SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1999
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _____ to _____
Commission File Number 1-13051
MARKEL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-0292420
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
4551 Cox Road, Glen Allen, Virginia
23060-3382 (Address of principal
executive offices)
(Zip code)
(804) 747-0136
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ X ] No [ ]
Number of shares of the registrant's common stock outstanding at April 28, 1999:
5,591,070
1
<PAGE>
Markel Corporation
Form 10-Q
Index
Page Number
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets--
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Income and Comprehensive Income--
Three Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows--
Three Months Ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements--
March 31, 1999 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 15
2
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<CAPTION>
March 31, December 31,
------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
ASSETS
<S> <C> <C>
Investments, available-for-sale, at estimated fair value
Fixed maturities (cost of $1,357,147 in 1999 and $1,041,155 in 1998) $ 1,371,792 $ 1,070,978
Equity securities (cost of $187,296 in 1999 and $200,004 in 1998) 285,801 317,887
Short-term investments (estimated fair value approximates cost) 100,502 92,228
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investments, Available-For-Sale 1,758,095 1,481,093
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 658 1,527
Receivables 97,040 68,138
Reinsurance recoverable on unpaid losses 411,115 198,288
Reinsurance recoverable on paid losses 30,635 21,205
Deferred policy acquisition costs 49,016 40,471
Prepaid reinsurance premiums 68,314 42,241
Property and equipment 10,703 7,981
Intangible assets 98,718 35,298
Other assets 60,585 25,022
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 2,584,879 $ 1,921,264
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 1,406,312 $ 933,830
Unearned premiums 275,426 205,908
Payables to insurance companies 47,416 22,715
Long-term debt (estimated fair value of $200,087 in 1999 and $96,931 in 1998) 198,232 93,219
Other liabilities 89,900 90,291
Company-Obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary
Trust Holding Solely Junior Subordinated Deferrable Interest Debentures
of Markel Corporation (estimated fair value of $141,414 in 1999 and $144,453 in 1998) 150,000 150,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 2,167,286 1,495,963
- -----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Common stock 25,501 25,415
Retained earnings 318,545 303,878
Accumulated other comprehensive income
Net unrealized holding gains on fixed maturities and equity securities, net of taxes 73,547 96,008
- -----------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 417,593 425,301
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 2,584,879 $ 1,921,264
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1999 1998
- -------------------------------------------------------------------------------------------------
(dollars in thousands,
except per share data)
OPERATING REVENUES
<S> <C> <C>
Earned premiums $ 108,407 $ 78,898
Net investment income 22,651 17,570
Net realized gains from investment sales 7,063 3,413
Other 378 202
- -------------------------------------------------------------------------------------------------
Total Operating Revenues 138,499 100,083
- -------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Losses and loss adjustment expenses 70,150 49,527
Underwriting, acquisition and insurance expenses 41,495 28,067
Amortization of intangible assets 1,256 509
- -------------------------------------------------------------------------------------------------
Total Operating Expenses 112,901 78,103
- -------------------------------------------------------------------------------------------------
Operating Income 25,598 21,980
Interest expense 6,290 5,084
- -------------------------------------------------------------------------------------------------
Income Before Income Taxes 19,308 16,896
Income tax expense 4,634 4,055
- -------------------------------------------------------------------------------------------------
Net Income $ 14,674 $ 12,841
=================================================================================================
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains (losses) on securities, net of taxes
Net unrealized holding gains (losses) arising during the
period $ (17,870) $ 21,251
Less reclassification adjustments for gains included in
net income (4,591) (2,218)
- -------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) (22,461) 19,033
- -------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $ (7,787) $ 31,874
=================================================================================================
NET INCOME PER SHARE
Basic $ 2.64 $ 2.34
Diluted $ 2.61 $ 2.27
=================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
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<TABLE>
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
OPERATING ACTIVITIES
<S> <C> <C>
Net Income $ 14,674 $ 12,841
Adjustments to reconcile net income to net cash used by operating activities (18,715) (12,902)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used By Operating Activities (4,041) (61)
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of fixed maturities and equity securities 477,635 92,542
Proceeds from maturities of fixed maturities 19,245 18,482
Cost of fixed maturities and equity securities purchased (391,396) (142,207)
Net change in short-term investments (8,274) 26,643
Acquisition of insurance company, net of cash acquired (143,557) --
Other (560) 4,073
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (46,907) (467)
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Additions to long-term debt 105,000 --
Repayments of long-term debt (55,000) --
Other 79 388
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 50,079 388
- -----------------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (869) (140)
Cash and cash equivalents at beginning of period 1,527 1,309
- -----------------------------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents At End Of Period $ 658 $ 1,169
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--March 31, 1999
1. Principles of Consolidation
The consolidated balance sheet as of March 31, 1999, the related consolidated
statements of income and comprehensive income for the three months ended March
31, 1999 and 1998, and the consolidated statements of cash flows for the three
months ended March 31, 1999 and 1998, are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of such
consolidated financial statements have been included. Such adjustments consist
only of normal recurring items. Interim results are not necessarily indicative
of results of operations for the full year.
