In view of the short period between the date of the Terra Nova Acquisition and year-end, December 31, 1994 has been considered the date of the Terra Nova Acquisition for accounting purposes. As a result, the operations of the Company, UK Holdings and Terra Nova (Bermuda) for the period December 21, 1994 to December 31, 1994, which are not material, have been included in the results of operations of Terra Nova.
- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In recent years the insurance industry has experienced a succession of catastrophic losses, including major European storms in 1987 and 1990, the explosion of the Piper Alpha North Sea oil platform in 1988, Hurricane Hugo, the Phillips Petroleum plant explosion and the Exxon Valdez oil spill in 1989, the San Francisco earthquake in 1990, Typhoon Mirielle (Japan) and the Oakland California fires in 1991, Hurricanes Andrew and Iniki and major storms affecting the East Coast of the United States in 1992, the Northridge earthquake in 1994 and the Kobe earthquake in 1995. Consolidations within the insurance industry have also reduced the demand for reinsurance, which in some cases has adversely affected rates and/or underwriting terms and conditions.
As a result of the catastrophe losses suffered in the late eighties and early nineties and the contraction in reinsurance capacity caused by the withdrawal of a number of the Company's competitors, property catastrophe reinsurance rates hardened significantly and retentions increased sharply during the period 1991 through 1993. In 1994, 1995 and 1996, property catastrophe reinsurance rates fell from the strong levels of 1993. Management believes, in light of its experience with the Company's renewals for 1997 business, that premium rates can be expected to decline in 1997 in the absence of a major catastrophe event, but that rates and retention levels in the near future are likely to remain higher than those experienced in 1992.
After a period of weakness in rates and declining deductibles, terms for marine insurance improved during 1992, 1993 and 1994 with large increases in deductibles and significant rate increases being imposed by marine insurers. While rate reductions have occurred since 1994, particularly in the hull and energy account, as a result of increasingly competitive conditions, deductibles generally remain at the higher levels established in 1992.
The following discussion addresses the principal factors affecting the earnings and financial condition of the Company. All references herein to the "Company" are to Terra Nova (Bermuda) Holdings Ltd. ("Bermuda Holdings") and all of its direct and indirect subsidiaries, including Terra Nova Insurance (UK) Holdings plc ("UK Holdings"), Terra Nova Insurance Company Limited ("Terra Nova"), Terra Nova (Bermuda) Insurance Company Ltd. ("Terra Nova (Bermuda)"), Octavian Syndicate Management Limited ("Octavian") and Terra Nova Capital Limited ("Terra Nova Capital").
TERRA NOVA (BERMUDA) HOLDINGS LTD. TERRA NOVA INSURANCE COMPANY LIMITED AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company's mix of business for the years ended December 31, 1996, 1995 and 1994 and the key ratios by major line of business are as set forth in the following table.
(1) The following table breaks down gross premiums written into gross premiums written during the current year and revisions to prior year premiums written
The Company's functional currency is the U.S. dollar. The changes in line item amounts from year to year as discussed below are all affected by the movement in exchange rates, principally the dollar/sterling average rate which varied from 1.57 for 1996, 1.58 for 1995 and 1.54 for 1994.
(b) Terra Nova Capital writing gross premiums of $36.8 million in 1996. Terra Nova Capital was established by the Company to participate in business written by the Octavian Syndicates for the 1996 and subsequent years of account. The majority of the business written by the Octavian Syndicates is U.K. casualty, marine and aviation business.
Reinsurance ceded decreased by 10.5% to $49.8 million in 1996 from $55.7 million in 1995. The decrease was due to lower reinsurance costs at Terra Nova in 1996 as a result of an increase in the retention of the non-marine property catastrophe reinsurance program and rate reductions obtained on the non-marine property, non-marine casualty and marine programs, partially offset by reinsurance costs of $8.2 million in Terra Nova Capital in 1996.
Realized Net Capital Gains on Sales of Investments. Realized net capital gains on sales of investments increased $2.4 million to $11.8 million in 1996 from $9.4 million in 1995 mainly due to equity securities sold in the year.
Net Interest Expense. Net interest expense in 1996 relates to interest on the $100 million 10.75% Senior Notes issued on June 30, 1995. The net interest expense in 1995 relates to interest on an $85 million Credit Agreement which became effective on December 21, 1994 and which was repaid in full out of the proceeds of the Senior Notes issued on June 30, 1995, as well as interest of $5.4 million on the Senior Notes.
