-----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, BsHR9nuZWcvrkUMwpoNMYahlhjT7nVqzo41P3akmw5+ypuM3G0e729Zyqz0XeaFa IGCrkUYqejsDXpcbQlft4w== 0000916641-99-000357.txt : 19990430 0000916641-99-000357.hdr.sgml : 19990430 ACCESSION NUMBER: 0000916641-99-000357 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990429 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARKEL CORP CENTRAL INDEX KEY: 0000803509 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 540292420 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13051 FILM NUMBER: 99604630 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-Q 1 FIRST QUARTER REPORT SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [ X ] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 1999 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _____ to _____ Commission File Number 1-13051 MARKEL CORPORATION (Exact name of registrant as specified in its charter) Virginia 54-0292420 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 4551 Cox Road, Glen Allen, Virginia 23060-3382 (Address of principal executive offices) (Zip code) (804) 747-0136 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Number of shares of the registrant's common stock outstanding at April 28, 1999: 5,591,070 1 Markel Corporation Form 10-Q Index Page Number PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Balance Sheets-- March 31, 1999 and December 31, 1998 3 Consolidated Statements of Income and Comprehensive Income-- Three Months Ended March 31, 1999 and 1998 4 Consolidated Statements of Cash Flows-- Three Months Ended March 31, 1999 and 1998 5 Notes to Consolidated Financial Statements-- March 31, 1999 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 PART II. OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K 15 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements MARKEL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets
March 31, December 31, ------------------------------------ 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) ASSETS Investments, available-for-sale, at estimated fair value Fixed maturities (cost of $1,357,147 in 1999 and $1,041,155 in 1998) $ 1,371,792 $ 1,070,978 Equity securities (cost of $187,296 in 1999 and $200,004 in 1998) 285,801 317,887 Short-term investments (estimated fair value approximates cost) 100,502 92,228 - ----------------------------------------------------------------------------------------------------------------------------------- Total Investments, Available-For-Sale 1,758,095 1,481,093 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 658 1,527 Receivables 97,040 68,138 Reinsurance recoverable on unpaid losses 411,115 198,288 Reinsurance recoverable on paid losses 30,635 21,205 Deferred policy acquisition costs 49,016 40,471 Prepaid reinsurance premiums 68,314 42,241 Property and equipment 10,703 7,981 Intangible assets 98,718 35,298 Other assets 60,585 25,022 - ----------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 2,584,879 $ 1,921,264 =================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Unpaid losses and loss adjustment expenses $ 1,406,312 $ 933,830 Unearned premiums 275,426 205,908 Payables to insurance companies 47,416 22,715 Long-term debt (estimated fair value of $200,087 in 1999 and $96,931 in 1998) 198,232 93,219 Other liabilities 89,900 90,291 Company-Obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable Interest Debentures of Markel Corporation (estimated fair value of $141,414 in 1999 and $144,453 in 1998) 150,000 150,000 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 2,167,286 1,495,963 - ----------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity Common stock 25,501 25,415 Retained earnings 318,545 303,878 Accumulated other comprehensive income Net unrealized holding gains on fixed maturities and equity securities, net of taxes 73,547 96,008 - ----------------------------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 417,593 425,301 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 2,584,879 $ 1,921,264 ===================================================================================================================================
See accompanying notes to consolidated financial statements. 3 MARKEL CORPORATION AND SUBSIDIARIES Consolidated Statements of Income and Comprehensive Income
Three Months Ended March 31, ----------------------------- 1999 1998 - ------------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) OPERATING REVENUES Earned premiums $ 108,407 $ 78,898 Net investment income 22,651 17,570 Net realized gains from investment sales 7,063 3,413 Other 378 202 - ------------------------------------------------------------------------------------------------- Total Operating Revenues 138,499 100,083 - ------------------------------------------------------------------------------------------------- OPERATING EXPENSES Losses and loss adjustment expenses 70,150 49,527 Underwriting, acquisition and insurance expenses 41,495 28,067 Amortization of intangible assets 1,256 509 - ------------------------------------------------------------------------------------------------- Total Operating Expenses 112,901 78,103 - ------------------------------------------------------------------------------------------------- Operating Income 25,598 21,980 Interest expense 6,290 5,084 - ------------------------------------------------------------------------------------------------- Income