The consolidated financial statements and notes are presented as permitted by
Form 10-Q, and do not contain certain information included in the Company's
annual consolidated financial statements and notes.
2. Net Income per share
Net income per share was determined by dividing net income by the applicable
shares outstanding (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income, as reported (Basic and diluted income) $ 14,674 $ 12,841
=================================================================================================
Average common shares outstanding 5,555 5,497
Dilutive potential common shares 66 154
- -------------------------------------------------------------------------------------------------
Average diluted shares outstanding 5,621 5,651
=================================================================================================
3. Reinsurance
The table below summarizes the effect of reinsurance on premiums written and
earned (dollars in thousands):
<CAPTION>
Three Months Ended March 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Written Earned Written Earned
Direct $ 131,269 $ 143,428 $ 95,524 $ 98,939
Assumed 2,663 3,355 1,196 1,587
Ceded (34,924) (38,376) (20,273) (21,628)
- -----------------------------------------------------------------------------------------------------------------------------------
Net premiums $ 99,008 $ 108,407 $ 76,447 $ 78,898
===================================================================================================================================
</TABLE>
Incurred losses and loss adjustment expenses are net of reinsurance recoveries
of $27.3 million and $12.8 million for the three months ended March 31, 1999 and
1998, respectively.
6
<PAGE>
4. Company Obligated Mandatorily Redeemable Preferred Securities (8.71% Capital
Securities)
On January 8, 1997 the Company arranged the sale of $150 million of 8.71%
Capital Securities issued under an Amended and Restated Declaration of Trust
dated January 13, 1997 (The Declaration) by Markel Capital Trust I (the Trust),
a statutory business trust sponsored and wholly-owned by Markel Corporation.
Proceeds from the sale of the 8.71% Capital Securities were used to purchase
$154,640,000 aggregate principal amount of the Company's 8.71% Junior
Subordinated Deferrable Interest Debentures (the Debentures) due January 1,
2046, issued to the Trust under an indenture dated January 13, 1997 (the
Indenture). The Debentures are the sole assets of the Trust. The Company has the
right to defer interest payments on the Debentures for up to five years. The
8.71% Capital Securities and related Debentures are redeemable by the Company on
or after January 1, 2007. Taken together, the Company's obligations under the
Debentures, the Indenture, the Declaration and a guarantee made by the Company
provide, in the aggregate, a full, irrevocable and unconditional guarantee of
payments of distributions and other amounts due on the 8.71% Capital Securities.
5. Comprehensive Income
Other comprehensive income (loss) is composed of net unrealized holding gains
(losses) on securities arising during the period less reclassification
adjustments for gains included in net income. The related tax expense (benefit)
on net unrealized gains (losses) on securities was $(9.6) million and $11.4
million for the three months ended March 31, 1999 and 1998, respectively. The
related tax expense on the reclassification adjustments for gains included in
net income was $2.5 million and $1.2 million for the three months ended March
31, 1999 and 1998, respectively.
6. Acquisition
On January 15, 1999, the Company acquired Gryphon Holdings, Inc. and its
subsidiaries (Gryphon) as the result of the completion of a public tender offer.
