfolio by rating category, determined by recognized rating agencies, was:
(g) Equities available for sale: At December 31, 2000, the cost and estimated fair value of investments in common stocks were as follows:
(a) The U.K. corporation tax rate applicable to ordinary income was reduced to 31% from 33% on April 1, 1997, and to 30% from 31% on April 1, 1999. The corporation tax rate in France was 41.67% for 1998, 40% for 1999 and 37.7% for 2000. The difference between the actual tax expense and the "expected" amount calculated by applying the U.K. corporation tax rate is explained as follows:
(c) Deferred tax liabilities and assets are provided for expected future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. The measurement of current and deferred tax liabilities and assets is based on the difference between the financial statements and tax bases of assets and liabilities using enacted rates in effect for the years in which the differences are expected to reverse. Measurement of a deferred tax asset, if any, is subject to the expectation of future realization. The components of net deferred tax asset (liability) of the Company as at December 31, 2000 and 1999, were as follows:
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 had historically adopted for its Bermuda employees, a similar policy on pension and related benefits and provided for a plan on the same cost basis. Since May 2000, the Company has no Bermuda employees.
Corifrance provides two defined contribution plans for its managers and all other employees. The annual contribution rate for managers is 5.66% of pensionable salary and, for employees, is 1.43% of pensionable salary.
The total cost of the Company's defined contribution plans for the year was $3,035,586 (1999: $3,121,304).
The "A" ordinary shares and "B" ordinary shares rank pari passu in right to receive dividends. 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.
On acquisition by Markel each outstanding option under the Terra Nova Approved and Non Approved Executive Share Option Scheme and, if issued before January 1, 2000, each outstanding option under the Octavian Plan was treated as fully exercised and converted into the right to receive the consideration payable in the transaction.
The Octavian Plan is a variable plan for accounting purposes. The accounting follows paragraphs 27 and 28 of APB Opinion No.25. Compensation expense of $212,000 has been charged against income in the period from January 1, 2000, to the date of the Markel acquisition (full year charge 1999: $2,941,000). The Octavian Plan was amended to provide for the issuance of options to purchase Markel common stock.
A credit risk exists with 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; so allowances are established for amounts thought uncollectable. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from its exposure to individual reinsurers.
In the years ended December 31, 2000, 1999 and 1998, the percentage of reinsurance premiums assumed to net written premiums was 30.4%, 42.6% and 54.4%, respectively.
Movement in unpaid losses and loss adjustment expenses for the years ended December 31, 2000, 1999 and 1998, is summarized in the table below.
Insurance balances receivable and reinsurance recoverable on paid and unpaid losses are stated after deduction of an allowance for doubtful accounts at December 31, 2000 and 1999, of $48,189,000 and $46,440,000, respectively. Doubtful accounts against which provisions of $7,643,000 had previously been made were written off during 2000. The charge to doubtful accounts was $9,392,000, $8,497,000 and $9,464,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
(a) On January 31, 2001, the Company received notice of a lawsuit filed in the United States District Court for the Southern District of New York against Terra Nova by Palladium Insurance Limited and Bank of America, N.A. seeking approximately $27 million plus exemplary damages in connection with alleged reinsurance agreements. The Company believes it has numerous defenses to these claims, including the defense that the alleged reinsurance agreements were not valid. The Company intends to vigorously defend this matter, however, it cannot predict the outcome at this time.
An extraordinary charge of $11.6 million arose during the second quarter of 1998 as a result of Markel International 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.
The Company considers many factors including the nature of the underwriting units' insurance products, production sources, distribution strategies and regulatory environment in determining how to aggregate operating segments.
Segment profit or loss is measured by underwriting profit or loss. Segment profit for the Investing operating segment is measured by net investment income and realized net gains or losses.
The Company does not allocate assets to the operating divisions for management reporting purposes. The total investment portfolio and cash and cash equivalents are allocated to the Investing operating segment. The Company does not allocate capital expenditure for long-lived assets to any of its operating segments for management reporting purposes.
(a) Terra Nova files an annual audited return with the Financial Services Authority (the "FSA"), in the U.K. The regulations require U.K. insurance companies to comply with prescribed minimum solvency margins. Assets and liabilities reported within the annual FSA Return are prepared subject to specified rules concerning valuation and admissibility. Consequently, net assets reported within the Return may vary from net assets as they appear in Terra Nova's published financial statements. Technical provisions shown in Terra Nova's annual FSA Return reflect the statutory requirement in the U.K. for insurance companies to maintain equalization provisions. Equalization provisions are established in accordance with specified rules and are in addition to the provisions required to meet the anticipated ultimate cost of settlement of outstanding claims at the balance sheet date. Such provisions are not required under U.S. GAAP.
Bermuda Holdings' and Markel International's ability to meet their expenses and debt services requirements is dependent upon the ability of Terra Nova and Terra Nova (Bermuda) to pay dividends as described above.
Markel International is the issuer of $75 million 7.2% Senior Notes due 2007 and $100 million 7.0% Senior Notes due 2008. The Senior Notes are guaranteed fully and unconditionally by the Company.