Before Income Taxes 19,308 16,896 Income tax expense 4,634 4,055 - ------------------------------------------------------------------------------------------------- Net Income $ 14,674 $ 12,841 ================================================================================================= OTHER COMPREHENSIVE INCOME (LOSS) Unrealized gains (losses) on securities, net of taxes Net unrealized holding gains (losses) arising during the period $ (17,870) $ 21,251 Less reclassification adjustments for gains included in net income (4,591) (2,218) - ------------------------------------------------------------------------------------------------- Total Other Comprehensive Income (Loss) (22,461) 19,033 - ------------------------------------------------------------------------------------------------- Comprehensive Income (Loss) $ (7,787) $ 31,874 ================================================================================================= NET INCOME PER SHARE Basic $ 2.64 $ 2.34 Diluted $ 2.61 $ 2.27 =================================================================================================
See accompanying notes to consolidated financial statements. 4 MARKEL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows
Three Months Ended March 31, ------------------------------- 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) OPERATING ACTIVITIES Net Income $ 14,674 $ 12,841 Adjustments to reconcile net income to net cash used by operating activities (18,715) (12,902) - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Used By Operating Activities (4,041) (61) - ----------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Proceeds from sales of fixed maturities and equity securities 477,635 92,542 Proceeds from maturities of fixed maturities 19,245 18,482 Cost of fixed maturities and equity securities purchased (391,396) (142,207) Net change in short-term investments (8,274) 26,643 Acquisition of insurance company, net of cash acquired (143,557) -- Other (560) 4,073 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Used By Investing Activities (46,907) (467) - ----------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Additions to long-term debt 105,000 -- Repayments of long-term debt (55,000) -- Other 79 388 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided By Financing Activities 50,079 388 - ----------------------------------------------------------------------------------------------------------------------------------- Decrease in cash and cash equivalents (869) (140) Cash and cash equivalents at beginning of period 1,527 1,309 - ----------------------------------------------------------------------------------------------------------------------------------- Cash And Cash Equivalents At End Of Period $ 658 $ 1,169 ===================================================================================================================================
See accompanying notes to consolidated financial statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--March 31, 1999 1. Principles of Consolidation The consolidated balance sheet as of March 31, 1999, the related consolidated statements of income and comprehensive income for the three months ended March 31, 1999 and 1998, and the consolidated statements of cash flows for the three months ended March 31, 1999 and 1998, are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such consolidated financial statements have been included. Such adjustments consist only of normal recurring items. Interim results are not necessarily indicative of results of operations for the full year. The consolidated financial statements and notes are presented as permitted by Form 10-Q, and do not contain certain information included in the Company's annual consolidated financial statements and notes. 2. Net Income per share Net income per share was determined by dividing net income by the applicable shares outstanding (in thousands):
Three Months Ended March 31, ----------------------------- 1999 1998 - ------------------------------------------------------------------------------------------------- Net income, as reported (Basic and diluted income) $ 14,674 $ 12,841 ================================================================================================= Average common shares outstanding 5,555 5,497 Dilutive potential common shares 66 154 - ------------------------------------------------------------------------------------------------- Average diluted shares outstanding 5,621 5,651 ================================================================================================= 3. Reinsurance The table below summarizes the effect of reinsurance on premiums written and earned (dollars in thousands): Three Months Ended March 31, - ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Written Earned Written Earned Direct $ 131,269 $ 143,428 $ 95,524 $ 98,939 Assumed 2,663 3,355 1,196 1,587 Ceded (34,924) (38,376) (20,273) (21,628) - ----------------------------------------------------------------------------------------------------------------------------------- Net premiums $ 99,008 $ 108,407 $ 76,447 $ 78,898 ===================================================================================================================================