The Company's first quarter results include Gryphon's results of operations
since the date of acquisition. The acquisition was accounted for using the
purchase method of accounting. Total consideration paid for Gryphon was
approximately $145.7 million. The excess of the purchase price over the fair
value of the net tangible and identifiable intangible assets acquired was
recorded as goodwill and is being amortized using the straight-line method over
20 years. The Company funded the transaction with available cash of
approximately $95.7 million and borrowings of approximately $50 million.
7. Segment Reporting Disclosures
The Company has five underwriting units focused on specific niches within the
Excess and Surplus Lines and Specialty Admitted markets. Excess and Surplus
Lines, Professional/Products Liability and Brokered Excess and Surplus Lines
write business in the Excess and Surplus Lines market and for purposes of
segment reporting are aggregated as one operating segment. Specialty Program
Insurance and Specialty Personal and Commercial Lines write business in the
Specialty Admitted market and for purposes of segment reporting are aggregated
as one operating segment. All investing activities are included in the Investing
operating segment.
The Company intends to significantly restructure Gryphon's operations and
expects that Gryphon's premium volume will decrease by 50% or more. The Gryphon
programs that the Company intends to continue will be administered by
underwriting units in the Excess and Surplus Lines operating segment. Gryphon's
discontinued programs are included in Other for purposes of segment reporting.
The Company considers many factors including the nature of the underwriting
units' insurance products, production sources, distribution strategies and
regulatory environment in determining how to aggregate operating segments.
7
<PAGE>
7. Segment Reporting Disclosures (continued)
Segment profit or loss for the Excess and Surplus Lines and the Specialty
Admitted operating segments is measured by underwriting profit or loss. Segment
profit for the Investing operating segment is measured by net investment income
and realized gains or losses.
The Company does not allocate assets to the Excess and Surplus Lines or the
Specialty Admitted operating segments for management reporting purposes. The
total investment portfolio is allocated to the Investing operating segment. The
Gryphon acquisition increased the total investment portfolio by approximately
$300 million in the first quarter of 1999. The Company does not allocate capital
expenditures for long-lived assets to any of its operating segments for
management reporting purposes.
a) Following is a summary of segment profit (loss) (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Excess &
Surplus Specialty
Lines Admitted Investing Other Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Segment revenues $ 69,565 $ 25,495 $ 29,714 $ 13,347 $ 138,121
Segment profit (loss) $ 4,094 $ (1,469) $ 29,714 $ (5,863) $ 26,476
Combined ratio 94% 106% -- 144% 103%
Segment assets $ -- $ -- $ 1,758,095 $ 826,784 $ 2,584,879
===================================================================================================================================
<CAPTION>
Three Months Ended March 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Excess &
Surplus Specialty
Lines Admitted Investing Other Total
- -----------------------------------------------------------------------------------------------------------------------------------
Segment revenues $ 53,688 $ 25,210 $ 20,983 $ -- $ 99,881
Segment profit (loss) $ 2,566 $ (1,262) $ 20,983 $ -- $ 22,287
Combined ratio 95% 105% -- -- 98%
Segment assets $ -- $ -- $ 1,440,623 $ 432,189 $ 1,872,812
===================================================================================================================================
b) The following summary reconciles segment profit (loss) to income before
income taxes (dollars in thousands):
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1999 1998
- -------------------------------------------------------------------------------------------------
Income before income taxes
Segment profit $ 26,476 $ 22,287
Unallocated amounts
Amortization expense (1,256) (509)
Interest expense (6,290) (5,084)
Other 378 202
- -------------------------------------------------------------------------------------------------
Income Before Income Taxes $ 19,308 $ 16,896
=================================================================================================
</TABLE>
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months ended March 31, 1999 compared to Three Months ended March 31, 1998
The Company underwrites specialty insurance products and programs for niche
markets. Significant areas of underwriting include Excess and Surplus Lines,
Professional/Products Liability, Brokered Excess and Surplus Lines, Specialty
Programs and Specialty Personal and Commercial Lines. Property and casualty
insurance for nonstandard and hard-to-place risks is underwritten by the Excess
and Surplus Lines unit. Professional liability coverage is offered to physicians
and health professionals, insurance companies, attorneys and architects and
engineers. Special risk programs provide products liability insurance for
manufacturers and distributors and tailored coverages for other unique
exposures. In addition, employment practices liability coverage is offered. The
Brokered Excess and Surplus Lines unit writes hard-to-place, large general
liability, commercial umbrella, products liability and property accounts.
