UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
AMENDMENT TO APPLICATION OR REPORT
Filed Pursuant to Section 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
MARKEL CORPORATION
(Exact name of registrant as specified in its charter)
AMENDMENT NO. 1
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Annual Report on Form 10-K for
the year ended December 31, 1995 as set forth in the pages attached hereto.
EXHIBIT INDEX
Exhibit 13.1 "1995 Annual Report to Shareholders" was inadvertently
filed with incorrect numbers as indicated by redline tags.
EXHIBITS
Exhibit 13.1 "1995 Annual Report to Shareholders" was inadvertently
filed with incorrect numbers as indicated by redline tags.
MARKEL CORPORATION
(Registrant)
Dated: April 9, 1996 By: /s/ STEVEN A. MARKEL
Steven A. Markel
Vice Chairman
Selected Financial Data (dollars in millions, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
------ ------- ------
<S> <C> <C> <C>
RESULTS OF OPERATIONS (1)
Earned premiums $ 285 $ 243 $ 193
Net investment income 43 29 24
Total operating revenues 344 280 235
Net income 34 19 24
PRIMARY EARNINGS PER SHARE (2)
Core operations $ 5.15 $ 3.77 $ 3.31
Net realized gains 1.39 0.45 1.83
Nonrecurring items - - -
Amortization expense (0.39) (0.89) (0.91)
Net income $ 6.15 $ 3.33 $ 4.23
FINANCIAL POSITION (1)(3)(4)
Total investments $ 909 $ 612 $ 597
Total assets 1,315 1,103 1,135
Unpaid losses and loss adjustment expenses 734 653 688
Long-term debt 107 101 78
Total shareholders' equity 213 139 151
RATIO ANALYSIS
GAAP combined ratio 99% 97% 97%
Investment yield (5) 6% 5% 5%
Total return (6) 15% (2%) 11%
Debt to total capital 33% 42% 34%
Return on average shareholders' equity 20% 13% 18%
PER SHARE DATA (2)
Common shares outstanding (in thousands) 5,422 5,387 5,414
Total investments $ 167.57 $113.55 $110.27
Book value 39.37 $ 25.71 $ 27.83
Growth in book value 53% (8%) 38%
5-Year CAGR in book value (7) 31% 17% 25%
Closing stock price $ 75.50 $ 41.50 $ 39.38
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1992 1991 1990 1989 1988 1987 1986 10-Year CAGR(7)
------ ------ ------ ------ ------ ------ ----- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS (1)
Earned premiums $ 153 $ 152 $ 33 $ 24 $ 20 $ 13 $ 10 52%
Net investment income 27 31 7 5 4 2 2 44%
Total operating revenues 206 223 73 48 37 28 25 36%
Net income 26 14 6 14 11 7 5 42%
PRIMARY EARNINGS PER SHARE (2)
Core operations $ 3.03 $ 2.61 $ 1.76 $ 1.33 $ 1.61 $ 0.86 $0.98 32%
Net realized gains 0.89 0.94 0.13 0.89 0.28 0.14 0.08 -
Nonrecurring items 1.90 0.28 (0.41) 0.65 0.45 0.51 0.29 -
Amortization expense (1.18) (1.15) (0.43) (0.25) (0.05) - - -
Net income $ 4.64 $ 2.68 $ 1.05 $ 2.62 $ 2.29 $ 1.51 $1.35 37%
FINANCIAL POSITION (1)(3)(4)
Total investments $ 434 $ 415 $ 360 $ 66 $ 51 $ 43 $ 30 47%
Total assets 1,129 700 670 196 147 104 57 43%
Unpaid losses and loss
adjustment expenses 733 346 302 31 27 22 6 -
Long-term debt 101 94 127 44 24 21 3 -
Total shareholders' equity 109 83 55 60 45 20 15 51%
RATIO ANALYSIS
GAAP combined ratio 97% 106% 81% 78% 84% 85% 78% -
Investment yield (5) 6% 7% 10% 8% 8% 8% 8% -
Total return (6) 7% 16% 8% 11% 11% 6% 10% -
Debt to total capital 48% 53% 70% 42% 35% 52% 15% -
Return on average
shareholders' equity 27% 21% 10% 26% 33% 38% 55% -
PER SHARE DATA (2)
Common shares outstanding
(in thousands) 5,403 5,332 5,323 5,401 5,220 4,320 4,320 -
Total investments $80.27 $77.91 $67.59 $12.31 $ 9.71 $ 9.97 $6.92 41%
Book value $20.24 $15.59 $10.27 $11.69 $ 9.22 $ 4.66 $3.42 45%
Growth in book value 30% 52% (12%) 27% 98% 36% 268% -
5-Year CAGR in book value (7) 34% 35% - - - - - -
Closing stock price $31.25 $22.00 $11.75 $22.50 $15.42 $11.46 $8.13 -
</TABLE>
(1) In December 1990, the Company acquired the remaining ownership interests of
a previously unconsolidated subsidiary, Shand/Evanston Group, Inc.
(Shand/Evanston). Assets and liabilities reflect the consolidation of
Shand/Evanston beginning in 1990, and income reflects the consolidation of
the revenues and expenses of Shand/Evanston in 1991 and subsequent years.
(2) All per share amounts have been restated to reflect a 20% stock dividend in
1989.
(3) The change in accounting for net unrealized gains (losses) on fixed
maturities in accordance with provisions of Statement of Financial
Accounting Standards No. 115 affect 1993 and subsequent years.
(4) The gross reinsurance reporting provisions of Statement of Financial
Accounting Standards No. 113 affect 1992 and subsequent years.
(5) Investment yield reflects net investment income as a percent of average
invested assets.
(6) Total return includes net investment income, net realized investment gains
and the change during the period between estimated fair value and the cost
of fixed maturities and equity securities as a percent of average invested
assets.
(7) CAGR - compound annual growth rate.
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1995 1994
---------- ----------
(dollars in thousands)
<S> <C> <C>
ASSETS
Investments, available-for-sale, at estimated fair value
Fixed maturities (cost of $683,568 in 1995 and $441,983 in 1994) $ 706,055 $ 423,114
Equity securities (cost of $104,538 in 1995 and $98,117 in 1994) 134,346 107,315
Short-term investments (estimated fair value approximates cost) 68,182 81,258
Total Investments, Available-For-Sale 908,583 611,687
---------- ----------
Cash and cash equivalents 18,315 10,229
Receivables 47,210 71,561
Reinsurance recoverable on unpaid losses 159,141 180,934
Reinsurance recoverable on paid losses 20,404 45,163
Deferred policy acquisition costs 32,024 26,064
Prepaid reinsurance premiums 39,728 37,290
Property and equipment 27,729 43,288
Intangible assets 41,657 45,086
Other assets 19,746 32,186
Total Assets $1,314,537 $1,103,488
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 734,409 $ 652,930
Unearned premiums 170,697 146,553
Payables to insurance companies 17,247 20,757
Long-term debt (estimated fair value of $109,189 in 1995 and $87,489 in 1994) 106,689 100,686
Other liabilities 72,053 44,061
Total Liabilities 1,101,095 964,987
---------- ----------
Shareholders' equity
Common stock 23,118 22,929
Retained earnings 156,333 121,858
Net unrealized gains (losses) on fixed maturities and equity securities,
net of tax expense of $18,304 in 1995 and tax benefit of $3,385 in 1994 33,991 (6,286)
TOTAL SHAREHOLDERS' EQUITY 213,442 138,501
---------- ----------
Commitments and contingencies
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$1,314,537 $1,103,488
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
1995 1994 1993
-------- -------- --------
(dollars in thousands, except per share data)
OPERATING REVENUES
<S> <C> <C> <C>
Earned premiums $285,146 $243,067 $192,607
Net investment income 42,981 29,110 23,512
Net realized gains from investment sales 11,952 3,870 15,756
Other 3,496 3,646 3,020
Total Operating Revenues 343,575 279,693 234,895
-------- -------- --------
OPERATING EXPENSES
Losses and loss adjustment expenses 186,655 156,169 119,463
Underwriting, acquisition and insurance expenses 96,113 80,681 67,255
Other 1,642 2,386 3,193
Amortization of intangible assets 2,778 7,051 7,190
Total Operating Expenses 287,188 246,287 197,101
-------- -------- --------
Operating Income 56,387 33,406 37,794
-------- -------- --------
Interest Expense 8,460 7,675 5,638
Income Before Income Taxes 47,927 25,731 32,156
Income Taxes 13,435 7,142 8,521
NET INCOME $ 34,492 $ 18,589 $ 23,635
======== ======== ========
Earnings per share
Primary $ 6.15 $ 3.33 $ 4.23
======== ======== ========
Fully diluted $ 6.12 $ 3.33 $ 4.22
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31, 1993, 1994, 1995
-----------------------------------------------------------
Common Common Retained
Shares Stock Earnings Other Total
------ ------- -------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 5,403 $22,636 $ 81,846 $ 4,860 $109,342
Net income - - 23,635 - 23,635
Implementation of change in accounting
for investments, net of taxes - - - 17,552 17,552
Issuance of common stock 11 169 - - 169
Other - - (20) - (20)
------ ------- -------- ------- --------
Balance at December 31, 1993 5,414 22,805 105,461 22,412 150,678
Net income - - 18,589 - 18,589
Net unrealized depreciation of fixed maturities
and equity securities, net of taxes - - - (28,698) (28,698)
Issuance of common stock 19 124 - - 124
Repurchase of common stock (46) - (2,175) - (2,175)
Other - - (17) - (17)
------ ------- -------- ------- --------
Balance at December 31, 1994 5,387 22,929 121,858 (6,286) 138,501
Net income - - 34,492 - 34,492
Net unrealized appreciation of fixed maturities
and equity securities, net of taxes - - - 40,277 40,277
Issuance of common stock 35 189 - - 189
Other - - (17) - (17)
BALANCE AT DECEMBER 31, 1995 5,422 $23,118 $156,333 $33,991 $213,442
====== ======= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 34,492 $ 18,589 $ 23,635
Adjustments to reconcile net income to net cash provided by
operating activities
Deferred income tax expense (benefit) 1,374 4,328 (1,131)
Depreciation and amortization 11,088 15,361 13,037
Net realized gains from investment sales (11,952) (3,870) (15,756)
Proceeds from reinsurer commutations and other settlements 82,637 31,818 65,900
Increase in receivables (296) (10,261) (16,234)
Increase in deferred policy acquisition costs (3,563) (2,513) (9,708)
Increase (decrease) in unpaid losses and loss
adjustment expenses, net 43,133 (21,224) 7,731
Increase in unearned premiums, net 12,393 14,014 29,252
Increase (decrease) in payables to insurance companies (7,270) 13,782 (3,202)
Increase (decrease) in current income taxes (894) (2,344) 2,469
Other 7,867 3,310 (3,981)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 169,009 60,990 92,012
========= ========= =========
INVESTING ACTIVITIES
Proceeds from sales of fixed maturities and equity securities 586,121 344,433 454,392
Proceeds from maturities of fixed maturities 35,993 15,983 33,129
Cost of fixed maturities and equity securities purchased (793,058) (400,936) (585,396)
Net change in short-term investments 13,076 (17,099) 3,998
