<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
Not Applicable
MARKEL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of incorporation or organization)
1-13051 54-0292420
(Commission (I.R.S. employer
file number) 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)
<PAGE>
Item 5. Other Events
Markel acquired Gryphon Holdings, Inc. in January 1999.
This filing contains certain financial information related to that transaction.
Item 7. Financial Statements and Exhibits
The following financial statements are filed as part of this report.
<PAGE>
(a) Gryphon Holdings, Inc. Financial Statements
Independent Auditors' Report
Consolidated Balance Sheet as of December 31, 1998
Consolidated Statements of Income and Comprehensive Income for the year
ended December 31, 1998
Consolidated Statements of Shareholders' Equity for the year ended
December 31, 1998
Consolidated Statements of Cash Flows for the year ended December 31,
1998
Notes to Consolidated Financial Statements
(c) The Exhibits listed in the Exhibit Index are filed as part of this report on
Form 8-K.
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 hereunto duly authorized.
MARKEL CORPORATION
Date: September 22, 1999 By: Darrell D. Martin
---------------------
Executive Vice President
And Chief Financial Officer
<PAGE>
EXHIBIT INDEX
23.1 Consent of KPMG LLP to the inclusion and/or incorporation of their
report as part of this report on Form 8-K.
<PAGE>
INDEPENDENT AUDITORS' REPORT
KPMG LLP
The Board of Directors and Shareholders
Markel Corporation:
We have audited the accompanying consolidated balance sheet of Gryphon Holdings
Inc. and subsidiaries as of December 31, 1998 and the related consolidated
statements of income and comprehensive income, shareholders' equity, and cash
flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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 Gryphon Holdings
Inc. and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Richmond, Virginia
September 10, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
GRYPHON HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(in thousands)
<S> <C>
ASSETS
Investments, available-for-sale, at estimated fair value
Fixed maturities (cost of $191,390) $ 193,593
Equity securities (cost of $ 716) 851
Short-term investments (estimated fair value approximates cost) 208,275
------------
Total Investments, Available-For-Sale 402,719
Cash and cash equivalents 1,416
Premiums receivable 29,170
Reinsurance recoverable on unpaid losses 210,217
Reinsurance recoverable on paid losses, net of $3.0 million
allowance for uncollectible receivables 16,827
Deferred policy acquisition costs 10,395
Deferred income taxes 24,088
Prepaid reinsurance premiums 29,998
Property and equipment 3,486
Goodwill 11,350
Other assets 3,574
------------
Total Assets $ 743,240
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 468,692
Unearned premiums 82,842
Payables to insurance companies 29,098
Long-term debt (estimated fair value approximates cost) 55,000
Other liabilities 11,711
------------
Total Liabilities 647,343
------------
Shareholders' equity
Preferred stock 11,630
Common stock 81
Additional paid-in capital 30,742
Retained earnings 75,944
Treasury stock, 1,373,321 shares at cost (23,326)
Deferred compensation (209)
Accumulated other comprehensive income
Net unrealized gains on fixed maturities and
equity securities, net of taxes of $818 1,520
Foreign currency translation adjustment, net of taxes of $261 (485)
------------
Total Accumulated Other Comprehensive Income 1,035
Total Shareholders' Equity 95,897
------------
Total Liabilities and Shareholders' Equity $ 743,240
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
GRYPHON HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(in thousands)
<S> <C>
OPERATING REVENUES
Earned premiums $ 100,764
Net investment income 18,365
Net realized gains from investment sales 10,105
Other 8
------------
Total Operating Revenues 129,242
------------
OPERATING EXPENSES
Losses and loss adjustment expenses 103,302
Underwriting, acquisition and insurance expenses 55,013
Amortization of intangible assets 145
------------
Total Operating Expenses 158,460
------------
Operating Loss (29,218)
Interest expense 3,212
------------
Loss Before Income Taxes (32,430)
Income tax benefit 13,128
------------
NET LOSS (19,302)
------------
OTHER COMPREHENSIVE LOSS
Unrealized gains on securities, net of taxes
