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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) May 30, 1995
MARKEL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 0-15458 54-0292420
(State or other jurisdiction of (Commission (I.R.S. employer
incorporation or organization) file number) identification number)
4551 Cox Road, Glen Allen, Virginia 23060-3382
(Address of principal executive offices)
(Zip code)
(804) 747-0136
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
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Item 2. Acquisition or Disposition of Assets
On May 30, 1995 Markel Corporation (the Registrant) acquired all of the issued
and outstanding shares of common stock of Lincoln Insurance Company (Lincoln)
from Lincoln Insurance Group, Inc. (LIGI) an operating unit of The Thomson
Corporation. Total consideration for the stock of Lincoln and certain other
agreements was approximately $24.3 million. Markel funded the transaction with
available cash on hand and borrowings of $17.0 million under existing lines of
credit with Crestar Bank, Chase Manhattan Bank (National Association) and First
Union National Bank of North Carolina. LIGI also provided an Indemnification
Agreement with respect to adverse development in reserves for loss and loss
adjustment expenses and reserves for uncollectible reinsurance. The
Indemnification Agreement is guaranteed by The Thomson Corporation.
Markel expects to significantly reorganize Lincoln and renew certain portions
of Lincoln's business in Essex Insurance Company (Essex), an existing
subsidiary of the Registrant. Lincoln is a Delaware domiciled excess and
surplus lines insurance company. Lincoln's total assets, total liabilities and
net worth at March 31, 1995, as adjusted to reflect certain preacquisition
transactions, were approximately $80.7 million, $52.4 million and $28.3
million, respectively.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
a) Financial Statements of Business Acquired
The following financial statements for Lincoln Insurance Company are
included as part of this report:
Independent Auditor's Report
Balance Sheets December 31, 1994 and 1993
Statements of Income for the years ended December 31, 1994 and 1993
Statements of Stockholder's Equity December 31, 1994 and 1993
Statements of Cash Flows for the years ended December 31, 1994 and 1993
Notes to Financial Statements
b) Pro Forma Financial Information (Unaudited)
The following pro forma financial information is included as part of
this report:
Pro Forma Consolidated Balance Sheet March 31, 1995
Pro Forma Consolidated Statement of Income for the three months ended
March 31, 1995
Pro Forma Consolidated Statement of Income for the year ended
December 31, 1994
c) Exhibits
The Exhibits listed on the Exhibit Index are filed as part of this
report.
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Item 7a. FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Price Waterhouse LLP
Thirty South Seventeenth Street
Philadelphia, PA 19103-4094
Telephone 215 575-5000
REPORT OF INDEPENDENT ACCOUNTANTS
March 29, 1995
To the Board of Directors of
Lincoln Insurance Company
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholder's equity and of cash flows present fairly, in all
material respects, the financial position of Lincoln Insurance Company (the
Company) at December 31, 1994 and 1993, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed more fully in Note A and Note E to the financial statements, in
1994 the Company's parent announced its intention to sell all the common stock
of the Company. In addition, in 1994, the Company implemented a new accounting
pronouncement for investments and, in 1993, implemented new accounting
pronouncements related to accounting for income taxes and reinsurance.
Price Waterhouse LLP
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LINCOLN INSURANCE COMPANY
(A wholly-owned subsidiary of the Lincoln Insurance Group, Inc.)
Balance Sheets
December 31,
--------------------------------
1994 1993
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments, available for sale:
Bonds, at estimated fair value in 1994 (amortized cost $80,612,043)
and at amortized cost in 1993 (estimated fair value $70,758,034) $ 77,862,188 $ 70,018,605
Short-term investments, at estimated fair value,
which approximates cost 1,000,000 --
- -------------------------------------------------------------------------------------------------------------------------
78,862,188 70,018,605
Cash and cash equivalents 651,713 1,479,251
Accrued investment income 1,287,230 1,044,248
Notes receivable--affiliates 44,660,000 44,660,000
Agents' balances, less allowances (1994--$245,000 and 1993--$210,000) 4,615,721 4,313,208
Reinsurance recoverable on unpaid claims and claim
adjustment expenses, less allowances (1994--$625,000 and 1993--$505,000) 7,663,082 5,489,032
Reinsurance and deductible recoverables on paid claims and claim adjustment expenses,
less allowances (1994--$247,947 and 1993--$250,975) 583,729 572,739
Unearned reinsurance premiums 274,308 390,281
Deferred income taxes, net 4,550,877 3,260,464
Deferred acquisition costs 2,869,190 2,522,465
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $146,018,038 $133,750,293
=========================================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Unpaid claims and claim adjustment expenses $ 36,651,246 $ 29,511,005
Unearned premiums and deposit premium liabilities 11,422,987 10,070,085
Reinsurance balances payable 3,145,297 3,133,875
Federal income taxes payable 3,325,881 --
Dividends payable to stockholder 1,121,181 858,333
Payable to affiliates 480,921 568,609
Drafts outstanding 402,093 483,560
Accrued expenses and other liabilities 626,532 598,845
Redeemable preferred stock 50,000,000 50,000,000
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 107,176,138 95,224,312
- -------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies--Note G
Stockholder's equity:
Common stock, $100 par value; 35,000 shares authorized, issued, and outstanding 3,500,000 3,500,000
Additional paid-in capital 24,023,565 24,023,565
Retained earnings 13,105,741 11,002,416
Net unrealized loss on investments (1,787,406) --
- -------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 38,841,900 38,525,981
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $146,018,038 $133,750,293
=========================================================================================================================
The notes are an integral part of these financial statements.