Incurred losses and loss adjustment expenses are net of reinsurance recoveries of $27.3 million and $12.8 million for the three months ended March 31, 1999 and 1998, respectively. 6 4. Company Obligated Mandatorily Redeemable Preferred Securities (8.71% Capital Securities) On January 8, 1997 the Company arranged the sale of $150 million of 8.71% Capital Securities issued under an Amended and Restated Declaration of Trust dated January 13, 1997 (The Declaration) by Markel Capital Trust I (the Trust), a statutory business trust sponsored and wholly-owned by Markel Corporation. Proceeds from the sale of the 8.71% Capital Securities were used to purchase $154,640,000 aggregate principal amount of the Company's 8.71% Junior Subordinated Deferrable Interest Debentures (the Debentures) due January 1, 2046, issued to the Trust under an indenture dated January 13, 1997 (the Indenture). The Debentures are the sole assets of the Trust. The Company has the right to defer interest payments on the Debentures for up to five years. The 8.71% Capital Securities and related Debentures are redeemable by the Company on or after January 1, 2007. Taken together, the Company's obligations under the Debentures, the Indenture, the Declaration and a guarantee made by the Company provide, in the aggregate, a full, irrevocable and unconditional guarantee of payments of distributions and other amounts due on the 8.71% Capital Securities. 5. Comprehensive Income Other comprehensive income (loss) is composed of net unrealized holding gains (losses) on securities arising during the period less reclassification adjustments for gains included in net income. The related tax expense (benefit) on net unrealized gains (losses) on securities was $(9.6) million and $11.4 million for the three months ended March 31, 1999 and 1998, respectively. The related tax expense on the reclassification adjustments for gains included in net income was $2.5 million and $1.2 million for the three months ended March 31, 1999 and 1998, respectively. 6. Acquisition On January 15, 1999, the Company acquired Gryphon Holdings, Inc. and its subsidiaries (Gryphon) as the result of the completion of a public tender offer. The Company's first quarter results include Gryphon's results of operations since the date of acquisition. The acquisition was accounted for using the purchase method of accounting. Total consideration paid for Gryphon was approximately $145.7 million. The excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired was recorded as goodwill and is being amortized using the straight-line method over 20 years. The Company funded the transaction with available cash of approximately $95.7 million and borrowings of approximately $50 million. 7. Segment Reporting Disclosures The Company has five underwriting units focused on specific niches within the Excess and Surplus Lines and Specialty Admitted markets. Excess and Surplus Lines, Professional/Products Liability and Brokered Excess and Surplus Lines write business in the Excess and Surplus Lines market and for purposes of segment reporting are aggregated as one operating segment. Specialty Program Insurance and Specialty Personal and Commercial Lines write business in the Specialty Admitted market and for purposes of segment reporting are aggregated as one operating segment. All investing activities are included in the Investing operating segment. The Company intends to significantly restructure Gryphon's operations and expects that Gryphon's premium volume will decrease by 50% or more. The Gryphon programs that the Company intends to continue will be administered by underwriting units in the Excess and Surplus Lines operating segment. Gryphon's discontinued programs are included in Other for purposes of segment reporting. The Company considers many factors including the nature of the underwriting units' insurance products, production sources, distribution strategies and regulatory environment in determining how to aggregate operating segments. 7 7. Segment Reporting Disclosures (continued) Segment profit or loss for the Excess and Surplus Lines and the Specialty Admitted operating segments is measured by underwriting profit or loss. Segment profit for the Investing operating segment is measured by net investment income and realized gains or losses. The Company does not allocate assets to the Excess and Surplus Lines or the Specialty Admitted operating segments for management reporting purposes. The total investment portfolio is allocated to the Investing operating segment. The Gryphon acquisition increased the total investment portfolio by approximately $300 million in the first quarter of 1999. The Company does not allocate capital expenditures for long-lived assets to any of its operating segments for management reporting purposes. a) Following is a summary of segment profit (loss) (dollars in thousands):