Purchase of Lincoln Insurance Company, net of cash acquired (21,747) - -
Net proceeds from sale of buildings 19,068 - -
Decrease in funds held in escrow - - 20,055
Additions to property and equipment (4,509) (7,025) (4,644)
Other (1,989) 1,469 (1,452)
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (167,045) (63,175) (79,918)
========= ========= =========
FINANCING ACTIVITIES
Borrowings under credit facility 27,500 - -
Net proceeds from issuance of long-term debt - 29,280 83,735
Repayments of long-term debt and credit facility (21,550) (7,550) (107,195)
Retirement of capital lease - (19,584) -
Other 172 (2,118) 140
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 6,122 28 (23,320)
========= ========= =========
Increase (decrease) in cash and cash equivalents 8,086 (2,157) (11,226)
Cash and cash equivalents at beginning of year 10,229 12,386 23,612
Cash and cash equivalents at end of year $ 18,315 $ 10,229 $ 12,386
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of The Company underwrites specialty insurance products and
Significant programs to niche markets. Significant areas of underwriting
Accounting include professional and products liability, excess and
Policies surplus lines, specialty programs and specialty personal and
commercial lines.
a) PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS.
Generally accepted accounting principles require management to
make estimates and assumptions when preparing financial
statements. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of
Markel Corporation and all subsidiaries (the Company). All
significant intercompany balances and transactions have been
eliminated in consolidation.
b) INVESTMENTS. All investments are considered
available-for-sale and are recorded at estimated fair value,
generally based on quoted market prices. The net unrealized
gains or losses on investments, net of deferred income taxes,
are included as a separate component of shareholders' equity.
A decline in the fair value of any investment below cost
that is deemed other than temporary is charged to earnings,
resulting in a new cost basis for the security.
Premiums and discounts are amortized or accreted over the
lives of the related fixed maturities as an adjustment to yield
using the effective interest method. Dividend and interest
income are recognized when earned. Realized gains and
losses are included in earnings and are derived using the
first in, first out method for determining the cost of
securities sold.
c) CASH EQUIVALENTS. The Company considers overnight
deposits to be cash equivalents for purposes of the
consolidated statements of cash flows.
d) DEFERRED POLICY ACQUISITION COSTS. Costs directly related
to the acquisition of insurance premiums, such as commissions
to agents and brokers, are deferred and amortized over the
related policy period, generally one year. 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.
e) PROPERTY AND EQUIPMENT. Owned property and equipment are
stated at cost less accumulated depreciation. Depreciation and
amortization of buildings and equipment are calculated using
the straight-line method over the respective estimated service
lives.
f) INTANGIBLE ASSETS. Policy renewal rights represent the
value attributable to renewal rights for lines of businesses
acquired and are amortized using either the straight-line or
accelerated methods over the estimated lives of the
businesses acquired, generally seven to ten years. Goodwill
is amortized using the straight-line method, generally over
40 years. The Company assesses the recoverability of
goodwill by determining whether the amortization of the
balance over its remaining life can be recovered through the
undiscounted future operating cash flows of the acquired
operations.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Summary of g) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES. Unpaid losses
Significant and loss adjustment expenses are based on evaluations of
Accounting reported claims and estimates for losses and loss adjustment
Policies expenses incurred but not reported. Estimates for losses and
(continued) loss adjustment expenses incurred but not reported are
based on reserve development studies. The reserves
recorded are estimates, and the ultimate liability may be
greater than or less than the estimates; however, management
believes the reserves are adequate.
h) REVENUE RECOGNITION. Insurance premiums are earned on a
pro rata basis over the policy period, generally one year.
Profit-sharing commissions from reinsurers are recognized when
received and earned and are netted against policy
acquisition costs. Reinsurance premiums ceded are netted
against premiums written.
i) INCOME TAXES. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying
amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period of the enactment date.
j) EARNINGS PER SHARE. Primary earnings per share is
computed by dividing net income, less required dividends on
redeemable preferred stock, by the weighted average number of
common shares outstanding during the year. The weighted
average number of common shares outstanding includes the
weighted average common equivalent shares attributable to
dilutive stock options. Fully diluted earnings per share is
computed using the weighted average common shares
outstanding during the year, including the maximum dilutive
effect of common equivalent shares.
k) DERIVATIVE FINANCIAL INSTRUMENTS. The Company is not
currently a party to any derivative financial instruments as
defined by Statement of Financial Accounting Standards No. 119.
l) RECLASSIFICATIONS. Certain reclassifications of prior
years' amounts have been made to conform with 1995
presentations.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Investments
a) Following is a summary of investments (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed maturities
U.S. Treasury securities and obligations
of U.S. government agencies $211,779 $ 4,384 $ (212) $215,951
Obligations of states and political
subdivisions 109,314 3,674 (177) 112,811
Corporate securities 360,471 15,967 (1,294) 375,144
Other debt securities 2,004 145 - 2,149
--------- ---------- ---------- ---------
Total fixed maturities 683,568 24,170 (1,683) 706,055
Equity securities 104,538 40,542 (10,734) 134,346
Short-term investments 68,182 - - 68,182
TOTAL $856,288 $64,712 $(12,417) $908,583
========= ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed maturities
U.S. Treasury securities and obligations
of U.S. government agencies $147,042 $ 7 $(11,176) $135,873
Obligations of states and political
subdivisions 182,252 509 (4,482) 178,279
Corporate securities 111,109 2,848 (6,665) 107,292
Other debt securities 1,580 90 - 1,670
--------- ---------- ---------- ---------
Total fixed maturities 441,983 3,454 (22,323) 423,114
Equity securities 98,117 23,388 (14,190) 107,315
Short-term investments 81,258 - - 81,258
TOTAL $621,358 $26,842 $(36,513) $611,687
========= ========== ========== =========
</TABLE>
b) The amortized cost and estimated fair value of fixed maturities at December
31, 1995 are shown below by contractual maturity (dollars in thousands):
Estimated
Amortized Fair
Cost Value
--------- ---------
Due in one year or less $ 19,905 $ 20,000
Due after one year through five years 208,614 212,776
Due after five years through ten years 247,011 254,113
Due after ten years 208,038 219,166
--------- ---------
TOTAL $683,568 $706,055
========= =========
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties, and the lenders may have the right to put the securities back to the
borrower. Based on expected maturities, the estimated average duration of the
fixed maturities was 4.3 years.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Investments (continued)
C) Components of net investment income were as follows (dollars in thousands):
Years Ended December 31,
1995 1994 1993
------- ------- -------
Interest
Municipal bonds (tax-exempt) $ 6,900 $ 7,784 $ 6,093
Taxable bonds 31,042 18,299 15,336
Short-term investments, including
overnight deposits 3,969 2,691 3,062
Dividends on equity securities 3,675 2,804 2,229
------- ------- -------
45,586 31,578 26,720
Less investment expenses 2,605 2,468 3,208
------- ------- -------
NET INVESTMENT INCOME $42,981 $29,110 $23,512
======= ======= =======
d) The following table presents the Company's realized gains and losses from
investment sales and the change in gross unrealized gains (losses) (dollars in
thousands):
Years Ended December 31,
1995 1994 1993
-------- -------- -------
Realized gains
Fixed maturities $ 13,861 $ 8,894 $15,162
Equity securities 9,838 5,569 8,070
-------- -------- -------
23,699 14,463 23,232
Realized losses
Fixed maturities (9,281) (9,621) (5,947)
Equity securities (2,466) (972) (1,529)
-------- -------- -------
(11,747) (10,593) (7,476)
-------- -------- -------
Net Realized Gains from Investment Sales $ 11,952 $ 3,870 $15,756
======== ======== =======
Change in gross unrealized gains (losses)
Fixed maturities $ 41,356 $(31,029) $ 844
Equity securities 20,610 (13,121) 14,955
-------- -------- -------
Net Increase (Decrease) $ 61,966 $(44,150) $15,799
======== ======== =======
e) Investments with a carrying value of $30.0 million and $22.9 million were on
deposit with regulatory authorities at December 31, 1995 and 1994, respectively.
f) At December 31, 1995, there were no investments in any one issuer, other
than U.S. Treasury securities and obligations of U.S. government agencies, that
exceeded 10% of consolidated shareholders' equity.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Receivables
Following are the components of receivables (dollars in thousands):
December 31,
1995 1994
------- -------
Agents' balances and premiums in course of collection $39,326 $36,144
Less allowance for doubtful receivables 2,201 1,725
------- -------
37,125 34,419
Other 10,085 37,142
------- -------
RECEIVABLES $47,210 $71,561
======= =======
Included in other receivables at December 31, 1994 is $28 million due from
Alexander & Alexander, Inc. (A&A) (see Note 13a).
