UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
or
Commission File Number 001-15811
MARKEL CORPORATION
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
4521 Highwoods Parkway, Glen Allen, Virginia 23060-6148
(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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Number of shares of the registrant’s common stock outstanding at April 28, 2005: 9,840,273
Markel Corporation
Form 10-Q
Index
Quantitative and Qualitative Disclosures About Market Risk
Controls and Procedures
Unregistered Sales of Equity Securities and Use of Proceeds
Exhibits
2
PART I. FINANCIAL INFORMATION
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
Investments, available-for-sale, at estimated fair value:
Fixed maturities (amortized cost of $4,454,271 in 2005 and $4,386,908 in 2004)
Equity securities (cost of $892,439 in 2005 and $849,071 in 2004)
Short-term investments (estimated fair value approximates cost)
Total Investments, Available-For-Sale
Cash and cash equivalents
Receivables
Reinsurance recoverable on unpaid losses
Reinsurance recoverable on paid losses
Deferred policy acquisition costs
Prepaid reinsurance premiums
Goodwill
Other assets
Total Assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Unpaid losses and loss adjustment expenses
Unearned premiums
Payables to insurance companies
Convertible notes payable (estimated fair value of $117,000 in 2005 and $124,000 in 2004)
Senior long-term debt (estimated fair value of $667,000 in 2005 and $671,000 in 2004)
Junior Subordinated Deferrable Interest Debentures (estimated fair value of $162,000 in 2005 and 2004)
Other liabilities
Total Liabilities
Shareholders’ equity:
Common stock
Retained earnings
Accumulated other comprehensive income
Net unrealized holding gains on fixed maturities and equity securities, net of tax expense of $154,348 in 2005 and $203,041 in 2004
Cumulative translation adjustments, net of tax benefit of $6,108 in 2005 and tax expense of $39 in 2004
Total Shareholders’ Equity
Commitments and contingencies
Total Liabilities and Shareholders’ Equity
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Income and Comprehensive Income (Loss)
OPERATING REVENUES
Earned premiums
Net investment income
Net realized investment gains
Total Operating Revenues
OPERATING EXPENSES
Losses and loss adjustment expenses
Underwriting, acquisition and insurance expenses
Total Operating Expenses
Operating Income
Interest expense
Income Before Income Taxes
Income tax expense
Net Income
OTHER COMPREHENSIVE INCOME (LOSS)
Net unrealized gains (losses) on securities, net of taxes
Net holding gains (losses) arising during the period
Less reclassification adjustments for net gains included in net income
Net unrealized gains (losses)
Currency translation adjustments, net of taxes
Total Other Comprehensive Income (Loss)
Comprehensive Income (Loss)
NET INCOME PER SHARE
Basic
Diluted
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Consolidated Statements of Changes in Shareholders’ Equity
Three Months Ended
March 31,
COMMON STOCK
Balance at beginning of period
Restricted stock units expensed
Balance at end of period
RETAINED EARNINGS
Net income
Repurchase of common stock
ACCUMULATED OTHER COMPREHENSIVE INCOME
Unrealized gains:
Net unrealized holding gains (losses) arising during the period, net of taxes
Cumulative translation adjustments:
Currency translation adjustments, net of taxes (see note 11)
SHAREHOLDERS’ EQUITY AT END OF PERIOD
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Consolidated Statements of Cash Flows
OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities
Net Cash Provided By Operating Activities
INVESTING ACTIVITIES
Proceeds from sales of fixed maturities and equity securities
Proceeds from maturities, calls and prepayments of fixed maturities
Cost of fixed maturities and equity securities purchased
Net change in short-term investments
Sale of subsidiary, net of cash sold
Other
Net Cash Used By Investing Activities
FINANCING ACTIVITIES
Net Cash Used By Financing Activities
Decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
CASH AND CASH EQUIVALENTS AT END OF PERIOD
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of March 31, 2005 and the related consolidated statements of income and comprehensive income (loss), changes in shareholders’ equity and cash flows for the three months ended March 31, 2005 and 2004 are unaudited. In the opinion of management, all adjustments necessary for 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 entire year. The consolidated balance sheet as of December 31, 2004 was derived from the Company’s audited annual consolidated financial statements.
