-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RBMQESazbEizHcfkD5wiCQMLhNTRhcU9vTn2a7PQJ24DKGC47LKDNxyHPvWbuUsJ o3uFwzp5PIEzt5VMxKJ4Ww== 0000916641-96-000236.txt : 19960410 0000916641-96-000236.hdr.sgml : 19960410 ACCESSION NUMBER: 0000916641-96-000236 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960409 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARKEL CORP CENTRAL INDEX KEY: 0000803509 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 540292420 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-15458 FILM NUMBER: 96545524 BUSINESS ADDRESS: STREET 1: 4551 COX RD CITY: GLEN ALLEN STATE: VA ZIP: 23060-3382 BUSINESS PHONE: 8047470136 MAIL ADDRESS: STREET 1: P O BOX 2009 CITY: GLEN ALLEN STATE: VA ZIP: 23058-2009 10-K405/A 1 MARKEL 10-K405/A 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 EX-13 2 EXHIBIT 13.1 Selected Financial Data (dollars in millions, except per share data)
Years Ended December 31, 1995 1994 1993 ------ ------- ------ 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
1992 1991 1990 1989 1988 1987 1986 10-Year CAGR(7) ------ ------ ------ ------ ------ ------ ----- --------------- 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 -
(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. CONSOLIDATED BALANCE SHEETS
December 31, 1995 1994 ---------- ---------- (dollars in thousands) 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 ========== ==========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 1995 1994 1993 -------- -------- -------- (dollars in thousands, except per share data) OPERATING REVENUES 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 ======== ======== ========
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1993, 1994, 1995 ----------------------------------------------------------- Common Common Retained Shares Stock Earnings Other Total ------ ------- -------- ------- -------- (in thousands) 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 ====== ======= ======== ======= ========
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995 1994 1993 --------- --------- --------- (dollars in thousands) 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 ========= ========= =========
See accompanying notes to consolidated financial statements. 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. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. Investments a) Following is a summary of investments (dollars in thousands):
December 31, 1995 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- 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 ========= ========== ========== =========
December 31, 1994 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- 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 ========= ========== ========== =========
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. 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. 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 ======== ======== ======== 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 ======= 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% ==== ==== ==== 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):
December 31, 1995 1994 -------- -------- 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 ======== ========
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. 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):
Years Ended December 31, 1995 1994 1993 -------- -------- -------- 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 ======== ======== ========
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. 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. 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, 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:
Years Ended December 31, 1995 1994 1993 -------- -------- -------- 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 ======== ======== ========
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. 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. 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. 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. 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 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):
Mar. 31 June 30 Sept. 30 Dec. 31 ------- ------- -------- -------- 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
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. 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. 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. 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):
Years Ended December 31, 1995 1994 1993 --------- --------- --------- 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% ========= ========= =========
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 $25 million, respectively. The proceeds of the November issue and cash on hand were used to retire variable rate bank debt, while the proceeds of the February issue were used to retire certain capital lease obligations. Interest expense in 1994 increased due primarily to higher rates associated with the fixed rate bond issues and interest on short-term borrowings. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) [Graph] Earnings from Core Operations ($ 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. 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):
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 -------- -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- 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 =======
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. 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. 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. 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. 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. 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. 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. 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. 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 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 -----END PRIVACY-ENHANCED MESSAGE-----