Net unrealized holding gains arising during the period 4,157
Less reclassification adjustments for gains included
in net income (6,568)
Change in foreign exchange adjustment, net of taxes (139)
------------
Total Other Comprehensive Loss (2,550)
------------
COMPREHENSIVE LOSS $ (21,852)
============
NET LOSS PER SHARE $ (2.88)
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Gryphon Holdings Inc. and Subsidiaries
Consolidated Statement of Shareholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Additional
Preferred Preferred Common Common Paid-in
Shares Stock Shares Stock Capital
------ ----- ------ ----- -------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1998 - - $8,148 $ 81 $ 30,742
Add (deduct):
Net loss
Net unrealized holding losses,
net of tax
Foreign currency translation
adjustment, net of tax
Comprehensive Loss
Treasury stock used for stock compensation
plans
Deferred compensation adjustment 14 11,630
Issuance of preferred stock
------ ---------- ------ ------ ---------
Balance at December 31, 1998 14 $ 11,630 8,148 $ 81 $ 30,742
====== ========== ====== ====== =========
<CAPTION>
Accumulated
Other
Retained Deferred Treasury Comprehensive
Earnings Compensation Stock Income Total
-------- ------------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1998 $ 95,065 $ (151) $ (24,813) $ 3,585 $ 104,509
Add (deduct):
Net loss (19,302) (19,302)
Net unrealized holding losses,
net of tax (2,411) (2,411)
Foreign currency translation
adjustment, net of tax (139) (139)
----------
Comprehensive Loss (21,852)
Treasury stock used for stock compensation plans 181 1,487 1,668
Deferred compensation adjustment (58) (58)
Issuance of preferred stock 11,630
--------- ------ ----------- ------------ ----------
Balance at December 31, 1998 $ 75,944 $ (209) $ (23,326) $ 1,035 $ 95,897
========= ====== =========== ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
GRYPHON HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(in thousands)
<TABLE>
<CAPTION>
OPERATING ACTIVITIES
<S> <C>
Net loss $ (19,302)
Adjustments to reconcile net loss to
net cash provided by operating activities
Deferred income tax benefit (9,045)
Depreciation and amortization 2,583
Net realized gains from investment sales (10,105)
Changes in operating assets and liabilities, net of
effects from business acquisitions:
Increase in premiums receivable (4,057)
Decrease in deferred policy acquisition costs 3,090
Increase in unpaid losses and loss adjustment
expenses, net 30,817
Decrease in unearned premiums, net (725)
Increase in payables to insurance companies 10,475
Decrease in current income taxes (4,209)
Decrease in accrued investment income 2,675
Increase in other liabilities 2,432
Decrease in reinsurance recoverable of paid losses 1,801
Decrease in other assets 3,087
-----------
Net Cash Provided By Operating Activities 9,517
-----------
INVESTING ACTIVITIES
Proceeds from sales of fixed maturities and equity
securities 601,083
Proceeds from maturities of fixed maturities 201
Cost of fixed maturities and equity securities purchased (440,313)
Net change in short-term investments (186,458)
Acquisition of insurance companies, net of cash acquired (30,814)
Additions to property and equipment (790)
Other 493
-----------
Net Cash Used By Investing Activities (56,598)
-----------
FINANCING ACTIVITIES
Additions to long-term debt 55,000
Repayments and repurchases of long-term debt (21,125)
Proceeds from exercise of stock options 1,223
Other 387
-----------
Net Cash Provided By Financing Activities 35,485
-----------
Effect of exchange rate changes on cash (139)
-----------
Decrease in cash and cash equivalents (11,735)
Cash and cash equivalents at beginning of year 13,151
-----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,416
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
GRYPHON HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company underwrites specialty insurance products and programs to niche
markets. Significant areas of underwriting include excess and surplus lines,
professional and products liability, specialty programs, specialty personal and
commercial lines and brokered excess and surplus 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 Gryphon Holdings, Inc. 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 in accumulated other comprehensive
income in 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 specific identification method.