Income from Continuing Operations before Income Taxes and Minority Interests. Income from continuing operations before income taxes and minority interests increased 32.4% to $82.7 million in 1996 from $62.4 million in 1995, primarily due to an increase in investment income and an improved underwriting result in 1996.
Income from Continuing Operations. Income from continuing operations increased $19.1 million, to $64.9 million in 1996 from $45.8 million in 1995, as a result of the factors described above.
being offset by a reduction to prior year premiums written of $59.5 million, due primarily to a change in premium estimates of ceding companies and brokers.
Realized Net Capital Gains on Sales of Investments. Realized net capital gains on sales of investments decreased $4.5 million to $9.4 million in 1995 from $13.9 million in 1994 due to a lower level of activity in the equities portfolio.
101.3% in 1995 from 87.6% in 1994 due to an increase in 1995 in the reserve for asbestos and pollution losses. The decrease in the marine loss and LAE ratio to 63.9% in 1995 from 78.4% in 1994 was a consequence of the lower reinsurance costs experienced in 1995, a decrease in adverse development of the 1992 and prior years on the marine LMX business in 1995 and the more favorable loss environment experienced in 1995 compared to 1994.
Other Expenses. Other expenses increased 52.2%, to $3.5 million in 1995 from $2.3 million in 1994, due to the establishment of the Bermuda operations and an increased level of corporate activity in 1995.
Income from Continuing Operations. Income from continuing operations increased $11.5 million, to $45.8 million in 1995 from $34.3 million in 1994, as a result of the factors described above.
Combined Ratios. The Company's combined ratios were 103.8% for 1995 and 106.8% for 1994. This reduction was due to lower property catastrophe losses and marine LMX losses in 1995, offset by an increase in losses on the casualty business in 1995 compared to 1994.
Following the Terra Nova Acquisition, charges or credits resulting from changes in estimates after December 31, 1994 are reflected in continuing operations of the Company. In 1996 and 1995 the aviation business in run-off produced a break-even result.
Since 1983 the U.K. Inland Revenue had asserted that the Company's loss reserves should have been discounted in determining underwriting results for corporation tax purposes, although the Company did not accept discounting as an appropriate accounting policy nor the U.K. Inland Revenue's assertion in this regard. On January 26, 1996 the U.K. Inland Revenue withdrew their assertion and have stated that they currently have no intention of raising the issue in relation to the tax liability on all years prior to and including 1995. In March 1996, the Inland Revenue repaid all the taxes (including interest on the overdue amount) due to Terra Nova relating to this dispute.
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 a concurrent offering ("the Offerings"). In addition, the Company granted to the U.S. 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, including the additional 675,000 shares purchased, were $114.0 million after expenses. Of these net proceeds, $16.0 million was used to redeem a portion of the Company's non-voting convertible redeemable preference shares, $75 million was contributed to Terra Nova (Bermuda) to support its insurance operations, including increasing the capacity potentially available to the Octavian Syndicates from the Company, and $15 million was contributed to Terra Nova, with the balance retained for general corporate purposes.
The sources of funds for the Company's subsidiaries consist primarily of net premiums, investment income and proceeds from sales and redemptions of investments. The funds are used primarily to pay claims and operating expenses and for the purchase of investments, largely fixed income securities.
The consolidated shareholders' equity of the Company at December 31, 1996 of $398.8 million represented the combined shareholders' equity in Terra Nova, Terra Nova (Bermuda) and Octavian of $488.5 million and other net assets of $10.3 million, reduced by $100.0 million of debt in UK Holdings.
The shareholders' equity of Terra Nova at December 31, 1996 was $253.1 million. The increase of $41.2 million during 1996 was due to net income of $31.8 million (after dividends paid to UK Holdings of $7.2 million, used primarily to pay interest on the Company's debt obligations) and additional capital of $15 million contributed during 1996, partially offset by $5.6 million of unrealized losses on investments (net of tax). The shareholders' equity of Terra Nova (Bermuda) at December 31, 1996 was $223.4 million. The increase of $100.5 million during 1996 was due to net income of $32.1 million and additional capital of $75 million contributed during 1996, partially offset by $6.6 million of unrealized losses on investments.
