SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1999
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _____ to _____
Commission File Number 1-13051
MARKEL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-0292420
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
4551 Cox Road, Glen Allen, Virginia 23060-3382
(Address of principal executive offices)
(Zip code)
(804) 747-0136
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ X ] No [ ]
Number of shares of the registrant's common stock outstanding at July 28, 1999:
5,593,091
Markel Corporation
Form 10-Q
Index
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Consolidated Balance Sheets--
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Income and Comprehensive Income--
Quarters and Six Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows--
Six Months Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements--
June 30, 1999 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
-----------------------------------
1999 1998
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(dollars in thousands)
ASSETS
Investments, available-for-sale, at estimated fair value
Fixed maturities (cost of $1,362,218 in 1999 and $1,041,155 in 1998) $1,343,159 $1,070,978
Equity securities (cost of $200,928 in 1999 and $200,004 in 1998) 309,066 317,887
Short-term investments (estimated fair value approximates cost) 81,442 92,228
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments, Available-For-Sale 1,733,667 1,481,093
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 1,248 1,527
Receivables 105,884 68,138
Reinsurance recoverable on unpaid losses 401,010 198,288
Reinsurance recoverable on paid losses 40,113 21,205
Deferred policy acquisition costs 50,742 40,471
Prepaid reinsurance premiums 75,850 42,241
Property and equipment 10,058 7,981
Intangible assets 98,992 35,298
Other assets 67,457 25,022
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $2,585,021 $1,921,264
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $1,388,010 $ 933,830
Unearned premiums 290,205 205,908
Payables to insurance companies 63,270 22,715
Long-term debt (estimated fair value of $197,416 in 1999 and $96,931 in 1998) 198,245 93,219
Other liabilities 81,373 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 $135,570 in 1999 and $144,453 in 1998) 150,000 150,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 2,171,103 1,495,963
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Shareholders' equity
Common stock 25,572 25,415
Retained earnings 330,445 303,878
Accumulated other comprehensive income
Net unrealized holding gains on fixed maturities and equity securities, net of taxes 57,901 96,008
- ------------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 413,918 425,301
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Total Liabilities and Shareholders' Equity $2,585,021 $1,921,264
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
Quarter Ended Six Months Ended
June 30, June 30,
------------------------- ---------------------------
1999 1998 1999 1998
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(dollars in thousands, except per share data)
OPERATING REVENUES
Earned premiums $ 108,329 $ 84,526 $ 216,736 $ 163,424
Net investment income 21,659 17,158 44,310 34,728
Net realized gains from investment sales 1,980 6,207 9,043 9,620
Other 557 257 935 459
- ------------------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 132,525 108,148 271,024 208,231
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Losses and loss adjustment expenses 68,153 53,559 138,303 103,086
Underwriting, acquisition and insurance expenses 40,816 29,331 82,311 57,398
Amortization of intangible assets 1,364 508 2,620 1,017
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Total Operating Expenses 110,333 83,398 223,234 161,501
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Operating Income 22,192 24,750 47,790 46,730
Interest expense 6,528 5,097 12,818 10,181
- ------------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 15,664 19,653 34,972 36,549
Income tax expense 3,759 4,717 8,393 8,772
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 11,905 $ 14,936 $ 26,579 $ 27,777
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains (losses) on securities, net of taxes
Net unrealized holding gains (losses) arising during the period $ (14,359) $ 863 $ (32,229) $ 22,114
Less reclassification adjustments for gains included in
net income (1,287) (4,035) (5,878) (6,253)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) (15,646) (3,172) (38,107) 15,861
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $ (3,741) $ 11,764 $ (11,528) $ 43,638
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE
Basic $ 2.13 $ 2.71 $ 4.77 $ 5.05
Diluted $ 2.10 $ 2.64 $ 4.72 $ 4.92
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended
June 30,
------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------
(dollars in thousands)
OPERATING ACTIVITIES
Net Income $ 26,579 $ 27,777
Adjustments to reconcile net income to net cash used by operating activities (29,027) (16,807)
- -------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used By) Operating Activities (2,448) 10,970
- -------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of fixed maturities and equity securities 671,107 190,464
Proceeds from maturities of fixed maturities 33,021 56,822
Cost of fixed maturities and equity securities purchased (616,462) (292,032)
Net change in short-term investments 10,786 29,874
Acquisition of insurance company, net of cash acquired (143,557) --
Other (2,871) 3,298
- -------------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (47,976) (11,574)
- -------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Additions to long-term debt 105,000 --
Repayments of long-term debt (55,000) --
Other 145 466
- -------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 50,145 466
- -------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (279) (138)
Cash and cash equivalents at beginning of period 1,527 1,309
- -------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents At End Of Period $ 1,248 $ 1,171
- -------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - June 30, 1999
1. Principles of Consolidation
The consolidated balance sheet as of June 30, 1999, the related consolidated
statements of income and comprehensive income for the quarters and six months
ended June 30, 1999 and 1998, and the consolidated statements of cash flows for
the six months ended June 30, 1999 and 1998, are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of such
consolidated financial statements have been included. Such adjustments consist
only of normal recurring items. Interim results are not necessarily indicative
of results of operations for the full year.
