The Company's premiums by segment for the years ended December 31, 2000 and 1999, and the combined ratio are set out in the following table:
Combined ratio Loss ratio (including LAE) 91.5% 83.9% Expense ratio 42.3 46.3 ------ ------ Combined ratio 133.8% 130.2% ====== ======
Gross written premiums decreased 18.4% to $705.4 million in 2000 from $864.9 million in 1999. The decreases are primarily a result of:
Net written premiums decreased 11.9% to $544.9 million in 2000 from $618.4 million in 1999 principally in line with the fall in gross written premiums. This fall was offset by an increase in retention rates to 77.2% in 2000 from 71.5% in 1999. The low retention rate in 1999 was primarily due to the purchase of additional reinsurance at the end of 1999 to protect against exposure to aviation and satellite business written by Syndicate 959.
Net earned premiums remained broadly unchanged in 2000, increasing by 3.1% to $603.5 million from $585.3 million in 1999. This arose because the decrease in 2000 net written premiums was offset by 1999 premiums being earned during the year.
The underwriting loss increased to $203.8 million in 2000 from $176.8 million in 1999. The underwriting loss in 2000 was primarily the result of inadequate pricing and poor underwriting controls on the discontinued lines and portions of the continuing programs. The increased underwriting loss reflects non-recurring transaction related expenses of $58.6 million in the first quarter and $145.2 million of underwriting losses from operations.
(a) $36.5 million charge against deferred acquisition costs due to poor experience on property business and certain marine, casualty and auto lines.
(b) $19.6 million of reserve strengthening required on marine, property, casualty and auto accounts.
As a consequence of the above, the Company's combined ratio increased to 133.8% in 2000, compared to 130.2% in 1999.
In our opinion, the 2000 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Terra Nova (Bermuda) Holdings, Ltd. and subsidiaries as of December 31, 2000, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related 2000 financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
Consolidated Statements of Operations Year Ended December 31, (dollars in thousands)
Consolidated Statements of Comprehensive (Loss) Income Year Ended December 31, (dollars in thousands)
Terra Nova (Bermuda) Holdings Ltd. ("Bermuda Holdings") is incorporated in Bermuda. All references to the "Company" are to Terra Nova (Bermuda) Holdings Ltd. and all of its direct and indirect subsidiaries, including Markel International Limited ("Markel International"), Terra Nova Insurance Company Limited ("Terra Nova"), Terra Nova (Bermuda) Insurance Company Ltd. ("Terra Nova (Bermuda)"), Compagnie de Reassurance d'Ile de France ("Corifrance"), Markel Syndicate Management Limited ("Markel Syndicate Management") and Markel Capital Limited ("Markel Capital"). On April 20, 2000, Markel International changed its name from Terra Nova Insurance (UK) Holdings plc, Markel Syndicate Management changed its name from Octavian Syndicate Management Limited and Markel Capital changed its name from Terra Nova Capital Limited. On November 3, 2000, Markel International was re-registered as a private limited company. Accordingly, the name was changed to Markel International Limited and the status of the company changed to private with effect from that date.
Members of Lloyd's underwrite insurance risk at Lloyd's by being a member of one or more Lloyd's syndicates. A syndicate has no separate legal identity and is "managed" by a managing agent.
a) determine underwriting policy and determine policy and effect reinsurance including the reinsurance to close; b) appoint and supervise the underwriter and associate underwriting, claims, administrative and accounting staff; c) accept underwriting risks and settle and pay claims on behalf of the syndicate; d) manage the investment of the monies and other assets held in each syndicate; e) prepare and distribute annual reports, personal accounts and other reports and documents as required by the Council of Lloyd's.
The managing agent does not participate directly in the profit or loss on underwriting of its syndicates. It is incentivized by earning a commission on syndicate profits. Markel Syndicate Management will not charge a profit commission from the 2001 underwriting year.
(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 shareholder's equity.
(k) 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 estimates for reported losses, including provisions for losses incurred but not reported ("IBNR"). The adequacy of these estimates is assessed by reference to projections of the ultimate losses for each accident year. The methods of determining such estimates and establishing reserves are reviewed continually and updated. Resulting adjustments are reflected in current operations.
(m) Risks and uncertainties: 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.
- Investments: Fair values were based on quoted market prices. For securities for which market prices were not readily available, fair values were estimated using quoted market prices of comparable investments.
(o) Goodwill: The goodwill in the Company's balance sheet has been calculated using the purchase method of accounting and is amortized on a straight line basis over periods not exceeding 40 years.