For the years ended December 31, 1996 and 1995, the cashflow provided by operating activities of the Company and available for investment was $30.6 million and $9.4 million, respectively. The increase in cash flows provided by operating activities in 1996 was primarily due to:
Certain information contained herein is based on management's estimates, assumptions and projections. Important factors that could cause actual results to differ materially from those estimated by management include, among other things, an unexpected increase in competition, unfavorable government regulation, the pricing environment and other industry developments.
The Company maintains internal accounting controls which have been designed to provide reasonable assurance that all assets are safeguarded against unauthorized use or disposition and that transactions are authorized, executed and recorded properly in accordance with management's authorizations. The internal accounting controls are continually reviewed by qualified personnel.
In our opinion, the financial statements referred to above present fairly, in all material respects, (a) the consolidated financial position of Terra Nova (Bermuda) Holdings Ltd. and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1996 and (b) the consolidated results of operations and cash flows of Terra Nova Insurance Company Limited and subsidiaries for the year ended December 31, 1994, in conformity with accounting principles generally accepted in the United States of America.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
TERRA NOVA (BERMUDA) HOLDINGS LTD., TERRA NOVA INSURANCE COMPANY LIMITED, AND THEIR SUBSIDIARIES
Terra Nova (Bermuda) Holdings Ltd. ("Bermuda Holdings") was incorporated in Bermuda. All references herein to the "Company" are to Bermuda Holdings and all of its direct and indirect subsidiaries, including Terra Nova Insurance (UK) Holdings plc ("UK Holdings"), Terra Nova Insurance Company Limited ("Terra Nova"), Terra Nova (Bermuda) Insurance Company Ltd. ("Terra Nova (Bermuda)"), Octavian Syndicate Management Limited ("Octavian") and Terra Nova Capital Limited ("Terra Nova Capital").
The Company is a specialty property and casualty and marine insurance and reinsurance company operating in the London market through its London based subsidiary Terra Nova, in the Bermuda market through its Bermuda based subsidiary Terra Nova (Bermuda) and in the Lloyd's market through its London based subsidiary Terra Nova Capital. The principal lines of business consist of various classes of (i) non-marine property coverage written largely on a reinsurance basis, (ii) non-marine casualty coverage written largely on a reinsurance basis, and (iii) marine and aviation coverage written on both a primary and a reinsurance basis. Writings originate worldwide. The vast majority of insurance and reinsurance business is written through brokers authorized to place business at Lloyd's. Business is also written through non- Lloyd's brokers and with individual ceding companies. The broker is regarded as the agent of the insured or reinsured in placing the business. On January 5, 1996, the Company purchased the business and assets of Octavian ("Octavian Acquisition"), a Lloyd's managing agent, consisting primarily of the rights to manage five Lloyd's syndicates ("the Octavian syndicates"), for the 1996 and subsequent years of account.
The consolidated statements of operations, shareholders' equity and cash flows for Terra Nova for the year ended December 31, 1994 and the related notes reflect the historical operations of Terra Nova. The notes to the financial statements present information in relation to Terra Nova's continuing operations, except for note 18, which presents information about Aviation business in run-off. The predecessor financial information includes the operations of the Company for the period December 21, 1994 to December 31, 1994, which increased retained earnings and total shareholders' equity by $184,000. The pre-acquisition operations of Terra Nova (Bermuda) are not significant and have not been included in the predecessor information since the business is no longer being written.
The significant accounting policies of the Company and Terra Nova are as follows:
(d) DEFERRED ACQUISITION COSTS: Acquisition costs, which represent commission and other expenses directly related to the production of business, are deferred and amortized over the period in which the related premiums are earned. Deferred acquisition costs are limited to the amounts estimated to be recoverable from the applicable unearned premiums and the related anticipated investment income after giving effect to anticipated losses, loss adjustment expenses and expenses necessary to maintain the contracts in force.
(g) FOREIGN CURRENCY TRANSLATION: The U.S. dollar is the functional and reporting currency as a majority 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 historic 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 component of shareholders' equity.
SFAS No. 123 is effective for financial statements for fiscal years beginning after December 15, 1995. The Company has complied with the disclosure provisions of SFAS No. 123 in its financial statements for the year ending December 31, 1996. The Company has not adopted the recognition provisions of SFAS No. 123 and has found that, if adopted, such provisions would not have any material effect on the Company's operating income or financial position.