Gryphon's continuing lines of business consist of an earthquake exposed
California property program, professional liability programs and several
specialty casualty programs. Specialty Program Insurance includes coverage for
camps, youth and recreation, child care, health and fitness and agribusiness
organizations, as well as accident and medical insurance for colleges. The
Company also underwrites personal and commercial property and liability
coverages for watercraft, motorcycles and automobile lenders.
Following is a comparison of gross premium volume and earned premiums by
significant underwriting area:
<TABLE>
<CAPTION>
Gross Premium Volume Earned Premiums
-------------------------------- --------------------------------
Three Months Ended March 31, Three Months Ended March 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 (dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 26,893 $ 24,953 Excess and Surplus Lines $ 20,799 $ 20,658
33,538 30,756 Professional/Products Liability 27,408 24,402
15,292 14,638 Brokered Excess and Surplus Lines 10,150 8,621
16,981 -- Gryphon Continuing Programs 11,208 --
16,985 18,311 Specialty Program Insurance 16,066 14,792
6,328 7,807 Specialty Personal and Commercial Lines 9,429 10,418
17,448 -- Gryphon Discontinued Programs 13,347 --
568 895 Other --- 7
- -----------------------------------------------------------------------------------------------------------------------------------
$ 134,033 $ 97,360 Total $ 108,407 $ 78,898
===================================================================================================================================
</TABLE>
Gross premium volume for the first quarter in 1999 was $134.0 million compared
to $97.4 million in the same period in the prior year. The growth was primarily
the result of the Gryphon acquisition which added $34.4 million to the Company's
gross premium volume in the first quarter of 1999. As the Company re-underwrites
the Gryphon programs, the Gryphon business is expected to decline by 50% or
more. The Company's core books of business increased 2% in the first quarter of
1999. The Company has maintained its underwriting standards at the expense of
premium growth.
Excess and Surplus Lines gross premium volume was $26.9 million compared to
$25.0 million in 1998. The growth was due to increased production in the Essex
special property program and the inland marine program.
Premiums from Professional/Products Liability insurance were $33.5 million
compared to $30.8 million a year ago. Growth in the employment practices
liability and specified professions programs was partially offset by lower
production from other lines, including the lawyers and medical malpractice
programs.
Premiums from Brokered Excess and Surplus Lines totaled $15.3 million in the
first quarter of 1999 compared to $14.6 million in 1998. The increase was due to
higher gross premium volume in the unit's property and excess and umbrella
programs offset by decreased gross premium volume in the casualty programs.
9
<PAGE>
Gross premium volume for the Gryphon programs that the Company expects to
continue was $17.0 million in the first quarter of 1999. Continuing program
gross premium volume consisted of $10.9 million of earthquake exposed California
property business which will become part of the Essex special property program,
$3.3 million of professional liability business which will become part of the
Professional/Products Liability unit and $2.8 million of casualty programs, most
of which will be administered by the Brokered Excess and Surplus Lines
underwriting unit.
Gross premiums from Specialty Program Insurance were $17.0 million compared to
$18.3 million in the first quarter of 1998. Increased competition in the youth
and recreation and health and fitness programs contributed to the decrease.
Specialty Personal and Commercial Lines premiums declined to $6.3 million from
$7.8 million in 1998. The decrease was due primarily to the discontinuance of
certain portions of the units' property programs.
Gross premium volume for the Gryphon programs that were discontinued was $17.5
million. The Company reviewed all of Gryphon's programs at the time of
acquisition and determined that certain programs were unprofitable and presented
little opportunity to generate underwriting profits in the future. The Company
has discontinued these programs and is working with the affected agents and
brokers to locate new markets for these risks.
Other gross premiums totaled $0.6 million compared to $0.9 million in 1998.
Other gross premium volume primarily consisted of facultative reinsurance placed
by the Professional/Products Liability unit.
Currently many of the Company's products are being adversely affected by
increased competition and lower rates in the property and casualty market. The
Company does not intend to relax underwriting standards 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.