The consolidated financial statements and notes are presented as permitted by
Form 10-Q, and do not contain certain information included in the Company's
annual consolidated financial statements and notes.
2. Net Income per share
Net income per share was determined by dividing net income by the applicable
shares outstanding (in thousands):
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------
Net income, as reported (Basic and diluted income) $11,905 $14,936 $26,579 $27,777
- -------------------------------------------------------------------------------------------
Average basic common shares outstanding 5,592 5,502 5,573 5,499
Dilutive potential common shares 64 152 64 152
- -------------------------------------------------------------------------------------------
Average diluted shares outstanding 5,656 5,654 5,637 5,651
- -------------------------------------------------------------------------------------------
3. Reinsurance
The table below summarizes the effect of reinsurance on premiums written and
earned (dollars in thousands):
Quarter Ended June 30,
- ----------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------
Written Earned Written Earned
Direct $ 149,906 $ 143,549 $ 119,147 $ 104,261
Assumed 16,456 6,832 1,760 1,712
Ceded (50,790) (42,052) (26,940) (21,447)
- ----------------------------------------------------------------------------------------
Net premiums $ 115,572 $ 108,329 $ 93,967 $ 84,526
========================================================================================
Six Months Ended June 30,
- ----------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------
Written Earned Written Earned
Direct $ 281,175 $ 286,977 $ 214,671 $ 203,200
Assumed 19,119 10,187 2,956 3,299
Ceded (85,714) (80,428) (47,213) (43,075)
- ----------------------------------------------------------------------------------------
Net premiums $ 214,580 $ 216,736 $ 170,414 $ 163,424
========================================================================================
Incurred losses and loss adjustment expenses are net of reinsurance recoveries
of $26.1 million and $17.1 million for the quarters ended June 30, 1999 and
1998, respectively and $53.4 million and $29.9 million for the six months ended
June 30, 1999 and 1998, respectively.
6
4. Company Obligated Mandatorily Redeemable Preferred Securities (8.71% Capital
Securities)
On January 8, 1997 the Company arranged the sale of $150 million of 8.71%
Capital Securities issued under an Amended and Restated Declaration of Trust
dated January 13, 1997 (The Declaration) by Markel Capital Trust I (the Trust),
a statutory business trust sponsored and wholly-owned by Markel Corporation.
Proceeds from the sale of the 8.71% Capital Securities were used to purchase
$154,640,000 aggregate principal amount of the Company's 8.71% Junior
Subordinated Deferrable Interest Debentures (the Debentures) due January 1,
2046, issued to the Trust under an indenture dated January 13, 1997 (the
Indenture). The Debentures are the sole assets of the Trust. The Company has the
right to defer interest payments on the Debentures for up to five years. The
8.71% Capital Securities and related Debentures are redeemable by the Company on
or after January 1, 2007. Taken together, the Company's obligations under the
Debentures, the Indenture, the Declaration and a guarantee made by the Company
provide, in the aggregate, a full, irrevocable and unconditional guarantee of
payments of distributions and other amounts due on the 8.71% Capital Securities.
5. Comprehensive Income
Other comprehensive income (loss) is composed of net unrealized holding gains
(losses) on securities arising during the period less reclassification
adjustments for gains included in net income. The related tax expense (benefit)
on net unrealized gains (losses) on securities was $(7.7) million and $(17.4)
million for the quarter and six months ended June 30, 1999 and $0.5 million and
$11.9 million for the same periods in 1998. The related tax expense on the
reclassification adjustments for gains included in net income was $0.7 million
and $3.2 million for the quarter and six months ended June 30, 1999,
respectively and $2.2 million and $3.4 million for the same periods in 1998.
6. Acquisition
On January 15, 1999, the Company acquired Gryphon Holdings, Inc. and its
subsidiaries (Gryphon) as the result of the completion of a public tender offer.
The Company's second quarter and six month results for the period ending June
30, 1999 include Gryphon's results of operations since the date of acquisition.
The acquisition was accounted for using the purchase method of accounting. Total
consideration paid for Gryphon was approximately $145.7 million. The excess of
the purchase price over the fair value of the net tangible and identifiable
intangible assets acquired was recorded as goodwill and is being amortized using
the straight-line method over 20 years. The Company funded the transaction with
available cash of approximately $95.7 million and borrowings of approximately
$50 million. In addition the Company refinanced $55.0 million of Gryphon's
long-term debt.