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LINCOLN INSURANCE COMPANY
(A wholly-owned subsidiary of the Lincoln Insurance Group, Inc.)
STATEMENTS OF INCOME
Year Ended December 31,
-------------------------------
1994 1993
- -------------------------------------------------------------------------------------------------------------------------
Underwriting:
Premiums earned $23,330,099 $19,686,842
Claims and claim adjustment expenses incurred 13,860,215 12,795,498
Commissions and brokerage, net 5,054,783 4,274,026
Other underwriting expenses 3,444,266 2,949,775
- -------------------------------------------------------------------------------------------------------------------------
22,359,264 20,019,299
- -------------------------------------------------------------------------------------------------------------------------
UNDERWRITING INCOME (LOSS) 970,835 (332,457)
- -------------------------------------------------------------------------------------------------------------------------
Investment:
Net investment income 7,563,564 6,818,605
Net realized gains on investments 30,615 616,562
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME 7,594,179 7,435,167
- -------------------------------------------------------------------------------------------------------------------------
Other income 465 234
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 8,565,479 7,102,944
Provision for federal income taxes 2,997,917 2,203,817
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 5,567,562 4,899,127
- -------------------------------------------------------------------------------------------------------------------------
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR INCOME TAXES -- 5,277,177
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 5,567,562 $10,176,304
=========================================================================================================================
The notes are an integral part of these financial statements.
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LINCOLN INSURANCE COMPANY
(A wholly-owned subsidiary of the Lincoln Insurance Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
Net Unrealized
Common Paid-In Retained Gain (Loss)
Stock Capital Earnings on Investments Total
- -------------------------------------------------------------------------------------------------------------------------
Balance at
January 1, 1993 $ 3,500,000 $ 24,023,565 $ 3,867,779 $ -- $ 31,391,344
Net income -- -- 10,176,304 -- 10,176,304
Dividends to stockholder -- -- (3,041,667) -- (3,041,667)
- -------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1993 3,500,000 24,023,565 11,002,416 -- 38,525,981
Net income -- -- 5,567,562 -- 5,567,562
Dividends to stockholder -- -- (3,464,237) -- (3,464,237)
Cumulative effect of change
in accounting for
investments, net of
income taxes -- -- -- 480,629 480,629
Net unrealized loss on
investments, net of
income taxes -- -- -- (2,268,035) (2,268,035)
- -------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1994 $ 3,500,000 $ 24,023,565 $ 13,105,741 $(1,787,406) $ 38,841,900
=========================================================================================================================
The notes are an integral part of these financial statements.
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LINCOLN INSURANCE COMPANY
(A wholly-owned subsidiary of the Lincoln Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------
1994 1993
- -------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 5,567,562 $ 10,176,304
Adjustments to reconcile net income to
net cash provided by operating activities:
Change in:
Agents' balances (302,513) (618,510)
Unearned premiums 1,352,902 1,244,082
Unpaid claims and claim
adjustment expenses 7,140,241 2,040,821
Reinsurance and deductible
recoverables (2,069,067) 1,366,251
Federal income taxes payable 3,325,881 --
Accrued investment income (242,982) 40,220
Reinsurance balances payable 11,422 685,814
Payable to affiliates (87,688) (265,304)
Accrued expenses and other liabilities (53,780) 269,900
Deferred acquisition costs (346,725) (314,369)
Deferred income taxes-net (327,964) (3,073,360)
Net amortization of bond premiums 80,631 207,501
Net realized gains on investments (30,615) (616,562)
- -------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 14,017,305 11,142,788
- -------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of investment securities (163,842,868) (71,860,714)
Sales and maturities of investment securities 152,199,414 63,654,613
- -------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN
INVESTMENT ACTIVITIES (11,643,454) (8,206,101)
- -------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Dividends paid (3,201,389) (2,616,967)
- -------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN
FINANCING ACTIVITIES (3,201,389) (2,616,967)
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (827,538) 319,720
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,479,251 1,159,531
- -------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 651,713 $ 1,479,251
=========================================================================================================================
The notes are an integral part of these financial statements.
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LINCOLN INSURANCE COMPANY
(A wholly-owned subsidiary of the Lincoln Insurance Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
December 31, 1994
NOTE A--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization:
The Company is wholly-owned by the Lincoln Insurance Group, Inc. (LIGI), an
insurance holding company domiciled in the State of Delaware. LIGI is
wholly-owned by the Thomson Newspapers Holdings Inc. (TNHI). TNHI is
ultimately wholly-owned by The Thomson Corporation, which is approximately 70%
owned by members of, or companies controlled by members of, the family of the
late Lord Thomson of Fleet.
