UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1999
Commission File Number 1-13051
MARKEL CORPORATION
(Exact name of registrant as specified in its charter)
A Virginia Corporation
IRS Employer Identification No. 54-0292420
4521 Highwoods Parkway, Glen Allen, Virginia 23060-6148 (Address of principal
executive offices) (Zip code)
Telephone (804) 747-0136
(Registrant's telephone number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, no par value
New York Stock Exchange
(title and class and name of the exchange on which registered)
Securities Registered Pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K . [ ]
The aggregate market value of the shares of the registrant's Common Stock held
by non-affiliates as of January 31, 2000 was approximately $657,842,048.
The number of shares of the registrant's Common Stock outstanding at January 31,
2000: 5,597,789.
Documents Incorporated By Reference
The portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders scheduled to be held on May 24, 2000, referred to in Part III.
Index and Cross References-Form 10-K Annual Report
Item No. Page
Part I
1. Business 10-21
1a. Executive Officers of the Registrant 66
2. Properties (note 5) 33-34
3. Legal Proceedings (note 15) 42
4. Submission of Matters to a Vote of Security Holders NONE
Part II
5. Market for the Registrant's Common
Equity and Related Stockholder Matters 65
6. Selected Financial Data 22-23
7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 51-64
7a. Qualitative and Quantitative
Disclosures About Market Risk 60-63
8. Financial Statements and Supplementary Data
The response to this item is submitted in Item 14.
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures NONE
Part III
10. Directors and Executive Officers of the Registrant*
11. Executive Compensation*
12. Security Ownership of Certain Beneficial Owners and Management*
13. Certain Relationships and Related Transactions*
* Items Number 10,11,12, and 13 will be incorporated by reference from the
Registrant's 2000 Proxy Statement pursuant to instructions G(1) and G(3) of the
General Instructions to Form 10-K.
Part IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a. Documents filed as part of this Form 10-K
Markel Corporation & Subsidiaries
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Item No. Page
(1) Financial Statements
Consolidated Balance Sheets at
December 31, 1999 and 1998 24
Consolidated Statements of Income
and Comprehensive Income for the
Years Ended December 31, 1999,
1998, and 1997 25
Consolidated Statements of
Changes in Shareholders' Equity
for the Years Ended December 31,
1999, 1998, and 1997 26
Consolidated Statements of Cash
Flows for the Years Ended
December 31, 1999, 1998,
and 1997 27
Notes to Consolidated Financial
Statements for the Years Ended
December 31, 1999, 1998, and 1997 28-48
Independent Auditors' Report 49
(2) Schedules have been omitted since
they either are not required or are
not applicable, or the information
called for is shown in the Consolidated
Financial Statements.
(3) See Index to Exhibits for a list of
Exhibits filed as part of this report
b. Reports on Form 8-K. On November 16, 1999, the Company filed an amended
report on Form 8-K/A, reporting under Item 2 and Item 7 the acquisition of
Gryphon Holdings, Inc. and subsidiaries.
The following financial statements of Gryphon Holdings, Inc. were filed as
part of the Form 8-K/A:
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)
c. See Index to Exhibits and Item 14a(3)
d. See Index to Financial Statements and Item 14a(2)
2
THE CORPORATE PROFILE
Markel Corporation markets and underwrites specialty insurance products and
programs to a variety of niche markets. In each of these markets, we seek to
provide quality products and excellent customer service so that we can be a
market leader. Our financial goals are to earn consistent underwriting profits
and superior investment returns to build shareholder value.
THE MARKEL STYLE
Markel has a Commitment to Success. We believe in hard work and a zealous
pursuit of excellence while keeping a sense of humor. Our creed is honesty and
fairness in all of our dealings.
The Markel way is to seek to be a market leader in each of our pursuits.
We seek to know our customers' needs and to provide our customers with quality
products and service.
Our pledge to our shareholders is that we will build the financial value of
our Company. We respect our relationship with our suppliers and have a
commitment to our communities.
We are encouraged to look for a better way to do things...to challenge
management. We have the ability to make decisions or alter a course quickly.
The Markel approach is one of spontaneity and flexibility. This requires a
respect for authority but a disdain of bureaucracy.
At Markel, we hold the individual's right to self-determination in the
highest light, providing an atmosphere in which people can reach their personal
potential. Being results oriented, we are willing to put aside individual
concerns in the spirit of teamwork to achieve success.
Above all, we enjoy what we are doing. There is excitement at Markel, one
that comes from innovating, creating, striving for a better way, sharing success
with others...winning.
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1999
TO OUR BUSINESS PARTNERS
We measure our success in building shareholder value by focusing on growth
in book value per share over the long term. Book value per share declined 11% to
$68.59 due to disappointing investment results. In spite of that, 1999 was a
very good year overall. Our core underwriting results remained exceptionally
good at virtually every operating division in the Company. This is a real
tribute to our underwriters given the very difficult market conditions they
faced. Additionally, we should remember that over the past five years we
compounded book value per share at a 22% annual rate. While it would be pleasant
to report consistently improving results, it would be unrealistic given the
nature of our business. Insurance and financial markets are volatile by nature
and the volatility itself creates significant business opportunities for Markel.
The year also included the acquisition and amalgamation of Gryphon as well
as the announcement of the plan to acquire Terra Nova (Bermuda) Holdings, Ltd.
and the agreement to acquire the renewal rights to Acceptance Insurance
Companies' Scottsdale business. Despite the setback in our book value growth
during 1999, we believe we continued to build the intrinsic value of the company
and positioned ourselves to take advantage of even more opportunities in the
future.
1999 Financial Review
After several years of very modest growth, operating revenues increased 23%
to $524 million in 1999. While the acquisition of Gryphon was responsible for
the largest part of this increase, in the closing months of the year we saw
significant increases in written premiums in virtually every line of business.
In the fourth quarter, excluding the Gryphon acquisition, written premiums
increased 26%. This is a very positive sign and we are certainly hopeful it will
continue.
Earned premiums increased 31% to $437 million and we had a small
underwriting loss with a combined ratio of 101%. This was the result of
excellent performance from almost every operating division enabling us to
partially offset the costs associated with acquiring Gryphon. Our core business
units enjoyed a combined ratio of 96% exclusive of the Gryphon business. This is
truly excellent performance and compares favorably to our 1998 combined ratio of
98%.
Net investment income increased 23% to $88 million primarily due to the
growth in the investment portfolio as a result of the Gryphon acquisition. In
the fourth quarter, to create tax savings, we realized $10 million in investment
losses. At the same time we replaced the bonds sold with bonds of similar
quality and duration. As a result, we reported $1 million in net losses from the
sale of investments in 1999 as compared to $21 million in realized gains in
1998.
4
HIGHLIGHTS
FINANCIAL HIGHLIGHTS
(in millions, except per share data) 1999 1998 1997
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Gross premium volume $ 595 $ 437 $ 423
Net written premiums 428 344 330
Earned premiums 437 333 333
Net income 41 57 50
Comprehensive income (loss) (40) 68 92
GAAP combined ratio 101% 98% 99%
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Total investments $ 1,623 $ 1,481 $ 1,408
Total assets 2,455 1,921 1,870
Long-term debt 168 93 93
8.71% Capital Securities 150 150 150
Shareholders' equity 383 425 357
Debt to total capital 35% 25% 28%
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PER SHARE DATA
Common shares outstanding (in thousands) 5,590 5,522 5,474
Net income (diluted) $ 7.20 $ 10.17 $ 8.92
Total investments $290.36 $268.22 $257.27
Book value $ 68.59 $ 77.02 $ 65.18
Growth in book value (11%) 18% 33%
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OPERATING HIGHLIGHTS
. Combined ratio of 96% in core underwriting units, consolidated combined
ratio of 101% due to Gryphon discontinued programs
. Book value per share decreased 11% to $68.59, five year compound annual
growth rate of 22%
. Successful integration of Gryphon continuing programs into core
underwriting units
. Announced planned acquisition of Terra Nova (Bermuda) Holdings, Ltd.
[GRAPH]
Net Income Total Investments Book Value Per Share
1989 1994 1999 1989 1994 1999 1989 1994 1999
- ---- ---- ---- ---- ---- ---- ---- ---- ----
$ in millions $ in millions $ per share
14 19 41 66 612 1,623 11.69 25.71 68.59
69
The brightest spot of the year was the outstanding underwriting
performance of our core insurance company subsidiaries.
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Net income was $41 million compared to $57 million last year. Earnings per
share were $7.20 on a diluted basis compared to $10.17 last year. As a result of
the reduction in the market value of our invested assets, we had a comprehensive
loss of $40 million compared to comprehensive income last year of $68 million.
Shareholders' equity declined 11% to $383 million, or $68.59 per share.
Excellent Results From Core Underwriting Businesses
The brightest spot of the year was the outstanding underwriting performance
of our core insurance company subsidiaries, which produced an enviable 96%
combined ratio in spite of another year of intense, irrational competition. This
is clear testimony to our straightforward and continuous focus on underwriting
profits and the unwavering dedication of our associates to that goal.
The Excess and Surplus Lines units, Essex (Excess and Surplus Lines),
Evanston (Professional and Products Liability) and Investors (Brokerage Excess
and Surplus Lines) generated a 94% combined ratio while showing some solid,
well-controlled growth.
Essex volume grew to $186 million from $122 million as a result of the
smooth assumption of the Gryphon DIC property book and moderate increases in
their other core lines--property, casualty, inland marine and ocean marine.
Steve Vaccaro, President of Essex, and his troops continue to produce results
that are the envy of the industry.
Evanston, led by continued increases in its Employment Practices Liability
volume, along with the addition of a book of Errors and Omissions business
acquired as a part of the Gryphon transaction, grew to $154 million from $124
million. In addition, they successfully experimented with some creative new
production sources. At year end, Mike Rozenberg accepted sole responsibility for
this subsidiary, as a result of Paul Springman's promotion to President,
Markel--North America. Mike has been Paul's partner in the management of
Evanston for over eight years, so the transition will be completely seamless.
In October, Jeremy Cooke, President of Investors, accepted the Chief
Operating Officer role of Terra Nova, passing the mantle of leadership on to Rod
Ayer, previously Senior Vice President. Under the combined leadership of Jeremy
and Rod, Investors put impressive numbers together exhibiting both a volume
increase ($85 million from $65 million) and a gratifying underwriting profit.
The Specialty Admitted subsidiaries, Markel Insurance Company (Specialty
Programs) and Markel American Insurance Company (Specialty Personal and
Commercial Lines), made notable strides in both size and profitability during
1999 as the combined ratio improved to 101% from 102% in 1998 and 110% in 1997.
Markel Insurance Company, which has historically produced outstanding loss
ratios, aggressively attacked its expense ratio through a combination of
significant expense reductions, a new corporate structure with emphasis on sales
and marketing, and some creative new product experimentation. We are comfortable
that Britt Glisson and his energized staff will significantly contribute to the
underwriting profits this year and for many years to come.
Markel American Insurance Company, now led by Timberlee Grove, who was
promoted to President in August 1999, also had an outstanding year of growth and
profitability. Their operation, bolstered by the acquisition in April 1999 of a
book of yacht business, grew to $50 million in volume. They also completed the
transition to a completely autonomous unit with all product underwriting and
support services under the same roof in Pewaukee, Wisconsin.
As important as acquisitions have been, and will continue to be, we could
not expand our horizons without the knowledge and comfort that our core
operations are well managed and will continue to produce the outstanding results
that we have come to expect. We are fortunate and extremely grateful to have
this talented, motivated group of associates.
Investment Philosophy and Results
Our fixed income portfolio, the largest part of our investment portfolio,
has a duration that ranges between 4 and 5 years. At the beginning of 1999 we
were earning a tax equivalent yield of approximately 6.1%. By year-end, this
yield increased to 7.1%. This rise in yield caused a decline in the value of our
portfolio. Unrealized gains
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1999
declined $67.3 million and we realized losses of $13.7 million. This market
value decline was about 6% and almost completely offset our return from the
investment income of 6.9%, resulting in a total return on our fixed income
portfolio of only .9%.
Changes in interest rates cause changes in book value, which can be extreme
in any particular year. However, over a longer period of time, the fluctuations
in value related to interest rate movements tend to have only a modest impact on
our results. This is why we prefer to measure our performance over five year
periods. Additionally, the duration of our fixed income portfolio is
conservatively matched to the duration of our liabilities and is well within a
reasonable tolerance for interest rate risk.
We believe that in the long term we can significantly enhance shareholder
value by allocating significant investment funds to common equities. We do not
think about risk in the context of short-term volatility but rather in the
context of a permanent loss of capital. We buy shares of companies where we
believe the business will earn good returns on capital and which are being run
by honest and talented, shareholder oriented managers who are building the value
of the enterprise. We expect to share in the increased value of the business
over the long term. (We hope you, as a shareholder of Markel, have a similar
view with regard to your investment.) Our result in equity investing was
disappointing in 1999. In most cases we are pleased with the companies we have
selected and believe the business fundamentals are sound even though stock
market prices have suffered.
We concentrate our equity portfolio in relatively few securities. At
year-end our top five positions represented over 32% of our portfolio and the
top 20 represented 71%. While diversification might reduce short-term
volatility, we do not believe it maximizes long-term total return. We believe we
can earn the best returns by concentrating our focus and our portfolio in
promising areas where we have the best understanding and knowledge. In 1999 our
concentration in other insurance stocks contributed to our disappointing
results, and our failure to invest in the red hot portions of the NASDAQ market
prevented us from enjoying the well advertised, but narrowly based, returns of
the bull market.
In 1999 our total return on equity investing was a loss of 10%. This
compares very unfavorably to the major indexes, which include the Dow Jones
Industrial Average (up 25%), the S&P 500 (up 20%) and the NASDAQ Index (up 86%).
Over the past five years our performance in equities was up an average of 14%,
and for the past ten years 13%. These results are obviously much better than
1999 and are
6
We invest with a serious regard
for the risks we assume.
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results which we believe will in fact be more like our long-term performance in
the future. In managing equity investments, we do not seek to match or beat any
specific market index. In addition to selecting individual businesses with good
returns on capital as well as honest and talented management, we seek to invest
at prices that allow for some margin of safety for our inevitable mistakes in
judgement about those attributes. Our goal as investors, rather than traders, is
to earn returns similar to those intrinsically earned by the companies
themselves in the course of conducting their business. We invest in the equity
markets because over time we expect to earn more than we would earn by investing
in the fixed income market, always attempting to do so without taking on
significant risks of permanent loss of capital.
We have avoided the technology sector due to our view that many of the
businesses represented by the stocks that might be exciting trading vehicles
were not clearly businesses with sufficiently durable returns on capital,
management attributes, and reinvestment opportunities to qualify for what we
seek in equity investments. While you as a shareholder may be justifiably
unhappy about the opportunities that have passed us by so far, we think you may
also someday appreciate the fact that we have not put any of your capital at
risk in stocks with valuations that make ownership an extremely high risk
proposition. The seesaw of risk versus reward has been all focused on the reward
side with too little regard for risk. We invest with a serious regard for the
risks we assume.
Acquisition of Gryphon
In January 1999 we completed the acquisition of Gryphon. This purchase was
intended to provide profitable premium volume as well as investment
opportunities at a reasonable cost. In the first year of this transaction we
believe we are very much "on schedule as planned," however it remains too early
to proclaim the deal a success.
Our first goal was to acquire profitable premium volume. We completed our
re-underwriting and currently expect the acquired business to contribute about
$70 million in gross written premium in the year 2000. We also expect this
business to generate underwriting profits. This premium forecast is slightly
short of our original goal of $80 to $100 million.
A second goal was to re-underwrite and discontinue the unprofitable lines
of business as quickly as possible. We completed this very effectively as we
eliminated all of the business that we believed caused problems for Gryphon. The
underwriting loss on this run-off business was somewhat higher than we
originally estimated, however, this cost is now behind us.
Another goal was to increase our investment leverage. With the addition of
$300 million to our portfolio, this goal was achieved. Because interest rates
increased throughout the year, we did not earn the returns we anticipated on
this portfolio, however the investments are productive and will be with us for
years to come.
The acquisition price of Gryphon was $146 million. Because a majority of
the business is being transferred to other Markel business units, we have sold
as licensed shells some of our insurance companies to recapture as much of our
capital investment as possible. We sold the Calvert Insurance Company for $22
million in August 1999 and although not directly related to Gryphon, sold
Investors Insurance Company as a shell for $54 million in January 2000. These
transactions effectively enable us to re-allocate $76 million in capital. In
addition, the gain on Calvert reduced goodwill by $6 million and the sale of
Investors will represent a gain of $8 million.
Our final objective is to manage the claims process in an effective manner
and to maintain appropriate loss reserves for our outstanding exposures. In last
year's report we said that we believed the Gryphon reserves were adequate but
not with the margin of safety we would prefer. To date we have made a great deal
of progress in evaluating, reserving and settling the outstanding claims. As
might be expected, there have been some areas where we have had good news and
some where we have been disappointed. Unfortunately, we had to deal with several
lines of business where Gryphon did an extremely poor job of managing its risk.
As a result we have continued to strengthen Gryphon loss reserves but are still
slightly short of our desired margin of safety.
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[LOGO OF MARKEL]
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1999
The process of merging the Gryphon organization into Markel involved a
great deal of work by numerous associates throughout the organization. To the
extent that this has prevented us from doing other things, it certainly
represents an additional cost. However, we learned a great deal from this
experience and developed new skills. We appreciate the extraordinary efforts of
so many of our associates to make the Gryphon acquisition successful.
Planned Acquisition of Terra Nova
In August 1999 we announced an agreement to acquire Terra Nova (Bermuda)
Holdings, Ltd. Terra Nova is a specialty property and casualty insurance and
reinsurance company with headquarters in Bermuda and principal operations in
London. The Terra Nova business is split between direct insurance and
reinsurance; the London market and Lloyd's; and marine and non-marine. It
largely writes short tail business.
Throughout the fall we worked with Terra Nova to begin the integration
process and to complete the transaction. Unexpectedly, Terra Nova reported
significant losses for the fourth quarter and for the year. As a result, in
January we renegotiated this transaction and agreed to revised terms. The
transaction is currently expected to close on March 24, 2000.
In purchasing Terra Nova we believe we will acquire a high quality
international insurance business at a fair price. While the company suffered
from some recent problems and will probably finish the year 2000 with a combined
ratio in excess of 100%, we believe that its people will embrace the Markel
Style and return their focus to consistently earning underwriting profits.