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. Readers are urged to review the Company’s 2004 annual report on Form 10-K for a more complete description of the Company’s business and accounting policies.
Certain prior year amounts have been reclassified to conform to the current presentation.
Net income per share was determined by dividing net income by the applicable weighted average shares outstanding.
(amounts in thousands, except per share amounts)
Net income as reported
Interest expense, net of tax, on convertible notes payable
Adjusted net income
Basic common shares outstanding
Dilutive effect of convertible notes payable
Other dilutive potential common shares
Diluted shares outstanding
Basic net income per share
Diluted net income per share
The Company applies the intrinsic value recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for stock-based compensation plans. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (Statement) No. 123, Accounting for Stock-Based Compensation, as amended by Statement No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure.
Stock-based compensation expense, net of taxes, included in net income under APB Opinion No. 25 was $0.4 million and $0.5 million for the three months ended March 31, 2005 and 2004, respectively. Under the fair value method principles of Statement No. 123, pro forma stock-based compensation expense, net of taxes, and pro forma net income would not have differed from reported amounts for the three months ended March 31, 2005 and 2004.
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The following table summarizes the effect of reinsurance on premiums written and earned.
(dollars in thousands)
Direct
Assumed
Ceded
Net premiums
Incurred losses and loss adjustment expenses were net of reinsurance recoverables (ceded incurred losses and loss adjustment expenses) of $24.4 million and $82.9 million for the three months ended March 31, 2005 and 2004, respectively.
On January 8, 1997, the Company arranged the sale of $150 million of Company-Obligated Mandatorily Redeemable Preferred Capital Securities (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 the Company. Proceeds from the sale of the 8.71% Capital Securities were used to purchase the Company’s 8.71% Junior Subordinated Debentures due January 1, 2046, issued to the Trust under an indenture dated January 13, 1997 (the Indenture). The 8.71% Junior Subordinated Debentures are the sole assets of the Trust. The Company has the right to defer interest payments on the 8.71% Junior Subordinated Debentures for up to five years. The 8.71% Capital Securities and related 8.71% Junior Subordinated 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. No other subsidiary of the Company guarantees the 8.71% Junior Subordinated Debentures or the 8.71% Capital Securities. In the event of default under the Indenture, the Trust may not make distributions on, or repurchases of, the Trust’s common securities. During a period in which the Company elects to defer interest payments or in the event of default under the Indenture, the Company may not make distributions on, or repurchases of, the Company’s capital stock or debt securities ranking equal or junior to the 8.71% Junior Subordinated Debentures.
During 2001, the Company issued $408.0 million principal amount at maturity, $112.9 million net proceeds, of Liquid Yield Option Notes™ (LYONs). The LYONs are zero coupon senior notes, which were issued at a price of $283.19 per LYON, representing a yield to maturity of 4.25%. The LYONs mature on June 5, 2031. The Company uses the effective yield method to recognize the accretion of discount from the issue price to the face amount of the LYONs at maturity. The accretion of discount is included in interest expense.
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In accordance with their terms, each LYON is convertible into 1.1629 shares of common stock upon the occurrence of certain events. Effective April 1, 2005, each LYON became convertible because the closing price of the Company’s common shares exceeded the conversion trigger price of $336.49 for at least 20 of the last 30 consecutive trading days in the quarter ended March 31, 2005. No LYONs have been converted as of the date of this filing; however, holders may convert LYONs at any time through June 4, 2031. Approximately 335,000 shares would be issued if all of the LYONs were to be converted. These shares were included in the Company’s calculation of diluted earnings per share for the three months ended March 31, 2005 and 2004.