In 1994, The Thomson Corporation announced its intention to cause LIGI to sell
all of the common stock of the Company. Prior to the closing date of the
anticipated sale, the preferred stock of the Company will be redeemed through
an assignment by the Company of the notes receivable from affiliates in the
amount of $44,660,000 to the preferred stockholder and the payment of
$5,340,000 of cash. Also prior to the anticipated sale, the Company intends to
declare an extraordinary dividend of approximately $11,500,000, subject to
regulatory approval.
Revenue Recognition:
Premiums are recognized as revenue on a straight-line basis calculated monthly
over the terms of the respective policies. Earned premiums are stated net of
amounts ceded to reinsurers.
Deferred Policy Acquisition Costs:
Acquisition costs such as commissions, premium taxes, and certain other
underwriting expenses, net of reinsurance commissions received, are deferred
and amortized ratably over the terms of the related contracts. Anticipated
claims and claim adjustment expenses and policy overhead expenses are
considered in determining the recoverability of such acquisition costs.
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Investments:
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," effective January 1, 1994. All investments are considered
available-for-sale and are recorded at estimated fair value, generally based on
quoted market prices. The net unrealized gain or loss on investments, net of
deferred income taxes, is included as a separate component of stockholders'
equity.
Premiums and discounts are amortized or accreted over the life of the related
bond as an adjustment to yield using the effective interest method. Interest
income is recognized when earned. Gains or losses on the disposal of
investments are determined on a specific identification basis and are included
in operations.
Prior to January 1, 1994, bonds were carried at amortized cost.
Unpaid Claims and Claim Adjustment Expenses:
The ultimate cost of claims arising from insured events is subject to numerous
uncertainties that are normal, recurring and inherent in the property and
casualty business. The process of establishing the liability for unpaid claims
and claim adjustment expenses is based upon:
1. Estimates of the cost of claims reported prior to the close of the
accounting period in respect to direct and assumed business, together
with an estimate of the costs of settlement of those claims, and are net
of estimated salvage and subrogation;
2. Estimates, based on historical experience, augmented by relevant industry
trends and other data, of the costs of claims not yet reported to the
Company.
The Company employs actuarial techniques to estimate the ultimate cost of
incurred claims and claim adjustment expenses. These actuarial estimates are
updated at least annually and the projected ultimate costs are revised based
upon the Company's most recent loss and premium development statistics.
Changes in claims estimates are charged or credited to income in the period in
which they become known. The liability for unpaid claims and allocated claim
adjustment expenses has been certified as to its adequacy by an independent
actuary as of December 31, 1994 and 1993.
Estimating liabilities for unpaid claims and reinsurance recoveries for
asbestos-related illnesses and toxic waste cleanup claims is subject to
significant uncertainties that are generally not present for other types of
claims. The ultimate cost of these claims cannot be reasonably estimated using
traditional loss estimating techniques. The Company establishes liabilities
for reported asbestos-related and toxic waste clean-up claims, including costs
of related litigation, as information permits. This information includes the
status of current law and coverage litigation, whether an insurable event has
occurred, which policies and policy years might be applicable and which
insurers may be liable, if any. In addition, incurred but not reported
liabilities have been established by management to cover potential additional
exposure on both known and unasserted claims. Given the expansion of coverage
and liability by the courts and the legislatures in the past and the
possibilities of similar interpretations in the future, there is
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significant uncertainty regarding the extent of insurers' liability. Because
of the significant uncertainties involved, as discussed above, and the
likelihood that these uncertainties will not be resolved in the near future,
management is unable to reasonably estimate the amount of additional liability
that could develop, if any.
In management's judgment, information currently available has been adequately
considered in estimating the Company's ultimate cost of insured events and
future changes in these estimates are not likely to have a material adverse
effect on the Company's financial condition.
Reinsurance:
In the normal course of business, the Company seeks to reduce losses that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. The Company's current property
catastrophe reinsurance program provides for approximately $3.42 million of
coverage for aggregate losses in excess of $400,000. The Company's current
reinsurance program also provides for $4.75 million of coverage for casualty
losses in excess of $250,000 and provides for $400,000 of coverage for property
losses in excess of $100,000 on a per occurrence basis. These programs are
renewed in October of each year. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability associated with the
reinsured policy.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result
in losses to the Company; consequently, allowances are established for amounts
deemed uncollectible. Charges for uncollectible reinsurance are included in
other underwriting expenses. The Company evaluates the financial condition of
its reinsurers and monitors concentrations of credit risks arising from similar
geographic regions, activities, or economic characteristics of the reinsurers
to minimize its exposure to significant losses from reinsurer insolvencies.
Certain reinsurance agreements require cash deposits or letters of credit to be
deposited with the Company as security for the reinsurer's obligations.
The Company has unsecured reinsurance recoverables that exceed 3% of the
Company's capital and surplus as of December 31, 1994 from Continental
Reinsurance Corporation in the amount of $1,424,675.
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The effect of reinsurance on premiums written and earned is as follows:
1994 Written Earned
-------------------------------------------------------------
Direct $ 28,431,599 $ 27,078,697
Ceded (3,632,625) (3,748,598)
-------------------------------------------------------------
$ 24,798,974 $ 23,330,099
=============================================================
1993 Written Earned
-------------------------------------------------------------
Direct $ 24,157,239 $ 22,913,157
Ceded (3,287,880) (3,226,315)
-------------------------------------------------------------
$ 20,869,359 $ 19,686,842
=============================================================
The Company in 1993 adopted the provisions of SFAS No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts."