The total purchase price will be approximately $660 million. Approximately
half is being paid in cash and half in securities. We expect to issue
approximately 1.8 million common shares to complete this transaction. In
addition, we will issue contingent value rights which are intended to increase
the likelihood that a Terra Nova shareholder will be able to realize a minimum
value of $185 for each share of Markel received. While the potential cost is
very real, the contingent value rights will become worthless if our stock
consistently trades over $185 in the next 30 months. We are always thoughtful
about the cost of issuing stock and believe the contingent value rights were an
effective way to complete this transaction and minimize the number of shares we
would need to issue.
Terra Nova is slightly larger than Markel. In 1999 its gross written
premium was $865 million, and at December 31, 1999 its investment
8
One of our strengths is that we have an
experienced, talented and motivated staff.
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portfolio was $1.5 billion and its shareholders' equity was $439 million. Terra
Nova has 698 associates in its organization. Acquiring Terra Nova gives Markel
shareholders significant increases in premium volume and investment portfolio
per share as shown on the following table. We believe this additional operating
and financial leverage will add value to the company, although it will only do
so when we achieve underwriting profitability. Book value per share also
increases substantially, however, this is simply because we are issuing
additional Markel stock at a price in excess of our book value.
MARKEL AND TERRA NOVA COMBINED
SELECTED PRO FORMA INFORMATION
DECEMBER 31, 1999
(in millions, except per share data)
Pro Forma
Markel Combined
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Premium Volume $ 595 $1,460
Per Share $ 106 $ 186
Investment Portfolio $1,623 $3,003
Per Share $ 290 $ 409
Shareholders' Equity $ 383 $ 677
Per Share $ 69 $ 92
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Investment Leverage 4.2 to 1 4.4 to 1
================================================================================
The transaction will also add a significant amount of goodwill to our balance
sheet. This will be amortized over 20 years so we will have an additional
non-cash annual amortization charge. Goodwill on any balance sheet should be
viewed with caution and only future results can truly validate its real value.
We believe the premium volume, investments, business relationships and
experienced staff will more than justify the goodwill.
Since the transaction was announced in August, we have been working very
closely with the Terra Nova organization to make the transition as seamless as
possible. In most respects we share similar values and as a result we believe
the transition will be smooth. The Markel Style and our "Commitment to Success"
is being shared throughout the Terra Nova organization.
Expanding the Board and Management Team
The acquisition also gives us the opportunity to strengthen our Board of
Directors and our management team. We are particularly pleased that Nigel
Rogers, Jack Byrne and Mark Byrne will be joining our Board of Directors. Nigel
Rogers has been President and Chief Executive Officer of Terra Nova since May
1998 and has been working in the London insurance market for over 20 years.
Nigel will continue to run our international operations following the
transaction. Jack Byrne is a director and large shareholder of Terra Nova. He is
also Chairman and Chief Executive Officer of White Mountains Insurance Group, a
Bermuda-based reinsurance holding company. Jack has enjoyed a long and
illustrious career in the insurance industry having previously served as a
senior executive of both Fireman's Fund and GEICO. Mark Byrne is Jack's son and
is also a director and shareholder of Terra Nova. Mark is Chairman and President
of West End Capital Management (Bermuda) Limited, a Bermuda-based investment
management company. Mark was previously a Managing Director, Global Fixed Income
Arbitrage, for Credit Suisse First Boston.
One of our strengths is that we have an experienced, talented and motivated
staff. An unexpected benefit of acquiring Terra Nova is that it has created new
opportunities for our associates. With our expanding organization we promoted
Paul Springman to President of our North American operations. Paul previously
served as President and Chief Operating Officer of one of our largest operating
units, Shand/Evanston. Paul has over 20 years of experience in the insurance
industry and is a past President of the National Association of Professional
Surplus Lines Offices (NAPSLO). We are confident that Paul will help us continue
to meet our performance objectives in our U.S. operations. Another change made
possible by the acquisition is the transfer of Jeremy Cooke to Chief Operating
Officer of Terra Nova in London. Jeremy previously served as President and Chief
Executive Officer of our Investors
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1999
Insurance Group. Jeremy began his career at Lloyd's over 25 years ago, then
founded and built his own brokerage business which he sold in 1986. Jeremy is
also a past President of NAPSLO. We are extremely pleased that Jeremy will be
working with Nigel and his team in London.
We are proud of the depth of the team we have built and our bench strength.
Quality Balance Sheet and Loss Reserves
We have often stated that maintaining a quality balance sheet with a strong
loss reserve position is a fundamental principle of our Company. In the past
year many insurance companies had to fix balance sheet problems and acknowledge
their corresponding underwriting problems. Our approach is to seek to maintain a
high degree of confidence in the quality of our loss reserve provisions and to
do so without being influenced by the desire to achieve short-term earnings
goals. We continue to believe that our strong balance sheet means more than our
quarterly earnings statement.
This philosophy, coupled with our disciplined underwriting standards, puts
us in a position to take advantage of volatility and market opportunities. Many
others today are suffering from poor underwriting and in many cases, worse
accounting. The economic reality created by these events is now manifesting
itself. Our discipline, both in underwriting and in managing our balance sheet,
is creating real business opportunities and value for our shareholders.
Acceptance Business
In late December we were able to reach an agreement with Acceptance
Insurance Companies to purchase the renewal rights to their excess and surplus
business produced from their Scottsdale office. As a result we formed Markel
Southwest Underwriters and staffed it with former associates of Acceptance. The
business we retain will be priced and underwritten to our standards.
In this transaction we are assuming none of the existing business. We will
administer the runoff on behalf of Acceptance and may offer renewals in one of
our companies based on our underwriting and pricing guidelines. Our goal is to
manage this process to achieve an underwriting profit. We will be administering
the runoff of approximately $100 million and expect to walk away from half or
more of this business. As Paul Springman wrote to our new associates, "We fully
expect that premium volume (at Markel Southwest) will fall this year, and will
fall significantly! That's not only expected, it's OK! When we look at our
numbers at the end of this year, the only meaningful barometer will
10
We believe we have the people, the capital, and the business culture
to respond quickly and efficiently to opportunities in the market.
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be the combined ratio, not the top line. No one should be concerned about market
share. Our focus needs to be on underwriting profits."
Paul's comments are a good example of our culture of focusing on
underwriting results. This philosophy extends throughout our organization and is
a major reason for our success.
Trends in the Market
Beginning late in 1999 and continuing into this year we are seeing many
more opportunities to write business on our terms and conditions. There are many
examples of areas where companies are exiting classes of business that have
proven to be difficult to write profitably. Additionally, many are looking to
get rate increases. While it is far too early to call this a change in the
market cycle, it represents the first time in many years that the insurance
market environment showed any signs of improvement. There remains too much
capacity in the industry, however, it is clear that the industry's return on
this capital has been dismal. Maybe the time is coming when the industry will
run its affairs to earn reasonable returns.
We believe we have the people, the capital, and the business culture to
respond quickly and efficiently to opportunities in the market.
Markel Associates
As we enjoy the success of the past and look forward to our bright future,
we are especially thankful for the hard work and zealous pursuit of excellence
demonstrated by our 883 associates, nearly all of whom are also shareholders.
Our greatest pleasure stems from the fact that we are building an outstanding
organization. Our results depend on each associate making important
contributions and achieving individual goals every day. These individuals
working as a team make our success possible. They share a vision and a passion
for what our Company represents and we are confident that they will help us
continue that success into the future.
On behalf of all our associates, we appreciate our shareholder partners,
whose long-term confidence and support helps us achieve our goals.
/s/ Alan I. Kirshner
Alan I. Kirshner
Chairman of the Board and Chief Executive Officer
/s/ Anthony F. Markel
Anthony F. Markel
President and Chief Operating Officer
/s/ Steven A. Markel
Steven A. Markel
Vice Chairman
/s/ Darrell D. Martin
Darrell D. Martin
Executive Vice President and Chief Financial Officer
[PHOTO]
From left to right: Anthony F. Markel, Darrell D. Martin,
Steven A. Markel, Alan I. Kirshner
11
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
BUSINESS OVERVIEW
Markel Corporation (the Company), an insurance holding company, writes
specialty insurance products and programs for a variety of niche markets
through its insurance subsidiaries. The Company believes that its specialty
product focus and niche market strategy enable it to develop expertise and
specialized market knowledge.
Specialty Insurance
================================================================================
The specialty insurance market differs significantly from the standard
market. In the standard market, insurance rates and forms are highly
regulated by state insurance departments, products and coverages are
largely uniform with relatively predictable exposures, and companies tend
to compete for customers on the basis of price. In contrast, the specialty
market provides coverage for risks that do not fit the underwriting
criteria of the standard carriers. Competition tends to focus less on price
and more on availability, service and other value-based considerations.
While specialty market exposures may have higher insurance risks than their
standard market counterparts, Markel manages these risks to achieve higher
financial returns. To reach its financial and operational goals, the
Company must have extensive knowledge and expertise in its chosen markets.
Most of the Company's risks are considered on an individual basis, and
restricted limits, deductibles, exclusions and surcharges are employed in
order to respond to distinctive risk characteristics.
Markets
================================================================================
The Company competes in two distinct areas of the specialty insurance
market: the Excess and Surplus Lines segment (E&S) and the Specialty
Admitted segment. See note 18 in the notes to consolidated financial
statements for additional segment reporting disclosures.
The E&S market focuses on hard to place risks and risks that admitted
insurers specifically refuse to write. E&S eligibility allows the Company's
insurance subsidiaries to underwrite nonstandard market risks with more
flexible policy forms and unregulated premium rates. This typically results
in coverages that are more restrictive and more expensive than the standard
admitted market. In 1998 the E&S market represented approximately $10
billion, or 3%, of the entire $297 billion property and casualty (P&C)
industry.*
The Company is the sixth largest domestic E&S writer in the United States
as measured by direct premium writings.* Three of the Company's
underwriting units, Excess and Surplus Lines, Professional/Products
Liability, and Brokered Excess and Surplus Lines, write in the E&S market.
In 1999, on a consolidated basis, the Company controlled $462 million of
E&S business.
The Company also writes business in the specialty admitted market. Most of
these risks are unique and hard to place in the standard market, but for
marketing and regulatory reasons, must remain with an admitted insurance
company. In 1998 the specialty admitted market represented $9 billion, or
3%, of the entire P&C industry as measured by direct premium writings. The
specialty admitted market is subject to more state regulation than the E&S
market, particularly with regard to rate and form filing requirements,
restrictions on the ability to exit lines of business, premium tax payments
and membership in various state associations, such as state guaranty funds
and assigned risk plans.
Two of the Company's underwriting units, Specialty Program Insurance, and
Specialty Personal and Commercial Lines, write in the specialty admitted
market. In 1999, on a consolidated basis, the Company controlled $133
million of specialty admitted business.
*According to the 1999 A.M. Best Company Special Report, Annual Review of
the Excess and Surplus Lines Industry.
12
- --------------------------------------------------------------------------------
Competition
================================================================================
The Company's underwriting operations compete with numerous insurance
companies, risk retention groups, insurance buying groups, risk
securitization programs and alternative self-insurance mechanisms.
Competition may take the form of lower prices, broader coverages, greater
product flexibility, higher quality services or higher ratings by
independent rating agencies. In all of its markets, the Company competes by
developing specialty products to satisfy well-defined market needs and by
maintaining relationships with brokers and insureds who rely on the
Company's expertise. This expertise in offering and underwriting products
that are not readily available is the Company's principal means of
competition. The Company offers over forty major product lines, each with
its own distinct competitive environment. In all of its products, the
Company competes with innovative ideas, appropriate pricing, expense
control and quality service to policyholders, agents and brokers.
Few barriers exist to prevent insurers from entering the Company's segments
of the P&C industry, but many of the larger P&C insurance companies have
historically been unwilling to write specialty coverages. The P&C industry
is currently experiencing a soft market due to what is perceived by many as
excessive amounts of capital in the industry. In an attempt to utilize
their capital, many insurance companies often seek to write additional
premium without regard for its ultimate profitability. Admitted standard
companies are now writing programs that previously were written almost
exclusively in the specialty admitted or E&S markets. This additional
competition from the standard market has reduced rates and led to broader
coverage being offered to many of the Company's customers. In response to
this additional competition, the Company has maintained its underwriting
standards at the expense of growth in premium volume.
Acquisitions
================================================================================
GRYPHON. On January 15, 1999, as the result of the completion of a public
tender offer, the Company acquired Gryphon Holdings, Inc. (Gryphon), a
specialty property and casualty insurance group. The Company's results of
operations reflect Gryphon's results since the acquisition date. Total
consideration paid for Gryphon was approximately $145.7 million. In
addition the Company assumed $55 million of Gryphon's debt.
The Gryphon acquisition provided the Company with specialty insurance
business that complements existing products and can produce underwriting
profits. In addition at the date of acquisition, approximately $300 million
of high quality fixed income investments were added to the Company's
investment portfolio.
In 1998 Gryphon strengthened loss reserves by approximately $25 million in
response to development in environmental and asbestos claims and
construction defect claims. The Company recognized the underwriting
difficulties that Gryphon was experiencing prior to the acquisition and
determined that Gryphon's operations would require significant
reorganization to meet the Company's financial objectives. The Company
moved quickly after the acquisition to discontinue all Gryphon programs
that had historically produced underwriting losses (Gryphon discontinued
programs). In 1999 the Company reduced Gryphon's gross premium volume by
approximately 48% percent to $104.1 million. The Company expects to retain
and further develop approximately $70 million of Gryphon's 1999 gross
premium volume (Gryphon continuing programs). The Company believes that
these programs can earn underwriting profits in the future. The Company has
transferred the Gryphon continuing programs to its three E&S underwriting
units in order to realize operating efficiencies and to leverage the
Company's underwriting talent. A dedicated runoff unit has been established
to aggressively manage the Gryphon discontinued programs.
13
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
BUSINESS OVERVIEW (continued)
TERRA NOVA. The Company originally announced an agreement to purchase Terra
Nova (Bermuda) Holdings Ltd. (Terra Nova) in August of 1999. On January 26,
2000, subsequent to the Company's year end, the Company announced revised
terms for the acquisition of Terra Nova. The new agreement was reached
after preliminary information indicated that Terra Nova would report a loss
for the year ended December 31, 1999.
Pursuant to the revised terms of the merger agreement, purchase
consideration will consist of approximately $325 million of cash, 1.8
million Markel common shares and 1.8 million Markel contingent value rights
(CVR). The CVR's are intended to increase the likelihood that a Terra Nova
shareholder will be able to realize a minimum value of $185 for each Markel
share received. In addition, $175 million of Terra Nova debt will remain
outstanding. The transaction which is subject to approval by the
shareholders of both Markel and Terra Nova, the receipt of necessary
regulatory approvals and other customary closing conditions is scheduled to
close on March 24, 2000.
Terra Nova writes specialty property, casualty, marine and aviation
insurance on a direct and reinsurance basis. Business is written worldwide
with the majority coming from the United Kingdom and United States. Terra
Nova has a significant presence in the London Market through its
subsidiaries, Terra Nova Insurance Company Limited, and its participation
through Terra Nova Capital Limited in six Lloyd's syndicates managed by
Octavian Syndicate Management Limited. Other Terra Nova subsidiaries
include Terra Nova (Bermuda) Insurance Company Ltd., a specialty property
and casualty insurance and reinsurance company operating in the Bermuda
Market, and Compagnie de Reassurance D'Ile de France, a French reinsurance
company based in Paris that transacts specialty treaty and facultative
property reinsurance business internationally.
Terra Nova's underwriting philosophy and corporate culture are similar to
the Company's philosophy which will facilitate Terra Nova's integration
into the Company. The acquisition of Terra Nova will provide the Company
with additional opportunities to grow profitably in specialty insurance
markets on a worldwide basis. In 1999 Terra Nova had gross premium volume
of $865 million and at December 31, 1999, Terra Nova held an investment
portfolio of $1.5 billion. After completion of the Terra Nova acquisition,
the Company will realign its operations. Terra Nova will become the
Company's international division (Markel International) and the Company's
current domestic operations will be the United States division (Markel
North America).
Underwriting Philosophy
================================================================================
By focusing on market niches where it has underwriting expertise, the
Company seeks to earn consistent underwriting profits. Underwriting profits
are a key component of the Company's strategy. The ability to achieve
consistent underwriting profits demonstrates knowledge and expertise,
commitment to superior customer service and the ability to manage insurance
risk. In 1999 the Company's combined ratio was 101%. When Gryphon was
acquired, the Company expected underwriting losses in Gryphon's
discontinued programs. The Company's 1999 underwriting loss was the result
of the Gryphon discontinued programs. This represented the second time in
the past fourteen years that the Company's combined ratio exceeded 100%.
Excluding Gryphon, the Company's 1999 combined ratio was 96%. The Company
is aggressively managing the runoff of the Gryphon discontinued programs
and remains committed to underwriting profits as the key component of its
financial strategy.
14
- --------------------------------------------------------------------------------
The following graph shows Markel's GAAP combined ratio as compared to the
P&C industry for the past five years:
COMBINED RATIOS
[GRAPH]
1995 1996 1997 1998 1999*
---- ---- ---- ---- ----
Markel Corporation 99% 100% 99% 98% 101%
Industry Average 107% 106% 102% 105% 108%
* Source A.M. Best Co., Inc.
Industry Average is estimated for 1999.
The Underwriting Units
The Company has five core underwriting units focused on specific niches
within the E&S and specialty admitted markets. Excess and Surplus Lines,
Professional/Products Liability and Brokered Excess and Surplus Lines write
business in the E&S market. Specialty Program Insurance and Specialty
Personal and Commercial Lines write business in the specialty admitted
market. During 1999 Gryphon continuing programs were moved to the Company's
three E&S underwriting units. Gross premium volume from Gryphon
discontinued programs will decline significantly in 2000 and will be
administered by a runoff unit.
TOTAL GROSS PREMIUM VOLUME ($595 million)
[GRAPH]
Gryphon Discontinued Programs 7%
Specialty Personal and Commercial Lines 8%
Specialty Program Insurance 14%
Brokered Excess and Surplus Lines 14%
Professional/Products Liability 26%
Excess and Surplus Lines 31%
Excess and Surplus Lines
The Excess and Surplus Lines unit (E&S unit) writes a variety of coverages,
focusing on light-to-medium casualty exposures for businesses such as
artisan contractors, habitational risks, restaurants and bars, child and
adult care facilities, vacant properties, office buildings and light
manufacturing operations. The E&S unit also writes property insurance on
classes of business ranging from small, single location risks to large,
multi-state, multi-location risks. Property coverages consist principally
of fire and allied lines, such as windstorm, hail and water damage and more
specialized property coverages. In addition the E&S unit offers coverages
for heavier property risks, including earthquake, through its Essex special
property (ESP) division. These risks are typically larger and are of a low
frequency/high severity nature.