Three Months Ended March 31, 1999 - ----------------------------------------------------------------------------------------------------------------------------------- Excess & Surplus Specialty Lines Admitted Investing Other Total - ----------------------------------------------------------------------------------------------------------------------------------- Segment revenues $ 69,565 $ 25,495 $ 29,714 $ 13,347 $ 138,121 Segment profit (loss) $ 4,094 $ (1,469) $ 29,714 $ (5,863) $ 26,476 Combined ratio 94% 106% -- 144% 103% Segment assets $ -- $ -- $ 1,758,095 $ 826,784 $ 2,584,879 =================================================================================================================================== Three Months Ended March 31, 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Excess & Surplus Specialty Lines Admitted Investing Other Total - ----------------------------------------------------------------------------------------------------------------------------------- Segment revenues $ 53,688 $ 25,210 $ 20,983 $ -- $ 99,881 Segment profit (loss) $ 2,566 $ (1,262) $ 20,983 $ -- $ 22,287 Combined ratio 95% 105% -- -- 98% Segment assets $ -- $ -- $ 1,440,623 $ 432,189 $ 1,872,812 =================================================================================================================================== b) The following summary reconciles segment profit (loss) to income before income taxes (dollars in thousands): Three Months Ended March 31, ----------------------------- 1999 1998 - ------------------------------------------------------------------------------------------------- Income before income taxes Segment profit $ 26,476 $ 22,287 Unallocated amounts Amortization expense (1,256) (509) Interest expense (6,290) (5,084) Other 378 202 - ------------------------------------------------------------------------------------------------- Income Before Income Taxes $ 19,308 $ 16,896 =================================================================================================
8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Three Months ended March 31, 1999 compared to Three Months ended March 31, 1998 The Company underwrites specialty insurance products and programs for niche markets. Significant areas of underwriting include Excess and Surplus Lines, Professional/Products Liability, Brokered Excess and Surplus Lines, Specialty Programs and Specialty Personal and Commercial Lines. Property and casualty insurance for nonstandard and hard-to-place risks is underwritten by the Excess and Surplus Lines unit. Professional liability coverage is offered to physicians and health professionals, insurance companies, attorneys and architects and engineers. Special risk programs provide products liability insurance for manufacturers and distributors and tailored coverages for other unique exposures. In addition, employment practices liability coverage is offered. The Brokered Excess and Surplus Lines unit writes hard-to-place, large general liability, commercial umbrella, products liability and property accounts. Gryphon's continuing lines of business consist of an earthquake exposed California property program, professional liability programs and several specialty casualty programs. Specialty Program Insurance includes coverage for camps, youth and recreation, child care, health and fitness and agribusiness organizations, as well as accident and medical insurance for colleges. The Company also underwrites personal and commercial property and liability coverages for watercraft, motorcycles and automobile lenders. Following is a comparison of gross premium volume and earned premiums by significant underwriting area:
Gross Premium Volume Earned Premiums -------------------------------- -------------------------------- Three Months Ended March 31, Three Months Ended March 31, - ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 (dollars in thousands) 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- $ 26,893 $ 24,953 Excess and Surplus Lines $ 20,799 $ 20,658 33,538 30,756 Professional/Products Liability 27,408 24,402 15,292 14,638 Brokered Excess and Surplus Lines 10,150 8,621 16,981 -- Gryphon Continuing Programs 11,208 -- 16,985 18,311 Specialty Program Insurance 16,066 14,792 6,328 7,807 Specialty Personal and Commercial Lines 9,429 10,418 17,448 -- Gryphon Discontinued Programs 13,347 -- 568 895 Other --- 7 - ----------------------------------------------------------------------------------------------------------------------------------- $ 134,033 $ 97,360 Total $ 108,407 $ 78,898 ===================================================================================================================================
Gross premium volume for the first quarter in 1999 was $134.0 million compared to $97.4 million in the same period in the prior year. The growth was primarily the result of the Gryphon acquisition which added $34.4 million to the Company's gross premium volume in the first quarter of 1999. As the Company re-underwrites the Gryphon programs, the Gryphon business is expected to decline by 50% or more. The Company's core books of business increased 2% in the first quarter of 1999. The Company has maintained its underwriting standards at the expense of premium growth. Excess and Surplus Lines gross premium volume was $26.9 million compared to $25.0 million in 1998. The growth was due to increased production in the Essex special property program and the inland marine program. Premiums from Professional/Products Liability insurance were $33.5 million compared to $30.8 million a year ago. Growth in the employment practices liability and specified professions programs was partially offset by lower production from other lines, including the lawyers and medical malpractice programs. Premiums from Brokered Excess and Surplus Lines totaled $15.3 million in the first quarter of 1999 compared to $14.6 million in 1998. The increase was due to higher gross premium volume in the unit's property and excess and umbrella programs offset by decreased gross premium volume in the casualty programs. 