- Nature of operations. - Use of estimates in the preparation of financial statements. - Certain significant estimates. - Current vulnerability due to certain concentrations.
These disclosures are included in Notes 1, 3, 6, 13, 14, 15, 16 and 18.
(m) FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used by the company in estimating the fair value of the financial instruments presented.
Investments: Fair values were based upon quoted market prices. For securities for which market prices were not readily available, fair values were estimated using quoted market prices of comparable investments.
On January 5, 1996, the Company purchased the business and assets of Octavian, a Lloyd's managing agent, consisting primarily of the rights to manage five Lloyd's syndicates for the 1996 and subsequent years of account, for a purchase price of $9.2 million and 126,268 ordinary shares of Bermuda Holdings. The Octavian syndicates, whose business includes primarily U.K. liability and marine and aviation lines, had approximately $350 million of aggregate underwriting capacity, net of commission, for the 1996 year of account, of which $38.8 million, net of commission, was provided by the Company through Terra Nova Capital. The Company's share of the Octavian syndicates' gross written premiums for the 1996 year of account was $36.8 million. The goodwill in the Company's balance sheet represents the goodwill arising on the acquisition of Octavian, which has been calculated using the purchase method of accounting and is being amortized on a straight line basis over a 10 year period. The Octavian results from the date of acquisition are included in the 1996 consolidated statements of operations and comprise the following:
(a) DEPOSITS: Securities with a carrying value of $48,741,933 and $31,302,329 at December 31, 1996 and 1995, respectively, were held in trust for the benefit of the Company's U.S. cedents and to facilitate the Company being accredited as an alien reinsurer by certain States.
Cash and securities with a carrying value of $18,583,564 and $21,342,860 at December 31, 1996 and 1995 respectively, were held in trust for the benefit of the Company's U.S. surplus lines policyholders.
The Company has contingent liabilities in respect of undrawn letters of credit supporting certain reinsurance business written by the Company in the U.S. of $166,577,765 and $189,931,856 at December 31, 1996 and 1995, respectively. The Company has deposited cash and investments with a carrying value of $261,542,735 and $282,696,069 at December 31, 1996 and 1995 respectively, as collateral against these amounts.
(b) NET INVESTMENT INCOME: An analysis of the net investment income of the Company is as follows:
The Company's net unrealized appreciation of fixed maturities (before income tax) at December 31, 1996 included gross unrealized appreciation of $28,682,000 and gross unrealized depreciation of $4,277,000. The Company's net unrealized appreciation of fixed maturities at December 31, 1995 included gross unrealized appreciation of $65,006,000 and gross unrealized depreciation of $4,251,000, and is stated net of minority interests of $3,438,000. The Company's net unrealized appreciation of fixed maturities at December 31, 1994 was $nil. Net unrealized appreciation of equities (before income tax) at December 31, 1996 of the Company included gross unrealized appreciation of $34,047,000 and gross unrealized depreciation of $6,513,000. Net unrealized appreciation of equities at December 31, 1995 of the Company included gross unrealized appreciation of $15,288,000 and gross unrealized depreciation of $4,078,000, and is stated net of minority interests of $383,000. Net unrealized appreciation of equities at December 31, 1994 of the Company was $nil.
(d) FIXED MATURITIES AVAILABLE FOR SALE: At December 31, the amortized cost and estimated fair value of investments in fixed maturities of the Company were as follows:
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.
(e) At December 31, 1996, the Company's portfolio by rating category, determined by recognized rating agencies, was:
U.S. government and agency $421,660 U.K. government and agency 39,367 AAA 417,166 AA 166,200 A 27,852 Not Rated 47,286 ---------- $1,119,531 ==========
(f) At December 31, 1996, the fair value of the following investments exceeded 10% of shareholders' equity:
(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
Unrealized appreciation of investments (7,564) (11,757) Temporary difference between U.S. GAAP and U.K. tax (3,393) (537) Other (1,561) (4,097) ------- ---------
Acquisition costs deferred Commissions 78,051 67,942 68,225 Other 12,672 9,801 8,115 ------------ ----------- ----------- 90,723 77,743 76,340 ------------ ----------- -----------
Commissions 71,759 62,278 60,201 Other 10,635 10,036 7,045 ------------ ----------- ----------- 82,394 72,314 67,246 ------------ ----------- ----------- Balance at end of year $45,279 $36,950 $31,011 ============ =========== ===========
The deferred acquisition costs of the Company as of December 31, 1994, include additional deferred commission of $340,000 and other deferred expenses of $170,000, relating to Terra Nova (Bermuda).