15
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
BUSINESS OVERVIEW (continued)
The E&S unit's inland marine facility provides coverages for risks that
include motor truck cargo, logging equipment, warehouseman's legal
liability, builder's risk, contractor's equipment and oil and gas rigs. The
ocean marine facility writes risks that include marinas, hull coverage,
cargo and builder's risk for yacht manufacturers.
The E&S unit also includes several programs from Gryphon continuing lines.
The largest of these programs is an earthquake-exposed California
commercial property book. These programs contributed $46.3 million of gross
premium volume to the E&S unit in 1999.
Most of the E&S unit's business is generated by approximately 145
professional surplus lines general agents who have limited quoting and
binding authority. ESP, brokerage inland marine and ocean marine produce
business on a brokerage basis through approximately 80 wholesale brokers.
The E&S unit seeks to be a substantial underwriter for its producers in
order to enhance the likelihood of receiving the most desirable
underwriting opportunities. The E&S unit writes the majority of its
business in Essex Insurance Company (Essex). Essex is admitted in Delaware
and is eligible to write E&S insurance in 49 states and the District of
Columbia.
EXCESS AND SURPLUS LINES
GROSS PREMIUM VOLUME ($186 million)
[GRAPH]
Other 8%
Inland Marine 8%
Property 10%
Casualty 27%
Essex Special Property 47%
Professional/Products Liability
The Professional/Products Liability unit markets specialty professional
liability coverages, including medical malpractice for physicians and
specialized medical coverages, professional liability for lawyers,
architects and engineers, insurance companies, agents and brokers, and
management consultants. Errors and omissions coverage is targeted to
emerging technology in the life science and information systems fields.
Products liability insurance for manufacturers and distributors is provided
through the special risks program. In addition, directors and officers
liability coverage, and employment practices liability coverages are
offered.
The Professional/Products Liability unit was one of the first to enter the
emerging employment practices liability insurance (EPLI) market. EPLI
provides coverage for the defense of alleged inappropriate employment
practices not typically covered under traditional business coverages. While
virtually all businesses have a need for this coverage, the unit designed
its EPLI program for middle market firms with 25 to 250 employees, as this
niche appears to be the most underserved by other insurers.
The Professional/Products Liability unit also includes admitted
professional liability programs from Gryphon continuing lines for directors
and officers, architects, engineers and lawyers. These programs contributed
$14.1 million of gross premium volume to the Professional/Products
Liability unit in 1999.
16
- --------------------------------------------------------------------------------
Business is written nationwide and is developed through approximately 325
wholesale brokers. The Professional/ Products Liability unit writes the
majority of its business in Evanston Insurance Company (EIC). EIC is
admitted in Illinois and is eligible to write E&S insurance in 48 states
and the District of Columbia. Admitted programs for these coverages are
written in Deerfield Insurance Company (DIC).
PROFESSIONAL/PRODUCTS LIABILITY
GROSS PREMIUM VOLUME ($156 million)
[GRAPH]
Financial Institutions 6%
Architects and Engineers 8%
Other 11%
Specified Professions 16%
Special Risks 18%
Employment Practices Liability 19%
Medical Malpractice and Specified Medical 22%
Brokered Excess And Surplus Lines
The Brokered E&S unit is comprised of the following divisions: primary
casualty, property and excess and umbrella. The primary casualty division's
areas of expertise are hard to place, large general liability and products
liability accounts. The majority of the general liability book of business
is comprised of coverages for commercial and residential contractors. The
division also specializes in writing manufacturing accounts with heavy
products liability exposures. Examples include sporting goods
manufacturers, toy manufacturers, truck trailer manufacturers and vitamin
supply manufacturers. The property division focuses on monoline property
and package coverages for mercantile, industrial, habitational and
builder's risk exposures. The excess and umbrella division provides
umbrella and excess coverages primarily for small commercial insureds.
The Brokered E&S unit also includes a loan guarantee program from Gryphon
continuing lines. This program contributed $7.3 million of gross premium
volume in 1999.
The unit operates through approximately 110 wholesale brokers and wrote the
majority of its business in Investors Insurance Company of America (IICA)
in 1999. On January 1, 2000, the Company sold IICA for the value of its
insurance licenses and statutory surplus. The Company retained all of the
Brokered E&S unit's loss reserves and in the future these programs will be
written using the Company's other insurance subsidiaries.
BROKERED EXCESS AND SURPLUS LINES
GROSS PREMIUM VOLUME ($85 million)
[GRAPH]
Loan Guarantee 8%
Property 18%
Excess and Umbrella 22%
Casualty 52%
17
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
BUSINESS OVERVIEW (continued)
Specialty Program Insurance
Specialty Program Insurance focuses on providing total insurance programs
for businesses engaged in similar, but highly specialized, activities.
These activities typically do not fit the risk profiles of standard
insurers which makes complete coverage difficult to obtain from a single
insurer.
The Specialty Program Insurance operation is organized into five product
areas, which concentrate on particular markets and customer groups.
Specialty Program Insurance writes commercial coverages for youth and
recreation oriented organizations, such as children's summer camps,
conference centers and youth organizations such as YM/YWCA's, Boys' and
Girls' Clubs, child care centers, nursery and Montessori schools, gymnastic
schools and martial arts and dance schools. The agriculture division
specializes in insurance coverages for horse-related risks, such as horse
mortality coverage, and property and liability coverages for horse farms
and boarding, breeding and training facilities. Liability insurance for
sports organizations, and accident and medical insurance for colleges,
universities and private schools are sold through the sports liability,
accident and medical division. The contract surety bond division provides
surety bonds for small and transitional commercial building contractors.
The recently added Markel Risk Solutions facility develops customized
insurance products for a variety of commercial insureds.
The majority of Specialty Program Insurance business is produced by
approximately 3,600 retail insurance agents. Management grants very limited
underwriting authority to carefully selected agents and controls agency
business through regular audits and pre-approvals. Certain products and
programs are also marketed directly to consumers or through wholesale
producers. Specialty Program Insurance is underwritten by Markel Insurance
Company (MIC). MIC is licensed to write P&C insurance in all 50 states,
including its domicile state of Illinois, and the District of Columbia.
SPECIALTY PROGRAM INSURANCE
GROSS PREMIUM VOLUME ($83 MILLION)
[GRAPH]
Other 6%
Child Care 7%
Surety 7%
Health and Fitness 9%
Sports Liability, Accident and Medical 23%
Camp and Youth Recreation 23%
Agriculture 25%
18
- --------------------------------------------------------------------------------
Specialty Personal And Commercial Lines
Specialty Personal and Commercial Lines markets and underwrites its
insurance products in niche markets that are overlooked by large admitted
carriers. The recreational products division concentrates on watercraft,
yacht, motorcycle and property coverages. The watercraft program markets
personal lines insurance coverage for personal watercraft, older boats and
high performance boats; while small fishing ventures and small boat rentals
are the focus of the commercial marine program. The yacht program is
designed for experienced owners of moderately priced yachts. The motorcycle
program's target market is mature riders of high value bikes. The property
program provides coverage for dwellings which do not qualify for standard
homeowners coverage.
Specialty Personal and Commercial Lines products are characterized by high
numbers of transactions, low average premiums and creative solutions for
under-served and emerging markets. The unit distributes the watercraft,
yacht and property products through wholesale and retail producers. The
motorcycle program is marketed directly to the consumer, using direct mail,
internet and telephone promotion as well as relationships with various
motorcycle manufacturers, dealers and associations. The Specialty Personal
and Commercial Lines unit writes the majority of its business in Markel
American Insurance Company (MAIC). MAIC is licensed to write P&C business
in 46 states, including its state of domicile, Virginia, and the District
of Columbia.
SPECIALTY PERSONAL AND COMMERCIAL LINES
GROSS PREMIUM VOLUME ($50 million)
[GRAPH]
Other 3%
Property 12%
Motorcycle 16%
Watercraft 31%
Yacht 38%
Reinsurance
================================================================================
The Company enters into reinsurance agreements in order to reduce its
liability on individual risks and to enable it to underwrite policies with
higher limits. During the past several years, Markel has reduced its
reliance on reinsurance by gradually increasing retentions on its
profitable books of business.
Markel strives to minimize credit exposure to reinsurers and maintains a
margin of safety through adherence to its internal reinsurance guidelines.
To become a reinsurance partner of Markel, prospective companies generally
must: (i) maintain an A.M. Best rating of "A" (excellent), (ii) maintain
minimum capital and surplus of $100 million and (iii) provide collateral
for recoverables in excess of an individually established amount (usually
$10 million). In addition, foreign reinsurers must provide collateral equal
to 100% of recoverables (with the exception of Lloyd's syndicates).
19
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
BUSINESS OVERVIEW (continued)
The following table shows Markel's top ten active reinsurers at
December 31, 1999. These ten reinsurers represent 50% of Markel's $421.9
million reinsurance recoverable.
Reinsurers A.M. Best Rating Reinsurance Recoverable
- -------------------------------------------------------------------------------------------
(dollars in thousands)
American Re-Insurance Company A++ $ 44,030
Odyssey America Reinsurance Corporation A 30,863
GE Reinsurance Corporation A++ 30,047
Zurich Reinsurance (North America) Inc. A+ 17,876
St. Paul Fire and Marine Insurance Company A+ 16,971
Trenwick America Reinsurance Corporation A 16,146
Folksamerica Reinsurance Company A 14,277
Odyssey Reinsurance Corporation A- 14,066
NAC Reinsurance Corporation A+ 13,813
Swiss Reinsurance America Corporation A+ 13,279
Other reinsurers -- 210,501
- -------------------------------------------------------------------------------------------
Total reinsurance recoverable on paid and unpaid losses $ 421,869
===========================================================================================
Reinsurance treaties are generally subject to cancellation by the Company
or the reinsurers on the anniversary date and are subject to renegotiation
annually. The reinsurer remains responsible for all business produced prior
to termination. Treaties also typically contain provisions concerning
ceding commissions, required reports to the reinsurers, responsibility for
taxes, arbitration in the event of a dispute and provisions allowing the
Company to demand that a reinsurer post letters of credit or assets as
security if a reinsurer becomes an "unapproved" reinsurer under applicable
state laws and regulations.
Investments
================================================================================
The Company's business philosophy clearly recognizes the importance of both
underwriting profits and superior investment returns to build shareholder
value. The Company relies on sound underwriting practices to produce
investable funds with minimum underwriting risk. Approximately 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
durations. The balance, comprised of shareholder funds, is available to be
invested in equity securities, which over the long run, have produced
higher returns relative to fixed income investments. The Company seeks to
invest in companies with the potential for appreciation and hold these
investments over the long term. Officers of the Company manage the
investment portfolio.
Total investment returns include items which impact net income, such as net
investment income and realized gains or losses from the sales of
investments, as well as items which do not impact net income, such as
changes in unrealized holding gains or losses. The Company does not intend
to lower the quality of its investment portfolio in order to enhance or
maintain yields. The Company's focus on long-term total investment returns
may result in variability in the level of realized and unrealized
investment gains or losses from one period to the next.
20
- --------------------------------------------------------------------------------
The ultimate success of the Company's investment strategy can be analyzed
from the review of total investment returns over several years. The
following table presents taxable equivalent total returns for Markel's
investment portfolio for the past five years:
ANNUAL TAXABLE EQUIVALENT TOTAL RETURNS
---------------------------------------
5 Year 10 Year
Weighted Weighted
Average Average
Years Ended December 31, Annual Annual
1995 1996 1997 1998 1999 Return Return
--------------------------------------------------------------------------------------
Equities 29.7% 26.9% 31.4% 13.3% (10.3%) 13.9% 13.1%
Fixed maturities 13.9% 4.8% 9.2% 7.6% 0.9% 6.5% 6.9%
Total portfolio 15.7% 7.5% 12.8% 8.9% (1.3%) 7.5% 7.7%
--------------------------------------------------------------------------------------
Ending portfolio
balance (in millions) $ 909 $1,131 $1,408 $1,481 $1,623
======================================================================================
The Company's 1999 investment performance was impacted by the decline in
market value of its fixed maturity and equity portfolios. The fixed
maturity portfolio's market value declined primarily as a result of higher
interest rates in 1999. The equity portfolio's market value decline was
primarily a result of a concentration in the financial services sector. The
Company's disciplined, value-oriented investment approach has generated
solid results over a long period of time. The Company remains committed to
its investment philosophy.
The Company monitors its portfolio to ensure that credit risk does not
exceed prudent levels. Standard and Poor's Corp. (S&P) and Moody's
Investors Service (Moody's) provide corporate and municipal debt ratings
based on their assessment of the credit quality of an obligor with respect
to a specific obligation. S&P's ratings range from "AAA" (capacity to pay
interest and repay principal is extremely strong) to "D" (debt is in
payment default). Securities with ratings of "BBB" or higher are referred
to as "investment grade" securities. Debt rated "BB" and below is regarded
by S&P as having predominately speculative characteristics with respect to
capacity to pay interest and repay principal. Moody's ratings range from
"Aaa" to "C" with ratings of "Baa" or higher considered "investment grade."
The Company's fixed maturity portfolio has an average rating of "AA," with
87% rated "A" or better by at least one nationally recognized rating
organization. The Company's policy is to invest in securities which are
rated investment grade and to minimize its investments in fixed maturity
securities that are unrated or rated below investment grade.
The following chart shows the Company's fixed maturity portfolio, at
estimated fair value, by rating category at December 31, 1999:
CREDIT QUALITY OF FIXED MATURITY PORTFOLIO ($1,177 million)
[GRAPH]
Other 3%
BBB 10%
A 29%
AAA/AA 58%
21
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
BUSINESS OVERVIEW (continued)
Shareholder Value
================================================================================
The Company's financial goals are to earn consistent underwriting profits
and superior investment returns to build shareholder value. More
specifically, the Company assesses its effectiveness in building
shareholder value through the measurement of growth in book value per
share. The Company believes that growth in book value per share is the most
comprehensive measure of its success due to the fact that it includes all
underwriting and investing results. The Company has a stated objective to
grow book value per share by 20% annually. For the year ended December 31,
1999, book value declined 11% due to the decline in market value of the
Company's investment portfolio. Over the past five years, the Company has
grown book value per share at a compound annual rate of 22%. The following
graph presents Markel's book value per share for the past five years:
[GRAPH]
BOOK VALUE PER SHARE
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
$ per share
39.37 49.16 65.18 77.02 68.59
Regulatory Environment
================================================================================
The Company's insurance subsidiaries are subject to regulation and
supervision by the insurance regulatory authorities of the various
jurisdictions in which they conduct business. Regulation is intended for
the benefit of policyholders rather than shareholders. Insurance regulatory
authorities have broad regulatory, supervisory and administrative powers
relating to solvency standards, the licensing of insurers and their agents,
the approval of forms and policies used, the nature of, and limitations on,
insurers' investments, the form and content of annual statements and other
reports on the financial condition of such insurers and the establishment
of reserves.
The Company is also subject to state laws regulating insurance holding
companies. Under these laws, insurance departments may, at any time,
examine the Company, require disclosure of material transactions by the
holding company, require approval of certain extraordinary transactions,
such as extraordinary dividends from an insurance subsidiary to the holding
company, or require prior approval of changes in control of an insurer or
an insurance holding company. Generally, "control" for these purposes is
defined as ownership or voting power of 10% or more of a company's shares.
The laws of the domicile states of the Company's insurance subsidiaries
govern the amount of dividends which may be paid to the Company. Generally,
statutes in the domicile states of the Company's insurance subsidiaries
require prior approval for payment of "extraordinary" as opposed to
"ordinary" dividends. At December 31, 1999, the Company's insurance
subsidiaries could pay up to $60.9 million during the following twelve
months under the ordinary dividend regulations without prior regulatory
approval.
22
- --------------------------------------------------------------------------------
Ratings
================================================================================
Financial stability and strength are important purchase considerations of
policyholders and insurance agents and brokers. Because an insurance
premium paid today purchases coverage for losses that might not be paid for
many years, the financial viability of the insurer is of critical concern.
Various independent rating agencies provide information to assist buyers in
their search for financially sound insurers.
A.M. Best Co., Inc. (Best) publishes Best's Insurance Reports,
Property-Casualty and assigns ratings to P&C insurance companies based on
quantitative criteria, such as profitability, leverage and liquidity as
well as qualitative assessments, such as the spread of risk, the adequacy
and soundness of reinsurance, the quality and estimated market value of
assets, the adequacy of loss reserves and surplus and the competence,
experience and integrity of management. Best's letter ratings range from
"A++" (superior) to "F" (in liquidation). S&P and Duff & Phelps' Credit
Rating Co. (Duff & Phelps) provide analytical and statistical information
on the solvency and liquidity of major U.S. licensed insurance companies.
S&P's financial strength ratings and Duff & Phelps' claims paying ability
(CPA) ratings concern only the likelihood of timely payment of policyholder
obligations and are not intended to refer to the ability of either the
rated company or its parent or subsidiary to pay non-policy obligations
such as debt or commercial paper. The S&P financial strength ratings range
from "AAA" (extremely strong financial security) to "CC" (extremely weak
financial security). The Duff & Phelps CPA rating categories range from
"AAA" (risk factors are negligible) to "DD" (under order of liquidation).
Best has assigned the Company's insurance subsidiaries a group rating of
"A" (excellent) with the exception of Associated International Insurance
Company (AIIC) and Deerfield Insurance Company (DIC), which were acquired
in the Gryphon transaction. AIIC and DIC are rated "A-" (excellent) by
Best. In addition the Company's insurance subsidiaries with the exception
of AIIC, are rated "A+" (strong financial security) by S&P and "A+" (high
claims paying ability) by Duff & Phelps.
The Company's ratings are currently under review as a result of the pending
acquisition of Terra Nova.
Associates
================================================================================
At December 31, 1999, the Company and its consolidated subsidiaries
employed 883 persons, four of whom were executive officers.
The Company believes that, as a service organization, its continued
profitability and growth are dependent upon the talent and enthusiasm its
associates bring to their jobs. The Company has structured incentive
compensation plans and stock purchase plans to encourage associates to
think and act like owners. Associates are offered many opportunities to
become shareholders. Every associate eligible to participate in the
Company's retirement program, a 401(k) plan, receives a portion of the
Company's contribution in Markel stock and may purchase stock with their
own contributions. Stock may be acquired through a payroll deduction plan,
and associates have been given the opportunity to purchase stock with
interest financing partially subsidized by the Company. Under Markel's
incentive compensation plans, associates may earn a meaningful bonus based
on individual and Company performance. At December 31, 1999, the Company
estimated associates' ownership, including executive officers and
directors, at approximately 32% of the Company. The Company believes that
employee stock ownership and rewarding value-added performance aligns
associates' interests with the interests of non-employee shareholders.