9 Gross premium volume for the Gryphon programs that the Company expects to continue was $17.0 million in the first quarter of 1999. Continuing program gross premium volume consisted of $10.9 million of earthquake exposed California property business which will become part of the Essex special property program, $3.3 million of professional liability business which will become part of the Professional/Products Liability unit and $2.8 million of casualty programs, most of which will be administered by the Brokered Excess and Surplus Lines underwriting unit. Gross premiums from Specialty Program Insurance were $17.0 million compared to $18.3 million in the first quarter of 1998. Increased competition in the youth and recreation and health and fitness programs contributed to the decrease. Specialty Personal and Commercial Lines premiums declined to $6.3 million from $7.8 million in 1998. The decrease was due primarily to the discontinuance of certain portions of the units' property programs. Gross premium volume for the Gryphon programs that were discontinued was $17.5 million. The Company reviewed all of Gryphon's programs at the time of acquisition and determined that certain programs were unprofitable and presented little opportunity to generate underwriting profits in the future. The Company has discontinued these programs and is working with the affected agents and brokers to locate new markets for these risks. Other gross premiums totaled $0.6 million compared to $0.9 million in 1998. Other gross premium volume primarily consisted of facultative reinsurance placed by the Professional/Products Liability unit. Currently many of the Company's products are being adversely affected by increased competition and lower rates in the property and casualty market. The Company does not intend to relax underwriting standards in order to sustain premium volume. Further, the volume of premiums written may vary significantly with the Company's decision to alter its product concentration to maintain or improve underwriting profitability. The Company enters into reinsurance agreements in order to reduce its liability on individual risks and enable it to underwrite policies with higher limits. The Company's net retention of gross premium volume decreased to 74% in the first quarter of 1999 compared to 79% in the prior year. The decrease was due to low retentions on Gryphon's California property program. Total operating revenues rose to $138.5 million from $100.1 million in the prior year. First quarter earned premiums were $108.4 million compared to $78.9 million for the first quarter of 1998. The $29.5 million of growth was the result of $24.6 million of earned premiums for Gryphon and $4.9 million of growth from existing operations. Net investment income increased 29% to $22.7 million in the first quarter from $17.6 million a year ago. The increase was due to the Gryphon acquisition which added approximately $300 million to the investment portfolio and $4.8 million to net investment income in the first quarter of 1999. Realized gains were $7.1 million for the first quarter in 1999 compared to $3.4 million last year. Variability in the timing of realized and unrealized investment gains or losses is to be expected. Total operating expenses for the first quarter were $112.9 million compared to $78.1 million in 1998. The increase resulted primarily from the Gryphon acquisition. 10 Following is a comparison of selected data from the Company's operations (dollars in thousands): Three Months Ended March 31, ------------------------- 1999 1998 - -------------------------------------------------------------------------------- Gross premium volume $ 134,033 $ 97,360 Net premiums written $ 99,008 $ 76,447 Net retention 74% 79% Earned premiums $ 108,407 $ 78,898 Losses and loss adjustment expenses $ 70,150 $ 49,527 Underwriting, acquisition and insurance expenses $ 41,495 $ 28,067 Underwriting profit (loss) $ (3,238) $ 1,304 GAAP ratios Loss ratio 65% 63% Expense ratio 38% 35% - -------------------------------------------------------------------------------- Combined ratio 103% 98% ================================================================================ Underwriting performance is measured by the combined ratio of losses and expenses to earned premiums. The Company reported a combined ratio of 103% in 1999 compared to a combined ratio of 98% in 1998. The underwriting loss was the result of Gryphon's combined ratio of 122% in the first quarter of 1999. Excluding Gryphon, the Company's combined ratio would have been 97% in the first quarter. The 1999 loss ratio increased to 65% from 63% in 1998 due to higher loss ratios on Gryphon's discontinued lines of business. The 1999 expense ratio increased to 38% from 35% in 1998 as a result of Gryphon's higher expense ratio. The Company is working aggressively to reduce Gryphon's expense ratio by leveraging corporate services and reducing overhead costs to those necessary to run Gryphon's reduced operations more efficiently. The Company's five underwriting units focus on specific niches within the Excess and Surplus Lines and Specialty Admitted markets. Excess and Surplus Lines, Professional/Products Liability and Brokered Excess and Surplus Lines write business in the Excess and Surplus Lines market and for