Terra Nova maintains a supplemental pension plans which provides pension benefits for nominated employees above amounts allowed under tax qualified plans, through a funded money purchase plan.
Mandatory employee contributions to the Terra Nova Plan ceased in 1988 and there are no present plans to reintroduce such contributions. Employees may elect to make voluntary contributions to supplement their pension benefits when payable.
The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation at December 31, 1996 were 8.5% and 6.5% respectively. These are considered appropriate given the U.K. interest rate environment. The expected long-term rate of return on plan assets was 9.0%. The fund assets are invested primarily in equity securities.
The following table sets out the funded status of all defined benefit plans and the amounts recognized in the accompanying consolidated balance sheets of the Company at December 31, 1996 and 1995:
exercise of share options and shares issuable at the option of the Company under put agreements. For purposes of the calculation of primary earnings per share, net income has been increased to reflect the elimination of minority interests by exercise of the various put options and has been decreased to reflect the dividends paid to convertible redeemable preferred shareholders.
On March 25, 1996 the Company's shareholders approved an increase in the par value of the Company's `A' and `B' ordinary shares to $5.80 per share and a reverse split of the Company's ordinary shares on a one for 5.80 basis. The shareholders also approved an amendment to the Bye-Laws which, among other things, eliminated the Company's Class C ordinary shares.
In connection with the offering conversion and exchange transactions, the authorized share capital in total was increased to $518 million from $400 million now being $435 million for `A' ordinary shares, $58 million for `B' ordinary shares and $25 million for non-voting convertible redeemable preferred shares.
On January 9, 1995, the Company adopted two Executive Share Option Plans (the "Stock Option Plan"). The Stock Option Plan provides for the grant to eligible employees of options to purchase Class A ordinary shares of the Company (the "Option Shares"). The aggregate number of Option Shares issued and Option Shares for which an option may be granted is limited to 8% of the aggregate number of common shares of the Company outstanding. The options are only exercisable upon the occurrence of certain specified events and will expire 10 years after the date granted. The Stock Option Plan is administered by the Board of Directors of the Company, which determines which employees are granted options.
A summary of the Company's fixed stock option plan as of December 31, 1996 and changes during the year then ended is presented below:
OUTSTANDING AT JANUARY 1, 1996 660,909 6.26 Granted 182,893 13.64 Exercised (27,258) 5.80 Forfeited - - --------- -------- OUTSTANDING AT DECEMBER 31, 1996 816,544 $7.93 ========= ========
A summary of the Company's performance-based stock option plan as of December 31, 1996 and changes during the year then ended is presented below:
OUTSTANDING AT JANUARY 1, 1996 - - Granted 29,849 $0.00 Exercised - - Forfeited - - ------- ------ OUTSTANDING AT DECEMBER 31, 1996 29,849 $0.00 ======= ======
As of December 31, 1996, the 29,849 performance options outstanding under the Plan all have exercise prices of $nil and a remaining contractual life of nine years.
The Stock Appreciation Rights (SAR) plan introduced in 1993 was terminated in 1994. At January 1, 1994 the outstanding balance was $497,870. All outstanding SAR's were exercised during the year ended December 31, 1994 at a price of (Pounds)6.13 ($9.44) per SAR.
of continuing operations, including estimated reinsurance recoveries in respect of losses incurred but not reported, was approximately $96,762,000 million, the majority of which was ceded into Equitas with effect from September 4, 1996. No specific bad debt provision has been established for amounts due from Lloyd's syndicates.