23
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA (dollars in millions, except per share data)
----------------------------------
1999 1998 1997
----------------------------------
RESULTS OF OPERATIONS (1)
- --------------------------------------------------------------------------------
Earned premiums $ 437 $ 333 $ 333
Net investment income 88 71 69
Total operating revenues 524 426 419
Net income 41 57 50
Comprehensive income (loss) (40) 68 92
- --------------------------------------------------------------------------------
FINANCIAL POSITION (1)(2)(3)
- --------------------------------------------------------------------------------
Total investments $ 1,623 $ 1,481 $ 1,408
Total assets 2,455 1,921 1,870
Unpaid losses and loss adjustment expenses 1,344 934 971
Long-term debt 168 93 93
8.71% Capital Securities 150 150 150
Shareholders' equity 383 425 357
- --------------------------------------------------------------------------------
OTHER OPERATING DATA PER DILUTED SHARE (4)
- --------------------------------------------------------------------------------
Core operations $ 8.17 $ 8.10 $ 7.43
Net realized gains (losses) (0.10) 2.37 1.82
Nonrecurring items -- -- --
Amortization expense (0.87) (0.30) (0.33)
Net income $ 7.20 $ 10.17 $ 8.92
- --------------------------------------------------------------------------------
PER SHARE DATA
- --------------------------------------------------------------------------------
Common shares outstanding (in thousands) 5,590 5,522 5,474
Total investments $290.36 $268.22 $257.27
Book value $ 68.59 $ 77.02 $ 65.18
Growth in book value (11%) 18% 33%
5-Year CAGR in book value (5) 22% 23% 26%
Closing stock price $155.00 $181.00 $156.13
- --------------------------------------------------------------------------------
RATIO ANALYSIS
- --------------------------------------------------------------------------------
GAAP combined ratio 101% 98% 99%
Investment yield (6) 5% 5% 5%
Total return (7) (2%) 7% 11%
Debt to total capital (8) 35% 25% 28%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(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) The change in accounting for net unrealized gains (losses) on fixed
maturities in accordance with provisions of Statement of Financial
Accounting Standards No. 115 affects 1993 and subsequent years.
(3) The gross reinsurance reporting provisions of Statement of Financial
Accounting Standards No. 113 affect 1992 and subsequent years.
24
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 10-Year CAGR (5)
- ----------------------------------------------------------------------------------------------------------------------------
$ 307 $ 285 $ 243 $ 193 $ 153 $ 152 $ 33 34%
51 43 29 24 27 31 7 33%
367 344 280 235 206 223 73 27%
47 34 19 24 26 14 6 11%
56 75 (10) 34 26 39 5 --
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
$ 1,131 $ 909 $ 612 $ 597 $ 434 $ 415 $ 360 38%
1,605 1,315 1,103 1,135 1,129 700 670 29%
936 734 653 688 733 346 302 --
115 107 101 78 101 94 127 --
-- -- -- -- -- -- -- --
268 213 139 151 109 83 55 20%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
$ 6.03 $ 5.15 $ 3.77 $ 3.31 $ 3.03 $ 2.63 $ 1.76 20%
0.58 1.39 0.45 1.83 0.89 0.94 0.13 --
2.05 -- -- -- 1.90 0.28 (0.41) --
(0.36) (0.39) (0.89) (0.91) (1.18) (1.15) (0.43) --
$ 8.30 $ 6.15 $ 3.33 $ 4.23 $ 4.64 $ 2.70 $ 1.05 11%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
5,458 5,422 5,387 5,414 5,403 5,332 5,323 --
$207.18 $167.57 $113.55 $110.27 $ 80.27 $ 77.91 $ 67.59 37%
$ 49.16 $ 39.37 $ 25.71 $ 27.83 $ 20.24 $ 15.59 $ 10.27 19%
25% 53% (8%) 38% 30% 52% (12%) --
26% 31% 17% 25% 34% 35% -- --
$ 90.00 $ 75.50 $ 41.50 $ 39.38 $ 31.25 $ 22.00 $ 11.75 --
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
100% 99% 97% 97% 97% 106% 81% --
5% 6% 5% 5% 6% 7% 10% --
8% 15% (2%) 11% 7% 16% 8% --
30% 33% 42% 34% 48% 53% 70% --
- ----------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(4) In evaluating its operating performance, the Company focuses on core
underwriting and investing results (core operations) before considering net
gains or losses from the sale of investments, amortization expense and any
nonrecurring items. These measures do not replace operating income or net
income computed in accordance with generally accepted accounting principles
as a measure of profitability.
(5) CAGR--compound annual growth rate.
(6) Investment yield reflects net investment income as a percent of average
invested assets.
(7) Total return includes net investment income, net realized investment gains
or losses and the change in market value of the investment portfolio during
the period as a percent of average invested assets.
(8) The 8.71% Capital Securities contain equity-like features including the
Company's option to defer interest payments for five years and a forty-nine
year term. Due to these unique features, the Company considers the 8.71%
Capital Securities as 50% debt and 50% equity for calculation
purposes.
25
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
ASSETS
Investments, available-for-sale, at estimated fair value
Fixed maturities (cost of $1,214,603 in 1999 and $1,041,155 in 1998) $1,177,151 $1,070,978
Equity securities (cost of $243,145 in 1999 and $200,004 in 1998) 304,241 317,887
Short-term investments (estimated fair value approximates cost) 141,747 92,228
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS, AVAILABLE-FOR-SALE 1,623,139 1,481,093
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 1,813 1,527
Receivables 98,681 68,138
Reinsurance recoverable on unpaid losses 378,738 198,288
Reinsurance recoverable on paid losses 43,131 21,205
Deferred policy acquisition costs 50,800 40,471
Prepaid reinsurance premiums 69,591 42,241
Intangible assets 92,314 35,298
Other assets 97,098 33,003
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,455,305 $1,921,264
=====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $1,343,616 $ 933,830
Unearned premiums 276,910 205,908
Payables to insurance companies 60,706 22,715
Long-term debt (estimated fair value of $163,881 in 1999 and $96,931 in 1998) 167,984 93,219
Other liabilities 72,670 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 $124,500 in 1999 and $144,453 in 1998) 150,000 150,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,071,886 1,495,963
- ---------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Common stock 25,625 25,415
Retained earnings 342,426 303,878
Accumulated other comprehensive income
Net unrealized holding gains on fixed maturities and equity securities,
net of taxes of $8,276 in 1999 and $51,698 in 1998 15,368 96,008
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 383,419 425,301
Commitments and contingencies
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,455,305 $1,921,264
=====================================================================================================================
See accompanying notes to consolidated financial statements.
26
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31,
---------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
OPERATING REVENUES
Earned premiums $ 437,196 $ 333,267 $ 332,878
Net investment income 87,681 71,046 68,653
Net realized gains (losses) from investment sales (897) 20,558 15,834
Other 341 1,130 1,682
- ------------------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUES 524,321 426,001 419,047
============================================================================================================
OPERATING EXPENSES
Losses and loss adjustment expenses 283,630 203,336 210,061
Underwriting, acquisition and insurance expenses 156,703 124,841 120,076
Amortization of intangible assets 5,398 2,033 2,435
- ------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 445,731 330,210 332,572
- ------------------------------------------------------------------------------------------------------------
OPERATING INCOME 78,590 95,791 86,475
============================================================================================================
Interest expense 25,150 20,406 20,124
- ------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 53,440 75,385 66,351
Income tax expense 12,826 18,092 15,924
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 40,614 $ 57,293 $ 50,427
============================================================================================================
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains (losses) on securities, net of taxes
Net holding gains (losses) arising during the period $ (81,223) $ 24,112 $ 51,800
Less reclassification adjustments for gains (losses)
included in net income 583 (13,363) (10,292)
- ------------------------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS) (80,640) 10,749 41,508
- ------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ (40,026) $ 68,042 $ 91,935
============================================================================================================
NET INCOME PER SHARE
Basic $ 7.27 $ 10.41 $ 9.20
Diluted $ 7.20 $ 10.17 $ 8.92
============================================================================================================
See accompanying notes to consolidated financial statements.
27
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Other
Common Common Retained Comprehensive
Shares Stock Earnings Income Total
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Shareholders' Equity at January 1, 1997 5,458 $ 24,347 $ 200,237 $ 43,751 $ 268,335
Net income -- -- 50,427 -- 50,427
Net unrealized holding gains
arising during the period, net of taxes -- -- -- 41,508 41,508
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 91,935
Issuance of common stock 41 313 -- -- 313
Repurchase of common stock (25) -- (3,771) -- (3,771)
Other -- -- (8) -- (8)
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity at December 31, 1997 5,474 24,660 246,885 85,259 356,804
Net income -- -- 57,293 -- 57,293
Net unrealized holding gains
arising during the period, net of taxes -- -- -- 10,749 10,749
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 68,042
Issuance of common stock 50 755 -- -- 755
Repurchase of common stock (2) -- (300) -- (300)
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity at December 31, 1998 5,522 25,415 303,878 96,008 425,301
Net income -- -- 40,614 -- 40,614
Net unrealized holding losses
arising during the period, net of taxes -- -- -- (80,640) (80,640)
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss (40,026)
Issuance of common stock 81 210 -- -- 210
Repurchase of common stock (13) -- (2,066) -- (2,066)
- --------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT DECEMBER 31, 1999 5,590 $ 25,625 $ 342,426 $ 15,368 $ 383,419
================================================================================================================================
See accompanying notes to consolidated financial statements.
28
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
OPERATING ACTIVITIES
Net income $ 40,614 $ 57,293 $ 50,427
Adjustments to reconcile net income to net cash provided
by operating activities
Deferred income tax expense (benefit) 9,477 6,950 (557)
Depreciation and amortization 12,855 7,296 7,307
Net realized (gains) losses from investment sales 897 (20,558) (15,834)
Decrease (increase) in receivables (2,461) 5,758 (2,669)
Decrease (increase) in deferred policy acquisition costs 66 (3,655) 1,163
Increase (decrease) in unpaid losses and loss adjustment expenses, net (34,238) (15,885) 16,789
Increase (decrease) in unearned premiums, net (9,192) 10,610 (2,914)
Increase (decrease) in payables to insurance companies 8,174 (6,433) 5,278
Increase (decrease) in current income taxes (6,819) 3,084 4,313
Other (18,815) (4,516) 5,340
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 558 39,944 68,643
====================================================================================================================================
INVESTING ACTIVITIES
Proceeds from sales of fixed maturities and equity securities 1,069,006 405,561 636,212
Proceeds from maturities of fixed maturities 52,708 127,526 55,722
Cost of fixed maturities and equity securities purchased (945,927) (574,310) (863,785)
Net change in short-term investments (49,519) (484) (40,237)
Sales (acquisition) of insurance companies, net of cash (129,960) 4,689 9,230
Net proceeds from sale of building -- -- 6,500
Additions to property and equipment (4,026) (2,717) (4,612)
Other (6,797) (446) (177)
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (14,515) (40,181) (201,147)
====================================================================================================================================
FINANCING ACTIVITIES
Net proceeds from issuance of Company-Obligated Mandatorily
Redeemable Preferred Capital Securities -- -- 148,123
Additions to long-term debt 115,000 -- --
Repayments and repurchases of long-term debt (95,288) -- (21,577)
Other (5,469) 455 (3,787)
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,243 455 122,759
====================================================================================================================================
Increase (decrease) in cash and cash equivalents 286 218 (9,745)
Cash and cash equivalents at beginning of year 1,527 1,309 11,054
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,813 $ 1,527 $ 1,309
====================================================================================================================================
See accompanying notes to consolidated financial statements.
29
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The Company underwrites specialty insurance products and programs to niche
markets. Significant areas of underwriting include excess and surplus lines,
professional/products liability, brokered excess and 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 in accumulated other comprehensive income in shareholders' equity. A
decline in the fair value of any investment below cost that is deemed other than
temporary is charged to earnings, resulting in a new cost basis for the
security.
Premiums and discounts are amortized or accreted over the lives of the related
fixed maturities as an adjustment to yield using the effective interest method.
Dividend and interest income are recognized when earned. Realized gains or
losses are included in earnings and are derived using the first in, first out
method.
c) CASH EQUIVALENTS. The Company considers overnight deposits to be cash
equivalents for purposes of the consolidated statements of cash flows.
d) DEFERRED POLICY ACQUISITION COSTS. Costs directly related to the acquisition
of insurance premiums, such as commissions to agents and brokers, are deferred
and amortized over the related policy period, generally one year. If it is
determined that future policy revenues on existing policies are not adequate to
cover related costs and expenses, deferred policy acquisition costs are charged
to earnings. The Company does not consider anticipated investment income in
determining whether a premium deficiency exists.
e) PROPERTY AND EQUIPMENT. Owned property and equipment are stated at cost less
accumulated depreciation. Depreciation and amortization of property and
equipment are calculated using the straight-line method over the estimated
useful 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 over three to ten years. Goodwill is amortized
using the straight-line method, generally from 20 to 40 years. The Company
assesses the recoverability of goodwill by determining whether the amortization
of the balance over its remaining life can be recovered through the undiscounted
future operating cash flows of the acquired operations.
g) REVENUE RECOGNITION. Insurance premiums are earned on a pro rata basis over
the policy period, generally one year. The cost of reinsurance is initially
recorded as prepaid reinsurance premiums and is amortized over the reinsurance
contract period in proportion to the amount of insurance protection provided.
Profit-sharing commissions from reinsurers are recognized when earned and are
netted against policy acquisition costs. The Company estimates reinsurance
profit commissions earned based on reserve development studies. Premiums ceded
are netted against premiums written.
30
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (continued)
h) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES. Unpaid losses and loss adjustment
expenses are based on evaluations of reported claims and estimates for losses
and loss adjustment expenses incurred but not reported. Estimates for losses and
loss adjustment expenses incurred but not reported are based on reserve
development studies. The reserves recorded are estimates, and the ultimate
liability may be greater than or less than the estimates; however, management
believes the reserves are adequate.
i) INCOME TAXES. Deferred tax assets and liabilities are recorded in accordance
with the provisions of Statement of Financial Accounting Standards (SFAS) No.
109, Accounting for Income Taxes. Under SFAS No. 109, the Company records
deferred income taxes which reflect the net tax effect of the temporary
differences between the carrying amounts of the assets and liabilities for
financial reporting purposes and their respective tax bases.
j) EARNINGS PER SHARE. Basic earnings per share (EPS) is computed by dividing
net income, less required dividends on redeemable preferred stock, by the
weighted average number of common shares outstanding during the year. Diluted
EPS is computed using the weighted average number of common shares and dilutive
potential common shares outstanding during the year.
k) STOCK COMPENSATION PLANS. The Company applies Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for stock-based compensation plans. The Company
has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock
Based Compensation.
l) LONG-LIVED ASSETS. If an asset is considered to be impaired, the impairment
equals the amount by which the carrying amount of the asset exceeds the fair
value of the asset. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
m) COMPREHENSIVE INCOME (LOSS). Comprehensive income (loss) represents all
changes in equity of an enterprise that result from recognized transactions and
other economic events of the period. Other comprehensive income (loss) refers to
revenues, expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive income (loss) but excluded from net
income, such as unrealized gains or losses on certain investments in debt and
equity securities and foreign currency items.
n) DERIVATIVES. The Company occasionally uses derivative financial instruments
to hedge foreign currency risk and market risk in its investment portfolio. When
held, derivative instruments are matched against specific securities, and their
fair values are determined based on current settlement costs. Derivative
positions held by the Company at December 31, 1999 and 1998 were immaterial.
o) RECLASSIFICATIONS. Certain reclassifications of prior years' amounts have
been made to conform with 1999 presentations.
31
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Investments
a) Following is a summary of investments (dollars in thousands):
December 31, 1999
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
Fixed maturities
U.S. Treasury securities and obligations
of U.S. government agencies $ 189,157 $ 127 $ (4,697) $ 184,587
Obligations of states, municipalities
and political subdivisions 426,497 1,147 (11,305) 416,339
Public utilities 81,457 -- (5,793) 75,664
Convertibles and bonds with warrants 14,864 371 (534) 14,701
All other corporate bonds 502,628 350 (17,118) 485,860
- -----------------------------------------------------------------------------------------------------------------
Total fixed maturities 1,214,603 1,995 (39,447) 1,177,151
Equity securities
Banks, trusts and insurance companies 91,342 35,383 (6,550) 120,175
Industrial, miscellaneous and all other 151,171 45,032 (12,225) 183,978
Nonredeemable preferred stock 632 -- (544) 88
- -----------------------------------------------------------------------------------------------------------------
Total equity securities 243,145 80,415 (19,319) 304,241
Short-term investments 141,747 -- -- 141,747
- -----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $1,599,495 $ 82,410 $ (58,766) $1,623,139
=================================================================================================================
December 31, 1998
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
Fixed maturities
U.S. Treasury securities and obligations
of U.S. government agencies $ 199,655 $ 4,376 $ (937) $ 203,094
Obligations of states, municipalities
and political subdivisions 425,904 13,584 (207) 439,281
Public utilities 37,086 1,030 (37) 38,079
Convertibles and bonds with warrants 12,528 442 (151) 12,819
All other corporate bonds 365,982 13,219 (1,496) 377,705
- -----------------------------------------------------------------------------------------------------------------
Total fixed maturities 1,041,155 32,651 (2,828) 1,070,978
Equity securities
Banks, trusts and insurance companies 86,526 61,898 (454) 147,970
Industrial, miscellaneous and all other 112,780 60,917 (5,259) 168,438
Nonredeemable preferred stock 698 794 (13) 1,479
- -----------------------------------------------------------------------------------------------------------------
Total equity securities 200,004 123,609 (5,726) 317,887
Short-term investments 92,228 -- -- 92,228
- -----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $1,333,387 $ 156,260 $ (8,554) $1,481,093
=================================================================================================================
32
- --------------------------------------------------------------------------------
2. Investments (continued)
b) The amortized cost and estimated fair value of fixed maturities
at December 31, 1999 are shown below by contractual maturity (dollars in
thousands):
Estimated
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------
Due in one year or less $ 33,992 $ 33,922
Due after one year through five years 192,974 190,926
Due after five years through ten years 381,698 373,240
Due after ten years 605,939 579,063
- --------------------------------------------------------------------------------
TOTAL $1,214,603 $1,177,151
================================================================================
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 4.7 years.
c) Components of net investment income are as follows (dollars in thousands):
Years Ended December 31,
-----------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Interest
Municipal bonds (tax-exempt) $21,708 $20,169 $16,130
Taxable bonds 54,157 42,560 43,051
Short-term investments, including
overnight deposits 2,995 2,389 3,986
Dividends on equity securities 11,922 9,602 8,670
- --------------------------------------------------------------------------------
90,782 74,720 71,837
Less Investment expenses 3,101 3,674 3,184
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME $87,681 $71,046 $68,653
================================================================================
33
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Investments (continued)
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,
------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Realized gains
Fixed maturities $ 6,586 $ 6,201 $ 9,454
Equity securities 19,578 19,168 12,568
- --------------------------------------------------------------------------------
26,164 25,369 22,022
- --------------------------------------------------------------------------------
Realized losses
Fixed maturities (20,240) (1,376) (4,615)
Equity securities (6,821) (3,435) (1,573)
- --------------------------------------------------------------------------------
(27,061) (4,811) (6,188)
- --------------------------------------------------------------------------------
NET REALIZED GAINS (LOSSES)
From Investment Sales $ (897) $ 20,558 $ 15,834
================================================================================
Change in gross unrealized gains (losses)
Fixed maturities $ (67,275) $ 4,439 $ 18,911
Equity securities (56,787) 12,099 44,947
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) $(124,062) $ 16,538 $ 63,858
================================================================================
e) Investments with a carrying value of $41.7 million and $28.9 million were on
deposit with regulatory authorities at December 31, 1999 and 1998, respectively.
f) At December 31, 1999, there were no investments in any one issuer that
exceeded 10% of shareholders' equity.