The Company enters into reinsurance agreements in order to reduce its liability
on individual risks and enable it to underwrite policies with higher limits. The
Company's net retention of gross premium volume decreased to 74% in the first
quarter of 1999 compared to 79% in the prior year. The decrease was due to low
retentions on Gryphon's California property program.
Total operating revenues rose to $138.5 million from $100.1 million in the prior
year. First quarter earned premiums were $108.4 million compared to $78.9
million for the first quarter of 1998. The $29.5 million of growth was the
result of $24.6 million of earned premiums for Gryphon and $4.9 million of
growth from existing operations.
Net investment income increased 29% to $22.7 million in the first quarter from
$17.6 million a year ago. The increase was due to the Gryphon acquisition which
added approximately $300 million to the investment portfolio and $4.8 million to
net investment income in the first quarter of 1999.
Realized gains were $7.1 million for the first quarter in 1999 compared to $3.4
million last year. Variability in the timing of realized and unrealized
investment gains or losses is to be expected.
Total operating expenses for the first quarter were $112.9 million compared to
$78.1 million in 1998. The increase resulted primarily from the Gryphon
acquisition.
10
<PAGE>
Following is a comparison of selected data from the Company's operations
(dollars in thousands):
Three Months Ended
March 31,
-------------------------
1999 1998
- --------------------------------------------------------------------------------
Gross premium volume $ 134,033 $ 97,360
Net premiums written $ 99,008 $ 76,447
Net retention 74% 79%
Earned premiums $ 108,407 $ 78,898
Losses and loss adjustment expenses $ 70,150 $ 49,527
Underwriting, acquisition and insurance expenses $ 41,495 $ 28,067
Underwriting profit (loss) $ (3,238) $ 1,304
GAAP ratios
Loss ratio 65% 63%
Expense ratio 38% 35%
- --------------------------------------------------------------------------------
Combined ratio 103% 98%
================================================================================
Underwriting performance is measured by the combined ratio of losses and
expenses to earned premiums. The Company reported a combined ratio of 103% in
1999 compared to a combined ratio of 98% in 1998. The underwriting loss was the
result of Gryphon's combined ratio of 122% in the first quarter of 1999.
Excluding Gryphon, the Company's combined ratio would have been 97% in the first
quarter. The 1999 loss ratio increased to 65% from 63% in 1998 due to higher
loss ratios on Gryphon's discontinued lines of business. The 1999 expense ratio
increased to 38% from 35% in 1998 as a result of Gryphon's higher expense ratio.
The Company is working aggressively to reduce Gryphon's expense ratio by
leveraging corporate services and reducing overhead costs to those necessary to
run Gryphon's reduced operations more efficiently.
The Company's five underwriting units focus on specific niches within the Excess
and Surplus Lines and Specialty Admitted markets. Excess and Surplus Lines,
Professional/Products Liability and Brokered Excess and Surplus Lines write
business in the Excess and Surplus Lines market and for purposes of segment
reporting are aggregated as one operating segment. The Gryphon programs that the
Company intends to continue will be administered by underwriting units in the
Excess and Surplus Lines operating segment. Specialty Program Insurance and
Specialty Personal and Commercial Lines write business in the Specialty Admitted
market and for purposes of segment reporting are aggregated as one operating
segment.
The combined ratio for the Excess and Surplus Lines segment decreased to 94% in
the first quarter of 1999 compared to 95% in 1998. The decrease in the 1999
combined ratio was due to higher reinsurance profit commission in the Excess and
Surplus Lines underwriting unit in 1999. The combined ratio for the Specialty
Admitted segment increased to 106% in the first quarter of 1999 compared to 105%
in 1998. The increase was the result of higher acquisition costs.
Amortization of intangible assets was $1.3 million in the first quarter of 1999
compared to $0.5 million last year. The increase was the result of goodwill from
the Gryphon acquisition which is being amortized over 20 years.
Interest expense was $6.3 million in the first quarter of 1999 compared to $5.1
million in 1998. In January 1999, the Company borrowed $105 million under its
$250 million revolving credit facility to complete the acquisition of Gryphon.
The Company's effective tax rate for the first quarter of 1999 and 1998 was 24%
of income before income taxes.