7. Segment Reporting Disclosures
The Company has five underwriting units focused on specific niches within the
Excess and Surplus Lines and Specialty Admitted markets. Excess and Surplus
Lines, Professional/Products Liability and Brokered Excess and Surplus Lines
write business in the Excess and Surplus Lines market and for purposes of
segment reporting are aggregated as one operating segment. Specialty Program
Insurance and Specialty Personal and Commercial Lines write business in the
Specialty Admitted market and for purposes of segment reporting are aggregated
as one operating segment. All investing activities are included in the Investing
operating segment.
The Company intends to significantly restructure Gryphon's operations and
expects that Gryphon's premium volume will decrease by 50% or more from
preacquisition levels. The Gryphon programs that the Company
7
7. Segment Reporting Disclosures (continued)
intends to continue will be administered primarily by underwriting units in the
Excess and Surplus Lines operating segment. Gryphon's discontinued programs are
included in Other for purposes of segment reporting.
The Company considers many factors including the nature of the underwriting
units' insurance products, production sources, distribution strategies and
regulatory environment in determining how to aggregate operating segments.
Segment profit or loss for the Excess and Surplus Lines and the Specialty
Admitted operating segments is measured by underwriting profit or loss. Segment
profit for the Investing operating segment is measured by net investment income
and realized gains or losses.
The Company does not allocate assets to the Excess and Surplus Lines or the
Specialty Admitted operating segments for management reporting purposes. The
total investment portfolio is allocated to the Investing operating segment. The
Gryphon acquisition increased the total investment portfolio by approximately
$300 million in the first quarter of 1999. The Company does not allocate capital
expenditures for long-lived assets to any of its operating segments for
management reporting purposes.
a) Following is a summary of segment disclosures:
Segment Revenues
Quarter Ended June 30, Six Months Ended June 30,
- ----------------------------------------------------------------------------------------------------------
1999 1998 (dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------
$ 70,550 $ 59,480 Excess & Surplus Lines $140,113 $113,168
28,845 25,046 Specialty Admitted 54,342 50,256
23,639 23,365 Investing 53,353 44,348
8,934 -- Other 22,281 --
- ----------------------------------------------------------------------------------------------------------
$131,968 $107,891 Total $270,089 $207,772
==========================================================================================================
Segment Profit (Loss)
Quarter Ended June 30, Six Months Ended June 30,
- ----------------------------------------------------------------------------------------------------------
1999 1998 (dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------
$ 4,442 $ 3,650 Excess & Surplus Lines $ 8,526 $ 6,216
(1,253) (2,014) Specialty Admitted (2,688) (3,276)
23,639 23,365 Investing 53,353 44,348
(3,829) -- Other (9,716) --
- ----------------------------------------------------------------------------------------------------------
$ 22,999 $ 25,001 Total $ 49,475 $ 47,288
==========================================================================================================
Combined Ratio
Quarter Ended June 30, Six Months Ended June 30,
- ----------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------
94% 94% Excess & Surplus Lines 94% 95%
104% 108% Specialty Admitted 105% 107%
-- -- Investing -- --
143% -- Other 144% --
- ----------------------------------------------------------------------------------------------------------
101% 98% Total 102% 98%
==========================================================================================================
8
7. Segment Reporting Disclosures (continued)
Segment Assets (dollars in thousands)
June 30,
------------------------
1999 1998
- ------------------------------------------------------------
Excess & Surplus Lines $ -- $ --
Specialty Admitted -- --
Investing 1,733,667 1,450,961
Other 851,354 450,089
- ------------------------------------------------------------
Total $2,585,021 $1,901,050
============================================================
b) The following summary reconciles segment profit (loss) to income before
income taxes (dollars in thousands):
Quarter Ended Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------
Income before income taxes
Segment profit $ 22,999 $ 25,001 $ 49,475 $ 47,288
Unallocated amounts
Amortization expense (1,364) (508) (2,620) (1,017)
Interest expense (6,528) (5,097) (12,818) (10,181)
Other 557 257 935 459
- ----------------------------------------------------------------------------------------------------
Income Before Income Taxes $ 15,664 $ 19,653 $ 34,972 $ 36,549
====================================================================================================
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Quarter and Six Months ended June 30, 1999 compared to Quarter and Six Months
ended June 30, 1998
The Company underwrites specialty insurance products and programs for niche
markets. Significant areas of underwriting include Excess and Surplus Lines,
Professional/Products Liability, Brokered Excess and Surplus Lines, Specialty
Programs and Specialty Personal and Commercial Lines. Property and casualty
insurance for nonstandard and hard-to-place risks is underwritten by the Excess
and Surplus Lines unit. Professional liability coverage is offered to physicians
and health professionals, insurance companies, attorneys and architects and
engineers. Special risk programs provide products liability insurance for
manufacturers and distributors and tailored coverages for other unique
exposures. In addition, employment practices liability coverage is offered. The
Brokered Excess and Surplus Lines unit writes hard-to-place, large general
liability, commercial umbrella, products liability and property accounts.