LYONs holders have the right to require the Company to repurchase the LYONs on June 5th of 2006, 2011, 2016, 2021 and 2026 at their accreted value on these dates as follows:
June 5, 2006
June 5, 2011
June 5, 2016
June 5, 2021
June 5, 2026
The Company may choose to settle any LYONs tendered for repurchase in cash or common shares of the Company. The Company may redeem the LYONs for cash on or after June 5, 2006 at their accreted value.
The Company will pay contingent cash interest to the holders of the LYONs during the six-month period commencing June 5, 2006 and during any six-month period thereafter if the average market price of a LYON for a specified period equals or exceeds 120% of the sum of the issue price and accrued original issue discount of the LYON.
Other comprehensive income (loss) is primarily comprised of net holding gains (losses) on securities arising during the period less reclassification adjustments for net gains included in net income. Other comprehensive income (loss) also includes foreign currency translation adjustments. The related tax expense (benefit) on net holding gains (losses) on securities arising during the period was $(42.8) million and $31.2 million, respectively, for the three months ended March 31, 2005 and 2004. The related tax expense on the reclassification adjustments for net gains included in net income was $5.9 million and $2.6 million, respectively, for the three months ended March 31, 2005 and 2004. The related tax benefit on foreign currency translation adjustments was $6.1 million and $0.6 million, respectively, for the three months ended March 31, 2005 and 2004.
The Company operates in three segments of the specialty insurance marketplace: the Excess and Surplus Lines, the Specialty Admitted and the London markets.
All investing activities are included in the Investing segment. Discontinued programs and non-strategic insurance subsidiaries 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.
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Segment profit or loss for each of the Company’s operating segments is measured by underwriting profit or loss. The property and casualty insurance industry commonly defines underwriting profit or loss as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. Underwriting profit or loss does not replace operating income or net income computed in accordance with U.S. generally accepted accounting principles (U.S. GAAP) as a measure of profitability. Underwriting profit or loss provides a basis for management to evaluate the Company’s underwriting performance. Segment profit for the Investing segment is measured by net investment income and net realized investment gains or losses.
The Company does not allocate assets to the Excess and Surplus Lines, Specialty Admitted and London Insurance Market operating segments for management reporting purposes. Total investments and cash and cash equivalents are allocated to the Investing segment. The Company does not allocate capital expenditures for long-lived assets to any of its operating segments for management reporting purposes.
a) The following tables summarize the Company’s segment disclosures.
Three Months Ended March 31, 2005
Gross premium volume
Net written premiums
Underwriting profit (loss)
Segment profit (loss)
Income before income taxes
U.S. GAAP combined ratio(1)
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Three Months Ended March 31, 2004
b) The following table reconciles segment assets to the Company’s consolidated financial statements.
Segment Assets
Investing
On January 31, 2001, the Company received notice of a lawsuit filed in the United States District Court for the Southern District of New York against Terra Nova Insurance Company Limited by Palladium Insurance Limited and Bank of America, N.A. seeking approximately $27 million plus interest and exemplary damages in connection with alleged reinsurance agreements. The discovery phase of this matter ended in late 2004 and a trial date has not yet been determined. The Company believes it has numerous defenses to this claim, including the defense that the alleged reinsurance agreements and insurance policy were not valid. The Company intends to vigorously defend this matter.
This and other contingencies arise in the normal conduct of the Company’s operations. In the opinion of management, the resolutions of these contingencies are not expected to have a material impact on the Company’s financial condition or results of operations. However, adverse outcomes are possible and could negatively impact the Company’s financial condition and results of operations.
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a) Expenses relating to all of the Company’s defined contribution plans were $2.3 million and $2.2 million, respectively, for the three months ended March 31, 2005 and 2004.
b) The following table presents the components of net periodic benefit cost for the Terra Nova Pension Plan, the Company’s defined benefit plan.