11
<PAGE>
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 operating performance because it reduces the variability in results
associated with realized investment gains or losses and eliminates the impact of
accounting conventions which do not reflect current operating costs. For the
first quarter of 1999, income from core underwriting and investing operations
increased to $11.3 million, or $2.00 per diluted share, from $11.0 million, or
$1.96 per diluted share, in 1998. The increase was due to higher net investment
income offset by underwriting losses.
First quarter 1999 net income rose 14% to $14.7 million from $12.8 million in
1998. The increase was due to increased net investment income and higher
realized gains. Comprehensive income was a loss of $7.8 million, or $1.39 per
diluted share, compared to comprehensive income of $31.9 million, or $5.64 per
diluted share, in 1998. The decrease was the result of the net decrease in
unrealized gains of $4.00 per diluted share in 1999 compared to the net increase
in unrealized gains of $3.37 per diluted share in 1998.
Financial Condition as of March 31, 1999
The Company's insurance operations collect premiums and pay current claims,
reinsurance commissions 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.
On January 15, 1999, the Company acquired Gryphon Holdings, Inc. and its
subsidiaries as the result of the completion of a public tender offer. The
Company's first quarter results include Gryphon's results of operations since
the date of acquisition. The acquisition was accounted for using the purchase
method of accounting. Total consideration paid for Gryphon was approximately
$145.7 million. The excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets acquired was recorded as goodwill
and is being amortized using the straight-line method over 20 years. The Company
funded the transaction with available cash of approximately $95.7 million and
borrowings of approximately $50.0 million. In addition the Company refinanced
$55.0 million of Gryphon's long-term debt.
The Company's invested assets increased to $1.8 billion at March 31, 1999 from
$1.5 billion at December 31, 1998. The increase was primarily the result of the
Gryphon acquisition. The Company's unpaid losses and loss adjustment expenses
reserves and paid and unpaid reinsurance recoverables increased to $1.4 billion
and $441.8 million at March 31, 1999 from $933.8 million and $219.5 million,
respectively. The increases were the result of the purchase of Gryphon and
Gryphon's historically higher dependence on reinsurance.
For the three month period ended March 31, 1999, the Company reported net cash
used by operating activities of $4.0 million, compared to net cash used by
operating activities of $0.1 million for the same period in 1998. The Company
expects to discontinue over 50% of Gryphon's gross premium volume. As a result,
Gryphon's operations are expected to generate negative operating cash flows
throughout 1999 which will partially offset the operating cash flow generated by
the Company's core underwriting units.
For the three month period ended March 31, 1999, the Company reported net cash
used by investing activities of $46.9 million compared to $0.5 million in 1998.
The difference was the result of the Gryphon acquisition.
As of March 31, 1999 and December 31, 1998, the unused balances available under
the Company's $250 million revolving credit facility totaled $145 million and
$250 million, respectively. In January 1999, the Company borrowed $105 million
under the revolving credit facility to complete the acquisition of Gryphon.
Funds are available under the facility for general corporate purposes.
12
<PAGE>
Shareholders' equity at March 31, 1999 was $417.6 million compared to $425.3
million at December 31, 1998. Book value per share was $74.70 at March 31, 1999
compared to $77.02 at December 31, 1998. The decrease in the first quarter of
1999 was the result of the net decrease in unrealized gains of $22.5 million
partially offset by net income of $14.7 million.
Other Matters
Year 2000
The Year 2000 issue affects virtually all companies and organizations. Many
companies have existing computer applications which use only two digits to
identify a year in the date field. These applications were designed and
developed without considering the impact of the century change. If not corrected
these computer applications may fail or create erroneous results in the year
2000.
The Company's Year 2000 Strategy
The Company has created a Year 2000 team involving associates from all areas of
the organization and has charged them with implementing the Company's Year 2000
project. The team has been in place since September of 1997. The project's scope
includes all information technology (IT), both internally developed and
purchased from third parties, material vendors, producer and customer
relationships, and an assessment of the Company's underwriting exposure as a
result of the insurance products written by the Company's underwriting units. In
addition, the Company is evaluating the Year 2000 exposure to issuers included
as part of its investment portfolio.