Gryphon's continuing lines of business consist of an earthquake exposed
California property program, professional liability programs and several
specialty casualty programs. Specialty Program Insurance includes coverage for
camps, youth and recreation, child care, health and fitness and agribusiness
organizations, as well as accident and medical insurance for colleges. The
Company also underwrites personal and commercial property and liability
coverages for watercraft, motorcycles and automobile lenders.
Following is a comparison of gross premium volume by significant underwriting
area:
Gross Premium Volume
Quarter Ended June 30, Six Months Ended June 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 (dollars in thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
$ 37,049 $ 34,607 Excess and Surplus Lines $ 63,942 $ 59,560
35,557 32,459 Professional/Products Liability 69,095 63,215
19,904 17,227 Brokered Excess and Surplus Lines 35,196 31,865
19,016 -- Gryphon Continuing Programs 35,997 --
17,464 20,974 Specialty Program Insurance 34,449 39,285
24,692 13,987 Specialty Personal and Commercial Lines 31,020 21,794
12,438 -- Gryphon Discontinued Programs 29,886 --
241 903 Other 809 1,798
- ------------------------------------------------------------------------------------------------------------------------------------
$ 166,361 $ 120,157 Total $ 300,394 $ 217,517
====================================================================================================================================
Gross premium volume was $166.4 million for the second quarter and $300.4
million for the six month period in 1999 compared to $120.2 million and $217.5
million, respectively, for the same periods last year. The growth was primarily
the result of the Gryphon acquisition which added $31.5 million and $65.9
million to the Company's gross premium volume in the second quarter and six
month period of 1999. As the Company re-underwrites the Gryphon programs, the
Gryphon business is expected to decline significantly. The Company's core books
of business, excluding the effect of Gryphon, increased 12% in the second
quarter and 8% in the first six months of 1999. The Company has maintained its
underwriting standards at the expense of premium growth.
Excess and Surplus Lines second quarter gross premium volume was $37.0 million
compared to $34.6 million in 1998. For the six month period, gross premium
volume was $63.9 million compared to $59.6 million last year. The growth in both
periods was due to increased production in the casualty and inland marine
programs.
10
Second quarter gross premium volume from Professional/Products Liability was
$35.6 million compared to $32.5 million a year ago. For the six month period,
gross premium volume advanced to $69.1 million from $63.2 million in 1998. For
both the quarter and six month periods, growth in the employment practices
liability and specified professions programs was partially offset by lower
production from other lines, including the medical malpractice program.
Premiums from Brokered Excess and Surplus Lines totaled $19.9 million in the
second quarter of 1999 compared to $17.2 million in 1998. For the six month
period, gross premium volume grew to $35.2 million from $31.9 million last year.
The increase in both periods was primarily due to higher gross premium volume in
the unit's property and excess and umbrella programs.
Gross premium volume for the Gryphon programs that the Company expects to
continue was $19.0 million in the second quarter of 1999 and $36.0 million for
the six month period. For the six month period of 1999, continuing program gross
premium volume consisted of $23.4 million of earthquake exposed California
property business which will become part of the Excess and Surplus Lines unit's
special property program, $6.5 million of professional liability business which
will become part of the Professional/Products Liability unit and $6.1 million of
casualty programs, most of which will be administered by the Brokered Excess and
Surplus Lines underwriting unit.
Specialty Program Insurance premiums declined to $17.5 million for the second
quarter and $34.4 million for the six month period in 1999 from $21.0 million
and $39.3 million, respectively, in 1998. Increased competition in the youth and
recreation program was partially offset by continued growth in the surety
program.
Specialty Personal and Commercial Lines premiums rose to $24.7 million in the
second quarter and $31.0 million in the six month period of 1999 from $14.0
million and $21.8 million, respectively, in 1998. The 1999 increase was
primarily due to the acquisition of a yacht program, including $7.3 million of
unearned premium at the date of acquisition, which added $13.5 million in gross
premium to the second quarter. The yacht program is expected to generate
approximately $15 million of gross premium volume in 1999.