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. Amortization
in 1998 was approximately $36.6 million.
e) PROPERTY AND EQUIPMENT. Property and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation and
amortization are calculated using the straight-line method over the
respective estimated service lives.
f) INTANGIBLE ASSETS. 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.
g) 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 earned and are netted
against policy acquisition costs. Reinsurance premiums ceded are netted
against premiums written.
h) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES. Unpaid losses and loss
adjustment expenses are based on evaluations of reported claims and
estimates for losses and loss adjustment expenses incurred but not
reported. Estimates for losses and 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.
i) INCOME TAXES. Deferred tax assets and liabilities are recorded in
accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No.
109 the Company records deferred income taxes which reflect the net tax
effect of the temporary differences between the carrying amounts of the
assets and liabilities for financial reporting purposes and their
respective tax bases.
j) EARNINGS PER SHARE. Basic earnings per share (EPS) is computed by
dividing net income by the weighted average number of common shares
outstanding during the year. Diluted EPS is computed using the weighted
average number of common shares and dilutive potential common shares
outstanding during the year.
F-6
<PAGE>
GRYPHON HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
k) STOCK COMPENSATION PLANS. The Company applies Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for stock-based compensation
plans. The Company has adopted the disclosure-only provisions of SFAS
No. 123, Accounting for Stock Based Compensation.
l) LONG-LIVED ASSETS. If an asset is considered to be impaired, the
impairment equals the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell.
m) COMPREHENSIVE INCOME. Comprehensive income represents all changes in
equity of an enterprise that result from recognized transactions and
other economic events of the period. Other comprehensive income refers
to revenues, expenses, gains and losses that under generally accepted
accounting principles are included in comprehensive income but excluded
from net income, such as unrealized gains or losses on certain
investments in debt and equity securities and foreign currency items.
n) FOREIGN CURRENCY. Transactions denominated in foreign currencies are
translated at the rate of exchange at the transaction date. Revenues
and expenses are translated at average exchange rates. Assets and
liabilities are translated at the exchange rates in effect at the
balance sheet date.
o) DERIVATIVE FINANCIAL INSTRUMENTS. The Company enters into interest
rate swap agreements to manage exposure to interest rates. Interest
rate swaps relating to long-term debt are classified as held for
purposes other than trading and are accounted for on a settlement
basis. To qualify for this accounting treatment, the swap must
synthetically alter the nature of a designated underlying financial
instrument. Under this method, payments or receipts owed or due under
the swap agreement are accrued through each settlement date and
recorded as a component of interest expense. If a swap designated as a
synthetic alteration were to be terminated, any gain or loss on the
termination would be deferred and recognized over the shorter of the
original contractual life of the swap or the related life of the
designated long-term debt .
2.INVESTMENTS
a) Following is a summary of investments at December 31, 1998(in thousands):
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Fixed maturities Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies $ 87,471 $ 1,440 $ (108) $ 88,803
Obligations of states, municipalities,
and political subdivisions 15,315 579 -- 15,894
Public utilities 2,072 20 (4) 2,088
All other corporate bonds 86,532 874 (598) 86,808
-------- ------- ------- ---------
Total fixed maturities 191,390 2,913 (710) 193,593
Equity securities
Banks, trusts and insurance companies 716 135 - 851
Short-term investments 208,275 - - 208,275
-------- ------- ------- ---------
Total Investments $400,381 $ 3,048 $ (710) $ 402,719
======== ======= ======= =========
</TABLE>
b) The amortized cost and estimated fair value of fixed maturities at December
31, 1998 are shown below by contractual maturity (in thousands):
Estimated
Amortized Fair
Cost Value
--------- ---------
Due in one year or less $ 15,676 $ 15,659
Due after one year through five years 44,867 45,695
Due after five years through ten years 36,343 36,987
Due after ten years 94,504 95,252
--------- ---------
TOTAL $ 191,390 $ 193,593
========= =========
F-7
<PAGE>
2.INVESTMENTS (CONTINUED)
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 3.6 years.