================================================================================
3. Receivables
Following are the components of receivables (dollars in thousands):
December 31,
---------------------
1999 1998
- --------------------------------------------------------------------------------
Agents' balances and premiums in course of collection $84,794 $52,507
Less Allowance for doubtful receivables 3,283 3,113
- --------------------------------------------------------------------------------
81,511 49,394
Other 17,170 18,744
- --------------------------------------------------------------------------------
RECEIVABLES $98,681 $68,138
================================================================================
34
- --------------------------------------------------------------------------------
4. Deferred Policy Acquisition Costs
The following reflects the amounts of policy costs deferred and amortized
(dollars in thousands):
Years Ended December 31,
------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Balance, beginning of year $ 40,471 $ 36,816 $ 37,979
Policy acquisition costs deferred 104,861 85,041 79,356
Amortization charged to expense (94,532) (81,386) (80,519)
- --------------------------------------------------------------------------------
DEFERRED POLICY ACQUISITION COSTS $ 50,800 $ 40,471 $ 36,816
================================================================================
The following reflects the components of underwriting, acquisition and insurance
expenses (dollars in thousands):
Years Ended December 31,
------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Amortization of policy acquisition costs $ 94,532 $ 81,386 $ 80,519
Other operating expenses 62,171 43,455 39,557
- --------------------------------------------------------------------------------
UNDERWRITING, ACQUISITION AND
INSURANCE EXPENSES $ 156,703 $ 124,841 $ 120,076
================================================================================
5. Property and Equipment
Following are the components of property and equipment which are included in
other assets on the consolidated balance sheets (dollars in thousands):
December 31,
--------------------------
1999 1998
- --------------------------------------------------------------------------------
Land $ -- $ 1,066
Leasehold improvements 3,010 995
Furniture and equipment 31,699 26,292
Other 96 121
- --------------------------------------------------------------------------------
34,805 28,474
Less Accumulated depreciation and amortization 24,894 20,493
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT $ 9,911 $ 7,981
================================================================================
Depreciation and amortization expense of property and equipment was $4.0
million, $4.1 million and $3.5 million for the years ended December 31, 1999,
1998 and 1997, respectively.
Total rental expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $5.8 million, $4.9 million and $4.2 million, respectively.
35
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Property and Equipment (continued)
The Company has facilities and furniture and equipment under operating leases
with remaining terms ranging from 1 month to 120 months.
Minimum annual rental commitments for noncancelable operating leases at
December 31, 1999 are as follows (dollars in thousands):
Years Ending December 31,
- --------------------------------------------------------------------------------
2000 $ 6,817
2001 7,004
2002 6,885
2003 6,620
2004 6,774
2005 and thereafter 28,053
- --------------------------------------------------------------------------------
TOTAL $ 62,153
================================================================================
6. Intangible Assets
Following are the components of intangible assets (dollars in thousands):
December 31,
-------------------------
1999 1998
- --------------------------------------------------------------------------------
Goodwill $ 89,864 $ 34,587
Policy renewal rights 2,450 711
- --------------------------------------------------------------------------------
INTANGIBLE ASSETS $ 92,314 $ 35,298
================================================================================
Accumulated amortization related to intangible assets was $27.0 million and
$21.6 million at December 31, 1999 and 1998, respectively.
================================================================================
7. Income Taxes
Income tax expense on income before income taxes, substantially all of which was
federal tax expense, consists of (dollars in thousands):
Years Ended December 31,
----------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Current $ 3,349 $11,142 $16,481
Deferred 9,477 6,950 (557)
- --------------------------------------------------------------------------------
INCOME TAX EXPENSE $12,826 $18,092 $15,924
================================================================================
The Company made income tax payments of $13.3 million in 1999, $8.1 million in
1998 and $12.2 million in 1997. At December 31, 1999, current income taxes
recoverable were $6.7 million. At December 31, 1998, current income taxes
payable were $4.0 million.
36
- --------------------------------------------------------------------------------
7. Income Taxes (continued)
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,
------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
U.S. corporate tax rate 35% 35% 35%
Tax-exempt investment income (15) (9) (9)
Amortization of intangible assets 3 -- --
Differences between financial reporting and
tax bases of assets acquired -- (3) (3)
Other 1 1 1
- --------------------------------------------------------------------------------
EFFECTIVE TAX RATE 24% 24% 24%
================================================================================
The components of the net deferred tax asset (liability) are as follows (dollars
in thousands):
December 31,
--------------------
1999 1998
- --------------------------------------------------------------------------------
Assets
Income reported in different periods for
financial reporting and tax purposes $ 15,117 $ 8,840
Unpaid losses and loss adjustment expenses,
nondeductible portion for income tax purposes 59,255 46,814
Unearned premiums, adjustment for income tax purposes 14,512 11,457
Other 723 976
- --------------------------------------------------------------------------------
Total gross deferred tax assets 89,607 68,087
- --------------------------------------------------------------------------------
Liabilities
Property and equipment, depreciation 540 620
Deferred policy acquisition costs 17,780 14,165
Investments, net unrealized gains 8,276 51,698
Differences between financial reporting and
tax bases of assets acquired 14,000 12,126
Other 758 1,896
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities 41,354 80,505
- --------------------------------------------------------------------------------
NET DEFERRED TAX ASSET (LIABILITY) $ 48,253 $(12,418)
================================================================================
The net deferred tax asset at December 31, 1999 is included in other assets on
the consolidated balance sheets. The net deferred tax liability at December 31,
1998 is included in other liabilities on the consolidated balance sheets.
The Company believes that a valuation allowance with respect to the realization
of the total gross deferred tax assets is not necessary. The Company expects to
realize the majority of its gross deferred tax assets existing at December 31,
1999 through the reversal of existing temporary differences and the application
of the carryback provisions of the Internal Revenue Code. The Company expects to
generate future taxable income, excluding the effect of future originating
temporary differences, to realize the remaining gross deferred tax assets.
The Company's federal tax years through December 31, 1995 are closed to
examination.
37
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Unpaid Losses And Loss Adjustment Expenses
a) The following table sets forth a reconciliation of consolidated beginning and
ending reserves for losses and loss adjustment expenses (dollars in thousands):
Years Ended December 31,
---------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------
NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT
EXPENSES, BEGINNING OF YEAR $ 735,542 $ 745,752 $ 725,064
Commutations and other 1,636 (798) 745
Reserves for losses and loss adjustment
expenses of acquired insurance companies 258,472 -- --
- ------------------------------------------------------------------------------------------------
RESTATED NET RESERVES FOR LOSSES
AND LOSS ADJUSTMENT EXPENSES,
BEGINNING OF YEAR $ 995,650 $ 744,954 $ 725,809
Incurred losses and loss adjustment expenses
Current year 322,122 240,732 236,037
Prior years (38,492) (37,396) (25,976)
- ------------------------------------------------------------------------------------------------
TOTAL INCURRED LOSSES AND
LOSS ADJUSTMENT EXPENSES 283,630 203,336 210,061
- ------------------------------------------------------------------------------------------------
Payments
Current year 65,723 51,695 44,382
Prior years 248,679 161,053 145,736
- ------------------------------------------------------------------------------------------------
TOTAL PAYMENTS 314,402 212,748 190,118
- ------------------------------------------------------------------------------------------------
NET RESERVES FOR LOSSES AND LOSS
ADJUSTMENT EXPENSES, END OF YEAR 964,878 735,542 745,752
- ------------------------------------------------------------------------------------------------
Reinsurance recoverable on unpaid losses 378,738 198,288 225,405
- ------------------------------------------------------------------------------------------------
GROSS RESERVES FOR LOSSES AND LOSS
ADJUSTMENT EXPENSES, END OF YEAR $ 1,343,616 $ 933,830 $ 971,157
================================================================================================
The provision for prior years decreased in 1999, 1998 and 1997. Inherent in the
Company's reserving practices is the desire to establish reserves that are more
likely redundant than deficient. Furthermore, the Company's philosophy is to
price its insurance products to make an underwriting profit, not to increase
written premiums.
Management continually attempts to improve its loss estimation process by
refining its ability to analyze loss development patterns, claim payments and
other information, but many reasons remain for potential adverse development of
estimated ultimate liabilities. For example, the uncertainties inherent in the
loss estimation process have become increasingly subject to changes in social
and legal trends. In recent years, these trends have expanded the liability of
insureds, established new liabilities and reinterpreted contracts to provide
unanticipated coverage long after the related policies were written. Such
changes from past experience significantly affect the ability of insurers to
estimate reserves for unpaid losses and related expenses.
Management recognizes the higher variability associated with certain exposures
and books of business and considers this factor when establishing loss reserves.
Management currently believes the Company's gross and net reserves, including
the reserves for environmental and asbestos exposures, are adequate. The Company
has shown cumulative redundancies for thirteen consecutive years.
38
- --------------------------------------------------------------------------------
8. Unpaid Losses And Loss Adjustment Expenses (continued)
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 aggregate statutory net reserves for losses and loss
adjustment expenses.
b) All of the Company's exposure to environmental and asbestos (E&A) claims
resulted from policies written by Shand/Evanston, Lincoln Insurance Company and
Gryphon Holdings, Inc. before their acquisitions by the Company. The Company's
exposure to E&A claims originated from umbrella, excess, commercial general
liability (CGL) insurance and reinsurance assumed that was written on an
occurrence basis from the 1970's to mid-1980's. Exposure also originated from
claims made policies written by Shand/Evanston that were designed to cover
environmental risks (EIL policies) provided that all other terms and conditions
of the policy were met.
E&A claims include property damage and clean-up costs related to pollution, as
well as personal injury allegedly arising from exposure to hazardous materials.
After 1986 the Company began underwriting CGL coverage with pollution exclusions
and in some lines of business, the Company began using a claims made form. These
developments significantly reduced the Company's exposure to future E&A
claims.
The following table provides a reconciliation of beginning and ending E&A
reserves for losses and loss adjustment expenses, which are a component of
consolidated reserves for losses and loss adjustment expenses (dollars in
thousands):
Years Ended December 31,
------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
NET RESERVES FOR E&A LOSSES AND LOSS ADJUSTMENT
EXPENSES, BEGINNING OF YEAR $ 82,631 $ 81,364 $ 62,382
Commutations -- 3 1,009
Reserves for E&A losses and
loss adjustment expenses of
acquired insurance companies 38,913 -- --
- --------------------------------------------------------------------------------
RESTATED NET RESERVES FOR
E&A LOSSES AND LOSS ADJUSTMENT
EXPENSES, BEGINNING OF YEAR $121,544 $ 81,367 $ 63,391
Incurred losses and loss adjustment expenses 5,082 10,576 29,050
Payments 28,850 9,312 11,077
- --------------------------------------------------------------------------------
NET RESERVES FOR E&A LOSSES AND LOSS
ADJUSTMENT EXPENSES, END OF YEAR 97,776 82,631 81,364
- --------------------------------------------------------------------------------
Reinsurance recoverable on unpaid losses 70,758 11,925 14,018
- --------------------------------------------------------------------------------
GROSS RESERVES FOR E&A LOSSES AND LOSS
ADJUSTMENT EXPENSES, END OF YEAR $168,534 $ 94,556 $ 95,382
================================================================================
The increase in 1999 net and gross E&A reserves was due to the acquisition of
Gryphon in January 1999.
Inception to date net paid losses and loss adjustment expenses for E&A related
exposures totaled $184.8 million at December 31, 1999, of which approximately
$16.4 million was litigation related expense.
39
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Unpaid Losses And Loss Adjustment Expenses (continued)
There were 304 open claims related to E&A at December 31, 1999, compared to 205
at December 31, 1998 and 234 at December 31, 1997. Of the open claims at
December 31, 1999, approximately 13% were products liability asbestos or related
claims. The 1999 increase in open claims was due to the acquisition of Gryphon.
Management believes future exposure to valid EIL claims is limited because
coverage was afforded on a claims made basis.
The Company's reserves for losses and loss adjustment expenses related to E&A
exposures represent management's best estimate of ultimate settlement values.
E&A reserves are continually monitored by management, and the Company's
statistical analysis of these reserves is reviewed by independent consulting
actuaries. E&A exposures are generally subject to significant uncertainty due to
potential severity and an uncertain legal climate. E&A reserves 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 redundant than deficient.
================================================================================
9. Long-Term Debt
Long-term debt consists of the following (dollars in thousands):
December 31,
-----------------------
1999 1998
- ---------------------------------------------------------------------------------------------
Unsecured borrowings under $250 million revolving credit facility
at an average rate of 7.0%, due April 23, 2003 $ 75,000 $ --
7.25% unsecured notes, due November 1, 2003, interest payable
semi-annually, net of unamortized discount of
$178 in 1999 and $231 in 1998 92,984 93,219
- ---------------------------------------------------------------------------------------------
Long-Term Debt $167,984 $ 93,219
=============================================================================================
The $250 million revolving credit facility is available for working capital and
other general corporate purposes. The Company may select from various interest
rate options for balances outstanding under the facility. The Company pays a
commitment fee of .10% on the unused portion of the facility.
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%. During 1999 the
Company repurchased $0.3 million of its 7.25% notes.
The estimated fair values of the Company's long-term debt were $163.9 million
and $96.9 million at December 31, 1999 and 1998, respectively, and were based on
quoted market prices at the reporting dates.
The $168.0 million of future principal payments on long-term debt are due in
2003.
The Company paid $11.9 million, $7.3 million and $7.6 million in interest during
the years ended December 31, 1999, 1998 and 1997, respectively.
40
- --------------------------------------------------------------------------------
10. Company-Obligated Mandatorily Redeemable Preferred Capital 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.
The Company paid $13.1 million, $19.6 million and $6.1 million in interest on
the 8.71% Capital Securities during the years ended December 31, 1999, 1998 and
1997, respectively. The estimated fair values of the Company's 8.71% Capital
Securities were $124.5 million and $144.5 million at December 31, 1999 and 1998,
respectively, and were based on quoted market prices at the reporting dates.
================================================================================
11. Shareholders' Equity
a) The Company has 15,000,000 shares of no par value common stock authorized, of
which 5,590,118 and 5,522,437 shares were outstanding at December 31, 1999 and
1998, 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.
b) The Company has three stock option or stock award plans for employees and
directors; the 1986 Stock Option Plan which expired on November 3, 1996, the
1989 Non-employee Director Stock Option Plan which expired on December 31,1998
and the 1993 Incentive Stock Plan. At December 31, 1999, there were 64,579
shares and 100,000 shares reserved for issuance under the 1986 plan and the 1993
plan, respectively. At December 31, 1999, all options granted under the 1989
plan had been exercised. The 1986 and the 1993 plans are administered by the
Compensation Committee of the Company's Board of Directors. The 1993 plan
provides for the award of incentive stock options, stock appreciation rights or
incentive stock awards to employees of the Company. Options are granted at a
price not less than market price on the date of the grant and are exercisable
within a period established by the 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, 1999, the
Company had 97,500 options, stock appreciation rights or incentive stock awards
available for grant under the 1993 plan.
41
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Shareholders' Equity (continued)
Stock option transactions are summarized below:
Years Ended December 31,
----------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
1999 Price 1998 Price 1997 Price
- -------------------------------------------------------------------------------------------------------------
Options outstanding
at January 1 160,439 $ 31 217,279 $ 29 264,250 $ 26
Granted -- -- -- -- 2,500 144
Exercised (93,360) 26 (56,260) 23 (48,031) 17
Canceled -- -- (580) 39 (1,440) 39
- -------------------------------------------------------------------------------------------------------------
Options outstanding
at December 31 67,079 $ 38 160,439 $ 31 217,279 $ 29
=============================================================================================================
Options exercisable
at December 31 60,079 139,807 180,283
Options available for grant
at December 31 97,500 97,500 133,500
=============================================================================================================
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
- ------------------------------------------------------------------------------------------
$ 11 to 12 12,459 1.0 year $ 12 12,459 $ 12
18 to 21 9,350 1.6 20 9,350 20
26 4,500 2.4 26 4,500 26
36 to 42 33,270 3.8 38 31,270 38
87 5,000 6.8 87 2,000 87
144 2,500 7.8 144 500 144
- ------------------------------------------------------------------------------------------
$11 to 144 67,079 3.3 year $ 38 60,079 $ 31
==========================================================================================
The pro forma impact of stock options granted after 1995 had no effect on basic
or diluted net income per share.
42
- --------------------------------------------------------------------------------
11. Shareholders' Equity (continued)
c) Net income per share is determined by dividing net income, as adjusted below,
by the applicable shares outstanding (in thousands):
Years Ended December 31,
-----------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Net income as reported $ 40,614 $ 57,293 $ 50,427
Dividends on redeemable preferred stock -- -- (8)
- --------------------------------------------------------------------------------
Basic and diluted income $ 40,614 $ 57,293 $ 50,419
================================================================================
Average common shares outstanding 5,585 5,506 5,483
Dilutive potential common shares 53 130 169
- --------------------------------------------------------------------------------
Average diluted shares outstanding 5,638 5,636 5,652
================================================================================
Basic shares represent average common shares outstanding. Diluted shares include
average common shares and dilutive potential common shares outstanding. Average
closing common stock market prices are used to calculate the dilutive effect
attributable to stock options.
================================================================================
12. Comprehensive Income (Loss)
Other comprehensive income (loss) is composed of net holding gains (losses) on
securities arising during the period less reclassification adjustments for gains
(losses) included in net income. The related tax expense (benefit) on net
holding gains (losses) on securities arising during the period was $(43.7)
million, $13.0 million and $27.9 million for 1999, 1998 and 1997, respectively.