Reinsurance balances previously netted against claim liabilities and unearned
premiums are now classified as assets in the balance sheet.
Income Taxes:
The Company is a member of an affiliated group for federal income tax purposes,
all members of which have elected to file a consolidated federal income tax
return with their ultimate U.S. parent, Thomson U.S. Holdings Inc. (TUSHI).
The consolidated federal income tax liability, if any, is allocated to the
members in accordance with terms of a tax-sharing agreement adopted by the
members of the affiliated group. Under the terms of the agreement, each
profitable member accrues federal income tax based upon its taxable income
determined on a separate company basis. Net operating losses carried forward
from prior years can be used by the Company to offset current year taxable
income to the extent the net operating losses incurred by the Company would
otherwise be utilized if the Company were to file a separate tax return.
Notwithstanding the tax-sharing agreement, the Company is jointly and severally
liable for all federal income taxes of the consolidated group.
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes". The adoption of SFAS No. 109, which was done prospectively,
changes the Company's method of accounting for income taxes from the deferred
method (Accounting Principles Board Opinion (APB) No. 11) to an asset and
liability approach. The asset and liability approach requires the recognition
of deferred tax liabilities and assets for the expected future consequences of
temporary differences between the carrying amounts and the tax bases of assets
and liabilities. The net adjustment to the January 1, 1993 balance sheet to
adopt SFAS No. 109 amounted to $5,277,177. This amount is reflected in 1993
net income as the cumulative effect of a change in accounting. This cumulative
effect primarily represents recognition of the benefit of net operating loss
carryforwards and deductible temporary differences that could not be recognized
under APB No. 11 (See Note E).
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Statutory Surplus and Dividend Restrictions
Under applicable Delaware insurance laws and regulations, the Company is
required to maintain a minimum capital and surplus of $750,000. The maximum
amount of dividends which can be paid by Delaware insurance companies to
shareholders without prior approval of the Insurance Commissioner is subject to
restrictions relating to the insurance laws and statutory unassigned surplus.
Statutory unassigned deficit at December 31, 1994, was $39,898,671. Therefore,
the Company cannot pay dividends in 1995 without prior approval by the
Insurance Commissioner. Subject to this restriction, dividends are paid as
determined by the Board of Directors.
Retirement Plans:
The Company participates in the Lincoln Insurance Group, Inc. Pension Plan
which covers all employees of LIGI and its subsidiary companies. The annual
liabilities and expenses for the plan are recorded in the accounts of an
affiliated company which employs all eligible participants, and are paid to a
pension trust established for the benefit of plan members. The annual
liability is limited to the annual contribution required by the plan agreement,
which is based upon 4.5% of qualified employee earnings up to the Social
Security taxable wage base, plus 9% of employee earnings in excess of the
Social Security taxable wage base.
The Company also participates in the Lincoln Insurance Group, Inc. Employee
Savings Plan (the Savings Plan) which covers all employees of the companies.
The annual liabilities for the Savings Plan are recorded in the accounts of an
affiliated company employing eligible participants and are paid to a common
trust established for the benefit of Savings Plan members. Participants may
elect to make contributions in one percent increments of gross compensation,
subject to established limits. The affiliated company matches 33 1/3% of the
first 3% of compensation deferred by employees. Participants are immediately
vested in all contributions.
As the Company participates in a management agreement among LIGI and its
affiliates (Note F) and it employs no staff, the Company records no direct
retirement plan expense or liability.
NOTE B--REDEEMABLE PREFERRED STOCK
The Company has authorized, issued, and outstanding 5,000 shares of $.01 par
value Adjustable Rate Cumulative Redeemable Preferred Stock with a total
carrying value of $50,000,000 at December 31, 1994 and 1993. The preferred
stock is non-voting and has a liquidation and redemption value equal to its
carrying value of $10,000 per share. The preferred stock is redeemable at the
Company's option any time after October 30, 1996 and must be redeemed by
October 30, 2001. If LIGI enters into an agreement to sell the common stock of
the Company, as described in Note A, the Company's articles of incorporation
will be amended to permit immediate redemption of the preferred stock.
Dividends, if and when declared, are payable at a rate of $10,000 per share
times the prime rate at the beginning of a dividend period.
Dividends in the amount of $3,201,389 and $2,616,967 were paid during 1994 and
1993, respectively. Dividends in the amount of $1,212,181 and $858,333 were
accrued as of December 31, 1994 and 1993, respectively.
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NOTE C--INVESTMENTS
The amortized cost and fair values of debt securities as of December 31, 1994
and 1993 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Losses Value
- -------------------------------------------------------------------------------------------------------------------------
1994
- ----
U.S. Treasury securities $ 46,450,115 $ 324 $(2,028,387) $ 44,422,052
Corporate securities 28,741,695 4,015 (423,209) 28,322,501
Mortgage-backed securities 5,420,233 682 (303,280) 5,117,635
- -------------------------------------------------------------------------------------------------------------------------
$ 80,612,043 $ 5,021 $(2,754,876) $ 77,862,188
=========================================================================================================================
1993
- ----
U.S.Treasury securities $ 39,127,795 $ 249,250 $ (134,359) $ 39,242,686
Corporate securities 25,718,728 556,302 (91,072) 26,183,958
Mortgage-backed securities 5,172,082 190,000 (30,692) 5,331,390
- -------------------------------------------------------------------------------------------------------------------------
$ 70,018,605 $ 995,552 $ (256,123) $ 70,758,034
=========================================================================================================================
The amortized cost and fair values of debt securities at December 31, 1994 by
contractual maturity are shown below. 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.