purposes of segment reporting are aggregated as one operating segment. The Gryphon programs that the Company intends to continue will be administered by underwriting units in the Excess and Surplus Lines operating segment. Specialty Program Insurance and Specialty Personal and Commercial Lines write business in the Specialty Admitted market and for purposes of segment reporting are aggregated as one operating segment. The combined ratio for the Excess and Surplus Lines segment decreased to 94% in the first quarter of 1999 compared to 95% in 1998. The decrease in the 1999 combined ratio was due to higher reinsurance profit commission in the Excess and Surplus Lines underwriting unit in 1999. The combined ratio for the Specialty Admitted segment increased to 106% in the first quarter of 1999 compared to 105% in 1998. The increase was the result of higher acquisition costs. Amortization of intangible assets was $1.3 million in the first quarter of 1999 compared to $0.5 million last year. The increase was the result of goodwill from the Gryphon acquisition which is being amortized over 20 years. Interest expense was $6.3 million in the first quarter of 1999 compared to $5.1 million in 1998. In January 1999, the Company borrowed $105 million under its $250 million revolving credit facility to complete the acquisition of Gryphon. The Company's effective tax rate for the first quarter of 1999 and 1998 was 24% of income before income taxes. 11 In evaluating its operating performance, the Company focuses on core underwriting and investing results before consideration of realized gains or losses from the sales of investments and expenses related to the amortization of intangible assets. Management believes this is a better indicator of the Company's operating performance because it reduces the variability in results associated with realized investment gains or losses and eliminates the impact of accounting conventions which do not reflect current operating costs. For the first quarter of 1999, income from core underwriting and investing operations increased to $11.3 million, or $2.00 per diluted share, from $11.0 million, or $1.96 per diluted share, in 1998. The increase was due to higher net investment income offset by underwriting losses. First quarter 1999 net income rose 14% to $14.7 million from $12.8 million in 1998. The increase was due to increased net investment income and higher realized gains. Comprehensive income was a loss of $7.8 million, or $1.39 per diluted share, compared to comprehensive income of $31.9 million, or $5.64 per diluted share, in 1998. The decrease was the result of the net decrease in unrealized gains of $4.00 per diluted share in 1999 compared to the net increase in unrealized gains of $3.37 per diluted share in 1998. Financial Condition as of March 31, 1999 The Company's insurance operations collect premiums and pay current claims, reinsurance commissions and operating expenses. Premiums collected and positive cash flows from the insurance operations are invested primarily in short-term investments and long-term bonds. Short-term investments held by the Company's insurance subsidiaries provide liquidity for projected claims, reinsurance costs and operating expenses. On January 15, 1999, the Company acquired Gryphon Holdings, Inc. and its subsidiaries as the result of the completion of a public tender offer. The Company's first quarter results include Gryphon's results of operations since the date of acquisition. The acquisition was accounted for using the purchase method of accounting. Total consideration paid for Gryphon was approximately $145.7 million. The excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired was recorded as goodwill and is being amortized using the straight-line method over 20 years. The Company funded the transaction with available cash of approximately $95.7 million and borrowings of approximately $50.0 million. In addition the Company refinanced $55.0 million of Gryphon's long-term debt. The Company's invested assets increased to $1.8 billion at March 31, 1999 from $1.5 billion at December 31, 1998. The increase was primarily the result of the Gryphon acquisition. The Company's unpaid losses and loss adjustment expenses reserves and paid and unpaid reinsurance recoverables increased to $1.4 billion and $441.8 million at March 31, 1999 from $933.8 million and $219.5 million, respectively. The increases were the result of the purchase of Gryphon and Gryphon's historically higher dependence on reinsurance. For the three month period ended March 31, 1999, the Company reported net cash used by operating activities of $4.0 million, compared to net cash used by operating activities of $0.1 million for the same period in 1998. The Company expects to discontinue over 50% of Gryphon's gross premium volume. As a result, Gryphon's operations are expected to generate negative operating cash flows throughout 1999 which will partially offset the operating cash flow generated by the Company's core underwriting units. For the three month period ended March 31, 1999, the Company reported net cash used by investing activities of $46.9 million compared to $0.5 million in 1998. The difference was the result of the Gryphon acquisition. As of March 31, 1999 and December 31, 1998, the unused balances available under the Company's $250 million revolving credit facility totaled $145 million and $250 million, respectively. In January 1999, the Company borrowed $105 million under the revolving credit facility to complete the acquisition of Gryphon. Funds are available under the facility for general corporate purposes. 