ASBESTOS-RELATED LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED AND RESERVES OUTSTANDING (NET OF REINSURANCE)
The reinsurance recoverables netted against the loss reserves for each of the years 1996, 1995 and 1994 are as follows:
Insurance balances receivable and reinsurance recoverable on paid and unpaid losses are stated after deduction of an allowance for doubtful accounts as of December 31, 1996 and 1995 of $29,149,000 and $30,164,651, respectively. Doubtful accounts against which provisions of $194,000 had previously been made were written off
(b) Guarantees have been given by the Company in favor of the Prudential Insurance Company Limited and the Royal Bank of Scotland (Industrial Leasing) Limited in respect of leases granted to Market Building Limited in connection with the development of the London Underwriting Centre ("LUC"). The fire that occurred in August 1991, during the course of fitting out the new LUC, gave rise to the possibility of some shortfall of rental income in the future. Each year, the Company, charges its share of the expense necessary to maintain the LUC as a trading center.
(c) The Company entered into various lease agreements for office space. Certain leases have options permitting renewals for additional periods. In addition to 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, 1996 under non-cancelable operating leases are as follows:
DOLLARS IN THOUSANDS - ---------------------------------------------------------------------------- Year 1997 $4,252 1998 4,474 1999 3,479 2000 3,159 2001 1,667 2002 and later years 3,978 -------- $21,009 ========
The Company's total outstanding consolidated indebtedness at December 31, 1996 was comprised of $100 million of the Senior Notes, which were issued in June 1995 by UK Holdings and are guaranteed by Bermuda Holdings. The estimated fair value of these Senior Notes at December 31, 1996 was $112,750,000. The Senior
Notes may be redeemed at the option of UK Holdings at any time on or after July 1, 2000, at a redemption price equal to 104.031%, 102.688%, 101.344% and 100.000%, for the years 2000, 2001, 2002 and 2003 and thereafter, respectively, of the aggregate principal amount thereof plus accrued and unpaid interest thereon to the date of redemption. Subject to certain limitations, UK Holdings may also redeem on or before the third anniversary of the issuance of the Senior Notes up to 35% of the aggregate principal amount of the Senior Notes originally issued with the net proceeds of one or more offerings of capital stock (other than redeemable capital stock) of Bermuda Holdings or UK Holdings at a redemption price of 109.75% of the principal amount thereof plus accrued and unpaid interest thereon to the date of redemption. In addition, the Senior Notes are subject to redemption at the option of the holder thereof upon certain events constituting a change of control of Bermuda Holdings or UK Holdings (provided that holders of 25% of Senior Notes outstanding have tendered their Senior Notes for redemption), at a redemption price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest thereon to the date of redemption, and must be redeemed upon certain tax-related events at a redemption price of 100% of the principal amount thereof plus accrued and unpaid interest thereon to the date of redemption.
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 predecessor financial statements.
As of December 31, 1996, Terra Nova's aggregate exposure in respect of reinsurance ceded to Lloyd's syndicates in relation to Aviation, including estimated reinsurance recoveries in respect of losses incurred but not reported, was approximately $36,490,000, all of which was ceded into Equitas with effect from September 4, 1996.
The Company assumed reinsurance from and ceded reinsurance to certain related parties under reinsurance agreements. The amounts involved in the years ended December 31, 1996, 1995 and 1994 were not material.
(a) Terra Nova files an annual audited return with the Department of Trade and Industry (the "DTI") in the U.K. The DTI requires U.K. insurance companies to comply with prescribed minimum solvency margins. Terra Nova's unaudited required minimum DTI solvency margin and unaudited solvency margin at December 31, 1996 were $42,598,000 and $201,471,000 respectively. Terra Nova's unaudited and estimated DTI Return policyholders' surplus and unaudited net income for the year ended December 31, 1996 and the audited DTI Return policyholders' surplus and net income as reported in the annual returns to the DTI for the years ended December 31, 1995 and 1994 are as follows:
TERRA NOVA DOLLARS IN THOUSANDS 1996 1995 1994 - -------------------------------------------------------------------------- (UNAUDITED)
Policyholders' surplus $244,069 $212,480 $148,127 Net income before dividends 29,036 18,778 30,484
UK Holdings was incorporated in the United Kingdom on November 7, 1994 for the purposes of acquiring Terra Nova. UK Holdings is the issuer of Senior Notes as described in Note 17. Bermuda Holdings is the guarantor of such notes. The Guarantee is full and unconditional.
Summarized consolidated balance sheet information as at December 31, 1996 and 1995 and summarized consolidated statements of operations information for the years December 31, 1996 and 1995 relating to UK Holdings is set out below. No summarized statement of operations for the year ended December 31, 1994 is presented since the information is given in the predecessor statement of operations for this period.