Amortized
Cost Fair Value
- -----------------------------------------------------------------------------------------------------
Due in one year or less $ 20,648,952 $ 20,572,713
Due after one year through five years 57,391,187 54,803,772
Due after five years through ten years 780,353 760,493
Due after ten years 1,791,551 1,725,210
- -----------------------------------------------------------------------------------------------------
$ 80,612,043 $ 77,862,188
=====================================================================================================
Mortgaged-backed securities not due at a single maturity with an amortized cost
of $1,420,232 are included in the above schedule at their ultimate maturity
date.
Components of net investment income for the year ended December 31 were as
follows:
1994 1993
- -----------------------------------------------------------------------------------------------------
Debt securities $ 4,052,635 $ 3,832,047
Notes receivable-affiliates 3,637,323 3,126,180
Cash and cash equivalents 64,172 37,551
Other 12,964 8,465
- -----------------------------------------------------------------------------------------------------
7,767,094 7,004,243
Less investment expenses 203,530 185,638
- -----------------------------------------------------------------------------------------------------
Net investment income $ 7,563,564 $6,818,605
=====================================================================================================
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Proceeds from sales of debt securities were $15,214,165 and $45,111,155 in 1994
and 1993, respectively. Gross realized gains on such sales were $45,048 and
$656,922 and gross realized losses were $14,433 and $40,360 for 1994 and 1993,
respectively.
Securities with a book value of $9,074,964 and $7,391,740 at December 31, 1994
and 1993, respectively, were on deposit to meet various statutory insurance
requirements.
NOTE D--UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Activity in the liability for unpaid claims and claim adjustment expenses is
summarized as follows:
1994 1993
- -----------------------------------------------------------------------------------------------------
Balance at January 1
Direct liabilities $ 29,511,005 $ 27,470,184
Less reinsurance recoverables 5,489,032 7,240,887
- -----------------------------------------------------------------------------------------------------
Net Balance at January 1 24,021,973 20,229,297
- -----------------------------------------------------------------------------------------------------
Incurred related to:
Current year 14,609,785 13,581,764
Prior years (749,570) (786,266)
- -----------------------------------------------------------------------------------------------------
Total incurred 13,860,215 12,795,498
- -----------------------------------------------------------------------------------------------------
Paid related to:
Current year 3,160,850 3,462,452
Prior years 5,853,174 5,515,370
- -----------------------------------------------------------------------------------------------------
Total paid 9,014,024 8,977,822
- -----------------------------------------------------------------------------------------------------
Change in allowance for uncollectible
reinsurance recoverable on unpaid
claims and claim adjustment expenses 120,000 (25,000)
- -----------------------------------------------------------------------------------------------------
Balance at December 31
Net liabilities 28,988,164 24,021,973
Plus reinsurance recoverables 7,663,082 5,489,032
- -----------------------------------------------------------------------------------------------------
Direct liabilities at December 31 $ 36,651,246 $ 29,551,005
=====================================================================================================
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NOTE E--INCOME TAXES
The provision for income taxes for the year ended December 31 was as follows:
1994 1993
- -----------------------------------------------------------------------------------------------------
Current Federal $ 3,688,854 $ 3,176,507
Deferred (327,964) 2,203,817
Benefit of net operating loss carryforward (362,973) (3,176,507)
- -----------------------------------------------------------------------------------------------------
$ 2,997,917 $ 2,203,817
=====================================================================================================
As a result of the Omnibus Budget Reconciliation Act of 1993, the federal
corporate income tax rate increased by one percent retroactive to January 1,
1993. Deferred tax expense for 1993 includes a benefit of $282,214 related to
an increase in the Company's net deferred tax asset as of January 1, 1993 due
to the effect of the tax rate increase.
A reconciliation of the Federal statutory income tax rate to the Company's
effective income tax rate for the year ended December 31 was as follows:
1994 1993
- -----------------------------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0%
Federal tax rate change -- (4.0%)
- -----------------------------------------------------------------------------------------------------
Effective income tax rate 35.0% 31.0%
=====================================================================================================
The components of the net deferred tax asset were as follows:
1994 1993
- -----------------------------------------------------------------------------------------------------
Deferred tax assets:
Loss reserve discount $ 2,158,510 $ 1,859,680
Accrued reinsurance premiums 1,241,924 890,399
Unrealized loss on investments 962,449 --
Unearned premium reserve reduction 780,408 677,586
Uncollectible reinsurance 291,531 243,591
Operating loss carryforwards -- 362,973
Other 127,750 115,500
- -----------------------------------------------------------------------------------------------------
5,562,572 4,149,729
- -----------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs 1,004,217 882,863
Other 7,478 6,402
- -----------------------------------------------------------------------------------------------------
1,011,695 889,265
- -----------------------------------------------------------------------------------------------------
Deferred income taxes, net $ 4,550,877 $ 3,260,464
=====================================================================================================
15
16
As of December 31, 1994, the Company has tax basis federal net operating loss
carryforwards of $22 million, which expire in various amounts from 1996 to
2000. Since these loss carryforwards relate to separate return years, they are
subject to certain limitations with respect to utilization. Although not all
of the Company's net operating losses have been utilized in the consolidated
tax return of which the Company is a member, under the Company's tax sharing
agreement, the Company reflected tax benefit for the utilization of these
losses of approximately $362,973 during 1994. Cumulatively, tax benefits of
approximately $7.7 million have been realized by the Company under the tax
sharing agreement.