Service cost
Interest cost
Expected return on plan assets
Amortization of unrecognized loss
Net periodic benefit cost
The Company contributed $0.3 million to the Terra Nova Pension Plan during the first quarter of 2005. The Company expects plan contributions to total $1.3 million in 2005. If necessary, the Company will make any additional contributions to the plan to meet minimum funding requirements or to ensure that the fair value of plan assets at December 31, 2005 exceeds the accumulated benefit obligation.
On January 11, 2005, the Company sold its wholly-owned reinsurance subsidiary, Corifrance, to a subsidiary of Fairfax Financial Holdings Limited (the buyer). Under the terms of the sales agreement, the Company has agreed to indemnify the buyer through December 31, 2007 for any adverse development of loss reserves up to the purchase price. Corifrance was considered by the Company to be a non-strategic subsidiary, and its results have been included in the Other segment since the acquisition of Markel International. Proceeds from the sale of approximately $57 million were received in April 2005. The gain on the sale of Corifrance was $5.5 million and was included in underwriting, acquisition and insurance expenses in the Other segment. Included in the gain was the realization of the cumulative foreign currency translation adjustment on Corifrance. The gain was partially offset by the establishment of a contingent obligation to indemnify the buyer if loss reserves prove to be deficient.
The accompanying consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include the accounts of Markel Corporation and all subsidiaries.
Critical Accounting Estimates
Critical accounting estimates are defined as those estimates that are both important to the portrayal of our financial condition and results of operations and require us to exercise significant judgment. The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of material contingent assets and liabilities, including litigation contingencies. These estimates, by necessity, are based on assumptions about numerous factors.
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We review our critical accounting estimates and assumptions quarterly. These reviews include evaluating the adequacy of both reserves for unpaid losses and loss adjustment expenses and the reinsurance allowance for doubtful accounts, analyzing the recoverability of deferred tax assets, assessing goodwill for impairment and evaluating the investment portfolio for other-than-temporary declines in estimated fair value. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements.
Readers are urged to review our 2004 annual report on Form 10-K for a more complete description of our critical accounting estimates.
Our Business
We market and underwrite specialty insurance products and programs to a variety of niche markets and believe that our specialty product focus and niche market strategy enable us to develop expertise and specialized market knowledge. We seek to differentiate ourselves from competitors by reason of our expertise, service, continuity and other value-based considerations. We compete in three segments of the specialty insurance marketplace: the Excess & Surplus Lines, the Specialty Admitted and the London markets. Our financial goals are to earn consistent underwriting profits and superior investment returns to build shareholder value.
Our Excess and Surplus Lines segment is comprised of five underwriting units, our Specialty Admitted segment consists of two underwriting units and our London Insurance Market segment is comprised of the ongoing operations of Markel International.
Our Excess and Surplus Lines segment writes property and casualty insurance outside of the standard market for hard-to-place risks including catastrophe-exposed property, professional liability, products liability, general liability, commercial umbrella and other coverages tailored for unique exposures.
Our Specialty Admitted segment writes risks that are unique and hard-to-place in the standard market but must remain with an admitted insurance company for marketing and regulatory reasons. Our underwriting units in this segment write specialty program insurance for well-defined niche markets and personal and commercial property and liability coverages.
We participate in the London Market through Markel International, which includes Markel Capital Limited and Markel International Insurance Company Limited, two of our wholly-owned subsidiaries. Markel Capital Limited is the corporate capital provider for Markel Syndicate 3000 at Lloyd’s, which is managed by Markel Syndicate Management Limited, a wholly-owned subsidiary. Our London Insurance Market segment writes specialty property, casualty and marine insurance and reinsurance.
Our discontinued lines of business and non-strategic insurance subsidiaries are included in Other for segment reporting purposes. For the three months ended March 31, 2005, the Other segment consisted primarily of discontinued Markel International programs. In prior periods, the Other segment also included the results of Corifrance, our wholly-owned reinsurance subsidiary, which we sold on January 11, 2005. See note 11 of the notes to consolidated financial statements for a discussion of the sale of Corifrance.