c) Components of net investment income for the year ended December 31, 1998 are
as follows (in thousands):
Interest
Municipal bonds (tax-exempt) $ 6,533
Taxable bonds 12,185
Short-term investments, including
overnight deposits 1,230
Dividends on equity securities 20
-----------
19,968
Less investment expenses 1,603
-----------
Net Investment Income $ 18,365
===========
d) The following table presents the Company's realized gains and losses from
investment sales and the change in gross unrealized gains(losses)for the year
ended December 31, 1998 (in thousands):
Realized gains
Fixed maturities $ 10,599
Equity securities 106
-----------
10,705
-----------
Realized losses
Fixed maturities $ 573
Equity securities 27
-----------
600
-----------
Net Realized Gains From Investment Sales $ 10,105
===========
Change in gross unrealized gains (losses)
Fixed maturities $ (3,844)
Equity securities 135
-----------
Net Decrease $ (3,709)
===========
e) Investments with a carrying value of $18.2 million were on deposit with
regulatory authorities at December 31, 1998.
f) At December 31, 1998, there were no investments in any one issuer that
exceeded 10% of shareholders' equity.
3. PROPERTY AND EQUIPMENT
Following are the components of property and equipment at December 31, 1998 (in
thousands):
Furniture and equipment $ 5,392
Other 997
-----------
6,389
Less accumulated depreciation and amortization 2,903
-----------
Property And Equipment $ 3,486
===========
Depreciation and amortization expense of property and equipment was
approximately $0.9 million for the year ended December 31, 1998.
In addition, the Company has other facilities and furniture and equipment under
operating leases with remaining terms ranging from 18 months to 114 months.
F-8
<PAGE>
3. PROPERTY AND EQUIPMENT (CONTINUED)
Minimum annual rental commitments for noncancellable operating leases at
December 31, 1998 are as follows (in thousands):
Years Ending December 31,
1999 $ 1,130
2000 964
2001 755
2002 784
2003 784
2004 and thereafter 3,944
--------
Total $ 8,361
========
Total rental expense for the year ended December 31, 1998 was approximately $1.4
million.
4. GOODWILL
Goodwill of $11.5 million results from the purchase of The First Reinsurance
Company of Hartford, Oakley Underwriting Agency, Inc., and F/I Insurance Agency
Incorporated. (see note 16)
Accumulated amortization related to goodwill was approximately $0.1 million at
December 31, 1998.
5. INCOME TAXES
For the year ended December 31, 1998, income tax benefit on loss before income
taxes, substantially all of which was attributable to federal taxes, consists of
(in thousands):
Current $ 4,083
Deferred 9,045
--------
Income Tax Benefit $ 13,128
========
The Company made income tax payments of approximately $0.1 million in 1998.
Current income taxes receivable approximated $3.8 million at December 31, 1998.
Reconciliation of the U.S. corporate income tax rate and the effective tax rate
on loss before income taxes is as follows for the year ended December 31, 1998:
U.S. corporate tax rate 35.0%
Tax-exempt investment income 6.0
Other (1.0)
----------
Effective Tax Rate 40.0%
==========
The components of the net deferred tax asset are as follows at December 31, 1998
(in thousands):
Assets
Credit for alternative minimum tax $ 5,714
Income reported in different periods for
financial reporting and tax purposes 1,400
Unpaid losses and loss adjustment expenses,
nondeductible portion for income tax purposes 17,628
Unearned premiums, adjustment for income tax purposes 3,699
Other 535
----------
Total gross deferred tax assets 28,976
----------
Liabilities
Deferred policy acquisition costs 3,638
Investments, net unrealized gains 818
Other 432
----------
Total gross deferred tax liabilities 4,888
----------
Net Deferred Tax Asset $ 24,088
==========
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 the majority of its gross deferred tax assets existing at December 31,
1998 through the reversal of existing temporary differences and the application
of the carryback provisions of the Internal Revenue Code. The Company expects to
generate future taxable income, excluding the effect of future originating
temporary differences, to realize the remaining gross deferred tax assets.