Should the Company be sold, as discussed in Note A, its tax basis net operating
loss carryforwards will be reattributed to TUSHI in accordance with Internal
Revenue Code Section 1.1502-20(g), and accordingly, will not be available to
the purchaser of the Company. In addition if sold, realization of the
Company's net deferred tax asset will be dependent upon the buyer's tax and
organizational structure and future operating plans for the Company. Should
the Company not be sold, management believes that based on recent earnings
history and future earnings expectations, the Company will realize the net
deferred tax asset.
NOTE F--RELATED PARTY TRANSACTIONS
Notes Receivable - Affiliates
On October 30, 1991 and December 22, 1992, the Company invested $20,000,000 and
$24,660,000, respectively, in notes receivable from affiliated companies. The
notes receivable are due on October 30, 1996, but may be prepaid at any time at
the issuer's option without penalty. The notes bear a rate of interest of
prime plus one percent, payable quarterly. Interest earned on the notes
totaled $3,637,323 and $3,126,180 for 1994 and 1993, respectively. Interest
accrued and unpaid at December 31, 1994 and 1993 was $11,624 and $8,563,
respectively. The carrying value of these notes receivable approximates fair
value.
Management Agreement
The Company has entered into an agreement with an affiliated company, Lincoln
Management Company (Manager), whereby the Manager acts as the sole managing
agent for the Company's operations. Under this agreement, the Manager receives
a quarterly fee for services rendered equal to a contractually defined
proration of actual expenses incurred. This management contract has been
approved by the Delaware Insurance Department. Management fees for 1994 and
1993 were $3,774,199 and $3,398,704, respectively.
NOTE G--COMMITMENTS AND CONTINGENCIES
The Company at December 31, 1994 is contingently liable for annuities purchased
under structured settlement arrangements in the amount of $319,219.
NOTE H--EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT ACCOUNTANT'S
REPORT
As discussed in Note A and E, on May 30, 1995, LIGI sold all of the common stock
of the Company to Markel Corporation for approximately $24,300,000 in cash.
Prior to the closing date of the sale, the preferred stock of the Company was
redeemed through an assignment by the Company of the notes receivable from
affiliates in the amount of $44,660,000 to the preferred stockholder and the
payment of $5,340,000 of cash. Also, the Company declared and paid an
extraordinary dividend of approximately $11,887,000 prior to the sale.
16
17
Item 7b. UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
On May 30, 1995 Markel Corporation acquired all of the issued and outstanding
shares of common stock of Lincoln from LIGI, an operating unit of The Thomson
Corporation. Total consideration for the stock of Lincoln and certain other
agreements was approximately $24.3 million.
The unaudited pro forma consolidated balance sheet set forth below reflects how
the balance sheet of the Registrant might have appeared at March 31, 1995 if
the acquisition of Lincoln had been consummated at that date. The unaudited pro
forma consolidated statements of income for the three months ended March 31,
1995 and the year ended December 31, 1994 were prepared as if the acquisition
of Lincoln were effective as of January 1, 1995 or January 1, 1994, as
appropriate.
The Registrant expects to significantly reorganize Lincoln's business
operations and renew certain portions of Lincoln's business in the Registrant's
existing subsidiary, Essex. The unaudited pro forma consolidated financial
statements do not purport to represent what the combined results of operations
of the Registrant and Lincoln would have been if the acquisition had occurred
on January 1, 1995 or 1994, nor do they represent what the combined operations
of the companies may be in the future. The unaudited pro forma consolidated
financial statements should be read in conjunction with the consolidated
financial statements of the Registrant and related notes thereto as
incorporated by reference into the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994.