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Key Performance Indicators
We measure success by our ability to compound growth in book value per share over a five-year period. We recognize that it may be difficult to grow book value consistently each year, so we measure ourselves over a longer period of time. We believe that growth in book value per share is the most comprehensive measure of our success because it includes all underwriting and investing results. We measure underwriting results by our underwriting profit and combined ratio. These measures are discussed in greater detail under “Results of Operations.”
Results of Operations
The following table compares the components of net income.
Underwriting profit
Net income for the three months ended March 31, 2005 increased 79% compared to the same period of 2004. The increase in net income is primarily due to improved underwriting results. Each of the components of net income are discussed in further detail under “Underwriting Results,” “Investment Results” and “Other Expenses.”
Underwriting Results
Underwriting profits are a key component of our strategy to grow book value per share. We believe that the ability to achieve consistent underwriting profits demonstrates knowledge and expertise, commitment to superior customer service and the ability to manage insurance risk. The property and casualty insurance industry commonly defines underwriting profit or loss as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. We use underwriting profit or loss as a basis of evaluating our underwriting performance.
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The following table compares selected data from our underwriting operations.
Net retention
U.S. GAAP Combined Ratios (1)
Excess and Surplus Lines
Specialty Admitted
London Insurance Market
Markel Corporation (Consolidated)
We reported a combined ratio of 90% for the first quarter of 2005 compared to 96% for the same period last year. The increase in underwriting profit for the quarter ended March 31, 2005 was primarily due to improved underwriting performance in the London Insurance Market segment.
The combined ratio for the Excess and Surplus Lines segment was 84% for the quarter ended March 31, 2005 compared to 83% for the same period of 2004. The increase in the combined ratio is primarily due to a higher expense ratio in 2005 as a result of lower reinsurance commissions as we continue to increase our retention of gross written premiums.
The Specialty Admitted segment produced improved underwriting results for the quarter ended March 31, 2005 compared to the same period of 2004. The combined ratio for the first quarter of 2005 benefited from lower current year losses compared to 2004.
The London Insurance Market segment’s combined ratio for the quarter ended March 31, 2005 improved primarily due to less development on prior years’ loss reserves, partially offset by a higher expense ratio in 2005 compared to 2004. In 2004, the London Insurance Market segment’s underwriting results included a $30 million increase in prior years’ loss reserves.
The Other segment produced an underwriting profit of $2.0 million for the quarter ended March 31, 2005 compared to an underwriting loss of $2.3 million for the same period in 2004. The Other underwriting profit for the first quarter of 2005 included a $5.5 million gain on the sale of Corifrance. Prior to the sale, the operating results of Corifrance were included in the Other segment.
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Premiums and Net Retention
The following table compares gross premium volume and net written premiums by underwriting segment.
Total
Gross premium volume for the first quarter of 2005 declined 12% compared to the same period of 2004. Approximately two-thirds of the decline was due to lower 2005 premium writings at Markel International and the Investors Brokered Excess and Surplus Lines unit and to the sale of Corifrance. During the first quarter of 2005, gross premium volume at Markel International declined primarily due to increased competition, which reduced new and renewal business opportunities compared to the same period of 2004, and due to our exit from the aviation insurance market in late 2004. The decline in gross premium volume at the Investors Brokered Excess and Surplus Lines unit was primarily due to the re-underwriting of the casualty and excess and umbrella books of business beginning in early 2004 and the withdrawal from the California residential contractors market in early 2005.
During the first quarter of 2005, we continued to receive rate increases compared to the same period of the prior year for many product lines. However, the rate of increase has slowed and, in certain lines, rates have declined. We continue to experience market pressure to reduce prices in select lines of business on both new and renewal accounts. When we believe the prevailing market rates will not support our underwriting profit targets, the business is not written. Our 2005 business plans continue to focus on new product development, producer relationships and achieving our ultimate goal of underwriting profitability.