4. Deferred Policy Acquisition Costs
The following reflects the amounts of policy costs deferred and amortized
(dollars in thousands):
Years Ended December 31,
1995 1994 1993
-------- -------- --------
Balance, beginning of year $ 26,064 $ 23,551 $ 13,843
Policy acquisition costs deferred 72,748 61,299 54,806
Amortization charged to expense (66,788) (58,786) (45,098)
-------- -------- --------
DEFERRED POLICY ACQUISITION COSTS $ 32,024 $ 26,064 $ 23,551
======== ======== ========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Property and Equipment
Following are the components of property and equipment (dollars in thousands):
December 31,
1995 1994
-------- --------
Land $ 2,372 $ 3,628
Buildings and building equipment 24,221 39,771
Furniture and equipment 22,772 19,182
Other 130 609
-------- --------
49,495 63,190
Less accumulated depreciation and amortization 21,766 19,902
-------- --------
PROPERTY AND EQUIPMENT $ 27,729 $ 43,288
======== ========
Depreciation and amortization expense of property and equipment was $6.0
million, $5.0 million and $4.0 million for the years ended December 31, 1995,
1994 and 1993, respectively.
Total rental expense for the years ended December 31, 1995, 1994 and 1993 was
approximately $1.9 million, $1.0 million and $0.9 million, respectively.
During 1995, the Company entered into sale-leaseback agreements related to its
home office facilities in Richmond, Virginia. The Company sold the properties
which house its corporate offices and Richmond-based underwriting units for
approximately $19.1 million after expenses and concurrently entered into ten to
twelve year lease agreements with the buyers. The Company realized a $4.9
million gain on the sale of the properties which is being deferred and amortized
over the terms of the operating leases.
In addition, the Company has other office facilities, furniture and equipment
under operating leases with remaining terms ranging from 24 months to 68 months.
Minimum annual rental commitments for noncancelable operating leases at December
31, 1995 were as follows (dollars in thousands):
Year Ending December 31,
1996 $ 2,692
1997 2,837
1998 2,675
1999 2,577
2000 2,581
2001 and thereafter 12,830
-------
Total $26,192
=======
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Intangible Assets
Following are the components of intangible assets (dollars in thousands):
December 31,
1995 1994
-------- --------
Goodwill $ 36,628 $ 38,964
Policy renewal rights 5,029 6,122
-------- --------
INTANGIBLE ASSETS $ 41,657 $ 45,086
======== ========
Accumulated amortization related to intangible assets was $14.9 million and
$12.2 million at December 31, 1995 and 1994, respectively.
7. Income Taxes
Income tax expense (benefit) on income before income taxes, substantially all of
which was federal tax expense, consists of (dollars in thousands):
Current Deferred Total
-------- -------- --------
1995 $ 12,061 $ 1,374 $ 13,435
1994 $ 2,814 $ 4,328 $ 7,142
1993 $ 9,652 $ (1,131) $ 8,521
The Company made income tax payments of $13.0 million in 1995, $5.2 million in
1994 and $7.2 million in 1993. Income taxes currently payable were $0.2 million
and $0.9 million at December 31, 1995 and 1994, respectively.
Reconciliations of the U.S. corporate income tax rate and the effective tax rate
on income before income taxes are as follows:
Years Ended December 31,
1995 1994 1993
---- ---- ----
U.S. corporate tax rate 35% 35% 35%
Tax-exempt investment income (6) (11) (7)
Amortization of intangibles 1 2 2
Change in tax rate on deferred tax assets
and liabilities - - (1)
Other (2) 2 (2)
---- ---- ----
EFFECTIVE TAX RATE 28% 28% 27%
==== ==== ====
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Income Taxes (continued)
The components of the net deferred tax asset (liability) were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1994
-------- --------
<S> <C> <C>
Assets
Income reported in different periods for
financial reporting and tax purposes $ 10,409 $ 4,276
Unpaid losses and loss adjustment expenses,
nondeductible portion for income tax purposes 42,558 39,259
Unearned premiums, adjustment for income tax purposes 9,168 7,648
Investments, net unrealized losses - 3,385
Other 815 563
-------- --------
Total gross deferred tax assets 62,950 55,131
-------- --------
Liabilities
Property and equipment, depreciation 3,069 2,361
Deferred policy acquisition costs 11,208 9,122
Safe harbor leases 10,224 11,480
Investments, net unrealized gains 18,304 -
Differences between financial reporting and
tax bases of assets acquired 22,849 16,256
Other 1,169 1,000
-------- --------
Total gross deferred tax liabilities 66,823 40,219
-------- --------
DEFERRED TAX ASSET (LIABILITY), NET $ (3,873) $ 14,912
======== ========
</TABLE>
The Company believes that a valuation allowance with respect to the realization
of the total gross deferred tax assets is not necessary. The Company expects to
realize all of its $63.0 million gross deferred tax assets existing at December
31, 1995 through the reversal of existing temporary differences attributable to
the gross deferred tax liabilities and the application of the carryback
provisions of the Internal Revenue Code.
Federal tax returns through 1990 have been examined and are no longer subject to
adjustment by the Internal Revenue Service (IRS). The IRS has also examined tax
returns for 1991 through 1994. While the IRS has not issued its final report,
management believes the outcome of the examination will not have a material
adverse effect on consolidated earnings.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Unpaid Losses and Loss Adjustment Expenses
The following table sets forth a reconciliation of beginning and ending reserves
for losses and loss adjustment expenses (dollars in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT
EXPENSES, BEGINNING OF YEAR $471,996 $426,796 $353,114
Commutations and other settlements 54,637 59,818 65,900
Lincoln Insurance Company reserves for
losses and loss adjustment expenses at
acquisition date 35,233 - -
-------- -------- --------
RESTATED NET RESERVES FOR LOSSES
AND LOSS ADJUSTMENT EXPENSES,
BEGINNING OF YEAR $561,866 $486,614 $419,014
Incurred losses and loss adjustment expenses
Current year 195,448 159,730 125,454
Prior years (8,793) (3,561) (5,991)
-------- -------- --------
TOTAL INCURRED LOSSES AND
LOSS ADJUSTMENT EXPENSES 186,655 156,169 119,463
Payments
Current year 42,002 27,456 22,253
Prior years 131,251 144,376 93,646
-------- -------- --------
TOTAL PAYMENTS 173,253 171,832 115,899
Other - 1,045 4,218
-------- -------- --------
NET RESERVES FOR LOSSES AND LOSS
ADJUSTMENT EXPENSES, END OF YEAR 575,268 471,996 426,796
-------- -------- --------
Reinsurance recoverable on unpaid losses 159,141 180,934 261,037
-------- -------- --------
GROSS RESERVES FOR LOSSES AND LOSS
ADJUSTMENT EXPENSES, END OF YEAR $734,409 $652,930 $687,833
======== ======== ========
</TABLE>
The provision for prior years decreased in 1995, 1994 and 1993. Inherent in the
Company's reserving practices is the desire to have reserves more likely to
prove to be redundant than deficient. Furthermore, the Company's philosophy is
to price its insurance products to make an underwriting profit, not to increase
written premiums.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Unpaid Losses and Loss Adjustment Expenses (continued)
Management continually attempts to improve its loss estimation process by
refining its ability to analyze loss development patterns, claim payments and
other information, but there remain many reasons for potential adverse
development of estimated ultimate liabilities. For example, the uncertainties
inherent in the loss estimation process have become increasingly subject to
changes in social and legal trends. In recent years, these trends have expanded
the liability of insureds, established new liabilities and reinterpreted
contracts to provide unanticipated coverage long after the related policies were
written. Such changes from past experience significantly affect the ability of
insurers to estimate reserves for unpaid losses and related expenses.
Management recognizes the higher variability associated with certain exposures
and books of business and considers this factor when establishing loss reserves.
Management currently believes the Company's gross and net reserves, including
the reserves for environmental impairment liability (EIL) and toxic tort
exposures, are adequate. The Company has shown redundancies in 1987 and
subsequent years.
The net reserves for losses and loss adjustment expenses maintained by the
Company's insurance subsidiaries are equal under both statutory and generally
accepted accounting principles. However, certain reserves for claim handling
expenses are maintained by the Company's underwriting management subsidiaries,
in accordance with the contractual obligations of these subsidiaries. As a
result, the consolidated net reserves for losses and loss adjustment expenses
will be different from the statutory net reserves for losses and loss adjustment
expenses by those amounts.