The Company has completed all phases of its Year 2000 compliance project for its
material IT systems. The Company has also completed the assessment and
remediation phases for its ancillary IT systems and is currently in the testing
phase. The Company anticipates completion of all testing of its ancillary IT
systems by October 31, 1999.
The Company has been in contact with its material business partners to determine
their state of readiness with regard to the Year 2000 issue and the potential
impact on the Company. The Company has identified the following general
categories of business partners as material to the Company's ability to conduct
its operations: software, hardware and telecommunication providers, banks and
investment brokers, material holdings in the Company's investment portfolio,
insurance producers, reinsurers and reinsurance intermediaries, major insurance
clients and utilities.
Where the Company has determined that the relationship with a business partner
is material to its ability to conduct normal operations, the Company has sent
letters to the business partner requesting an update on the status of the
business partner's Year 2000 initiative. Where deemed necessary, the Company is
following up with the business partner to obtain further information. Based on
the assurances of these business partners and the Company's internal reviews of
information provided, the Company has not currently identified a material
business partner that will be noncompliant. However, there can be no assurances
that all material business partners will be compliant, and such noncompliance
could have a material effect on the Company's financial position and results of
operations. The Company expects to complete its review of material business
partners by October 31, 1999.
The Company has conducted a comprehensive review of its underwriting guidelines
and has made the decision to exclude Year 2000 exposures from virtually all
insurance policies. The Company began adding exclusions to policies in early
1998. Additionally it is the Company's position that Year 2000 exposures are not
fortuitous losses and thus are not covered under insurance policies even without
specific exclusions. For these reasons, the Company believes that its exposure
to Year 2000 claims will not be material. However, as was the case with
environmental exposures, changing social and legal trends may create unintended
coverage for exposures by reinterpreting insurance
13
<PAGE>
contracts and exclusions. It is impossible to predict what, if any, exposure
insurance companies may ultimately have for Year 2000 claims whether coverage
for the issue is specifically excluded or included.
The cost of the Company's Year 2000 project is estimated to be $1.0 million.
Approximately $0.5 million of this amount was incurred as of December 31, 1998.
The remainder of the estimated cost of the project is expected to be incurred
throughout 1999. All costs of the Year 2000 project have been expensed as
incurred.
As all of its material IT systems were deemed Year 2000 compliant at December
31, 1998, the Company has not established a contingency plan for noncompliance
of its IT systems. At this time, the Company is not aware of any material
business partners that will not be Year 2000 compliant. If the Company becomes
aware of noncompliant business partners, one option will be to evaluate using
other vendors. In many instances the establishment of a contingency plan is not
possible or is cost prohibitive. In these situations, noncompliance by the
Company or its material business partners could have a material adverse impact
on the Company's financial position and results of operations.
Subsequent to the Company's acquisition of Gryphon in January 1999, the Company
began an assessment of Gryphon's material IT systems for Year 2000 compliance.
The Company expects the assessment and remediation phases to continue through
the first half of 1999. The Company is converting Gryphon's business to the
Company's Year 2000 compliant systems.
Market Risk Disclosures
Market risk is the risk of economic losses due to adverse changes in the
estimated fair value of a financial instrument as the result of changes in
equity prices, interest rates, foreign exchange rates and commodity prices. The
Company's consolidated balance sheets include assets and liabilities whose
estimated fair values are subject to market risk. The primary market risks to
the Company are equity price risk associated with investments in equity
securities and interest rate risk associated with investments in fixed
maturities. From time to time, equity prices and interest rates fluctuate
causing an effect on the Company's investment portfolio. The Company has no
direct commodity risk, and its exposure to foreign exchange risk is immaterial.
The Company's market risk disclosures at March 31, 1999 have not materially
changed from those identified at December 31, 1998.