The related tax expense (benefit) on the reclassification adjustments for gains
(losses) included in net income was $(0.3) million for 1999, $7.2 million for
1998 and $5.5 million for 1997.
================================================================================
13. 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 $3.3 million, $2.9
million and $2.6 million in 1999, 1998 and 1997, respectively.
================================================================================
14. 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.
A credit risk exists with reinsurance ceded to the extent that any reinsurer is
unable to meet the obligations assumed under the reinsurance agreements.
Allowances are established for amounts deemed uncollectible. The Company
evaluates the financial condition of its reinsurers and monitors concentration
of credit risk arising from its exposure to individual reinsurers. At December
31, 1999 and 1998, the Company's top ten reinsurers represented 50% and 74%,
respectively, of the reinsurance recoverable on paid and unpaid losses.
43
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Reinsurance (continued)
The table below summarizes the effect of reinsurance on premiums written and
earned (dollars in thousands):
Years Ended December 31,
---------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------
Written Earned Written Earned Written Earned
Direct $ 564,749 $ 567,117 $ 432,094 $ 413,752 $ 413,252 $ 422,574
Assumed 27,784 25,529 4,933 5,313 7,395 6,938
Ceded (164,529) (155,450) (93,150) (85,798) (90,684) (96,634)
- -------------------------------------------------------------------------------------------------
Net Premiums $ 428,004 $ 437,196 $ 343,877 $ 333,267 $ 329,963 $ 332,878
=================================================================================================
Incurred losses and loss adjustment expenses are net of reinsurance recoveries
of $102.2 million, $55.8 million and $82.0 million for the years ended December
31, 1999, 1998 and 1997, respectively.
The percentage of assumed earned premiums to net earned premiums for the years
ended December 31, 1999, 1998 and 1997 was approximately 6%, 2% and 2%,
respectively.
================================================================================
15. Contingencies
The Company has contingencies that arise in the normal conduct of its
operations. In the opinion of management, the resolutions of these contingencies
are not expected to have a material impact on the Company's financial condition
or results of operations.
================================================================================
16. Related Party Transactions
The Company pays commissions for business produced by Gary Markel & Associates,
Inc. and Gary Markel Surplus Lines Brokerage, Inc., entities owned by a Director
of the Company. The commissions paid were $0.4 million, $0.4 million and $0.5
million for the years ended December 31, 1999, 1998 and 1997, respectively.
================================================================================
17. 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,
------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Net income $ 60,938 $ 48,357 $ 50,427
- --------------------------------------------------------------------------------
Statutory capital and surplus $435,071 $372,872 $334,025
================================================================================
The laws of the domicile states of the Company's insurance subsidiaries govern
the amount of dividends which may be paid to the Company. Generally, statutes in
the domicile states of the Company's insurance subsidiaries require prior
approval for payment of "extraordinary" as opposed to "ordinary" dividends. At
December 31, 1999, the Company's insurance subsidiaries could pay up to $60.9
million during the following twelve months under the ordinary dividend
regulations without prior regulatory approval. As of December 31, 1999, $374.2
million of the insurance subsidiaries' statutory surplus was so restricted.
In converting from statutory accounting principles to generally accepted
accounting principles, typical adjustments include deferral of policy
acquisition costs, a provision for deferred federal income taxes and the
inclusion of net unrealized holding gains or losses in shareholders' equity
relating to fixed maturities. The Company does not use any permitted statutory
accounting practices which are different from prescribed statutory accounting
practices.
44
- --------------------------------------------------------------------------------
18. Segment Reporting Disclosures
The Company has five core 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 has significantly restructured Gryphon's operations, and Gryphon's
premium volume has decreased by approximately 50% from preacquisition levels.
Gryphon continuing programs are administered by underwriting units in the Excess
and Surplus Lines operating segment. Gryphon 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.
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 net 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
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 disclosures (dollars in thousands):
Years Ended December 31,
---------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Segment Revenues
Excess & Surplus Lines $ 286,449 $ 229,541 $ 216,478
Specialty Admitted 114,567 103,726 116,400
Investing 86,784 91,604 84,487
Other 36,180 -- --
- --------------------------------------------------------------------------------
Segment Revenues $ 523,980 $ 424,871 $ 417,365
================================================================================
Segment Profit (Loss)
Excess & Surplus Lines $ 15,846 $ 6,878 $ 14,032
Specialty Admitted (890) (1,788) (11,291)
Investing 86,784 91,604 84,487
Other (18,093) -- --
- --------------------------------------------------------------------------------
SEGMENT PROFIT $ 83,647 $ 96,694 $ 87,228
================================================================================
45
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Segment Reporting Disclosures (continued)
Years Ended December 31,
----------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Segment Assets
Excess & Surplus Lines $ -- $ -- $ --
Specialty Admitted -- -- --
Investing 1,623,139 1,481,093 1,408,320
Other 832,166 440,171 461,780
- --------------------------------------------------------------------------------
SEGMENT ASSETS $2,455,305 $1,921,264 $1,870,100
================================================================================
Combined Ratio
Excess & Surplus Lines 94% 97% 94%
Specialty Admitted 101% 102% 110%
Investing -- -- --
Other 150% -- --
- --------------------------------------------------------------------------------
COMBINED RATIO 101% 98% 99%
================================================================================
b) The following summary reconciles significant segment items to the Company's
consolidated financial statements (dollars in thousands):
Years Ended December 31,
----------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Operating Revenues
Earned premiums $ 437,196 $ 333,267 $ 332,878
Investing results 86,784 91,604 84,487
Other 341 1,130 1,682
- --------------------------------------------------------------------------------
TOTAL OPERATING REVENUES $ 524,321 $ 426,001 $ 419,047
================================================================================
Income Before Income Taxes
Segment profit $ 83,647 $ 96,694 $ 87,228
Unallocated amounts
Amortization expense (5,398) (2,033) (2,435)
Interest expense (25,150) (20,406) (20,124)
Other 341 1,130 1,682
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 53,440 $ 75,385 $ 66,351
================================================================================
46
- --------------------------------------------------------------------------------
19. 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 results for the year ended December 31, 1999 include Gryphon 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. In addition the Company refinanced
$55.0 million of Gryphon's long-term debt.
The table below summarizes, on a pro forma basis, the Company's consolidated
results of operations as if the purchase of Gryphon had taken place as of
January 1, 1998 (dollars in thousands, except per share amounts):
Year Ended
December 31, 1998
- --------------------------------------------------------------------------------
Total operating revenues $549,201
Net income 28,489
- --------------------------------------------------------------------------------
Net income per share
Basic $ 5.17
Diluted 5.05
================================================================================
Gryphon's results had a dilutive effect on the Company's pro forma results of
operations in 1998 due to significant loss reserve strengthening at Gryphon.
================================================================================
20. Subsequent Event
The Company originally announced an agreement to purchase Terra Nova (Bermuda)
Holdings Ltd. (Terra Nova) in August 1999. On January 26, 2000, subsequent to
the Company's year end, the Company announced revised terms for its acquisition
of Terra Nova. The new agreement was reached after preliminary information
indicated that Terra Nova would report a loss for the year ended December 31,
1999.
Pursuant to the revised terms of the merger agreement, purchase consideration
will consist of approximately $325 million in cash, 1.8 million Markel common
shares and 1.8 million Markel contingent value rights (CVR). The CVR's are
intended to increase the likelihood that a Terra Nova shareholder will be able
to realize a minimum value of $185 for each Markel share received. In addition,
$175 million of Terra Nova debt will remain outstanding. The acquisition will be
accounted for as a purchase transaction. The excess of the purchase price over
the fair value of the net tangible and identifiable intangible assets acquired
will be recorded as goodwill and will be amortized using the straight-line
method over 20 years. The transaction which is subject to approval by the
Company's and Terra Nova's shareholders, the receipt of necessary regulatory
approvals and other customary closing conditions is scheduled to close on
March 24, 2000.
47
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
21. Markel Corporation (Parent Company Only) Financial Information
- ----------------------------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
December 31,
-------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------
(dollars in thousands)
ASSETS
Investments, available-for-sale, at estimated fair value
Fixed maturities (cost of $37,041 in 1999 and $86,669 in 1998) $ 36,246 $ 87,267
Equity securities (cost of $54,011 in 1999 and $48,007 in 1998) 55,822 50,637
Short-term investments (estimated fair value approximates cost) 28,053 58,726
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS, AVAILABLE-FOR-SALE 120,121 196,630
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents 853 624
Investments in consolidated subsidiaries 549,432 431,836
Notes receivable due from subsidiaries 38,864 52,764
Current income taxes recoverable -- 200
Other assets 30,289 25,328
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $739,559 $707,382
====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current income taxes payable $ 752 $ --
Deferred income taxes 4,906 6,570
Long-term debt 167,984 93,219
Other liabilities 27,858 27,652
8.71% Junior Subordinated Deferrable Interest Debentures 154,640 154,640
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 356,140 282,081
- ----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 383,419 425,301
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $739,559 $707,382
====================================================================================================
48
- --------------------------------------------------------------------------------
21. Markel Corporation (Parent Company Only) Financial Information (continued)
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31,
------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands)
REVENUES
Net investment income $ 10,390 $ 12,900 $ 11,816
Cash dividends on common stock of
consolidated subsidiaries 48,851 35,637 29,125
Net realized gains (losses) from investment sales (5,767) 3,980 1,036
Other 147 6 15
- --------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 53,621 52,523 41,992
==============================================================================================================
EXPENSES
Interest 23,845 20,167 20,306
Other 1,124 1,001 644
- --------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 24,969 21,168 20,950
==============================================================================================================
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF CONSOLIDATED SUBSIDIARIES
AND INCOME TAXES 28,652 31,355 21,042
Equity in undistributed earnings of
consolidated subsidiaries 8,345 19,734 23,666
Income tax benefit (3,617) (6,204) (5,719)
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 40,614 $ 57,293 $ 50,427
==============================================================================================================
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains (losses) on securities, net of taxes
Net holding gains (losses) arising
during the period $ (5,186) $ 2,881 $ 2,477
Consolidated subsidiaries' net holding
gains (losses) arising during the period (76,037) 21,231 49,323
- --------------------------------------------------------------------------------------------------------------
(81,223) 24,112 51,800
- --------------------------------------------------------------------------------------------------------------
Less reclassification adjustments for gains (losses)
included in net income 3,749 (2,587) (673)
Less consolidated subsidiaries' reclassification
adjustments for gains included in net income (3,166) (10,776) (9,619)
- --------------------------------------------------------------------------------------------------------------
583 (13,363) (10,292)
- --------------------------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS) (80,640) 10,749 41,508
- --------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $(40,026) $ 68,042 $ 91,935
==============================================================================================================
49
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
21. Markel Corporation (Parent Company Only) Financial Information (continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
(dollars in thousands)
OPERATING ACTIVITIES
Net income $ 40,614 $ 57,293 $ 50,427
Adjustments to reconcile net income to net cash
provided by operating activities 7,448 (34,186) (15,471)
- ----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 48,062 23,107 34,956
====================================================================================================
INVESTING ACTIVITIES
Proceeds from sales of fixed maturities
and equity securities 80,751 15,410 5,918
Proceeds from maturities of fixed maturities 16,442 82,846 2,047
Cost of fixed maturities and equity
securities purchased (56,691) (92,991) (152,551)
Net change in short-term investments 30,673 (23,232) (17,876)
Decrease (increase) in notes receivable due
from subsidiaries 13,900 (4,538) 1,468
Capital contribution to subsidiaries (14,000) -- (4,640)
Sales (acquisition) of insurance companies (124,318) -- 15,791
Other (8,833) (1,082) (1,424)
- ----------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (62,076) (23,587) (151,267)
====================================================================================================
FINANCING ACTIVITIES
Net proceeds from issuance of 8.71% Junior
Subordinate Deferrable Interest Debentures -- -- 152,763
Dividends to subsidiaries -- -- (51)
Additions to long-term debt 115,000 -- --
Repayments and repurchases of long-term debt (95,288) -- (21,527)
Repurchase of preferred stock from subsidiaries -- -- (12,000)
Other (5,469) 455 (3,787)
- ----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,243 455 115,398
====================================================================================================
Increase (decrease) in cash and cash equivalents 229 (25) (913)
Cash and cash equivalents at beginning of year 624 649 1,562
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 853 $ 624 $ 649
====================================================================================================
50
- --------------------------------------------------------------------------------
Independent Auditors' Report
[LOGO OF KPMG]
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, 1999 and 1998, and the related
consolidated statements of income and comprehensive income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Richmond, Virginia
February 1, 2000
51
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
QUARTERLY INFORMATION
The following table presents the quarterly results of consolidated operations
for 1999, 1998 and 1997 (dollars in thousands, except per share amounts):
Mar. 31 June 30 Sept. 30 Dec. 31
- -------------------------------------------------------------------------------------------------
1999
Operating revenues $ 138,110 $ 132,155 $ 132,622 $ 121,434
Income before income taxes 19,308 15,664 11,559 6,909
Net income 14,674 11,905 8,784 5,251
Comprehensive loss (7,787) (3,741) (27,956) (542)
Net income per share
Basic $ 2.64 $ 2.13 $ 1.57 $ 0.94
Diluted 2.61 2.10 1.55 0.93
Common stock price ranges
High $ 184 1/2 $ 192 $ 191 1/2 $ 180 1/2
Low 166 1/2 176 1/2 174 145
1998
Operating revenues $ 100,083 $ 108,148 $ 105,094 $ 112,676
Income before income taxes 16,896 19,653 15,914 22,922
Net income 12,841 14,936 12,095 17,421
Comprehensive income 31,874 11,764 3,151 21,253
Net income per share
Basic $ 2.34 $ 2.71 $ 2.20 $ 3.16
Diluted 2.27 2.64 2.14 3.09
Common stock price ranges
High $ 177 1/2 $ 180 1/2 $ 185 $ 183 3/4
Low 150 158 1/2 141 132 3/4
1997
Operating revenues $ 98,473 $ 101,700 $ 110,612 $ 108,262
Income before income taxes 11,878 12,476 21,039 20,958
Net income 8,790 9,722 15,988 15,927
Comprehensive income 3,082 37,614 32,742 18,497
Net income per share
Basic $ 1.61 $ 1.77 $ 2.91 $ 2.90
Diluted 1.56 1.72 2.82 2.81
Common stock price ranges
High $ 113 1/2 $ 131 $ 157 1/2 $ 161
Low 89 102 1/2 127 1/2 144
Effective June 11, 1997, the Company's common stock began trading on the New
York Stock Exchange under the symbol MKL. Prior to that time, the Company's
stock traded in the NASDAQ stock market under the symbol MAKL.
52
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- --------------------------------------------------------------------------------
In 1999 gross premium volume totaled $594.9 million compared to $437.5
million in 1998 and $423.3 million in 1997. The 1999 growth was primarily
the result of the acquisition of Gryphon which added $104.1 million to the
Company's gross premium volume. During 1999, $67.7 million of Gryphon gross
premiums that the Company expects to retain and further develop (Gryphon
continuing programs) were moved to the Company's three Excess & Surplus
lines units. After the acquisition, the Company identified and discontinued
all Gryphon programs that had historically produced underwriting losses
(Gryphon discontinued programs). Gryphon discontinued programs totaled
$36.4 million of gross premiums in 1999. Gross premiums from the Company's
core underwriting units, before consideration of Gryphon, increased 12% in
1999. Following is a comparison of gross premium volume by significant
underwriting unit (dollars in thousands):
Years Ended December 31,
---------------------------------------------------------------------------
GROSS PREMIUM VOLUME 1999 1998 1997
---------------------------------------------------------------------------
Excess and Surplus Lines $ 185,526 $ 121,959 $ 130,028
Professional/Products Liability 153,523 123,607 113,704
Brokered Excess and Surplus Lines 84,549 65,257 45,795
Specialty Program Insurance 82,501 83,562 85,645
Specialty Personal and Commercial Lines 50,388 39,770 44,871
Gryphon Discontinued Programs 36,374 -- --
Other 2,087 3,323 3,300
---------------------------------------------------------------------------
TOTAL $ 594,948 $ 437,478 $ 423,343
===========================================================================
Excess and Surplus Lines premiums totaled $185.5 million in 1999 compared
to $122.0 million in 1998 and $130.0 million in 1997. The 1999 growth was
primarily due to the addition of $46.3 million of Gryphon continuing
programs, principally consisting of earthquake-exposed California
commercial property business. Before considering volume added by the
Gryphon acquisition,1999 premiums from Excess and Surplus Lines grew 14% to
$139.2 million due to increased production in the casualty, Essex special
property and inland marine programs. In 1998 continued growth in the inland
marine program was more than offset by lower production in the casualty and
Essex special property programs. Both years were affected by intense
competition in the excess and surplus lines market.
Premiums from Professional/Products Liability rose 24% to $153.5 million in
1999 from $123.6 million in 1998 and $113.7 million in 1997. The 1999
growth was partially due to the addition of $14.1 million of Gryphon
continuing programs, consisting of directors and officers, architects,
engineers and lawyers programs. Before considering volume added by the
Gryphon acquisition, premiums from Professional/Products Liability rose 13%
to $139.5 million during 1999. This increase was due to growth in the
employment practices liability, specified professions and special risks
programs that was partially offset by lower production from the medical
malpractice and lawyers programs. In 1998 growth in the employment
practices and specified professions product lines was partially offset by
lower production from other lines, including scaffolding, financial
institutions and the directors and officers programs. Both years were
affected by continued aggressive competition in the professional liability
markets and changes in risk selection in certain programs.
[GRAPH]
Premiums
1997 1998 1999
---- ---- ----
$ in millions
gross premium volume $423 $437 $595
net premiums written $330 $344 $428
Premiums from Brokered Excess and Surplus Lines increased 30% to $84.5
million in 1999 from $65.3 million in 1998 and $45.8 million in 1997. The
increase in 1999 was due in part to the addition of a $7.3 million loan
guarantee program from the Gryphon acquisition. Before considering
53
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
volume added by the Gryphon acquisition, premiums from Brokered Excess and
Surplus Lines grew 18% to $77.3 million due to growth in the excess and
umbrella, casualty and property programs. The 1998 increase was due to
growth in the casualty and excess and umbrella programs.
Premiums from Specialty Program Insurance totaled $82.5 million in 1999
compared to $83.6 million in 1998 and $85.6 million in 1997. The 1999
decrease was due to increased competition in the youth and recreation
program and a change in risk selection in a portion of the agribusiness
program. The decrease in these lines was partially offset by continued
growth in the sports liability, accident and medical (SLAM) and surety
programs. In 1998 growth in the agriculture, SLAM and surety programs was
more than offset by declines in the camp and youth recreation and health
and fitness programs.