F-9
<PAGE>
6. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table sets forth a reconciliation of beginning and ending reserves
for losses and loss adjustment expenses for the year ended December 31, 1998 (in
thousands):
Net Reserves For Losses And Loss Adjustment
Expenses, beginning of year $ 188,101
Reserves for losses and loss adjustment
expenses of acquired insurance companies 39,558
------------
Restated Net Reserves For Losses And Loss
Adjustment Expenses, beginning of year 227,659
------------
Incurred losses and loss adjustment expenses
Current year 67,535
Prior years 35,767
------------
Total Incurred Losses And Loss Adjustment Expenses 103,302
------------
Payments
Current year 14,592
Prior years 57,894
------------
Total Payments 72,486
------------
Net Reserves For Losses And Loss Adjustment
Expenses, end of year 258,475
Reinsurance recoverable on unpaid losses 210,217
------------
Gross Reserves For Losses And Loss Adjustment
Expenses, end of year $ 468,692
============
Incurred losses and loss adjustment expenses for claims occurring in prior years
show an unfavorable development of $35.8 million in 1998. The unfavorable
development related to various lines of business, including pre-1985 casualty
coverages with environmental impairment and asbestos-related exposures ($15.2
million), artisan contractors ($12.8 million), and other liability coverages
($7.8 million), almost all of which had been previously discontinued.
Management continually attempts to improve its loss estimation process by
refining its ability to analyze loss development patterns, claims payments and
other information, but many reasons remain 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 and toxic tort exposures,
are adequate.
The net reserves for losses and loss adjustment expenses maintained by the
Company's insurance subsidiaries are different for statutory accounting (SAP)
and generally accepted accounting principles (GAAP)due to foreign exchange
adjustments made under GAAP and not under SAP.
F-10
<PAGE>
7. LONG-TERM DEBT
Long-term debt consists of borrowings from a group of commercial lending
institutions. The loan balance at December 31, 1998 was $55.0 million and
matures in varying amounts through 2004 with interest payable quarterly. The
initial term loan interest rate is equivalent to either the bank's prime rate
(7.75% at December 31, 1998) plus 62.5 basis points or the London Interbank
Offered Rate (5.06% at December 31, 1998) plus 162.5 basis points, at the
discretion of the Company. The Company has entered into an interest rate swap
agreement to reduce the impact of changes in interest rates on its floating rate
term loan. The agreement effectively changes the Company's interest rate
exposure on its debt to a fixed 7.65% on $43.5 million of the $55.0 million
debt. The fair value of the swap agreement was a liability of approximately
$500,000 at December 31, 1998 (in thousands):
The entire long term debt of $55 million was repaid in January 1999,
concurrently with the acquisition of Gryphon Holdings Inc. by Markel Corporation
(see note 17).
The Company paid approximately $2.7 million in interest during the year ended
December 31, 1998.
At December 31, 1998, the Company had unused letters of credit (related to
specific reinsurers) of $12.2 million.