(a) Deposits: Securities with a carrying value of $148,939,275 and $122,105,666 at December 31, 2000 and 1999, 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 $22,243,365 and $20,994,932 at December 31, 2000 and 1999, respectively, were held in trust for the benefit of the Company's U.S. surplus lines policyholders.
Proceeds from sales of investments in equity securities during 2000, 1999 and 1998, were $90,299,000, $174,530,000 and $140,564,000, respectively. Realized net capital gains on sale of equity securities for the years ended December 31, 2000, 1999 and 1998, included gross capital gains of $28,122,000, $42,403,000 and $24,567,000 and gross capital losses of $12,490,000, $9,458,000 and $15,458,000, respectively.
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, 2000, the estimated fair value of the following investments exceeded 10% of shareholder's equity:
(b) The components of income tax (benefit) expense attributable to continuing operations are as follows:
The valuation allowance of $33.7 million relates primarily to losses at Markel Capital and the uncertainty of realizing a future tax benefit. The Company expects to realize the gross deferred tax asset at December 31, 2000, of $44.2 million through future taxable income generated by its subsidiaries.
Terra Nova operates a defined benefit pension plan ("Terra Nova Plan") covering all employees (except those in Canada and Belgium) over 20 years old who meet the eligibility conditions set out in the plan document. The cost of providing pensions for employees is charged to earnings over the average working life of employees according to the recommendations of qualified actuaries. Annual funding requirements are determined based on the projected unit credit cost method, which attributes a pro rata portion of the total projected benefit payable at normal retirement to each year of credited service. Final benefits are based on the employee's years of credited service and the higher of pensionable compensation received in the calendar year preceding retirement or the best average pensionable compensation received in any three consecutive years in the ten years preceding retirement.
Markel Syndicate Management provides certain of its employees with one of two defined benefit pension schemes run in conjunction with the Lloyd's Superannuation Scheme ("Markel Syndicate Management Plans"). The Markel Syndicate Management Plans are similar in operation to the Terra Nova Plan though the benefit structure differs.
Markel Syndicate Management provides a defined contribution plan for nominated employees and directors. The annual contribution rate for employees is 15% of annual pensionable salary and, for directors and certain senior underwriters, is 25% of annual pensionable salary.
The following tables set out the funded status of all defined benefit plans for the years ended December 31, 2000, 1999 and 1998, and the amounts recognized in the accompanying consolidated balance sheets of the Company at December 31, 2000 and 1999:
At December 31, 1999, the Company had two stock-based compensation plans. The Terra Nova Approved and Non Approved Executive Share Option Scheme provided for the grant to eligible employees of options to buy Class A ordinary shares of the Company. The Octavian Stock Option Plan provides for the grant of options to former and current members of management of Octavian (now Markel Syndicate Management) based on profit commissions receivable by Markel Syndicate Management for the 1997 to 2000 years of account.
The Company cedes reinsurance to and assumes reinsurance from Lloyd's syndicates. At December 31, 2000, 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 $183.7 million. The majority was ceded into Equitas with effect from September 4, 1996. Equitas is a reinsurance company that was formed to reinsure the 1992 and prior losses of 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 Equitas and Lloyd's syndicates.
On January 29, 2001, Reliance Insurance Company entered into an order of supervision with the Pennsylvania Insurance Department under which its business and operations will be monitored and reviewed by the Department. At December 31, 2000, Reliance Insurance Company and its affiliates (Reliance Insurance Group) owed the Company approximately $33.4 million in reinsurance recoverables for paid and unpaid losses. These balances were considered in the normal course of assessing the collectability of reinsurance recoverables. The Company believes this matter will not have a material impact on its financial condition or result of operations.
The adverse prior year development of $44.9 million during 2000 is largely attributable to inadequate pricing on the discontinued lines and portions of the continuing programs for the 1997, 1998 and 1999 accident years. These deficiencies have been partially offset by net favorable development experienced on the 1986 to 1990 accident years. This net favorable development arises on the Company's casualty accounts offset by deterioration on the asbestos-related and environmental pollution losses in both the marine and casualty accounts on the 1985 and prior accident years.