9. Long-Term Debt
Long-term debt consists of the following (dollars in thousands):
December 31,
1995 1994
-------- --------
7.25% notes, due November 1, 2003,
interest payable semi-annually,
net of unamortized discount of $411
in 1995 and $464 in 1994 $ 99,589 $ 99,536
9% subordinated debentures, due
December 19, 1997, interest
payable annually - 1,000
6.63% borrowings under revolving credit
facility, due June 30, 1997 7,000 -
Other 100 150
-------- --------
LONG-TERM DEBT $106,689 $100,686
======== ========
The notes due November 1, 2003 are not redeemable or subject to any sinking fund
requirements and have an effective cost of approximately 7.54%. The estimated
fair value of the Company's long-term debt is based on quoted market prices at
the reporting date.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Long-Term Debt (continued)
In 1994, the Company arranged a revolving credit facility which provides up to
$40.0 million for working capital and other general corporate purposes.
Outstanding balances under the revolving credit facility bear interest based
either on the prime rate, the London Interbank Offered Rate, or the individual
bank's certificate of deposit rate.
Following is a schedule of future principal payments due on long-term debt as of
December 31, 1995 (dollars in thousands):
Years Ending December 31,
1996 $ 50
1997 7,050
1998 -
1999 -
2000 -
2001 and thereafter 99,589
--------
Total $106,689
========
The Company paid $8.4 million, $7.4 million and $5.2 million in interest during
the years ended December 31, 1995, 1994 and 1993, respectively.
10. Shareholders' Equity
a) The Company has 15,000,000 shares of no par value common stock authorized, of
which 5,421,988 and 5,386,996 shares were issued and outstanding at December 31,
1995 and 1994, respectively. The Company is authorized to issue up to 2,069,200
shares of preferred stock, $1.00 par value per share, in one or more series and
to fix the powers, designations, preferences and rights of each series. There
were 11,269 shares of Series A redeemable preferred stock outstanding at
December 31, 1995 and 1994. These shares were included in other liabilities at a
redemption value of $28.50 per share and carry a cumulative dividend of $1.50
per share, payable semi-annually. There were also 120,000 shares of Series B
redeemable preferred stock outstanding at December 31, 1995 and 1994. These
shares have a redemption value of $100 per share, carry a cumulative dividend of
$9.00 per share and are eliminated in consolidation as all shares are held by
the Company's wholly-owned subsidiaries.
b) The Company has three stock option or stock award plans for employees and
directors; the 1986 Stock Option Plan, the 1989 Non-employee Director Stock
Option Plan, and the 1993 Incentive Stock Plan. At December 31, 1995, there were
330,797 shares, 60,000 shares and 100,000 shares reserved for issuance under the
1986 plan, the 1989 plan and the 1993 plan, respectively. The 1986 and 1993
plans are administered by the Compensation Committee of the Company's Board of
Directors. The 1986 plan provides for the award of incentive stock options, and
the 1993 plan provides for the award of incentive stock options, stock
appreciation rights, or incentive stock awards to employees of the Company. The
1989 plan is administered by the Company's Board of Directors and provides for
the award of non-statutory stock options to the non-employee directors. Options
are granted at a price not less than market on the date of the grant and are
exercisable within a period established by the Committee or the Board at the
time of the grant, but not earlier than six months from the date of grant.
Options expire either five or ten years from the date of grant. At December 31,
1995, the Company had 15,215 and 36,000 options available for grant under the
1986 and 1989 plans, respectively, and 100,000 options,
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Shareholders' Equity (continued)
stock appreciation rights or incentive stock awards were available for grant
under the 1993 plan. Stock option transactions are summarized below:
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Options outstanding at January 1 382,421 383,566 370,056
Granted - 46,000 41,050
Exercised (40,919) (44,850) (11,660)
Canceled (1,920) (2,295) (15,880)
-------- -------- --------
Options outstanding at December 31 339,582 382,421 383,566
======== ======== ========
Option price range at December 31
Low $ 10.53 $ 10.53 $ 10.53
High $ 47.00 $ 47.00 $ 39.00
Options exercisable at December 31 255,274 273,935 230,874
Options available for grant at December 31 151,215 149,295 193,000
======== ======== ========
</TABLE>
c) Earnings per share was determined by dividing net income, as adjusted
below, by the applicable shares outstanding (in thousands):
Years Ended December 31,
1995 1994 1993
------- ------- -------
$34,492 $18,589 $23,635
Net income as reported
Dividends on redeemable preferred stock (17) (17) (20)
------- ------- -------
Primary and fully diluted income $34,475 $18,572 $23,615
======= ======= =======
Average common shares outstanding 5,405 5,395 5,410
Shares applicable to common stock
equivalents 200 174 179
------- ------- -------
Average primary shares outstanding 5,605 5,569 5,589
Additional dilution attributable to
common stock equivalents 28 - 9
------- ------- -------
Average fully diluted shares outstanding 5,633 5,569 5,598
======= ======= =======
Average primary and fully diluted shares include common and common equivalent
shares attributable to stock options. Common stock market prices which produce
the maximum dilutive effect are used to calculate fully diluted shares
attributable to stock options.
11. Employee Benefit Plan
The Company maintains a defined contribution plan, the Markel Corporation
Retirement Savings Plan, in accordance with Section 401(k) of the Internal
Revenue Code. The plan requires the Company to contribute, on an annual basis,
6% of each participating employee's compensation plus a matching contribution of
100% of the first 2% and 50% of the next 2% of each participating employee's
contribution. Annual expenses relating to this plan were $1.9 million in 1995,
1994 and 1993.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Reinsurance
The Company enters into reinsurance agreements in order to reduce its liability
on individual risks and enable it to underwrite policies with higher limits. In
a reinsurance transaction, an insurance company transfers, or cedes, all or part
of its exposure in return for a portion of the premium. The ceding of the
insurance does not legally discharge the ceding company from its primary
liability for the full amount of the policies, and the ceding company is
required to pay the loss and bear collection risk if the reinsurer fails to meet
its obligations under the reinsurance agreement.
The table below summarizes the effect of reinsurance on premiums written and
earned (dollars in thousands):
Years Ended December 31,
1995 1994 1993
------------------- ------------------- --------------------
Written Earned Written Earned Written Earned
-------- -------- -------- -------- -------- --------
Direct $366,739 $349,417 $310,748 $291,816 $259,662 $228,568
Assumed 23,879 26,158 29,121 30,618 36,772 31,903
Ceded (93,079) (90,429) (82,847) (79,367) (74,545) (67,864)
-------- -------- -------- -------- -------- --------
Net Premiums $297,539 $285,146 $257,022 $243,067 $221,889 $192,607
======== ======== ======== ======== ======== ========
Incurred losses and loss adjustment expenses are net of reinsurance recoveries
of $63.9 million, $67.1 million and $92.2 million for the years ended December
31, 1995, 1994 and 1993, respectively.
Since 1993, the Company has pursued the commutation, or termination, of
contracts with certain reinsurers of Shand/Evanston's 1987 and prior books of
business. The objectives of the commutations were to reduce credit risk
and eliminate administrative expenses associated with the run-off of
reinsurance placed with certain inactive reinsurers. Primarily as a result of
the commutation program, during 1995, the Company reassumed exposures for
ceded unpaid losses and loss adjustment expenses in exchange for $54.6 million.
In 1994 and 1993, reinsurer commutations and other settlements totaled $59.8
million and $65.9 million, respectively. In all years, pricing for
commutations was based on ceded unpaid losses and loss adjustment expenses at
the date of commutation plus other factors deemed appropriate by management.
The recording of commutations had no effect on the Company's results of
operations in 1995, 1994 and 1993.
At December 31, 1995, the Company recorded reinsurance recoverable on paid and
unpaid claims of $146.0 million from 19 reinsurance companies, which represented
approximately 81% of the total reinsurance recoverable on paid and unpaid
claims. At December 31, 1995, reinsurers had established irrevocable letters of
credit or trust accounts in the amount of $37.8 million for the Company's
benefit. Requests for payments of recoverables from reinsurers are often not
made for several years after the inception of a reinsurance agreement, so it is
possible that the financial strength of a reinsurer may deteriorate during that
period. In order to reduce its credit risk, the Company seeks to do business
only with financially sound reinsurance companies and regularly reviews the
financial strength of all reinsurers used.
An allowance for uncollectible reinsurance recoverable is included as a
component of reinsurance recoverable on paid and unpaid losses. The allowance
was $3.4 million and $10.8 million at December 31, 1995 and 1994, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Contingencies
a) Under the terms of the agreement for the Company's purchase of Shand/Evanston
from Alexander & Alexander, Inc. (A&A), A&A is obligated to indemnify the
Company with respect to certain liabilities and actions pre-dating the
acquisition of Shand/Evanston. During 1994 and 1995, the Company concluded
several agreements with A&A to resolve disputes regarding the scope
and nature of A&A's indemnification obligations. As a result of these
agreements, the Company is now responsible for defending certain claims
against Shand/Evanston while A&A remains responsible for other exposures. A&A
is actively performing with respect to its ongoing indemnification obligations.