Specialty Personal and Commercial Lines premiums rose 27% to $50.4 million
in 1999 from $39.8 million in 1998 and $44.9 million in 1997. The 1999
increase was due to the acquisition of a yacht program that added $19.3
million in gross premium, including $7.3 million of unearned premiums at
the date of acquisition. This growth was partially offset by the
discontinuance of portions of the unit's property programs. The decrease in
1998 was primarily due to the restructuring of the property programs and
aggressive competition.
Gross premium volume for the Gryphon discontinued programs was $36.4
million in 1999. The Company reviewed all of Gryphon's programs at the time
of the acquisition and determined that certain programs were unprofitable
and presented little opportunity to generate future underwriting profits.
The Company has discontinued these programs and has established a runoff
unit to aggressively manage their resolution.
Other gross premium volume was $2.1 million in 1999 and $3.3 million in
both 1998 and 1997. 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. 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 72% in 1999 compared to 79% in 1998 and 78% in 1997. The
decrease in 1999 was primarily due to lower retentions on the Gryphon
California property program that was added to the Excess and Surplus Lines
underwriting unit. The 1998 increase was primarily due to a new reinsurance
treaty structure in the Specialty Program Insurance unit and higher
retentions in the Professional/Products Liability unit.
Total operating revenues were $524.3 million in 1999 compared to $426.0
million in 1998 and $419.0 million in 1997. In 1999 growth in earned
premiums and higher net investment income, primarily as a result of the
Gryphon acquisition, more than offset the recognition of net realized
losses from investment sales. In 1998 the increase was due to substantially
higher realized gains and an increase in net investment income.
54
Earned premiums increased 31% to $437.2 million in 1999 from $333.3 million
in 1998 and $332.9 million in 1997. Gryphon continuing and discontinued
programs contributed $31.1 million and $36.2 million of earned premiums,
respectively. Before considering earned premiums added by the Gryphon
acquisition, earned premiums from the Company's core underwriting units
increased 11% in 1999. Following is a comparison of earned premiums by
significant underwriting unit (dollars in thousands):
Years Ended December 31,
---------------------------------
EARNED PREMIUMS 1999 1998 1997
---------------------------------------------------------------------------
Excess and Surplus Lines $ 103,602 $ 86,439 $ 84,244
Professional/Products Liability 128,941 105,177 102,075
Brokered Excess and Surplus Lines 53,906 37,911 30,170
Specialty Program Insurance 67,785 63,438 67,778
Specialty Personal and Commercial Lines 46,782 40,288 48,622
Gryphon Discontinued Programs 36,180 -- --
Other -- 14 (11)
---------------------------------------------------------------------------
TOTAL $ 437,196 $ 333,267 $ 332,878
===========================================================================
Excess and Surplus Lines earned premiums rose in 1999 to $103.6 million and
in 1998 to $86.4 million from $84.2 million in 1997. The growth in 1999 was
primarily due to the addition of $13.2 million of earned premium from
Gryphon continuing programs. Before considering earned premiums added by
the Gryphon acquisition, higher gross premium volume over the past several
years accounted for earned premium growth in 1999 and 1998 of 5% and 3%,
respectively.
Premiums earned from Professional/Products Liability increased in 1999 to
$128.9 million and in 1998 to $105.2 million from $102.1 million in 1997.
The growth in 1999 was partially due to the addition of $10.6 million of
earned premiums from Gryphon continuing programs. Before considering earned
premiums added by the Gryphon acquisition, higher gross premium volume over
the past several years accounted for earned premium growth in 1999 and 1998
of 13% and 3%, respectively.
Premiums earned from Brokered Excess and Surplus Lines increased in 1999 to
$53.9 million and to $37.9 million in 1998 from $30.2 million in 1997. The
increase in 1999 was partially due to $7.3 million of earned premiums from
Gryphon continuing programs. Before considering earned premiums added by
the Gryphon acquisition, the increase in both 1999 and 1998 was due to
gross premium growth.
Specialty Program Insurance earned premiums increased 7% to $67.8 million
in 1999 and decreased 6% to $63.4 million in 1998 from $67.8 million in
1997. The increase in 1999 was primarily due to steadily increasing net
retentions over the past several years partially offset by lower gross
premium volume. The decline in 1998 was due to lower gross premium volume.
Specialty Personal and Commercial Lines earned premiums increased 16% in
1999 to $46.8 million and decreased 17% in 1998 to $40.3 million from $48.6
million in 1997. The increase in 1999 was primarily due to the acquisition
of a yacht program, which contributed $11.4 million of earned premiums
during 1999. The 1998 decrease was due to declining gross premium
production in 1998 and 1997.
55
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
[GRAPH]
Investment Earnings
1997 1998 1999
---- ---- ----
$ in millions
net realized gains (losses) 16 21 (1)
net investment income 69 71 88
--------------------------------------------------------------------
Total 85 92 87
Net investment income increased 23% in 1999 to $87.7 million and 3% in 1998
to $71.0 million from $68.7 million in 1997. The 1999 increase was
primarily the result of the Gryphon acquisition, which added approximately
$300 million to the Company's investment portfolio in January 1999. The
1998 increase was the result of operating cash flows which added to the
Company's investment portfolio, partially offset by lower interest rates.
Invested assets grew 10% in 1999 to $1.6 billion and 5% in 1998 to $1.5
billion from $1.4 billion in 1997.
The Company recognized $0.9 million of net realized losses from investment
sales in 1999 compared to $20.6 million of net realized gains in 1998 and
$15.8 million of net realized gains in 1997. As part of its tax planning
strategy, the Company made the decision in 1999 to sell fixed income
securities with unrealized losses and realize the associated tax savings.
Proceeds were reinvested in high quality fixed income securities at higher
yields. Over the past three years, the Company has experienced variability
in its realized and unrealized investment gains and losses. The
fluctuations are primarily the result of interest rate volatility which
influences the market values of fixed maturity and equity investments. The
Company's investment strategy seeks to maximize total investment returns
over a long-term period. The Company's focus on long-term total investment
returns may result in variability in the level of realized and unrealized
investment gains or losses from one period to the next.
Total operating expenses, which include losses and loss adjustment
expenses, underwriting, acquisition and insurance expenses and amortization
of intangible assets, were $445.7 million in 1999 compared to $330.2
million in 1998 and $332.6 million in 1997. The 1999 increase resulted
primarily from the Gryphon acquisition. In 1998 lower operating expenses
were primarily due to continued favorable loss reserve development.
The following is a comparison of selected data from the Company's
operations (dollars in thousands):
Years Ended December 31,
-------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------
Gross premium volume $ 594,948 $ 437,478 $ 423,343
Net premiums written $ 428,004 $ 343,877 $ 329,963
Net retention 72% 79% 78%
Earned premiums $ 437,196 $ 333,267 $ 332,878
Losses and loss adjustment expenses $ 283,630 $ 203,336 $ 210,061
Underwriting, acquisition and insurance expenses $ 156,703 $ 124,841 $ 120,076
Underwriting profit (loss)* $ (3,137) $ 5,090 $ 2,741
GAAP RATIOS
Loss ratio 65% 61% 63%
Expense ratio 36% 37% 36%
-----------------------------------------------------------------------------------------
COMBINED RATIO 101% 98% 99%
=========================================================================================
*The property and casualty insurance industry commonly defines underwriting
profit or loss as earned premiums net of losses and loss adjustment
expenses and underwriting, acquisition and insurance expenses. Underwriting
profit or loss does not replace operating income or net income computed in
accordance with generally accepted accounting principles (GAAP) as a
measure of profitability.
The combined ratio measures the relationship of incurred losses, loss
adjustment expenses and underwriting, acquisition and insurance expenses to
earned premiums. The loss ratio for 1999 increased to 65% from 61% in 1998
and from 63% in 1997. In 1999 favorable loss development in the Excess and
Surplus Lines operating segment was more than offset by the higher loss
ratio on Gryphon
56
- --------------------------------------------------------------------------------
discontinued programs. The 1998 loss ratio compared favorably to 1997 due
to continued favorable loss reserve development and favorable results from
corrective actions taken in certain lines of business. The expense ratio
was 36% in 1999 compared to 37% in 1998 and 36% in 1997. The decrease in
the 1999 expense ratio was primarily due to lower overhead costs in the
Specialty Admitted operating segment and higher earned premiums. The
increase in the 1998 expense ratio was due to higher acquisition costs,
primarily producer commissions, and lower contingent profit commissions
from reinsurers compared to 1997.
The Company's five core 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.
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 1999 compared to 97% in 1998 and 94% in 1997. The 1999 improvement
was due to continued favorable loss reserve development across most lines
of business. The increase in the 1998 combined ratio was primarily due to
reserve strengthening for toxic tort and environmental impairment claims,
partially offset by favorable development in other lines of business. The
1998 increase was also due to higher producer commissions and lower
contingent profit commissions from reinsurers compared to 1997.
The combined ratio for the Specialty Admitted segment decreased to 101% in
1999 compared to 102% in 1998 and 110% in 1997. The 1999 improvement was
due to lower overhead costs. The improvement in 1998 was the result of
improving loss ratios, partially offset by higher acquisition costs.
Interest expense was $25.2 million in 1999 compared to $20.4 million in
1998 and $20.1 million in 1997. The 1999 increase was due to additional
borrowings to finance a portion of the Gryphon acquisition.
In evaluating its operating performance, the Company focuses on
underwriting and investing results before consideration of realized gains
or losses from the sales of investments, expenses related to the
amortization of intangible assets and any nonrecurring items (earnings from
core operations). Although earnings from core operations does not replace
operating income or net income computed in accordance with GAAP as a
measure of profitability, management focuses on this performance measure
because it reduces the variability in results associated with realized
gains or losses and also eliminates the impact of accounting transactions
which do not reflect current operating costs. Earnings from core operations
were $46.1 million in 1999 compared to $45.6 million in 1998 and $42.0
million in 1997. The 1999 increase was primarily due to higher net
investment income generated from the Gryphon investment portfolio and
underwriting profits in the Company's core underwriting units, partially
offset by underwriting losses in Gryphon discontinued programs. The 1998
increase was due to underwriting profitability and higher net investment
income, resulting primarily from larger investment portfolios.
[GRAPH]
Earnings from Core Operations
1997 1998 1999
---- ---- ----
$ per diluted share
7.43 8.10 8.17
Net income was $40.6 million in 1999 compared to $57.3 million in 1998 and
$50.4 million in 1997. The decrease in 1999 was primarily the result of net
realized losses from sales of investments compared to net realized gains in
1998. The 1998 increase was due to increased realized investment gains and
higher underwriting profitability.
57
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The Company reported a comprehensive loss of $40.0 million in 1999 compared
to $68.0 million of comprehensive income in 1998 and $91.9 million of
comprehensive income in 1997. The comprehensive loss in 1999 was due to
unrealized holding losses on equity and fixed maturity securities and lower
net income compared to 1998. The decrease in 1998 comprehensive income was
due to smaller increases in unrealized holding gains on equity and fixed
maturity securities compared to 1997, partially offset by higher net
income.
Claims And Reserves
================================================================================
The Company maintains reserves for specific claims incurred and reported,
reserves for claims incurred but not reported 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.
The first line of the following table shows net reserves for losses and
loss adjustment expenses restated for reinsurer commutations, acquisitions
and other items, 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, including acquisitions, completed in recent years.
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 1994 liability for losses and
loss adjustment expenses at the end of 1994 for 1994 and all prior years,
adjusted for commutations, acquisitions and other, was originally estimated
to be $715.4 million. Five years later, as of December 31, 1999, this
amount was re-estimated to be $642.5 million, of which $403.7 million had
been paid, leaving a reserve of $238.8 million for losses and loss
adjustment expenses for 1994 and prior years remaining unpaid as of
December 31, 1999.
58
The following table represents the development of the Company's balance
sheet reserves for the period 1989 through 1999 (in thousands):
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Net reserves restated
for commutations,
acquisitions and other $559,213 566,744 618,534 638,199 675,937 715,407 790,943 876,063 947,240 995,650 964,878
- -----------------------------------------------------------------------------------------------------------------------------------
Paid (cumulative)
as of:
One year later 65,810 52,545 83,720 95,084 151,413 135,947 124,467 145,736 161,103 248,679
Two years later 116,418 107,209 156,256 217,180 253,418 219,133 227,640 266,248 345,124
Three years later 154,798 160,808 253,424 297,034 307,831 286,926 305,217 399,473
Four years later 194,199 242,670 318,298 331,709 353,325 337,712 399,714
Five years later 258,412 297,914 346,009 361,214 387,224 403,727
Six years later 310,448 320,766 367,636 385,347 439,425
Seven years later 331,842 337,735 386,721 426,419
Eight years later 346,213 353,380 426,028
Nine years later 360,575 389,897
Ten years later 394,335
Reserves
re-estimated as of:
One year later 553,747 562,366 608,945 631,960 638,738 706,614 766,826 850,087 909,844 957,158
Two years later 551,658 550,488 603,883 604,928 660,001 681,923 740,053 826,064 873,646
Three years later 544,311 546,491 583,354 606,374 642,360 658,964 723,029 795,375
Four years later 537,501 533,764 574,963 590,375 636,738 654,501 707,564
Five years later 525,932 519,869 562,134 592,780 637,844 642,468
Six years later 509,960 508,561 568,574 598,358 632,003
Seven years later 499,448 519,826 577,779 595,926
Eight years later 512,074 529,022 577,527
Nine years later 522,498 529,886
Ten years later 524,391
Net cumulative
redundancy $ 34,822 36,858 41,007 42,273 43,934 72,939 83,379 80,688 73,594 38,492
===================================================================================================================================
Cumulative % 6% 7% 7% 7% 6% 10% 11% 9% 8% 4%
Gross liability, end of year, restated
for acquisitions and other $1,048,373 1,034,791 1,006,860 1,097,475 1,211,381 1,333,520 1,403,954 1,343,616
Reinsurance recoverable, restated for
commutations, acquisitions and other 410,174 358,854 291,453 306,532 335,318 386,280 408,304 378,738
- -----------------------------------------------------------------------------------------------------------------------------------
Net liability, end of year, restated for
commutations, acquisitions and other $ 638,199 675,937 715,407 790,943 876,063 947,240 995,650 964,878
===================================================================================================================================
Gross re-estimated liability 1,015,103 969,953 924,406 1,018,230 1,147,523 1,251,106 1,357,606
Re-estimated recoverable 419,177 337,950 281,938 310,666 352,148 377,460 400,448
- -----------------------------------------------------------------------------------------------------------------------------------
Net re-estimated liability $ 595,926 632,003 642,468 707,564 795,375 873,646 957,158
===================================================================================================================================
Gross cumulative redundancy $ 33,270 64,838 82,454 79,245 63,858 82,414 46,348
===================================================================================================================================
59
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Net cumulative redundancy represents the change in the estimate from the
original balance sheet date to the date of the current estimate. For
example, the 1994 liability for losses and loss adjustment expenses
developed a $72.9 million redundancy from December 31, 1994 to December 31,
1999, five years later. Conditions and trends that have affected the
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. The gross cumulative
redundancies for 1998 and prior years are 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.
Liquidity And Capital Resources
================================================================================
The Company seeks to maintain prudent levels of liquidity and financial
leverage for the protection of its policyholders, creditors and
shareholders. The Company's targeted capital structure is approximately
one-third debt to two-thirds equity. At December 31, 1999, the Company's
debt to total capital ratio was 35% compared to 25% in 1998. The increase
was due to borrowings used to fund a portion of the Gryphon acquisition.
From time to time, the Company's debt to total capital ratio may increase
due to business opportunities that may be financed in the short term with
debt.
In calculating its debt to total capital ratio, the Company considers the
8.71% Capital Securities as one-half debt and one-half equity due to the
equity-like features of these instruments. The Company has the option to
defer interest payments for up to five years, and the 8.71% Capital
Securities have a 49-year term.
In order to maintain strong liquidity, the Company seeks to maintain
minimum cash and investments of approximately two times annual interest
expense at its holding company (Markel Corporation). At December 31, 1999,
$121.0 million of cash and investments were held at Markel Corporation
which approximated 4.8 times annual interest expense.
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 it incurs. The reimbursements are
executed within the guidelines of various management agreements between the
holding company and its subsidiaries.
The holding company has historically relied 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, 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, 1999, the Company's insurance subsidiaries could pay
dividends of $60.9 million without prior regulatory approval.
Net cash provided by operating activities decreased to $0.6 million in 1999
compared to $39.9 million in 1998. The decrease in 1999 was due to $58.8
million of operating cash flows used at Gryphon to fund claim payments and
underwriting losses, primarily in discontinued programs. Gryphon
discontinued lines are anticipated to produce negative operating cash flows
in 2000 which will partially offset cash flows generated by the Company's
core underwriting units.
60
- --------------------------------------------------------------------------------
[GRAPH]
Invested Assets
1997 1998 1999
---- ---- ----
$ in millions
$1,408 $1,481 $1,623
The Company's invested assets increased to $1.6 billion at December 31,
1999 from $1.5 billion at December 31, 1998. The increase in invested
assets was due to the addition of approximately $300 million of investments
to the portfolio from the Gryphon acquisition, partially offset by a
decrease in the market value of the Company's fixed maturity and equity
investments. Proceeds from sales of fixed maturities and equity securities
were $1.1 billion in 1999 compared to $405.6 million in 1998. The cost of
fixed maturities and equity securities purchased was $945.9 million in 1999
compared to $574.3 million in 1998. Both increases were primarily due to
the reallocation of the Gryphon portfolio from short-term investments into
fixed maturities after the acquisition.
Long-term debt was $168.0 million and $93.2 million at December 31, 1999
and 1998, respectively. In January 1999 the Company borrowed $105 million
under its $250 million revolving credit facility to fund a portion of the
Gryphon purchase price and repay $55 million of Gryphon's long-term debt.
During 1999, the Company made net repayments of $30 million on its credit
facility. As of December 31, 1999 there was $75 million outstanding under
the $250 million revolving credit facility. There were no balances
outstanding under the Company's revolving credit facility at December 31,
1998.
In January 1997 the Company arranged the sale of $150 million of 8.71%
Capital Securities issued by Markel Capital Trust I, a statutory business
trust sponsored by Markel Corporation. Proceeds from the sale of the 8.71%
Capital Securities were used to purchase the Company's 8.71% Junior
Subordinated Deferrable Interest Debentures due January 1, 2046. The 8.71%
Capital Securities and related Debentures are redeemable by the Company on
or after January 1, 2007.
The Company's 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 P&C 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, 1999 of each of the
Company's insurance subsidiaries was above the minimum regulatory
threshold.