17
18
MARKEL CORPORATION AND SUBSIDIARIES
Pro Forma Consolidated Balance Sheet
March 31, 1995
(dollars in thousands)
(Unaudited)
Pro Forma Adjustments
-------------------------------
Markel Lincoln Preacquisition Purchase Markel and
Consolidated Insurance Co. Transactions Adjustments Lincoln
(Historical) (Historical) (Note 2a) (Note 2) Pro Forma
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments, available-for-sale,
at estimated fair value
Fixed maturities $ 489,236 $ 82,066 $ (22,643) $ -- $ 548,659
Equity securities 116,511 -- -- -- 116,511
Short-term investments 83,741 -- -- (7,259) (2c) 76,482
- -----------------------------------------------------------------------------------------------------------------------------------
Total investments 689,488 82,066 (22,643) (7,259) 741,652
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 2,493 1,726 -- -- 4,219
Receivables 100,116 4,385 (12) 1,306 (2e) 105,795
Notes receivable-affiliates -- 44,660 (44,660) -- --
Reinsurance recoverable on unpaid losses 188,067 7,688 -- -- 195,755
Reinsurance recoverable on paid losses 39,289 554 -- -- 39,843
Deferred policy acquisition costs 26,917 2,568 -- -- 29,485
Prepaid reinsurance premiums 40,741 247 -- -- 40,988
Property and equipment 42,343 -- -- -- 42,343
Intangible assets 45,008 -- -- (827) (2b) 44,181
Deferred tax asset 4,392 4,157 -- -- 8,549
Other assets 17,580 -- -- -- 17,580
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,196,434 $ 148,051 $ (67,315) $ (6,780) $ 1,270,390
===================================================================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 655,471 $ 37,785 -- $ 3,512 (2e) $ 696,768
Unearned premiums 154,000 10,225 -- -- 164,225
Payables to insurance companies 88,328 3,408 -- -- 91,736
Long-term debt 100,699 -- -- 17,000 (2c) 117,699
Other liabilities 39,661 6,453 (5,427) 1,000 (2d) 41,687
Redeemable preferred stock -- 50,000 (50,000) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,038,159 107,871 (55,427) 21,512 1,112,115
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Common stock and paid-in capital 22,948 27,523 (6,523) (21,000) (2f) 22,948
Retained earnings 128,398 13,410 (5,365) (8,045) (2f) 128,398
Net unrealized gains (losses) on fixed
maturities and equity securities, net of taxes 6,929 (753) -- 753 (2f) 6,929
- -----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 158,275 40,180 (11,888) (28,292) 158,275
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 1,196,434 $ 148,051 $ (67,315) $ (6,780) $ 1,270,390
===================================================================================================================================
See accompanying Notes to Pro Forma Consolidated Financial Statements.
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19
MARKEL CORPORATION AND SUBSIDIARIES
Pro Forma Consolidated Statement of Income
Three Months Ended March 31, 1995
(dollars in thousands, except per share data)
(Unaudited)
Pro Forma Adjustments
-------------------------------
Markel Lincoln Preacquisition Purchase Markel and
Consolidated Insurance Co. Transactions Adjustments Lincoln
(Historical) (Historical) (Note 3a) (Note 3) Pro Forma
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Earned premiums $ 65,784 $ 6,019 $ -- $ (369) (3c) $ 71,434
Net investment income 8,368 2,143 (1,422) (109) (3b) 8,980
Net realized gains (losses) from investment sales 1,563 (7) -- -- 1,556
Other 810 -- -- -- 810
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUES 76,525 8,155 (1,422) (478) 82,780
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Losses and loss adjustment expenses 42,023 3,766 -- (208) (3c) 45,581
Underwriting, acquisition and insurance expenses 22,605 2,287 -- (197) (3c) 24,695
Other 417 -- -- -- 417
Amortization of intangible assets 703 -- -- (30) (3d) 673
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 65,748 6,053 -- (435) 71,366
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 10,777 2,102 (1,422) (43) 11,414
Interest 1,939 -- -- 340 (3e) 2,279
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 8,838 2,102 (1,422) (383) 9,135
Income taxes 2,298 736 (498) (135) (3f) 2,401
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 6,540 $ 1,366 $ (924) $ (248) $ 6,734
===================================================================================================================================
Earnings per share
Primary $ 1.17 $ 1.21
- -----------------------------------------------------------------------------------------------------------------------------------
Fully diluted $ 1.17 $ 1.21
===================================================================================================================================
Average primary shares outstanding (in thousands) 5,570 5,570
===================================================================================================================================
See accompanying Notes to Pro Forma Consolidated Financial Statements.
19
20
MARKEL CORPORATION AND SUBSIDIARIES
Pro Forma Consolidated Statement of Income
Year Ended December 31, 1994
(dollars in thousands, except per share data)
(Unaudited)
Pro Forma Adjustments
-------------------------------
Markel Lincoln Preacquisition Purchase Markel and
Consolidated Insurance Co. Transactions Adjustments Lincoln
(Historical) (Historical) (Note 3a) (Note 3) Pro Forma
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Earned premiums $ 243,067 $ 23,330 $ -- $ (10,650) (3c) $ 255,747
Net investment income 29,110 7,564 (4,937) (436) (3b) 31,301
Net realized gains from investment sales 3,870 30 -- -- 3,900
Other 3,646 -- -- -- 3,646
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUES 279,693 30,924 (4,937) (11,086) 294,594
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Losses and loss adjustment expenses 156,169 13,860 -- (5,870) (3c) 164,159
Underwriting, acquisition and insurance expenses 80,681 8,499 -- (3,801) (3c) 85,379
Other 2,386 -- -- -- 2,386
Amortization of intangible assets 7,051 -- -- (118) (3d) 6,933
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 246,287 22,359 -- (9,789) 258,857
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 33,406 8,565 (4,937) (1,297) 35,737
Interest 7,675 -- -- 1,360 (3e) 9,035
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 25,731 8,565 (4,937) (2,657) 26,702
Income taxes 7,142 2,998 (1,728) (930) (3f) 7,482
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 18,589 $ 5,567 $ (3,209) $ (1,727) $ 19,220
===================================================================================================================================
Earnings per share
Primary $ 3.33 $ 3.45
- -----------------------------------------------------------------------------------------------------------------------------------
Fully diluted $ 3.33 $ 3.45
===================================================================================================================================
Average primary shares outstanding (in thousands) 5,569 5,569
===================================================================================================================================
See accompanying Notes to Pro Forma Consolidated Financial Statements.