A&A further provided indemnification for claims arising out of or related to the
Rehabilitation of Mutual Fire Marine and Inland Marine Insurance Company (Mutual
Fire). During 1995, A&A resolved a lawsuit and certain other disputes with
the Rehabilitator for Mutual Fire. This settlement favorably resolved a
material contingency previously reported in the Company's consolidated
financial statements.
b) The Company has other contingencies arising in the normal conduct of its
operations. In the opinion of management, the resolutions of these
contingencies are not expected to have a material impact on the Company's
financial condition.
14. Related Party Transactions
The Company purchases investment counseling services from Hamblin Watsa
Investment Counsel Ltd., a company in which a director of the Company has a
significant interest. The cost of such services was $618,000, $512,000 and
$1,236,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
The Company pays commissions to Gary Markel & Associates, Inc. and Gary Markel
Surplus Lines Brokerage, Inc., entities owned by a director of the Company. The
commissions paid were $424,000, $344,000 and $53,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
15. Statutory Financial Information
The following table includes selected information for the Company's wholly-owned
insurance subsidiaries as filed with insurance regulatory authorities (dollars
in thousands):
Years Ended December 31,
1995 1994 1993
-------- -------- --------
$ 42,181 $ 26,816 $ 26,271
Net income
Statutory capital and surplus $224,833 $164,650 $144,379
The Company's insurance company subsidiaries are subject to certain regulatory
restrictions on the payment of dividends or advances to the Company. As of
December 31, 1995, $188.6 million of the insurance company subsidiaries'
statutory surplus was so restricted.
In converting from statutory accounting principles to generally accepted
accounting principles, typical adjustments include deferral of policy
acquisition costs, a provision for deferred federal income taxes and the
inclusion of net unrealized gains or losses in shareholders' equity relating to
fixed maturities.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. Acquisition
On May 30, 1995, the Company acquired the stock of Lincoln Insurance Company
(LIC), an excess and surplus lines company. The acquisition was accounted for
using the purchase method of accounting. The terms of the transaction provided
for the Company to pay total consideration of $24.3 million which approximated
the fair value of the assets acquired. Additionally, the seller will provide
indemnification against adverse development of reserves for losses and loss
adjustment expenses and uncollectible reinsurance, if any, in an amount up to
the purchase price. The Company funded the transaction with available cash and
borrowings of approximately $17.0 million under existing lines of credit. After
the acquisition, LIC ceased writing business as soon as practical. However,
certain portions of the business will be renewed in Essex Insurance Company, a
subsidiary of the Company. The acquisition's effect on current earnings, which
consist primarily of investment income from LIC's investment portfolio, was not
significant in 1995.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
[KPMG Peat Marwick LLP LOGO]
The Board of Directors and Shareholders
Markel Corporation:
We have audited the accompanying consolidated balance sheets of Markel
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Markel Corporation
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
Effective December 31, 1993, the Company changed its method of accounting for
investments to adopt the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities.
/s/ KPMG PEAT MARWICK LLP
Richmond, Virginia
February 7, 1996
<PAGE>
QUARTERLY INFORMATION
The following table presents the unaudited quarterly results of consolidated
operations for 1995, 1994 and 1993 (dollare in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- --------
<S> <C> <C> <C> <C>
1995
Operating revenues $76,525 $82,565 $91,543 $92,942
Income before income taxes 8,838 11,286 12,835 14,968
Net income 6,540 8,352 8,984 10,616
Earnings per share
Primary $ 1.17 $ 1.49 $ 1.59 $ 1.88
Fully diluted 1.17 1.49 1.59 1.88
Common stock price ranges
High $ 48 1/4 $ 57 $ 75 1/2 $ 75 1/2
Low 40 3/4 47 1/4 56 1/4 67 1/2
1994
Operating revenues $65,468 $66,398 $72,414 $75,413
Income before income taxes 7,236 6,388 5,858 6,249
Net income 5,210 4,599 4,218 4,562
Earnings per share
Primary $ 0.93 $ 0.83 $ 0.76 $ 0.82
Fully diluted 0.93 0.83 0.76 0.82
Common stock price ranges
High $ 44 1/2 $ 42 1/2 $ 44 $ 42 1/4
Low 38 1/2 37 1/2 39 40 1/4
1993
Operating revenues $50,841 $54,689 $61,963 $67,402
Income before income taxes 7,899 7,680 7,635 8,942
Net income 5,687 5,530 5,650 6,768
Earnings per share
Primary $ 1.02 $ 0.99 $ 1.01 $ 1.21
Fully diluted 1.02 0.99 1.01 1.21
Common stock price ranges
High $ 36 1/2 $ 36 1/2 $ 40 1/2 $ 40 1/4
Low 30 3/4 32 1/4 36 1/4 37 3/4
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company underwrites specialty insurance products and programs to
niche markets. Significant areas of underwriting include professional and
products liability, excess and surplus lines, specialty programs and specialty
personal and commercial lines. Professional liability coverage is offered to
physicians and health professionals, insurance companies, directors and
officers, attorneys and architects and engineers. Products liability insurance
is provided to manufacturers and distributors. Property/casualty insurance for
nonstandard and hard-to-place risks is underwritten on an excess and surplus
lines basis. Specialty program insurance includes coverages for camps and
youth recreation, child care, health and fitness and agribusiness
organizations, as well as accident and health insurance for colleges.
The Company also underwrites personal and commercial property and
liability coverages for watercraft, motorcycles, automobiles, mobile homes,
dwellings and commercial freight companies, and maintains wholesale and
retail brokerage operations that produce business primarily for its
insurance subsidiaries.
The Company relies on sound underwriting practices to produce investable funds
with minimum underwriting risk which management can then invest for long-term
total return. Three quarters of the Company's investable assets come from
premiums paid by policyholders. Policyholder funds are invested
predominately in high quality corporate, government and municipal bonds
with relatively short duration. The balance, comprised of shareholder
funds, is available to be invested in equity securities, which over the long
run, have produced superior returns relative to fixed income investments.
Confidence in the ability to produce consistent underwriting profits and
confidence in loss reserving practices enables the Company to invest for
long-term returns.
RESULTS OF OPERATIONS
In 1995, gross premium volume totaled $402.1 million compared to $349.3
million in 1994 and $312.9 million in 1993.
Following is a comparison of gross premium volume by significant
underwriting area (dollars in thousands):
Years Ended December 31,
GROSS PREMIUM VOLUME 1995 1994 1993
-------- -------- --------
Professional/Products Liability $127,245 $128,876 $113,337
Excess and Surplus Lines 104,841 90,211 67,467
Specialty Program Insurance 102,336 94,637 94,002
Specialty Personal and Commercial Lines 44,456 13,924 9,442
Other 23,212 21,636 28,672
-------- -------- --------
Total $402,090 $349,284 $312,920
======== ======== ========
Premiums from professional/products liability insurance totaled $127.2
million in 1995 compared to $128.9 million in 1994 and $113.3 million in
1993. The Company reported growth in the medical malpractice and
specified medical professions product lines in both 1995 and 1994. However,
1995 production from professional and products liability programs was
adversely affected by increasing competition from the standard markets,
especially in the insurance companies, lawyers and architects and engineers
programs, which more than offset the growth in the medical malpractice and
specified medical professions lines. The gain in 1994 was also aided by
higher production from directors' and officers' professional liability
insurance following increased limits of liability for that program.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Excess and surplus lines premiums grew 16% in 1995 to $104.8 million and 34%
in 1994 to $90.2 million from $67.5 million in 1993. The increases in 1995 and
1994 were fueled by strong growth in the special property program. Special
property premiums amounted to $34.2 million in 1995 compared to $21.6 million
in 1994 and $7.5 million in 1993. Growth in 1995 production from other
excess and surplus lines products was moderate due to increased
competition during the year. Production in 1994 also reflected growth in
casualty premiums primarily from more favorable market conditions.
[Graph]
Growth in Gross Premium Volume
1993 1994 1995
2.8% 11.6% 15.1%
Premiums from specialty program insurance totaled $102.3 million in
1995 compared to $94.6 million in 1994 and $94.0 million in 1993. Higher
production in 1995 was prompted by policy processing improvements and
other operating efficiencies. Growth in the child care programs also
contributed to the 1995 and 1994 increases. In 1994, higher than expected
persistency with the camps and youth recreation programs resulted in premium
growth which was largely offset by the elimination or restriction of
unprofitable workers' compensation business and intense competition in the
health and fitness markets.
Specialty personal and commercial lines premiums rose to $44.5 million in
1995, a 219% increase over 1994 production. In 1994, premiums were $13.9
million, 47% higher than 1993 premiums of $9.4 million. New programs
were primarily responsible for the growth in 1995. These programs, including
property coverage for mobile homes and low value dwellings, liability
coverages for commercial autos and physical damage coverage for personal
autos, contributed $28.5 million to 1995 production. In 1995 and 1994, focused
marketing efforts enhanced production from the specialty motorcycle
program while an improved economy helped increase production in the
watercraft program.
Other gross premium volume was $23.2 million in 1995 compared to $21.6
million in 1994 and $28.7 million in 1993. Other gross premium volume included
premiums from the Company's brokerage operations as well as business
related to the acquisition of LIC in May 1995. Production in both 1995 and 1994
reflected lower premiums from facultative reinsurance related to professional/
products liability programs and a decreased emphasis on business underwritten
by managing general agents.
While certain of the Company's products may be adversely affected by
the increased competition and lower rates which characterize a "soft"
insurance market, the Company does not intend to relax underwriting standards
or rates in order to sustain premium volume. Further, the volume of premiums
written may vary significantly with the Company's decision to alter
its product concentration to maintain or improve underwriting profitability.