On January 26, 2000, the Company announced revised terms for its
acquisition of Terra Nova (Bermuda) Holdings Ltd. (NYSE: TNA). The new
agreement was reached after preliminary information indicated that Terra
Nova would report a loss for the fourth quarter and for the full year of
1999 and after taking into account the decline in the market price of
Markel shares since the merger agreement was signed in August 1999. Under
the revised agreement, Terra Nova shareholders will receive for each
ordinary share, $13.00 in cash, 0.07027 of a Markel common share and
0.07027 of a Markel contingent value right (CVR). The CVR is intended to
increase the likelihood that a Terra Nova shareholder will be able to
realize a minimum value of $185 for each Markel share received.
Pursuant to the revised terms of the merger agreement, the consideration
will consist of approximately $325 million in cash, 1.8 million Markel
common shares and 1.8 million Markel CVR's. In addition, $175 million of
Terra Nova debt will remain outstanding. The acquisition will be accounted
for as a purchase transaction. The transaction, which is subject to
approval by the shareholders of both Markel and Terra Nova, the receipt of
necessary regulatory approvals and other customary closing conditions is
scheduled to close on March 24, 2000.
The Company has arranged for a five year $500 million revolving credit
facility which is expected to replace its existing $250 million revolving
credit facility upon closing of the Terra Nova acquisition. Due to the
revised terms of the Terra Nova merger agreement, the Company is seeking
amendments to the $500 million revolving credit facility. Alternatively,
the Company has the ability to finance the transaction through the use of
its existing credit facility and internal funding.
61
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Year 2000
================================================================================
The Year 2000 issue affected virtually all companies and organizations.
Many companies had existing computer applications which used 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 were expected to fail
or create erroneous results in the year 2000.
In 1997 the Company created a Year 2000 team involving associates from all
areas of the organization and charged them with implementing the Company's
Year 2000 project. The project's scope included designing and implementing
a plan to prevent year 2000-related problems in all information technology
(IT) systems and in dealings with all material business partners (vendors,
producers, customers and issuers in the Company's investment portfolio).
The project also included an assessment of the Company's underwriting
exposure as a result of the insurance products written by the Company's
underwriting units.
The Company completed the Year 2000 project in late 1999 at a total project
cost of less than $1.0 million. Subsequent to the change of the century,
the Company has not experienced any significant Year 2000-related problems
in its IT systems. Also the Company has not experienced any significant
disruptions as a result of noncompliance by its material business partners.
The Company will continue to monitor both its IT systems and business
partners for the next several months.
The Company conducted a comprehensive review of its underwriting guidelines
and 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 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.
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. The Company has no material commodity or foreign exchange
risk.
62
- --------------------------------------------------------------------------------
Equity Price Risk
The estimated fair value of the Company's investment portfolio at December
31, 1999 was $1.6 billion, 81% of which was invested in fixed maturities
and short-term investments, and 19% of which was invested in equity
securities. The Company invests shareholder funds in equity securities
which have historically, over long periods of time, produced higher returns
relative to fixed income investments. The Company seeks to invest at
reasonable prices in companies with solid business plans and capable and
honest management. The Company intends to hold these investments over the
long term. This focus on long-term total investment returns may result in
variability in the level of unrealized investment gains or losses from one
period to the next. The changes in the estimated fair value of the equity
portfolio are presented as a component of shareholders' equity in
accumulated other comprehensive income, net of taxes.
At December 31, 1999, the Company's equity portfolio was concentrated in
terms of the number of issuers and industries. At December 31, 1999, the
Company's top ten equity holdings represented $168.2 million or 55% of the
equity portfolio. Investments in the property and casualty insurance
industry represented $145.0 million, or 48%, of the equity portfolio at
December 31, 1999. Such concentration can lead to higher levels of
short-term price volatility. Due to its long-term investment focus, the
Company is not as concerned with short-term market volatility as long as
its insurance subsidiaries' ability to write business is not impaired. The
Company has investment guidelines that set limits on the amount of equities
its insurance subsidiaries can hold.
The table below summarizes the Company's equity price risk and shows the
effect of a hypothetical 20% increase or decrease in market prices as of
December 31, 1999. The selected hypothetical changes do not indicate what
could be the potential best or worst case scenarios (dollars in thousands):
Estimated Hypothetical
Estimated Fair Value after Percentage Increase
Fair Value at Hypothetical Hypothetical (Decrease) in
December 31, 1999 Price Change Change in Prices Shareholders' Equity
---------------------------------------------------------------------------------------------
Equity Securities $ 304,241 20% increase $ 365,089 10.3%
20% decrease $ 243,393 (10.3%)
63
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Interest Rate Risk
The Company's fixed maturity investments and borrowings are subject to
interest rate risk. Increases and decreases in interest rates typically
result in decreases and increases in the fair value of these financial
instruments.
Approximately three-quarters of the Company's investable assets come from
premiums paid by policyholders. These funds are invested predominately in
high quality corporate, government and municipal bonds with relatively
short durations. The fixed maturity portfolio, including short-term
investments, has an average duration of 4.2 years and an average rating of
"AA." The fixed maturity portfolio is exposed to interest rate
fluctuations; as interest rates rise, fair values decline and as interest
rates fall, fair values rise. The changes in the fair value of the fixed
maturity portfolio are presented as a component of shareholders' equity in
accumulated other comprehensive income, net of taxes.
The Company works to manage the impact of interest rate fluctuations on its
fixed maturity portfolio. The effective duration of the fixed maturity
portfolio is managed with consideration given to the estimated duration of
the Company's liabilities. The Company has investment policies which limit
the maximum duration and maturity of the fixed maturity portfolio.
The Company utilizes bonds with embedded put options to manage the effect
of changing interest rates on the fixed maturity portfolio. At December 31,
1999, the Company held $276.7 million of corporate bonds with embedded put
options. These put bonds were issued with long maturity dates, generally 30
years, with shorter put dates, generally 10 years. Put bonds provide the
holder the option to force redemption of the bonds on the put dates. These
bonds are assumed to outperform in price should interest rates decline
while performing like a shorter dated security, if interest rates rise.
This asymmetrical price performance is shown in the following table by
greater price appreciation in the fixed maturity portfolio if rates decline
by 200 basis points than price depreciation if rates increase by 200 basis
points.
The Company utilizes a commonly used model to estimate the effect of
interest rate risk on the fair values of its fixed maturity portfolio and
borrowings. The model estimates the impact of interest rate changes on a
wide range of factors, including duration, prepayment, put options and call
options. Fair values are estimated based on the net present value of cash
flows, using a representative set of possible future interest rate
scenarios. The model requires that numerous assumptions be made about the
future. To the extent that any of the assumptions are invalid, incorrect
estimates could result. The usefulness of a single-point in time model is
limited, as it is unable to accurately incorporate the full complexity of
market interactions.
64
- --------------------------------------------------------------------------------
The table below summarizes the Company's interest rate risk and shows the effect
of hypothetical changes in interest rates as of December 31, 1999. The selected
hypothetical changes do not indicate what could be the potential best or worst
case scenarios (dollars in thousands):
Hypothetical Percentage
Estimated Estimated Increase (Decrease) in
Estimated Change in Fair Value after ----------------------------------
Fair Value at Interest Rates Hypothetical Change Market Value Shareholders'
December 31, 1999 (bp=basis points) in Interest Rates Fixed Maturities Equity
- ------------------------------------------------------------------------------------------------------------------------
FIXED MATURITY
INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and $ 129,036 200 bp decrease $ 138,172 0.7 1.5
obligations of U.S. 100 bp decrease 133,268 0.3 0.7
government agencies 100 bp increase 125,112 (0.3) (0.7)
200 bp increase 121,313 (0.6) (1.3)
- ------------------------------------------------------------------------------------------------------------------------
Obligations of states, $ 416,339 200 bp decrease $ 471,502 4.2 9.4
municipalities and 100 bp decrease 443,069 2.0 4.5
political subdivisions 100 bp increase 391,238 (1.9) (4.3)
200 bp increase 367,739 (3.7) (8.2)
- ------------------------------------------------------------------------------------------------------------------------
Collateralized mortgage $ 55,551 200 bp decrease $ 59,196 0.3 0.6
obligations 100 bp decrease 57,522 0.1 0.3
100 bp increase 53,478 (0.2) (0.4)
200 bp increase 51,444 (0.3) (0.7)
- ------------------------------------------------------------------------------------------------------------------------
Corporate bonds (including $ 717,972 200 bp decrease $ 787,404 5.3 11.8
short-term investments) 100 bp decrease 748,168 2.3 5.1
100 bp increase 693,149 (1.9) (4.2)
200 bp increase 671,379 (3.5) (7.9)
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITY $1,318,898 200 bp decrease $1,456,274 10.4 23.3
INVESTMENTS (INCLUDING 100 bp decrease 1,382,027 4.8 10.7
SHORT-TERM INVESTMENTS) 100 bp increase 1,262,977 (4.2) (9.5)
200 bp increase 1,211,875 (8.1) (18.1)
========================================================================================================================
LIABILITIES * *
- ------------------------------------------------------------------------------------------------------------------------
7.25% Long-term debt $ 88,881 200 bp decrease $ 94,923 *
100 bp decrease 91,841 *
100 bp increase 86,037 *
200 bp increase 83,304 *
- ------------------------------------------------------------------------------------------------------------------------
8.71% Capital Securities $ 124,500 200 bp decrease $ 152,625 *
100 bp decrease 137,508 *
100 bp increase 113,688 *
200 bp increase 104,579 *
========================================================================================================================
* Changes in estimated fair value have no impact on shareholders' equity.
** Balances outstanding under the Company's $250 million revolving credit
facility are not included in the above table. Interest rates on the amounts
outstanding under this facility reset every 30 days, and in some cases daily,
which limits the impact of changing interest rates.
65
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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 June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement, as amended, is
effective for years beginning after June 15, 2000. The standard requires
that all derivatives be recorded as an asset or liability, at estimated
fair value, regardless of the purpose or intent for holding the derivative.
If a derivative is not utilized as a hedge, all gains or losses from the
change in the derivative's estimated fair value are recognized in earnings.
The gains or losses from the change in estimated fair value of certain
derivatives utilized as hedges are recognized in earnings or other
comprehensive income depending on the type of hedge relationship. Due to
the Company's limited use of derivatives, the Company expects that adoption
of SFAS No. 133 will not have a material impact on the Company's
consolidated financial position and results of operations.
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.
The completion of the Terra Nova transaction is subject to the absence of
material adverse changes in the buyer's or seller's financial condition and
receipt of all necessary regulatory and shareholder approvals. Insurance
industry price competition has made it more difficult to attract and retain
adequately priced business. Changing legal and social trends and inherent
uncertainties in the loss estimation process can adversely impact the
adequacy of loss reserves. The Company's potential underwriting exposure to
Year 2000 claims are difficult to predict with any certainty. 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. Accordingly, the Company's premium growth,
underwriting and investment results have been and will continue to be
potentially materially affected by these factors.
66
- --------------------------------------------------------------------------------
OTHER INFORMATION
Market And Dividend Information
================================================================================
Effective June 11, 1997, the Company's common stock began trading on the
New York Stock Exchange under the symbol MKL. Prior to that time, the
Company's stock traded in the NASDAQ stock market under the symbol MAKL.
The number of shareholders of record as of January 31, 2000 was 496. The
total number of shareholders, including those holding shares in "street
name" or in brokerage accounts is estimated to be in excess of 3,800. 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.
High and low closing sales prices as reported on the New York Stock
Exchange composite tape for 1999 were $192 and $145, respectively. See
"Quarterly Information" on page 50 for additional quarterly sales price
information.
Shareholder Relations, Form 10-K
================================================================================
This document represents Markel Corporation's Annual Report and Form 10-K,
which is filed with the Securities and Exchange Commission.
Information about Markel Corporation, including exhibits filed as part of
this Form 10-K, may be obtained by writing Mr. Bruce Kay, Vice President of
Investor Relations, at the corporate offices, or by calling (800) 446-6671.
Annual Shareholders' 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 24, 2000.
Transfer Agent
================================================================================
First Union National Bank
Corporate Trust Department
Finance Group -NC 1196
1525 West W.T. Harris Boulevard 3C3
Charlotte, North Carolina 28288-1196
(800) 829-8432
Corporate Offices
================================================================================
Markel Corporation
4521 Highwoods Parkway
Glen Allen, Virginia 23060-6148
(804) 747-0136
(800) 446-6671
67
Markel Corporation & Subsidiaries
- --------------------------------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
Directors
================================================================================
Alan I. Kirshner
Chairman of the Board and Chief Executive Officer
Thomas S. Gayner
Vice President of Equity Investments
Leslie A. Grandis
Partner
McGuire Woods Battle & Boothe, LLP
Stewart M. Kasen
Private Investor
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
Executive Officers
================================================================================
Alan I. Kirshner
Chairman of the Board and Chief Executive Officer since 1986. He served as
President from 1979 until March of 1992 and has been a Director of the
Company since 1978. Age 64.
Anthony F. Markel
President and Chief Operating Officer since March of 1992. He served as
Executive Vice President from 1979 until March of 1992 and has been a
Director of the Company since 1978. Age 58.
Steven A. Markel
Vice Chairman since March of 1992. He served as Treasurer from 1986 to
August of 1993 and Executive Vice President from 1986 to March of 1992 and
has been a Director of the Company since 1978. Age 51.
Darrell D. Martin
Executive Vice President and Chief Financial Officer since March of 1992.
He served as Chief Financial Officer from 1988 to March of 1992 and has
been a Director of the Company since January 1991. Age 51.
68
APPENDIX
MARKEL CORPORATION ANNUAL REPORT ON FORM 10-K
Statement of Differences
1. The pages in the electronic filing do not correspond to the pages in the
printed document because there is more material on each page of the printed
document. The printed Annual Report and Form 10-K also contains numerous
charts, graphs and pictures not incorporated into the electronic Form 10-K.
2. The information on pages 67 and 68 of the printed document, i.e. the 10-K
cover sheet and Index and Cross References, have been repositioned on pages
1 and 2 of the electronic document for ease of reference.
3. The information on pages 22 and 23 of the printed document, i.e. the
Selected Financial Data has been repositioned over 2 consecutive pages of
the electronic document for ease of use. The footnotes to the Selected
Financial Data are meant to apply to all two pages of the electronic
document.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MARKEL CORPORATION
By: /s/ Steven A. Markel
-------------------------------
Steven A. Markel
Vice Chairman
March 15, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Alan I. Kirshner Chief Executive Officer and March 15, 2000
- ------------------------- Chairman of the Board of
Alan I. Kirshner,* Directors
/s/ Anthony F. Markel President, Chief Operating March 15, 2000
- ------------------------- Officer and Director
Anthony F. Markel,*
/s/ Steven A. Markel Vice Chairman and Director March 15, 2000
- -------------------------
Steven A. Markel,*
/s/ Darrell D. Martin Executive Vice President, March 15, 2000
- ------------------------- Chief Financial Officer
Darrell D. Martin,* and Director (Principal
Accounting Officer)
/s/ Thomas S. Gayner Director March 15, 2000
- --------------------------
Thomas S. Gayner,*
/s/ Leslie A. Grandis Director March 15, 2000
- --------------------------
Leslie A. Grandis,*
/s/ Stewart M. Kasen Director March 15, 2000
- --------------------------
Stewart M. Kasen,*
/s/ Gary L. Markel Director March 15, 2000
- --------------------------
Gary L. Markel,*
*Signed as of March 15, 2000
71
Index to Exhibits
2 Agreement and Plan of Merger and Scheme of Arrangement dated August 15, 1999,
among Markel Corporation and Terra Nova (Bermuda) Holdings, Ltd., as amended a
3(i) Amended and Restated Articles of Incorporation, as amended (3.1)b
3(ii) Bylaws, as amended (3.2)c
4 (i) Credit Agreement dated April 23,1998 among Markel Corporation, the lenders
referred to therein and First Union National Bank, as Agent (4)d
4 (ii) Credit Agreement dated December 21, 1999, as amended, among Markel
Corporation, the lenders referred to therein and First Union National Bank, as
Agent (4) **
The registrant hereby agrees to furnish to the Securities and Exchange
Commission a copy of all instruments defining the rights of holders of long-term
debt of the registrant and subsidiaries shown on the Consolidated Balance Sheet
of registrant at December 31, 1999, and the respective Notes thereto, included
in this Annual Report on Form 10-K.
Management Contracts or Compensatory Plans required to be filed
(Items 10.1--10.7)
10.1 Markel Corporation 1986 and 1989 Stock Option Plans as amended (4(d))e
10.2 Trust and amendment Under Markel Corporation 1989 Non-Employee Directors
Stock Option Plan **
10.3 Markel Corporation 1993 Incentive Stock Plan (10.3)f
10.4 Executive Employment Agreement between Markel Corporation and Alan I.
Kirshner dated as of October 1, 1991 (10.5)g
10.5 Executive Employment Agreement between Markel Corporation and Anthony F.
Markel dated as of October 1, 1991 (10.6)g
10.6 Executive Employment Agreement between Markel Corporation and Steven A.
Markel dated as of October 1, 1991 (10.7)g
10.7 Executive Employment Agreement between Markel Corporation and Darrell D.
Martin dated as of March 1, 1992 (10.8)g
10.8 Agreement and Plan of Merger dated as of November 25, 1998 among Markel
Corporation, MG Acquisition Corp., and Gryphon Holdings Inc. (g6) h
21 Subsidiaries of Markel Corporation**
23 Consents of independent auditors to incorporation by reference of certain
reports into the Registrant's Registration Statements on Forms S-8 and S-4**
27 Financial Data Schedule**
**filed with this report
a. Incorporated by reference from Appendix A to the Revised Proxy Statement/
Prospectus dated February 10, 2000
b. Incorporated by reference from the exhibit shown in parentheses filed with
the Commission in the Registrant's 1990 Form 10-K Annual Report
c. Incorporated by reference from the exhibit shown in parentheses filed with
the Commission in the Registrant's 1992 Form 10-K Annual Report
d. Incorporated by reference from the exhibit shown in parentheses filed with
the commission in the Registrant's Report on Form 10-Q for the quarter ended
March 31, 1998
e. Incorporated by reference from the exhibit shown in parentheses filed with
the Commission on May 25, 1989 in the Registrant's Registration Statement on
Form S-8 (Registration No. 33-28921)
f. Incorporated by reference from the exhibit shown in parentheses filed with
the Commission in the Registrant's 1994 Form 10-K Annual Report
g. Incorporated by reference from the exhibit shown in parentheses filed with
the Commission in the Registrant's 1991 Form 10-K Annual Report
h. Incorporated by reference from the exhibit shown in parentheses filed with
the Commission in the Registrant's Amendment No. 7 to Schedule 14D-1 filed
November 25, 1998