Management has considered environmental and latent injury claims and claims expenses in establishing the Company's reserve for unpaid losses and loss adjustment expenses. The Company continues to be advised of claims asserting injuries from hazardous materials and alleged damages to cover various clean-up costs affecting policies written in prior years. Coverage and claim settlement issues, such as determining that coverage exists and defining an occurrence, may cause the actual loss development to show more variation than the rest of the Company's book of business. Traditional reserving techniques cannot be used to estimate asbestos-related and environmental pollution claims and so the uncertainty about the ultimate cost of these types of claims is greater than the uncertainty relating to standard lines of business. The Company believes it has made reasonable provisions for claims, although the ultimate liability may be more or less than held reserves. The Company believes that future losses associated with these claims will not have a material adverse effect on its financial position. Still, there is no assurance that such losses will not materially affect the Company's results of operations for any period. Management is not able to estimate the additional loss, or range of loss, that is reasonably possible.
Asbestos-related and 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 2000, 1999 and 1998, are as follows:
The Company has other contingencies that arise in the normal conduct of its operations. In the opinion of management, the resolution of these contingencies are not expected to have a material impact on the Company's financial condition or results of operations.
(b) 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, 2000, under non-cancelable operating leases are as follows:
Rental expense on property leases of $5,057,000, $4,467,000 and $4,246,000 was incurred for the periods to December 31, 2000, 1999 and 1998, respectively.
(a) On April 1, 1998, Markel International repurchased $4.5 million of the Senior Notes for consideration of $5.2 million, including accrued interest. (b) On May 18, 1998, Markel International 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, 2000, 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, 2000, was $161.1 million, comprising $91.2 million of 7.0% Senior Notes due 2008 and $69.9 million of 7.2% Senior Notes due 2007.
The Senior Notes were issued by Markel International and are guaranteed fully and unconditionally by Bermuda Holdings. The Senior Notes may be redeemed at any time at the option of Markel International at a redemption price equal to the sum of: (i) the principal amount of the Senior Notes being redeemed plus accrued interest to the redemption date; and (ii) the make-whole amount, if any.
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.
(a) The table below summarizes the segment disclosures for the years ended December 31, 2000, 1999 and 1998. Prior year amounts have been reclassified to conform with the current year presentation.
(b) The table below reconciles segment (loss) profit to the Company's consolidated financial statements.
A reconciliation of total technical provisions (excluding provision for unearned premiums) reported in Terra Nova's annual FSA Return, to Terra Nova's reserve for unpaid losses and loss adjustment expenses under U.S. GAAP for the years ended December 31, 2000, 1999 and 1998, is provided below:
Terra Nova's unaudited required minimum statutory solvency margin and unaudited statutory solvency margin at December 31, 2000, were $35,529,000 and $105,322,000, respectively. Terra Nova's unaudited and estimated FSA Return policyholders' surplus and unaudited net income for the year ended December 31, 2000, and the audited FSA Return policyholders' surplus and net income as reported in the annual returns to the FSA for the years ended December 31, 1999 and 1998, are as follows:
Terra Nova's ability to pay dividends is limited by a Notice of Requirements issued by the FSA which requires Terra Nova to give 14 days' advance notice to the FSA 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.
(b) Terra Nova (Bermuda)'s ability to pay dividends is subject to certain regulatory restrictions. Under the Insurance Act of 1978, amendments to it and related regulations of Bermuda (the "Act"), Terra Nova (Bermuda) is required to file in Bermuda statutory financial statements and a statutory financial return. The Act also requires Terra Nova (Bermuda) to maintain certain measures of solvency and liquidity during the year.
Terra Nova (Bermuda) ceased accepting new business on April 2, 2000. On September 15, 2000, Terra Nova (Bermuda) de-registered as a Class 4 insurer, and obtained approval as a Class 3 insurer.
Terra Nova (Bermuda)'s statutory capital and surplus and minimum required statutory capital and surplus and net income for the years ended December 31, 2000, 1999 and 1998, respectively, were:
(c) Markel Capital must comply with the Companies Act 1985 which provides that dividends may only be paid out of distributable profits.
Markel International changed its name from Terra Nova Insurance (UK) Holdings plc on April 20, 2000. On November 3, 2000, Markel International was re-registered as a private limited company. Accordingly, the name was changed to Markel International Limited and the status of the company changed to private with effect from that date.
Markel International's summarized consolidated balance sheet information as at December 31, 2000, and December 31, 1999, and summarized consolidated statement of operations information for the year ended December 31, 2000, and 1999, is set out below.
The Company enters into forward foreign exchange contracts to hedge foreign currency transactions. Gains or losses from currency rate changes on forward contracts hedging foreign currency transactions are recorded currently in earnings. At December 31, 2000, the Company had entered into contracts with an aggregate notional amount of $45.3 million to buy U.K. sterling. Contract maturities range from June 2001 to June 2002. The effect from foreign currency transactions, including hedging activities was a gain of $4.4 million for the year ended December 31, 2000.