Total operating revenues increased 23% to $343.6 million in 1995 from
$279.7 million in 1994. Operating revenues in 1994 were 19% above the $234.9
million reported in 1993. In 1995, growth in earned premiums and
substantially higher net investment income and realized gains accounted for
the increase in revenues. In 1994, the increase in earned premiums and net
investment income more than offset lower realized gains from the sales of
investments.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Earned premiums advanced 17% to $285.1 million in 1995 and 26% to $243.1
million in 1994 from $192.6 million in 1993.
Following is a comparison of earned premiums by significant underwriting
area (dollars in thousands):
Years Ended December 31,
EARNED PREMIUMS 1995 1994 1993
-------- -------- --------
Professional/Products Liability $112,988 $107,735 $ 83,796
Excess and Surplus Lines 70,160 62,236 47,526
Specialty Program Insurance 64,582 56,002 47,413
Specialty Personal and Commercial Lines 25,181 11,180 8,943
Other 12,235 5,914 4,929
-------- -------- --------
TOTAL $285,146 $243,067 $192,607
======== ======== ========
Premiums earned from professional/products liability insurance increased 5% in
1995 to $113.0 million and 29% in 1994 to $107.7 million from $83.8 million in
1993. The growth resulted from slightly higher retention levels in 1995 and 1994
and higher gross premium volume throughout 1994. Excess and surplus lines earned
premiums rose 13% in 1995 to $70.2 million and 31% in 1994 to $62.2 million from
$47.5 million in 1993. Higher gross premium volume over the past several years
accounted for the increases. Specialty program insurance earned premiums
increased 15% to $64.6 million in 1995 and 18% to $56.0 million in 1994 from
$47.4 million in 1993. The growth was caused by increased retentions of gross
premium volume over the past three years and growth in gross premiums in 1995.
Specialty personal and commercial lines earned premiums rose 125% in 1995 to
$25.2 million and 25% in 1994 to $11.2 million from $8.9 million in 1993. The
increase was due to significant growth in gross premium volume from new programs
as well as established programs over the past two years.
Net investment income increased 48% in 1995 to $43.0 million and 24% in 1994 to
$29.1 million from $23.5 million in 1993. The increases reflected the impact of
a significantly larger investment portfolio. Invested assets grew 49% in 1995 to
$908.6 million and 2% in 1994 to $611.7 million from $597.0 million in 1993.
Higher yields during 1995 further enhanced the Company's investment return.
Net realized gains from the sales of investments totaled $12.0 million in 1995
compared to $3.9 million in 1994 and $15.8 million in 1993. Over the past three
years, the Company has experienced variability in its realized and unrealized
investment gains. The fluctuations are primarily the result of interest rate
volatility which influences the market values of fixed maturity and equity
investments.
[Graph]
Investment Earnings ($ in millions)
1993 1994 1995
---- ---- ----
Net realized gains $ 16 $ 4 $ 12
Net investment income $ 24 $ 29 $ 43
---- ---- ----
$ 40 $ 33 $ 55
==== ==== ====
The Company's investment strategy seeks to maximize total investment returns
over a long-term period. Total investment returns include items which impact
earnings, such as net investment income and realized gains and losses from the
sales of investments, as well as items which do not impact earnings, such as
unrealized gains and losses. The Company does not intend to lower the quality of
its investment portfolio in order to maintain yields. Further, the Company's
focus on long-term total investment returns may result in variability in the
level of realized investment gains and losses from one period to the next.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Total operating expenses, which included losses and loss adjustment expenses,
underwriting, acquisition and insurance expenses, other operating expenses and
amortization of intangible assets, were $287.2 million in 1995 compared to
$246.3 million in 1994 and $197.1 million in 1993. Higher variable expenses
associated with higher earned premiums accounted for the majority of the
increase in 1995 and 1994.
The following is a comparison of selected data from the Company's operations
(dollars in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Gross premium volume $ 402,090 $ 349,284 $ 312,920
Net premiums written $ 297,539 $ 257,022 $ 221,889
Net retention 74% 74% 71%
Earned premiums $ 285,146 $ 243,067 $ 192,607
Losses and loss adjustment expenses $ 186,655 $ 156,169 $ 119,463
Underwriting, acquisition and insurance expenses $ 96,113 $ 80,681 $ 67,255
GAAP RATIOS
Loss ratio 65% 64% 62%
Expense ratio 34% 33% 35%
--------- --------- ---------
COMBINED RATIO 99% 97% 97%
========= ========= =========
</TABLE>
The combined ratio measures the relationship of incurred losses, loss adjustment
expenses and underwriting, acquisition and insurance expenses to earned premium
revenues. The loss ratio for 1995 increased to 65% from 64% in 1994 and from 62%
in 1993. In 1995 loss ratios rose as increased competition and continued soft
market conditions prompted the Company to establish loss reserves for current
business at higher levels relative to the prior years. The increase in 1994 was
due to larger reserve redundancies in 1993 and losses related to the January
1994 earthquake in Northridge, California. The 1995 expense ratio was 34%
compared to 33% in 1994 and 35% in 1993. The increase in 1995 is largely the
result of investments in new programs which carry nonrecurring start-up costs,
as well as higher commission expenses. Cost control efforts and higher earned
premiums accounted for the improvement in the expense ratio in 1994.
Non-cash expenses related to the amortization of intangible assets were $2.8
million in 1995 compared to $7.1 million in 1994 and $7.2 million in 1993. The
61% decrease in 1995 reflected the expiration of certain noncompete agreements
in December 1994.
Interest expense amounted to $8.5 million in 1995 compared to $7.7 million in
1994 and $5.6 million in 1993. During 1995, the Company increased borrowings in
order to facilitate the purchase of LIC, leading to higher interest expense. In
November 1993 and February 1994, the Company issued fixed rate, 10-year bonds
totaling $75 million and $25 million, respectively. The proceeds of the November
issue and cash on hand were used to retire variable rate bank debt, while the
proceeds of the February issue were used to retire certain capital lease
obligations. Interest expense in 1994 increased due primarily to higher rates
associated with the fixed rate bond issues and interest on short-term
borrowings.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
[Graph]
Earnings from Core Operations ($ per primary share)
1993 $3.31
1994 $3.77
1995 $5.15
In evaluating its operating performance, the Company focuses on core
underwriting and investing results before consideration of realized gains or
losses from the sales of investments and expenses related to the amortization of
intangible assets. Management believes this is a better indicator of the
Company's performance because it reduces the variability in results associated
with realized gains or losses and also eliminates the impact of accounting
conventions which do not reflect current operating costs. Income from core
underwriting and investing operations advanced to $29.0 million in 1995 which
represented a 38% increase over 1994. In 1994, income from core operations rose
14% to $21.0 million from $18.5 million in 1993. The 1995 and 1994 increases
were due to growth in earned premiums, continued underwriting profitability and
higher net investment income.
Net income was $34.5 million in 1995 compared to $18.6 million in 1994 and $23.6
million in 1993. The increase in 1995 was due to substantial growth in net
investment income, realized investment gains and continued underwriting profits.
In 1994, higher income from core underwriting and investing operations was
offset by lower realized investment gains.
CLAIMS & RESERVES
The Company maintains reserves for specific claims incurred and reported,
reserves for claims incurred but not reported (IBNR) and reserves for
uncollectible reinsurance. Reserves for reported claims are based primarily on
case-by-case evaluations of the claims and their potential for adverse
development. Reserves for reported claims consider the Company's estimate of the
ultimate cost to settle the claims, including investigation and defense of
lawsuits resulting from the claims, and may be subject to adjustment for
differences between costs originally estimated and costs subsequently
re-estimated or incurred.
Generally accepted accounting principles require that reserves for claims
incurred but not reported be based on the estimated ultimate cost of settling
claims (including the effects of inflation and other social and economic
factors), using past experience adjusted for current trends and any other
factors that would modify past experience. The Company also evaluates and
adjusts reserves for uncollectible reinsurance in accordance with its collection
experience and the development of the gross reserves.
Ultimate liability may be greater or less than current reserves. In the
insurance industry there is always the risk that reserves may prove inadequate.