8. SHAREHOLDERS' EQUITY
a) At December 31, 1998 the Company had 15,000,000 shares of $0.01 par value
common stock authorized, of which 8,148,050 shares were issued and 6,774,729
were outstanding. The Company is authorized to issue up to 1,000,000 shares of
preferred stock, $0.01 par value per share, in one or more series and to fix the
powers, designations, preferences and rights of each series. At December 31,
1998 the Company had 14,444 issued and outstanding shares of non-redeemable
preferred stock. This Series A 4.0% Cumulative Convertible Preferred Stock is
convertible into 643,672 common shares. No dividends were paid or accrued in
1998 and do not become cumulative until the year 2003.
b) The Company has two stock option plans and one restricted stock award plan
for employees and directors; the 1993 Stock Option Plan (1993 Plan) and the 1995
Non-employee Directors Stock Option (1995 Plan). The stock option plans are
administered by the Company's Board of Directors. The 1993 Plan provides for the
award of incentive stock options, stock appreciation rights, or incentive stock
awards to employees of the Company. The 1995 plan provides for the award of non-
statutory stock options to the non-employee directors. Options are granted at a
price not less than market price on the date of the grant and are exercisable
within a period established by the Compensation Committee or the Board at the
time of the grant, but not earlier than six months from the date of grant.
Options expire ten years from the date of grant. The Company's restricted stock
award plan provides for the granting of up to 100,000 shares of common stock to
key employees, subject to restrictions as to continuous employment except in the
case of death or normal retirement. Restrictions generally expire over a five
year period, from the date of grant. Compensation expense is recognized over the
restriction period. Stock option transactions for the year ended December 31,
1998 are summarized below:
Weighted Average
Number Exercise Price
------ --------------
Options outstanding at beginning of year 531,075 14.76
Granted 221,000 16.28
Exercised (81,225) 13.45
Canceled (84,125) 15.85
-----------
Options outstanding at end of year 586,725 15.35
=========== =========
F-11
<PAGE>
8. SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes outstanding and exercisable options as of
December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Year of Exercise Number Life Exercise Number Exercise
Grant Price Outstanding In Years Price Exercisable Price
- ------ --------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
1993 $13 128,725 4.97 $ 13.00 128,725 $ 13.00
1994 $13 - $15 52,500 5.42 14.07 39,375 14.07
1995 $13 - $16 88,000 6.51 14.95 44,000 14.95
1996 $14 - $20 80,500 7.33 17.65 20,125 17.65
1997 $13 - $17 17,000 8.86 16.31 - 16.31
1998 $15 - $18 220,000 9.40 16.28 - 16.28
---------- -----------
586,725 7.34 15.35 232,225
========== ===========
</TABLE>
In addition, 33,000 restricted stock awards were outstanding as of December 31,
1998.
In January 1999 all of the options and restricted stock awards outstanding
became fully vested and were paid out as part of the purchase of Gryphon
Holdings, Inc by Markel Corporation at the purchase price of $19.00 per share.
(see note 17)
c) Net loss per share for the year ended December 31, 1998 was determined by
dividing the net loss by the 6,701,000 average common shares outstanding.
9. COMPREHENSIVE INCOME
Other comprehensive income is comprised of net unrealized holding gains on
securities arising during the period less reclassification adjustments for gains
included in net income and a foreign currency translation adjustment. The
related tax expense on net unrealized holding gains on securities was $2.2
million for 1998. The related tax expense on the reclassification adjustments
for gains included in net income was $3.5 million for 1998. The related tax
benefit on the change in foreign exchange adjustment was $0.08 million for 1998.
10. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution retirement 401(k)& Profit Sharing
Plan. Participation in the plan is available to all employees upon their
satisfaction of specified eligibility requirements.
F-12
<PAGE>
Under the 401(k) component of the plan, the Company matches, on a dollar-for-
dollar basis, each employee's contribution up to 3% of eligible compensation.
Under the profit sharing component of the plan, annual contributions may be
authorized by the Board of Directors based upon the Company's performance for
the relevant year. The Company's costs are charged to income and amounted to
$0.4 million in 1998.