As part of our underwriting philosophy, we seek to offer products with limits that do not require significant amounts of reinsurance. We purchase reinsurance in order to reduce our retention on individual risks and enable us to write policies with sufficient limits to meet policyholder needs. Net retention of gross premium volume has increased consistent with our strategy to retain more of our profitable business. Net retention of gross premium volume for the first quarter of 2005 was 85% compared to 81% for 2004. The increase was primarily due to changes in the mix of premium writings and purchasing less reinsurance in the Excess and Surplus Lines segment during 2005 compared to 2004.
The following table compares earned premiums by underwriting segment.
16
Earned premium for the three months ended March 31, 2005 decreased 2% compared to the same period of 2004. This decrease was primarily due to lower gross premium volume at Markel International partially offset by higher retentions in the Excess and Surplus Lines segment compared to 2004.
Investment Results
First quarter 2005 net investment income was $58.8 million compared to $48.7 million in the first quarter of 2004. The increase in 2005 was primarily due to higher invested assets and higher investment yields compared to the same period of 2004.
For the three months ended March 31, 2005, net realized gains were $16.8 million compared to $7.4 million for the same period last year. Variability in the timing of realized and unrealized investment gains and losses is to be expected.
At March 31, 2005, we held securities with gross unrealized losses of approximately $44.8 million, or less than 1% of total invested assets. At March 31, 2005, all of these securities were reviewed and management believes there were no indications of other-than-temporary impairment.
Other Expenses
Interest expense for the three months ended March 31, 2005 increased 24% to $16.0 million from $12.9 million for the same period of 2004. The increase was primarily due to the August 2004 issuance of $200 million of 7.35% unsecured senior notes.
The estimated annual effective tax rate was 30% for the three months ended March 31, 2005 compared to 32% for the same period in 2004. For both periods, the estimated annual effective tax rate differs from the statutory tax rate of 35% primarily as a result of tax-exempt investment income.
For the three months ended March 31, 2005, comprehensive loss was $26.1 million compared to comprehensive income of $94.3 million for the same period in 2004. The comprehensive loss for the three months ended March 31, 2005 was primarily due to net unrealized losses, net of taxes, on the investment portfolio of $90.4 million. This unfavorable movement in the market value of the investment portfolio was partially offset by a $33.4 million increase in net income for the first quarter of 2005 compared to the same period of 2004. For the three months ended March 31, 2004, comprehensive income included net unrealized investment gains, net of taxes, of $53.0 million. Comprehensive income for the first quarter of 2005 included a loss of $11.4 million from currency translation adjustments, net of taxes, compared to a loss of $1.1 million for the same period of 2004. The loss from currency translation adjustments, net of taxes, in 2005 included $11.5 million from the sale of Corifrance. The majority of Corifrance’s net assets were denominated in euros, which have strengthened against the U.S. dollar since our acquisition of Markel International. We attempt to match assets and liabilities in original currencies to mitigate the impact of currency volatility.
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Financial Condition
At March 31, 2005, total invested assets decreased 2% to $6.2 billion from $6.3 billion at December 31, 2004. Net unrealized gains, net of taxes, on fixed maturities and equity securities were $286.6 million at March 31, 2005 compared to $377.1 million at December 31, 2004. Equity securities were $1.3 billion, or 21% of total invested assets, at both March 31, 2005 and December 31, 2004.
Net cash provided by operating activities was $108.9 million for the three months ended March 31, 2005 compared to $55.2 million for the same period in 2004. The increase was primarily due to increased cash flows from our international operations for the three months ended March 31, 2005 compared to same period of 2004.
Net cash used by investing activities was $153.1 million for the three months ended March 31, 2005 compared to $159.9 million for the same period in 2004. Net cash used for investing activities for the three months ended March 31, 2005 included $14.0 million of cash balances transferred in the disposition of Corifrance. Cash proceeds of approximately $57 million from the sale were received in April 2005.