"Safe Harbor" Statement
This is a "Safe Harbor" statement under the Private Securities Litigation Reform
Act of 1995. Certain statements contained herein are forward-looking statements
that involve risks and uncertainties. Future actual results may materially
differ from those in these statements because of many factors. For example, the
Company continues to significantly reorganize Gryphon's operations, and the
scope and impact of these changes cannot be determined at this time. Insurance
industry price competition has made it more difficult to attract and retain
adequately priced business. Changing legal and social trends can adversely
impact the adequacy of loss reserves. State regulatory actions can impede the
Company's ability to charge adequate rates and efficiently allocate capital. The
frequency and severity of natural catastrophes are highly variable. Economic
conditions and interest rate volatility can have significant impacts on the
market value of fixed maturity and equity investments. The business community's
state of readiness for the Year 2000, the readiness of the Company's vendors and
business partners and the Company's potential underwriting exposure to Year 2000
claims are difficult to predict with any certainty. Accordingly, the Company's
premium growth, underwriting and investing results have been and will continue
to be potentially materially affected by these factors.
14
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The Exhibits to this Report are listed in the Exhibit Index.
(b) On January 29, 1999, the Company filed a report on item Form 8-K, reporting
under Item 2 and Item 7 the acquisition of Gryphon Holdings, Inc. and its
subsidiaries.
The following financial statements of Gryphon Holdings, Inc. were filed as
part of the Form 8-K:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995 Notes to Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and December 31
1997 (Unaudited)
Consolidated Statements of Income for the Nine Months Ended September
30, 1998 and 1997 (Unaudited)
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
The following Markel Corporation pro forma financial information were filed as
part of the Form 8-K:
Introduction
Pro Forma Consolidated Balance Sheet as of September 30, 1998
Pro Forma Consolidated Statement of Income and Comprehensive Income for
the Nine Months Ended September 30, 1998
Pro Forma Consolidated Statement of Income and Comprehensive Income for
the Year Ended December 31, 1997
Notes to Pro Forma Consolidated Financial Statements.
15
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 29th day of April, 1999.
Markel Corporation
By Alan I. Kirshner
--------------------------------------
Alan I. Kirshner
Chief Executive Officer
(Principal Executive Officer)
By Anthony F. Markel
--------------------------------------
Anthony F. Markel
President
(Principal Operating Officer)
By Steven A. Markel
--------------------------------------
Steven A. Markel
Vice Chairman
By Darrell D. Martin
--------------------------------------
Darrell D. Martin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
16
<PAGE>
Exhibit Index
Number Description
27 Financial Data Schedule for period ended March 31, 1999 *
* Filed electronically with the Commission's operational EDGAR system
17
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Form 10-Q for the quarterly period ended
March 31, 1999 for Markel Corporation and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 1,371,792
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 285,801
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,758,095
<CASH> 658
<RECOVER-REINSURE> 30,635
<DEFERRED-ACQUISITION> 49,016
<TOTAL-ASSETS> 2,584,879
<POLICY-LOSSES> 1,406,312
<UNEARNED-PREMIUMS> 275,426
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 198,232
<F1> 0
0
<COMMON> 25,501
<OTHER-SE> 392,092
<TOTAL-LIABILITY-AND-EQUITY> 2,584,879
108,407
<INVESTMENT-INCOME> 22,651
<INVESTMENT-GAINS> 7,063
<OTHER-INCOME> 378
<BENEFITS> 70,150
<UNDERWRITING-AMORTIZATION> 14,890
<UNDERWRITING-OTHER> 26,605
<INCOME-PRETAX> 19,308
<INCOME-TAX> 4,634
<INCOME-CONTINUING> 14,674
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,674
<EPS-PRIMARY><F2> 2.64
<EPS-DILUTED><F2> 2.61
<RESERVE-OPEN> 0
<PROVISION-CURRENT><F3> 0
<PROVISION-PRIOR><F3> 0
<PAYMENTS-CURRENT><F3> 0
<PAYMENTS-PRIOR><F3> 0
<RESERVE-CLOSE><F3> 0
<CUMULATIVE-DEFICIENCY><F3> 0
<FN>
<F1>
Does not include Company-Obligated Mandatorily Redeemable Preferred Capital
Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable
Interest Debentures of Markel Corporation.
<F2>
Markel adopted Statement of Financial Accounting Standards No. 128 "Earnings Per
Share" effective December 31, 1997. The Financial Data Schedules tags <EPS
PRIMARY> and <EPS DILUTED> refer to Basic EPS and Diluted EPS, respectively, as
these terms are set forth in Statement of Financial Accounting Standards No.
128.
<F3> Available on an annual basis only.
</FN>
</TABLE>