11. 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 for the year ended December 31, 1998(in thousands):
Written Earned
------- ------
Direct $ 158,021 $ 156,837
Assumed 9,532 9,110
Ceded (67,525) (65,183)
---------- ----------
Net Premiums $ 100,028 $ 100,764
========= ==========
11. REINSURANCE (CONTINUED)
Incurred losses and loss adjustment expenses are net of reinsurance recoveries
of $115.1 million for the year ended December 31, 1998.
The percentage of assumed earned premiums to net earned premiums for the year
ended December 31, 1998 was approximately 9.0%.
12. CONTINGENCIES
The Company has contingencies that arise 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
or results of operations.
13. STATUTORY FINANCIAL INFORMATION
The following table includes selected information for the Company's wholly owned
insurance subsidiaries for the year ended December 31, 1998 as filed with
insurance regulatory authorities (in thousands):
Net loss $ 17,024
Statutory capital and surplus $ 94,209
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, 1998, $87.8 million of the insurance 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.
14. CONCENTRATIONS OF BUSINESS
For the year ended December 31, 1998, gross written premiums for the states of
California and New York were $67.6 million and $9.1 million, respectively.
The Company's architects' and engineers' professional liability insurance
business is produced by Risk Administration and Management Company ("RAMCO"), an
unaffiliated managing general agent. For the year ended December 31, 1998,
direct premiums written by RAMCO for the Company amounted to approximately $24.8
million.
15. SEGMENT REPORTING DISCLOSURES
In January 1999 the Company was acquired (see note 17) and underwriting
operations of the Company have been significantly restructured by the acquirer
and have been included in the acquirer's segment information subsequent to the
acquisition. It is expected that the Company's premium volume will decrease by
more than 50% from pre-acquisition levels. Accordingly, pre-acquisition segment
information is not meaningful and has not been provided.
F-13
<PAGE>
16. ACQUISITIONS
On July 13, 1998, the Company acquired all of the issued and outstanding shares
of capital stock of The First Reinsurance Company of Hartford, Oakley
Underwriting Agency, Inc., and F/I Insurance Agency Incorporated (collectively
the "Acquired Businesses") from Dearborn Risk Management Inc. The acquisition
was accounted for using the purchase method of accounting. Total consideration
paid for the Acquired Businesses was approximately $43.6 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 40 years. The Company funded the transaction with
cash of approximately $32.0 million and $11.6 million estimated fair value of
14,444 shares of Series A 4.0% Cumulative Convertible Preferred Stock (Preferred
Stock) of Gryphon. The Preferred Stock is convertible into 643,672 shares of the
Company's common stock reflecting a conversion price of $22.44 per share. In
connection with the transaction, the Company entered into a $55.0 million credit
facility with a group of financial institutions, the proceeds of which were used
to pay the cash portion of the purchase price and to repay existing bank
borrowings.
16. ACQUISITIONS (CONTINUED)
The table below summarizes, on a pro forma basis, the Company's consolidated
results of operations for the year ended December 31, 1998 as if the purchase of
the Acquired Businesses had taken place as of January 1, 1998 (in thousands,
except per share amount):
Total operating revenues $ 142,926
Net loss $ (21,333)
Net loss per share $ (3.18)
17. SUBSEQUENT EVENT
In January 1999, the Company was acquired by Markel Corporation (Markel) as the
result of the completion of a public tender offer. Total consideration paid by
Markel was $150.7 million ($19 per share).
F-14
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
-------------------------------
The Board of Directors
Markel Corporation
We consent to the inclusion of our report dated September 10, 1999, with respect
to the consolidated balance sheet of Gryphon Holdings Inc. and subsidiaries as
of December 31, 1998, and the related consolidated statements of income and
comprehensive income, shareholders' equity, and cash flows for the year then
ended, which report appears in the Form 8-K of Markel Corporation dated
September 22, 1999. We also consent to incorporation by reference of our
aforementioned report in Registration Statements No. 33-28921, No. 33-46706 and
No. 33-61598 on Form S-8 of Markel Corporation.
/s/ KPMG LLP
Richmond, Virginia
September 22, 1999