Gross premium volume for the discontinued Gryphon programs was $12.4 million in
the second quarter and $29.9 million for the six month period in 1999. The
Company reviewed all of Gryphon's programs at the time of acquisition and
determined that certain programs were unprofitable and presented little
opportunity to generate future underwriting profits. The Company has
discontinued these programs and is working with the affected agents and brokers
to locate new markets for these risks.
Other gross premiums totaled $0.2 million in the second quarter of 1999 compared
to $0.9 million in the prior year. For the six month period in 1999, other gross
premiums totaled $0.8 million compared to $1.8 million a year ago. Other gross
premium volume primarily consisted of facultative reinsurance placed by the
Professional/Products Liability unit.
Currently many of the Company's products are being adversely affected by
increased competition and lower rates in the property and casualty market. The
Company does not intend to relax underwriting standards in order to sustain
premium volume. Further, the volume of premiums written may vary significantly
with the Company's decision to alter its product concentration to maintain or
improve underwriting profitability.
11
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 70% in the second
quarter of 1999 and 71% in the six month period compared to 78% for both periods
in the prior year. The decrease was due to low retentions on Gryphon's
California property program.
Total operating revenues for the second quarter of 1999 rose to $132.5 million
from $108.1 million in the prior year. For the six month period, operating
revenues rose to $271.0 million from $208.2 million in 1998.
Earned Premiums
Quarter Ended June 30, Six Months Ended June 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 (dollars in thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
$ 21,785 $ 22,974 Excess and Surplus Lines $ 42,584 $ 43,632
28,938 26,171 Professional/Products Liability 56,346 50,573
11,139 10,334 Brokered Excess and Surplus Lines 21,289 18,955
8,685 -- Gryphon Continuing Programs 19,893 --
16,269 15,785 Specialty Program Insurance 32,335 30,577
12,578 9,261 Specialty Personal and Commercial Lines 22,007 19,679
8,935 -- Gryphon Discontinued Programs 22,282 --
-- 1 Other -- 8
- ------------------------------------------------------------------------------------------------------------------------------------
$ 108,329 $ 84,526 Total $ 216,736 $ 163,424
====================================================================================================================================
Second quarter earned premiums were $108.3 million compared to $84.5 million in
1998. Six month earned premiums were $216.7 million compared to $163.4 million a
year ago. The growth in the second quarter was the result of $17.6 million of
earned premiums for Gryphon and $6.2 million of growth from existing operations.
For the six month period, the growth resulted from $42.2 million of Gryphon
earned premiums and $11.1 million of growth from existing operations.
Second quarter net investment income increased 26% to $21.7 million from $17.2
million in 1998. For the six month period, net investment income rose 28% to
$44.3 million from $34.7 million last year. The increases were the result of the
Gryphon acquisition which added $5.4 million and $10.2 million to net investment
income for the second quarter and six month period in 1999, respectively.
In the second quarter, the Company realized $2.0 million of investment gains
compared to $6.2 million of gains in 1998. For the six month period, realized
investment gains were $9.0 million compared to gains of $9.6 million for the
same period last year. Variability in the timing of realized and unrealized
investment gains and losses is to be expected.
Total operating expenses for the second quarter were $110.3 million compared to
$83.4 million in 1998. Total operating expenses for the six month period were
$223.2 million compared to $161.5 million a year ago. The increases resulted
primarily from the Gryphon acquisition.
12
Following is a comparison of selected data from the Company's operations
(dollars in thousands):
Quarter Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Gross premium volume $ 166,361 $ 120,157 $ 300,394 $ 217,517
Net premiums written $ 115,572 $ 93,967 $ 214,580 $ 170,414
Net retention 70% 78% 71% 78%
Earned premiums $ 108,329 $ 84,526 $ 216,736 $ 163,424
Losses and loss adjustment expenses $ 68,153 $ 53,559 $ 138,303 $ 103,086
Underwriting, acquisition and insurance expenses $ 40,816 $ 29,331 $ 82,311 $ 57,398
Underwriting profit (loss) $ (640) $ 1,636 $ (3,878) $ 2,940
GAAP ratios
Loss ratio 63% 63% 64% 63%
Expense ratio 38% 35% 38% 35%
- --------------------------------------------------------------------------------------------------------------------------
Combined ratio 101% 98% 102% 98%
- --------------------------------------------------------------------------------------------------------------------------
Underwriting performance is measured by the combined ratio of losses and
expenses to earned premiums. For the second quarter and six month period, the
Company reported a combined ratio of 101% and 102% compared to a combined ratio
of 98% in both periods in 1998. The underwriting losses in 1999 were the result
of Gryphon's combined ratio of 128% and 124% for the second quarter and six
month period, respectively. Excluding Gryphon, the Company's 1999 combined ratio
was 95% and 96% for the quarter and six month period, respectively.