12 Shareholders' equity at March 31, 1999 was $417.6 million compared to $425.3 million at December 31, 1998. Book value per share was $74.70 at March 31, 1999 compared to $77.02 at December 31, 1998. The decrease in the first quarter of 1999 was the result of the net decrease in unrealized gains of $22.5 million partially offset by net income of $14.7 million. Other Matters Year 2000 The Year 2000 issue affects virtually all companies and organizations. Many companies have existing computer applications which use only two digits to identify a year in the date field. These applications were designed and developed without considering the impact of the century change. If not corrected these computer applications may fail or create erroneous results in the year 2000. The Company's Year 2000 Strategy The Company has created a Year 2000 team involving associates from all areas of the organization and has charged them with implementing the Company's Year 2000 project. The team has been in place since September of 1997. The project's scope includes all information technology (IT), both internally developed and purchased from third parties, material vendors, producer and customer relationships, and an assessment of the Company's underwriting exposure as a result of the insurance products written by the Company's underwriting units. In addition, the Company is evaluating the Year 2000 exposure to issuers included as part of its investment portfolio. The Company has completed all phases of its Year 2000 compliance project for its material IT systems. The Company has also completed the assessment and remediation phases for its ancillary IT systems and is currently in the testing phase. The Company anticipates completion of all testing of its ancillary IT systems by October 31, 1999. The Company has been in contact with its material business partners to determine their state of readiness with regard to the Year 2000 issue and the potential impact on the Company. The Company has identified the following general categories of business partners as material to the Company's ability to conduct its operations: software, hardware and telecommunication providers, banks and investment brokers, material holdings in the Company's investment portfolio, insurance producers, reinsurers and reinsurance intermediaries, major insurance clients and utilities. Where the Company has determined that the relationship with a business partner is material to its ability to conduct normal operations, the Company has sent letters to the business partner requesting an update on the status of the business partner's Year 2000 initiative. Where deemed necessary, the Company is following up with the business partner to obtain further information. Based on the assurances of these business partners and the Company's internal reviews of information provided, the Company has not currently identified a material business partner that will be noncompliant. However, there can be no assurances that all material business partners will be compliant, and such noncompliance could have a material effect on the Company's financial position and results of operations. The Company expects to complete its review of material business partners by October 31, 1999. The Company has conducted a comprehensive review of its underwriting guidelines and has made the decision to exclude Year 2000 exposures from virtually all insurance policies. The Company began adding exclusions to policies in early 1998. Additionally it is the Company's position that Year 2000 exposures are not fortuitous losses and thus are not covered under insurance policies even without specific exclusions. For these reasons, the Company believes that its exposure to Year 2000 claims will not be material. However, as was the case with environmental exposures, changing social and legal trends may create unintended coverage for exposures by reinterpreting insurance 13 contracts and exclusions. It is impossible to predict what, if any, exposure insurance companies may ultimately have for Year 2000 claims whether coverage for the issue is specifically excluded or included. The cost of the Company's Year 2000 project is estimated to be $1.0 million. Approximately $0.5 million of this amount was incurred as of December 31, 1998. The remainder of the estimated cost of the project is expected to be incurred throughout 1999. All costs of the Year 2000 project have been expensed as incurred. As all of its material IT systems were deemed Year 2000 compliant at December 31, 1998, the Company has not established a contingency plan for noncompliance of its IT systems. At this time, the Company is not aware of any material business partners that will not be Year 2000 compliant. If the Company becomes aware of noncompliant business partners, one option will be to evaluate using other vendors. In many instances the establishment of a contingency plan is not possible or is cost prohibitive. In these situations, noncompliance by the Company or its material business partners could have a material adverse impact on the Company's financial position and results of operations. Subsequent to the Company's acquisition of Gryphon