20
21
MARKEL CORPORATION AND SUBSIDIARIES
Notes to Pro Forma Consolidated Financial Statements
(Unaudited)
1. Basis of presentation
On May 30, 1995 the Registrant acquired 100% of the common stock of Lincoln.
The purchase price for the net assets acquired and certain agreements was $24.3
million. The purchase price was funded as follows:
Cash $ 7,259,000
Borrowings under existing lines of credit 17,000,000
------------
$ 24,259,000
============
The accompanying unaudited pro forma consolidated balance sheet and statements
of income are provided to illustrate the effect of the purchase on the
Registrant and have been prepared using the purchase method of accounting. The
unaudited pro forma consolidated financial statements reflect how the balance
sheet might have appeared at March 31, 1995 if the acquisition had been
consummated at that date and how the statements of income for the three months
ended March 31, 1995 and for the year ended December 31, 1994 might have
appeared if the acquisition had been consummated on January 1, 1995 or 1994,
respectively. Certain reclassifications of Lincoln's historical financial
statements have been made to conform with the Registrant's presentation.
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22
2. Adjustments to unaudited pro forma consolidated balance sheet
The accompanying unaudited pro forma consolidated balance sheet as of March 31,
1995 reflects certain adjustments which are explained below. These adjustments
are required to give effect to matters directly attributable to the
acquisition. The explanations of these adjustments are as follows:
(a) To remove the assets and liabilities of Lincoln not purchased as part of
the acquisition from the balance sheet, as follows:
- redemption of 5,000 shares of Adjustable Rate Cumulative Redeemable
Preferred Stock, with accrued dividends
- retirement of notes receivable from affiliates, with accrued
interest
- payment of an extraordinary dividend to Lincoln's former parent
- payment of income taxes due to Lincoln's former parent
(b) To record the allocation of net purchase price as follows:
Fair value of net assets acquired $ 25,086,000
Excess of fair value over cost of net assets acquired (827,000)
------------
$ 24,259,000
============
(c) To record the debt incurred to finance the acquisition and to record the
cash paid at closing.
(d) To accrue severance and relocation costs for employees of Lincoln as agreed
to by the Registrant and Lincoln's employees in the plan for Lincoln's
reorganization.
(e) To strengthen unpaid losses and loss adjustment expenses reserves to bring
Lincoln's reserves into compliance with the Registrant's reserving policies and
to record an indemnity recoverable from the Seller.
(f) To record consolidating and eliminating entries.
22
23
3. Adjustments to unaudited pro forma consolidated statements of income
The accompanying unaudited pro forma consolidated statements of income for the
three months ended March 31, 1995 and for the year ended December 31, 1994
reflect certain adjustments which are explained below. These adjustments are
required to give effect to matters directly attributable to the purchase and to
eliminate non-recurring items in the historical combined financial statements.
Explanations of these adjustments are as follows:
(a) To remove the impact of assets and liabilities not purchased as part of the
acquisition from the results of operations; see Note 2(a).
To record pro forma adjustments related to the acquisition of Lincoln, the
following assumptions were used:
(b) Reduction in investment income due to net cash used in funding the
transaction; the rate of return is calculated at 6%.
(c) Lincoln will be reorganized and will cease writing new and renewal business
as soon as practicable after the transaction. It is assumed, solely for
purposes of these pro forma financial statements, that Essex, a wholly-owned
subsidiary of the Registrant, will retain approximately $6.0 million of
Lincoln's former business each year ($1.5 million quarterly). It is further
assumed that the loss reserves associated with Lincoln's unearned premium
reserves will be reserved at a 100% combined ratio and Essex will reserve any
business that it retains at an initial combined ratio of 100%.
(d) Excess of fair value over cost of net assets acquired is amortized on a
straight line basis over 7 years, the estimated time period necessary to
run-off Lincoln's reserves for unpaid losses and loss adjustment expenses.
(e) Interest on borrowed funds is assumed to be 8%.
(f) Taxes are calculated at an assumed 35% statutory rate.
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24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized, this 13th day of June, 1995.
MARKEL CORPORATION
By Darrell D. Martin
---------------------------
Darrell D. Martin
Executive Vice President and
Chief Financial Officer
24
25
EXHIBIT INDEX
Page No.
---------
2(a) Stock Purchase Agreement dated as of April 5, 1995, between Markel
Corporation and Lincoln Insurance Group, Inc. as amended by
Amendment dated May 30, 1995
2(b) Indemnification Agreement between Markel Corporation and Lincoln
Insurance Group, Inc. dated May 30, 1995
2(c) Guaranty provided by The Thomson Corporation in favor of Markel
Corporation dated May 30, 1995
23 Consent of Price Waterhouse to incorporation by reference of their
report included as part of this report on Form 8-K
25