The second quarter and six month period loss ratio was 63% and 64%,
respectively, compared to 63% for both periods of 1998. For the six month
period, favorable loss development in the Excess & Surplus Lines operating
segment was more than offset by the higher loss ratio on Gryphon's discontinued
lines of business. The second quarter and six month period expense ratio was 38%
compared to 35% for both periods in 1998. The increase was due to Gryphon's
higher expense ratio. The Company is working agressively to reduce Gryphon's
expense ratio by leveraging corporate services and reducing costs to those
necessary to run Gryphon's operations on a smaller scale.
The Company's five underwriting units focus on specific niches within the Excess
and Surplus Lines and Specialty Admitted markets. Excess and Surplus Lines,
Professional/Products Liability and Brokered Excess and Surplus Lines write
business in the Excess and Surplus Lines market and for purposes of segment
reporting are aggregated as one operating segment. The Gryphon programs that the
Company intends to continue will be administered by underwriting units in the
Excess and Surplus Lines operating segment. Specialty Program Insurance and
Specialty Personal and Commercial Lines write business in the Specialty Admitted
market and for purposes of segment reporting are aggregated as one operating
segment.
The combined ratio for the Excess and Surplus Lines segment was 94% in the
second quarter of 1999 and 1998. For the six month period, the Excess and
Surplus Lines combined ratio decreased to 94% from 95% in 1998. The decrease in
the 1999 six month combined ratio was due to continued favorable loss
development, partially offset by higher acquisition costs. The combined ratio
for the Specialty Admitted segment decreased to 104% in the second quarter of
1999 from 108% in 1998. For the six month period, the Specialty Admitted
combined ratio decreased to 105% from 107% in 1998. The decrease in both periods
was the result of lower acquisition costs.
13
Amortization of intangible assets was $1.4 million in the second quarter of 1999
compared to $0.5 million last year. For the six month period, amortization of
intangible assets was $2.6 million compared to $1.0 million in 1998. The
increase in both periods was primarily the result of goodwill from the Gryphon
acquisition which is being amortized over 20 years.
Interest expense was $6.5 million in the second quarter of 1999 compared to $5.1
million in 1998. Interest expense was $12.8 million for the six month period in
1999 compared to $10.2 million last year. In January 1999, the Company borrowed
$105 million under its $250 million revolving credit facility to complete the
acquisition of Gryphon. During July 1999, the Company repaid $20 million of the
$105 million of borrowings used to fund the purchase of Gryphon.
The Company's effective tax rate for the both periods of 1999 and 1998 was 24%
of income before income taxes.
In evaluating its operating performance, the Company focuses on core
underwriting and investing results before consideration of realized gains or
losses from the sales of investments and expenses related to the amortization of
intangible assets. Management believes this is a better indicator of the
Company's operating performance because it reduces the variability in results
associated with realized investment gains or losses and eliminates the impact of
accounting conventions which do not reflect current operating costs. For the
second quarter of 1999, income from core underwriting and investing operations
increased to $11.9 million, or $2.10 per diluted share, from $11.3 million, or
$2.01 per diluted share, in 1998. For the six month period, income from core
underwriting and investing operations increased to $23.2 million, or $4.11 per
diluted share, from $22.4 million, or $3.96 per diluted share, in 1998. The
increase was due to higher net investment income, partially offset by
underwriting losses.
Second quarter 1999 net income decreased to $11.9 million from $14.9 million in
1998. For the six month period of 1999, net income was $26.6 million compared to
$27.8 million last year. The decrease was due to underwriting losses and lower
realized gains in 1999, partially offset by higher net investment income.
Comprehensive income for the second quarter of 1999 was a loss of $3.7 million,
or $0.66 per diluted share, compared to comprehensive income of $11.8 million,
or $2.08 per diluted share, in 1998. The decrease was the result of the net
decrease in unrealized gains of $2.76 per diluted share in 1999 compared to the
net decrease in unrealized gains of $0.56 per diluted share in 1998. For the six
month period, comprehensive income was a loss of $11.5 million, or $2.05 per
diluted share, compared to comprehensive income of $43.6 million, or $7.72 per
diluted share, last year. The decrease was the result of the net decrease in
unrealized gains of $6.77 per diluted share in 1999 compared to the net increase
in unrealized gains of $2.80 per diluted share in 1998.
Financial Condition as of June 30, 1999
The Company's insurance operations collect premiums and pay current claims,
reinsurance commissions and operating expenses. Premiums collected and positive
cash flows from the insurance operations are invested primarily in short-term
investments and long-term bonds. Short-term investments held by the Company's
insurance subsidiaries provide liquidity for projected claims, reinsurance costs
and operating expenses. To the extent that operating cash flows are negative
during any period of time, a portion of the Company's investment portfolio may
be liquidated to meet operating needs.