in January 1999, the Company began an assessment of Gryphon's material IT systems for Year 2000 compliance. The Company expects the assessment and remediation phases to continue through the first half of 1999. The Company is converting Gryphon's business to the Company's Year 2000 compliant systems. Market Risk Disclosures Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in equity prices, interest rates, foreign exchange rates and commodity prices. The Company's consolidated balance sheets include assets and liabilities whose estimated fair values are subject to market risk. The primary market risks to the Company are equity price risk associated with investments in equity securities and interest rate risk associated with investments in fixed maturities. From time to time, equity prices and interest rates fluctuate causing an effect on the Company's investment portfolio. The Company has no direct commodity risk, and its exposure to foreign exchange risk is immaterial. The Company's market risk disclosures at March 31, 1999 have not materially changed from those identified at December 31, 1998. "Safe Harbor" Statement This is a "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. Certain statements contained herein are forward-looking statements that involve risks and uncertainties. Future actual results may materially differ from those in these statements because of many factors. For example, the Company continues to significantly reorganize Gryphon's operations, and the scope and impact of these changes cannot be determined at this time. Insurance industry price competition has made it more difficult to attract and retain adequately priced business. Changing legal and social trends can adversely impact the adequacy of loss reserves. State regulatory actions can impede the Company's ability to charge adequate rates and efficiently allocate capital. The frequency and severity of natural catastrophes are highly variable. Economic conditions and interest rate volatility can have significant impacts on the market value of fixed maturity and equity investments. The business community's state of readiness for the Year 2000, the readiness of the Company's vendors and business partners and the Company's potential underwriting exposure to Year 2000 claims are difficult to predict with any certainty. Accordingly, the Company's premium growth, underwriting and investing results have been and will continue to be potentially materially affected by these factors. 14 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The Exhibits to this Report are listed in the Exhibit Index. (b) On January 29, 1999, the Company filed a report on item Form 8-K, reporting under Item 2 and Item 7 the acquisition of Gryphon Holdings, Inc. and its subsidiaries. The following financial statements of Gryphon Holdings, Inc. were filed as part of the Form 8-K: Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Consolidated Balance Sheets as of September 30, 1998 and December 31 1997 (Unaudited) Consolidated Statements of Income for the Nine Months Ended September 30, 1998 and 1997 (Unaudited) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 (Unaudited) Notes to Consolidated Financial Statements (Unaudited) The following Markel Corporation pro forma financial information were filed as part of the Form 8-K: Introduction Pro Forma Consolidated Balance Sheet as of September 30, 1998 Pro Forma Consolidated Statement of Income and Comprehensive Income for the Nine Months Ended September 30, 1998 Pro Forma Consolidated Statement of Income and Comprehensive Income for the Year Ended December 31, 1997 Notes to Pro Forma Consolidated Financial Statements. 15 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, this 29th day of April, 1999. Markel Corporation By Alan I. Kirshner -------------------------------------- Alan I. Kirshner Chief Executive Officer (Principal Executive Officer) By Anthony F. Markel -------------------------------------- Anthony F. Markel President (Principal Operating Officer) By Steven A. Markel -------------------------------------- Steven A. Markel Vice Chairman By Darrell D. Martin -------------------------------------- Darrell D. Martin Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 16 Exhibit Index Number Description 27 Financial Data Schedule for period ended March 31, 1999 * * Filed electronically with the Commission's operational EDGAR system 17 EX-27 2 EXHIBIT 27 - FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from the financial statements contained in the Form 10-Q for the quarterly period ended March 31, 1999 for Markel Corporation and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1999 MAR-31-1999 1,371,792 0 0 285,801 0 0 1,758,095 658 30,635 49,016 2,584,879 1,406,312 275,426 0 0 198,232 0 0 25,501 392,092 2,584,879 108,407 22,651 7,063 378 70,150 14,890 26,605 19,308 4,634 14,674 0 0 0 14,674 2.64 2.61 0 0 0 0 0 0 0 Does not include Company-Obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable Interest Debentures of Markel Corporation. Markel adopted Statement of Financial Accounting Standards No. 128 "Earnings Per Share" effective December 31, 1997. The Financial Data Schedules tags and refer to Basic EPS and Diluted EPS, respectively, as these terms are set forth in Statement of Financial Accounting Standards No. 128. Available on an annual basis only.
-----END PRIVACY-ENHANCED MESSAGE-----