Reserves are continually monitored by the Company using new information on
reported claims and a variety of statistical techniques. Anticipated inflation
is reflected implicitly in the reserving process through analysis of cost trends
and the review of historical development. The Company does not discount its
reserves for losses and loss adjustment expenses to reflect estimated present
value.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
The following table presents the development of the Company's balance sheet
reserves for the period 1985 through 1995 (in thousands):
<TABLE>
<CAPTION>
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net reserves restated
for commutations
and other settlements $290,468 378,570 462,977 461,250 479,634 480,576 522,100 525,322 535,776 526,633 575,268
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Paid (cumulative as of:
One year later 68,870 77,466 98,107 79,466 87,266 84,509 82,970 93,601 144,376 131,251
Two years later 83,592 111,834 130,717 115,260 137,874 139,175 155,506 214,362 247,716
Three years later 101,436 134,560 158,949 157,185 176,254 192,773 251,339 295,551
Four years later 111,875 151,880 195,230 186,228 215,655 273,300 317,548
Five years later 121,773 175,055 213,940 225,267 278,533 329,879
Six years later 132,537 188,654 248,897 285,135 331,904
Seven years later 138,513 219,919 302,749 337,496
Eight years later 146,415 270,945 354,759
Nine years later 189,703 321,392
Ten years later 236,585
Reserves re-estimated as of:
One year later 323,003 405,021 475,404 471,194 474,168 476,198 512,512 519,083 532,215 517,840
Two years later 326,735 402,152 472,670 451,851 472,079 464,321 507,450 507,411 519,840
Three years later 327,612 401,415 454,776 448,976 464,732 460,324 492,912 493,497
Four years later 328,658 392,508 463,402 454,140 457,922 447,988 478,529
Five years later 325,273 410,611 471,886 451,311 445,398 433,701
Six years later 335,605 426,402 468,857 439,385 430,381
Seven years later 348,967 418,814 458,784 423,535
Eight years later 348,439 409,133 442,617
Nine years later 343,263 393,653
Ten years later 328,936
Cumulative redundancy $(38,468) (15,083) 20,360 37,715 49,253 46,875 43,571 31,825 15,936 8,793
(deficiency) -------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Cumulative % (13%) (4%) 4% 8% 10% 10% 8% 6% 3% 2%
Gross liability, end of year 652,930 734,409
Reinsurance recoverable,
restated for commutations 126,297 159,141
------- -------
Net liability, end of year,
restated for commuations 526,633 575,268
------- -------
Gross re-estimated liability-latest 648,006
Re-estimated recoverable-latest 130,166
-------
Net re-estimated liability-latest 517,840
=======
Gross cumulative redundancy 4,924
=======
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
The first line of the table shows net reserves for losses and loss adjustment
expenses restated for reinsurer commutations and other settlements, and is the
result of adding the reserves for losses and loss adjustment expenses as
originally estimated at the end of each year and all prior years to reserves
reassumed through commutations and other activities completed in 1993, 1994 and
1995.
The upper portion of the table shows the cumulative amount paid with respect to
the previously recorded liability as of the end of each succeeding year. The
lower portion of the table shows the re-estimated amount of the previously
recorded reserves based on experience as of the end of each succeeding year,
including cumulative payments made since the end of the respective year. For
example, the 1990 liability for losses and loss adjustment expenses at the end
of 1990 for 1990 and all prior years, adjusted for commutations, was originally
estimated to be $480.6 million. Five years later (as of December 31, 1995), this
amount was re-estimated to be $433.7 million, of which $329.9 million had been
paid, leaving a reserve of $103.8 million for losses and loss adjustment
expenses for 1990 and prior years remaining unpaid as of December 31, 1995.
Cumulative redundancy (deficiency) represents the change in the estimate from
the original balance sheet date to the date of the current estimate. For
example, the 1990 liability for losses and loss adjustment expenses developed a
$46.9 million redundancy from December 31, 1990 to December 31, 1995 (five years
later). Conditions and trends that have affected development of liability in the
past may not necessarily occur in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies based on the
table. Moreover, as the Company writes or reinsures greater amounts of liability
coverages, for which reserves are more difficult to estimate accurately, there
is a greater likelihood that reserve redundancies or deficiencies will develop.
The gross cumulative redundancy for 1994 and prior is presented before
deductions for reinsurance. Gross deficiencies and redundancies may be
significantly more or less than net deficiencies and redundancies, depending on
the nature and extent of applicable reinsurance.
The deficiencies in net reserves for losses and loss adjustment expenses in the
1985 and 1986 years are related primarily to Shand/Evanston's experience prior
to the Company's ownership. From 1987 to 1991, Shand/Evanston increased reserves
for its pre-1987 book of business by approximately $97 million. These increases
were made in response to adverse development related to professional liability
policies with optional extension provisions, EIL and toxic tort exposures, and
potentially uncollectible reinsurance recoverables. A significant portion of the
reserve increases (approximately $51 million) was ultimately offset by
reductions in deferred purchase price obligations owed to the former owners of
Shand/Evanston and therefore did not affect operating results.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
ENVIRONMENTAL MATTERS: From 1980 to 1985, Shand/Evanston offered EIL insurance
to large companies which generated or transported or disposed of toxic wastes.
The EIL coverage was intended to fill gaps in an insured's general liability
coverage to the extent a gap would have existed and was offered as a primary
policy with an "Other Insurance" clause. To the extent that other insurance was
not valid and collectible, Shand/Evanston's EIL policy was intended to perform
as primary coverage. To the extent that other insurance was valid and
collectible, the policy was intended to perform as excess coverage, provided all
other terms and conditions of the policy were met. All EIL policies were
underwritten on a claims made basis, and in most instances, with policy limits
that included the costs of defense. This book of business was reinsured with
numerous reinsurers and Shand/Evanston's original retentions were less than 5%
of policy limits. Policy limits ranged from $1 million per impairment with $2
million in the aggregate to $30 million per impairment with $60 million in the
aggregate.
Shand/Evanston's defenses in EIL claims have generally been policy specific and
have included defenses of non-disclosure and misrepresentation on policy
applications, policy exclusions including site limitations, late assertion of
claims and the existence of other valid and collectible insurance.
Following is an analysis of the Company's net outstanding reserves for
Shand/Evanston's EIL exposures. Commutations include reinsurer commutations
completed in 1995 as well as changes in reserves related to reinsurer
commutations completed in earlier years (dollars in thousands):
December 31,
1995 1994 1993
------- ------- -------
Case reserves $ 579 $ 1,130 $ 2,339
Incurred but not reported (IBNR) reserves - 49 4,663
Case and IBNR reserves reassumed through
commutations 13,125 14,008 58,629
------- ------- -------
TOTAL $13,704 $15,187 $65,631
======= ======= =======
Shand/Evanston carried net EIL case and IBNR reserves for losses and loss
adjustment expenses of $13.7 million at December 31, 1995 compared to $15.2
million at December 31, 1994 and $65.6 million at December 31, 1993. Over the
past three years, the Company has endeavored to close EIL claims as aggressively
as reasonably possible. The decrease in net EIL reserves in 1995 and 1994 was
due primarily to these efforts. Claim settlements were made within established
reserves.
In some cases, the Company may be entitled to subrogation against other primary
insurers. No specific provision for these potential recoveries is made when
establishing reserves for losses and loss adjustment expenses. As of December
31, 1995, Shand/Evanston's net retention of case and IBNR reserves related to
EIL was approximately 74% of gross EIL case and IBNR reserves.
Inception to date net paid losses and loss adjustment expenses for EIL related
exposures totaled $111.3 million at December 31, 1995, of which approximately
$8.6 million was litigation related expense.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
There were 9 active site exposures related to EIL at December 31, 1995 compared
to 11 active site exposures at December 31, 1994 and 109 active site exposures
at December 31, 1993. The 9 active site exposures at December 31, 1995 represent
9 insureds. Management believes future exposure to valid claims is limited
because coverage was afforded on a claims made basis.
Shand/Evanston's exposure to toxic tort related claims originated from umbrella,
excess and commercial general liability (CGL) insurance it underwrote on an
occurrence basis from the late 1970's to mid-1980's. The majority of the
policies attach over a self-insured retention, deductible, or other insurance.
This book of business was reinsured with numerous reinsurers, and
Shand/Evanston's original retention was less than 5% of policy limits. Policy
limits ranged from $125,000 to $30 million. Toxic tort claims include property
damage and clean-up related to pollution, as well as personal injury allegedly
arising from exposure to hazardous materials. After 1986, Shand/Evanston
underwrote CGL coverage using a claims made form which included a pollution
exclusion that significantly reduced its exposure to toxic tort claims.
Insurance coverage issues and other uncertainties have made the estimation of
reserves for toxic tort exposures difficult. The outcome of legal actions to
determine general liability coverages related to toxic tort issues have been
inconsistent among the states with respect to whether insurance coverage exists
at all; what policies provide the coverage; when and if an insurer has a duty to
defend; whether the release of contaminants is one or more occurrence for
purposes of determining applicable policy limits; how pollution exclusions in
policies should be applied; and whether clean-up costs constitute property
damage. Regulatory requirements regarding environmental matters are also
inconsistent and change frequently.
Following is an analysis of the Company's net outstanding reserves for
Shand/Evanston's toxic tort exposures. Commutations include reinsurer
commutations completed in 1995 as well as changes in reserves related to
reinsurer commutations occurring in earlier years (dollars in thousands):
December 31,
1995 1994 1993
------- ------- -------
Case reserves $ 2,197 $ 2,089 $ 1,198
Incurred but not reported (IBNR) reserves 1,589 1,032 2,320
Case and IBNR reserves reassumed through
commutations 44,636 24,887 16,268
------- ------- -------
TOTAL $48,422 28,008 $19,786
======= ======= =======
Shand/Evanston carried net toxic tort case and IBNR reserves for losses and loss
adjustment expenses of $48.4 million at December 31, 1995 compared to $28.0
million at December 31, 1994 and $19.8 million at December 31, 1993. The net
toxic tort reserves increased from 1993 to 1995 due to commutations with
reinsurers, adverse development in the underlying exposures and reserve
strengthening by management. As of December 31, 1995, Shand/Evanston's net
retention of case and IBNR reserves related to toxic torts was approximately 81%
of gross toxic tort case and IBNR reserves.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Inception to date net paid losses and loss adjustment expenses for toxic tort
related exposures totaled $8.4 million, of which approximately $0.6 million was
litigation related expense.