14
On January 15, 1999, the Company acquired Gryphon Holdings, Inc. and its
subsidiaries as the result of the completion of a public tender offer. The
Company's results for the second quarter and six month period ended June 30,
1999 include Gryphon's results of operations since the date of acquisition. The
acquisition was accounted for using the purchase method of accounting. Total
consideration paid for Gryphon was approximately $145.7 million. The excess of
the purchase price over the fair value of the net tangible and identifiable
intangible assets acquired was recorded as goodwill and is being amortized using
the straight-line method over 20 years. The Company funded the transaction with
available cash of approximately $95.7 million and borrowings of approximately
$50.0 million. In addition the Company refinanced $55.0 million of Gryphon's
long-term debt.
The Company's invested assets increased to $1.7 billion at June 30, 1999 from
$1.5 billion at December 31, 1998. The increase was primarily the result of the
Gryphon acquisition. The Company's unpaid losses and loss adjustment expenses
reserves and paid and unpaid reinsurance recoverables increased to $1.4 billion
and $441.1 million at June 30, 1999 from $933.8 million and $219.5 million,
respectively, at December 31, 1998. The increases were the result of the
purchase of Gryphon and Gryphon's historically higher dependence on reinsurance.
For the six month period ended June 30, 1999, the Company reported net cash used
by operating activities of $2.4 million, compared to net cash provided by
operating activities of $11.0 million for the same period in 1998. The decrease
in 1999 was the result of Gryphon's use of $20.2 million of operating cash for
the first six months of 1999. The Company continues to reunderwrite and
discontinue various Gryphon programs. As a result, Gryphon's operations are
expected to generate negative operating cash flows throughout 1999 which will
partially offset the operating cash flow generated by the Company's core
underwriting units.
For the six month period ended June 30, 1999, the Company reported net cash used
by investing activities of $48.0 million compared to $11.6 million in 1998. The
difference was primarily the result of the Gryphon acquisition.
As of June 30, 1999 and December 31, 1998, the unused balances available under
the Company's $250 million revolving credit facility totaled $145 million and
$250 million, respectively. Funds are available under the facility for general
corporate purposes. During July 1999, the Company repaid $20 million of the $105
million of borrowings used to fund the purchase of Gryphon. In addition the
Company has entered into an agreement to sell an unneeded Gryphon insurance
subsidiary as a shell for approximately $20 million. The transaction is expected
to close during the third quarter of 1999.
Shareholders' equity at June 30, 1999 was $413.9 million compared to $425.3
million at December 31, 1998. Book value per share was $74.02 at June 30, 1999
compared to $77.02 at December 31, 1998. The decrease in the six month period of
1999 was the result of the net decrease in unrealized gains of $38.1 million
partially offset by net income of $26.6 million.
15
Other Matters
Year 2000
The Year 2000 issue affects virtually all companies and organizations. Many
companies have existing computer applications which use only two digits to
identify a year in the date field. These applications were designed and
developed without considering the impact of the century change. If not corrected
these computer applications may fail or create erroneous results in the year
2000.
The Company's Year 2000 Strategy
The Company has created a Year 2000 team involving associates from all areas of
the organization and has charged them with implementing the Company's Year 2000
project. The team has been in place since September of 1997. The project's scope
includes all information technology (IT), both internally developed and
purchased from third parties, material vendors, producer and customer
relationships, and an assessment of the Company's underwriting exposure as a
result of the insurance products written by the Company's underwriting units. In
addition, the Company is evaluating the Year 2000 exposure to issuers included
as part of its investment portfolio.
The Company has completed all phases of its Year 2000 compliance project for its
material IT systems. The Company has also completed the assessment and
remediation phases for its ancillary IT systems and is currently in the testing
phase. The Company anticipates completion of all testing of its ancillary IT
systems by October 31, 1999.
The Company has been in contact with its material business partners to determine
their state of readiness with regard to the Year 2000 issue and the potential
impact on the Company. The Company has identified the following general
categories of business partners as material to the Company's ability to conduct
its operations: software, hardware and telecommunication providers, banks and
investment brokers, material holdings in the Company's investment portfolio,
insurance producers, reinsurers and reinsurance intermediaries, major insurance
clients and utilities. Where the Company has determined that the relationship
with a business partner is material to its ability to conduct normal operations,
the Company has sent letters to the business partner requesting an update on the
status of the business partner's Year 2000 initiative. Where deemed necessary,
the Company is following up with the business partner to obtain further
information. Based on the assurances of these business partners and the
Company's internal reviews of information provided, the Company has not
currently identified a material business partner that will be non-compliant.
However, there can be no assurances that all material business partners will be
compliant, and such noncompliance could have a material effect on the Company's
financial position and results of operations. The Company expects to complete
its review of material business partners by October 31, 1999.
The Company has conducted a comprehensive review of its underwriting guidelines
and has made the decision to exclude Year 2000 exposures from most 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.
The cost of the Company's Year 2000 project is estimated to be $1.0 million.
Approximately $0.5 million of this amount was incurred as of December 31, 1998.
The remainder of the estimated cost of the project is expected to be incurred
throughout 1999. All costs of the Year 2000 project have been expensed as
incurred.
16
As all of its material IT systems were deemed Year 2000 compliant at December
31, 1998, the Company has not established a contingency plan for noncompliance
of its IT systems. At this time, the Company is not aware of any material
business partners that will not be Year 2000 compliant. If the Company becomes
aware of non-compliant business partners, one option will be to evaluate using
other vendors. In many instances the establishment of a contingency plan is not
possible or is cost prohibitive. In these situations, noncompliance by the
Company or its material business partners could have a material adverse impact
on the Company's financial position and results of operations.
Subsequent to the Company's acquisition of Gryphon in January 1999, the Company
began an assessment of Gryphon's material IT systems for Year 2000 compliance.
The Company has converted Gryphon's continuing business to the Company's Year
2000 compliant systems.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of economic losses due to adverse changes in the
estimated fair value of a financial instrument as the result of changes in
equity prices, interest rates, foreign exchange rates and commodity prices. The
Company's consolidated balance sheets include assets and liabilities whose
estimated fair values are subject to market risk. The primary market risks to
the Company are equity price risk associated with investments in equity
securities and interest rate risk associated with investments in fixed
maturities. From time to time, equity prices and interest rates fluctuate
causing an effect on the Company's investment portfolio. The Company has no
direct commodity risk, and its exposure to foreign exchange risk is immaterial.
The Company's market risk disclosures at June 30, 1999 have not materially
changed from those identified at December 31, 1998.
"Safe Harbor" Statement
This is a "Safe Harbor" statement under the Private Securities Litigation Reform
Act of 1995. Certain statements contained herein are forward-looking statements
that involve risks and uncertainties. Future actual results may materially
differ from those in these statements because of many factors. For example, the
Company continues to significantly reorganize Gryphon's operations, and the
scope and impact of these changes cannot be fully determined at this time.
Insurance industry price competition has made it more difficult to attract and
retain adequately priced business. Changing legal and social trends can
adversely impact the adequacy of loss reserves. State regulatory actions can
impede the Company's ability to charge adequate rates and efficiently allocate
capital. The frequency and severity of natural catastrophes are highly variable.
Economic conditions and interest rate volatility can have significant impacts on
the market value of fixed maturity and equity investments. The business
community's state of readiness for the Year 2000, the readiness of the Company's
vendors and business partners and the Company's potential underwriting exposure
to Year 2000 claims are difficult to predict with any certainty. Accordingly,
the Company's premium growth, underwriting and investing results have been and
will continue to be potentially materially affected by these factors.
17
PART II. OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders
The Corporation's Annual Meeting was held on May 13, 1999, in Richmond,
Virginia. At the Annual Meeting, shareholders elected directors for the ensuing
year and ratified the selection by the Board of Directors of KPMG LLP as the
Company's independent auditors for the year ending December 31, 1999. The
results of the meeting were as follows:
Election of Directors For Withheld
- --------------------- --- --------
Alan I. Kirshner 4,736,103 22,836
Anthony F. Markel 4,736,485 22,454
Steven A. Markel 4,736,910 22,029
Darrell D. Martin 4,734,803 24,136
Thomas S. Gayner 4,735,074 23,865
Leslie A. Grandis 4,736,485 22,454
Stewart M. Kasen 4,738,457 20,482
Gary L. Markel 4,735,145 23,794
Ratification of Selection of Auditors:
Abstentions and Brokers
For Against Non-Votes
--- ------- ---------
4,744,955 9,869 4,115
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The Exhibits to this Report are listed in the Exhibit Index.
(b) No reports on Form 8-K were filed during the quarter ended June 30, 1999
18
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 29th day of July, 1999.
Markel Corporation
By Alan I. Kirshner
---------------------------------
Alan I. Kirshner
Chief Executive Officer
(Principal Executive Officer)
By Anthony F. Markel
---------------------------------
Anthony F. Markel
President
(Principal Operating Officer)
By Steven A. Markel
---------------------------------
Steven A. Markel
Vice Chairman
By Darrell D. Martin
---------------------------------
Darrell D. Martin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
19
Exhibit Index
Number Description
27 Financial Data Schedule for period ended June 30, 1999 *
* Filed electronically with the Commission
20