There were 249 open claims related to toxic torts at December 31, 1995 compared
to 307 at December 31, 1994 and 417 at December 31, 1993. Of the toxic tort
claims open at December 31, 1995, less than 10% were products liability asbestos
or related claims. Furthermore, the average severity of toxic tort claims is
substantially lower than the average severity of EIL claims.
The Company's reserves for losses and loss adjustment expenses related to EIL
and toxic tort exposures represent management's best estimate of ultimate
settlement values. These reserves are continually monitored by management, and
the Company's statistical analyses of these reserves are reviewed by independent
consulting actuaries. In addition, the Company continues to maintain unallocated
IBNR reserves to further mitigate the impact of adverse development, if any, in
these and other reserves.
At December 31, 1995, LIC held case reserves for toxic tort claims of $0.7
million. The sellers of LIC will indemnify the Company against adverse
development of reserves for losses and loss adjustment expenses and
uncollectible reinsurance, if any, in an amount up to the purchase price of
approximately $24.3 million. This indemnification covers all of LIC's reserves,
including those related to environmental matters.
Exposures of these types are generally subject to significant uncertainty due to
potential severity and an uncertain legal climate. Reserves for these types of
claims could be subject to increases in the future; however, these reserves have
been established in accordance with the Company's desire to have reserves of all
types that are more likely to prove to be redundant than deficient.
LIQUIDITY AND CAPITAL RESOURCES
The Company's insurance operations collect premiums and pay current claims,
reinsurance costs and operating expenses. Premiums collected and positive cash
flows from the insurance operations are invested primarily in short-term
investments and long-term bonds. Short-term investments held by the Company's
insurance subsidiaries provide liquidity for projected claims, reinsurance costs
and operating expenses.
As a holding company, the Company receives cash from its subsidiaries as
reimbursement for operating and other administrative expenses. The
reimbursements are executed within the guidelines of various management
agreements between the holding company and its subsidiaries.
The holding company also relies upon dividends from its subsidiaries to meet
debt service obligations. Under the insurance laws of the various states in
which the Company's insurance subsidiaries are incorporated or licensed to write
insurance, an insurer is restricted in the amount of dividends it may pay
without prior approval of regulatory authorities. Pursuant to such laws, at
December 31, 1995, the Company's insurance subsidiaries could pay dividends of
$36.2 million without prior regulatory approval.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
The Company's invested assets increased to $908.6 million at December 31, 1995
from $611.7 million at December 31, 1994. The increase in invested assets was
largely due to operating cash flows which included cash provided by reinsurer
commutations and other settlements, the purchase of LIC and an increase in the
market value of the Company's fixed maturity and equity investments. Absent
unusual circumstances, the Company expects that the rate of future investment
portfolio growth will moderate and result primarily from normal operating cash
flows.
[Graph]
Invested Assets ($ in millions)
1993 $597
1994 $612
1995 $909
Long-term debt increased to $106.7 million at December 31, 1995 from $100.7
million at December 31, 1994. The increase was due to the purchase of LIC in May
1995. In 1994, the Company arranged a revolving credit facility which provides
up to $40.0 million of funds for working capital and other general corporate
purposes. As of December 31, 1995, $7.0 million was outstanding under the
revolving credit facility.
The insurance operations require capital to support premium writings. The
National Association of Insurance Commissioners (NAIC) developed a model law and
risk-based capital formula designed to help regulators identify
property/casualty insurers that may be inadequately capitalized. Under the
NAIC's requirements, an insurer must maintain total capital and surplus above a
calculated threshold or face varying levels of regulatory action. The capital
and surplus at December 31, 1995 of each of the Company's insurance subsidiaries
was above the calculated minimum regulatory threshold. The Company believes that
its insurance subsidiaries have sufficient capital to support their expected
near-term writings.
IMPACT OF INFLATION
Property and casualty insurance premiums are established before the amount of
losses and loss adjustment expenses, or the extent to which inflation may affect
such expenses, is known. Consequently, in establishing premiums, the Company
attempts to anticipate the potential impact of inflation. Inflation is also
considered by the Company in the determination and review of reserves for losses
and loss adjustment expenses since portions of these reserves are expected to be
paid over extended periods of time. The importance of continually reviewing
reserves is even more pronounced in periods of extreme inflation.
IMPACT OF ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 121 (SFAS 121), Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
Statement requires that long-lived assets and certain identifiable intangibles
to be held and used by a company be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In performing the review for recoverability, a company should
estimate the future cash flows expected to result from the use of the asset and
its eventual disposition. An impairment loss would be recognized if the sum of
the expected future cash flows, undiscounted, is less than the carrying amount
of the asset. SFAS 121 also establishes standards for recording an impairment
loss for certain assets that are subject to disposal. The Company expects that
adoption will have no impact on the Company's consolidated financial position or
results of operations.
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123 (SFAS 123), Accounting for Stock-Based Compensation. The Standard
establishes financial accounting and reporting standards for stock-based
employee compensation plans, including stock option plans. While SFAS 123
defines a fair value based method of accounting for an employee stock option or
similar equity instrument, it also allows an entity to continue to measure
compensation costs for those plans using Accounting Principles Board Opinion No.
25 (APB 25), Accounting for Stock Issued to Employees. The Company has evaluated
SFAS 123 and has elected to continue to measure the costs of its stock-based
compensation plans under APB 25. Accordingly, the implementation of SFAS 123
will have no impact on the Company's consolidated financial position or results
of operations.
<PAGE>
OPERATING UNITS
ESSEX INSURANCE COMPANY Glen Allen, Virginia
Britton L. Glisson, President and Chief Operating Officer
Provides excess and surplus lines property & casualty insurance.
Rated "A" (Excellent) by A.M. Best Company, Inc.
SHAND/EVANSTON GROUP Evanston, Illinois
Paul W. Springman, President and Chief Operating Officer
Michael A. Rozenberg, Executive Vice President and Chief Administrative Officer
Provides medical malpractice, professional, products, and errors & omissions
liability insurance and specialty casualty coverages through the
Evanston Insurance Company.
Rated "A" (Excellent) by A.M. Best Company, Inc.
MARKEL INSURANCE COMPANY Glen Allen, Virginia
Ronald A. Abram, President and Chief Operating Officer
Michael W. Powell, Executive Vice President
Specializes in insurance for agribusiness, camps and youth recreation, child
care, health & fitness, and other types of specialty program business.
Rated "A-" (Excellent) by A.M. Best Company, Inc.
MARKEL AMERICAN INSURANCE COMPANY Glen Allen, Virginia
Mark J. Rickey, President and Chief Operating Officer
Timberlee T. Grove, Senior Vice President
Underwrites watercraft, motorcycle, mobile homes, dwelling, personal automobile,
commercial trucking and other miscellaneous products.
Rated "A" (Excellent) by A.M. Best Company, Inc.
MARKEL SERVICE, INC. Glen Allen, Virginia
Robert M. Bryant, Vice President
Serves as wholesale broker for independent agents in the mid-atlantic states
placing business primarily in Markel-owned companies.
<PAGE>
MARKET AND DIVIDEND INFORMATION
The Company's common stock is traded in the NASDAQ stock market under the symbol
MAKL. The number of shareholders of record as of January 31, 1996 was 491. The
total number of shareholders, including those holding shares in "street name" or
in brokerage accounts is estimated to be in excess of 2,000. The Company's
current strategy is to retain earnings, permitting the Company to take advantage
of expansion and acquisition opportunities. Consequently, the Company has never
paid a cash dividend on its common stock.
NASDAQ quotations during 1995 reflect a high sales price of $75.50 and a low
sales price of $40.75. See quarterly information for additional quarterly sales
price information.
SHAREHOLDER RELATIONS, FORM 10-K
Information about Markel Corporation, including the Form 10-K filed with the
Securities and Exchange Commission, may be obtained without charge by writing
Mr. Bruce A. Kay, Vice President-Investor Relations, at the corporate offices,
or by calling (800) 446-6671.
ANNUAL SHAREHOLDER'S MEETING
Shareholders of Markel Corporation are invited to attend the Annual Meeting to
be held at The Jefferson Hotel, Franklin and Adams Streets, Richmond, Virginia
at 4:30 p.m., May 7, 1996.
<PAGE>
TRANSFER AGENT
First Union National Bank
Shareholder Services Group
Two First Union Center
301 South Tryon Street
Charlotte, North Carolina 28288-1154
(800) 829-8432
CORPORATE OFFICES
Markel Corporation
4551 Cox Road
Glen Allen, Virginia 23060
(804) 747-0136
(800) 446-6671
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
ALAN I. KIRSHNER
Chairman of the Board and Chief Executive Officer
LESLIE A. GRANDIS
Partner
McGuire Woods Battle & Boothe, LLP
STEWART M. KASEN
President and Chief Operating Officer
Best Products Co., Inc.
ANTHONY F. MARKEL
President and Chief Operating Officer
GARY L. MARKEL
President
Gary Markel & Associates, Inc.
STEVEN A. MARKEL
Vice Chairman
DARRELL D. MARTIN
Executive Vice President and Chief Financial Officer
V. PREM WATSA
Principal
Hamblin Watsa Investment Counsel Ltd.
EXECUTIVE OFFICERS
ALAN I. KIRSHNER
Chairman of the Board and Chief Executive Officer
ANTHONY F. MARKEL
President and Chief Operating Officer
STEVEN A. MARKEL
Vice Chairman
DARRELL D. MARTIN
Executive Vice President and Chief Financial Officer