For the three months ended March 31, 2005, net cash used by financing activities was $2.4 million compared to $2.3 million for the same period of 2004. In both periods, cash was used to repurchase shares of our common stock. These repurchases were made in anticipation of the future issuance of common shares to satisfy grants of Restricted Stock Units made to directors and officers under the Markel Corporation Omnibus Incentive Plan.
We have access to various capital sources including dividends from our insurance subsidiaries, holding company invested assets, undrawn capacity under our revolving credit facility and access to the debt and equity capital markets. We believe we have sufficient liquidity to meet our capital needs.
Shareholders’ equity at March 31, 2005 was $1.6 billion compared to $1.7 billion at December 31, 2004. Book value decreased 2% to $165.47 per share from $168.22 per share at December 31, 2004 primarily as a result of the decline in the market value of the investment portfolio partially offset by net income for the three months ended March 31, 2005.
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. Our consolidated balance sheets include assets and liabilities with estimated fair values that are subject to market risk. Our primary market risks are equity price risk associated with investments in equity securities, interest rate risk associated with investments in fixed maturities and foreign exchange risk for our international operations. We have no material commodity risk.
We manage foreign exchange risk primarily by matching assets and liabilities in each foreign currency as closely as possible. Significant estimations and assumptions are required when establishing insurance balances such as reinsurance recoverables and reserves for unpaid losses and loss adjustment expenses. As a result, matching of assets and liabilities by currency is subject to change as actual results may differ from these estimations and assumptions.
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Our market risks at March 31, 2005 have not materially changed from those identified at December 31, 2004.
As of the end of the period covered by this quarterly report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15 (Disclosure Controls). This evaluation was conducted under the supervision and with the participation of our management, including the Chairman and Chief Executive Officer (CEO) and the Executive Vice President and Chief Financial Officer (CFO).
Our management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based upon our controls evaluation, the CEO and CFO have concluded that our Disclosure Controls provide reasonable assurance that the information we are required to disclose in periodic reports is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding disclosure and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
During the first quarter of 2005, we implemented a new general ledger accounting software package for the business written at Lloyd’s through Markel International. The software package is the same package implemented in the U.S. during the third quarter of 2003 but includes additional functionality to provide for foreign currency transactions. Also during the first quarter of 2005, we implemented a new payroll software package for our U.S. operations. This same software package was implemented in the U.K. in April 2005. While we do not believe that our previous general ledger or payroll systems had any significant deficiencies or material weaknesses, the new systems now provide a common platform for both our U.S. and U.K operations. There were no other changes in our internal control over financial reporting during the first quarter of 2005 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Safe Harbor and Cautionary Statement
This is a “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995. It also contains general cautionary statements regarding our business, estimates and assumptions. Future actual results may materially differ from those described in this report because of many factors. Among other things:
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Our premium volume, underwriting and investment results have been and will continue to be potentially materially affected by these factors. Additional factors that could affect us are discussed in our reports on Forms 8-K, 10-Q and 10-K. By making these forward-looking statements, we are not intending to become obligated to publicly update or revise any forward-looking statements whether as a result of new information, future events or other changes. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as at their dates.
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PART II. OTHER INFORMATION
The following table summarizes the Company’s common stock repurchases for the quarter ended March 31, 2005.
Issuer Purchases of Equity Securities¹
Period
Total Numberof Shares
(or Units)
Purchased
Average Price
Paid per Share
Number of Shares
Purchased as Part
Of Publicly
Announced Plans
Or Programs
Maximum Number(or Approximate
Dollar Value)
of Shares
(or Units) that
May Yet Be
Purchased Under
The Plans or
Programs
01/01/2005-01/31/2005
02/01/2005-02/28/2005
03/01/2005-03/31/2005
See Exhibit Index for a list of exhibits filed as part of this report.
21
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 3rd day of May, 2005.
The Company
/s/ Alan I. Kirshner
Alan I. Kirshner
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Anthony F. Markel
Anthony F. Markel
President
(Principal Operating Officer)
/s/ Steven A. Markel
Steven A. Markel
Vice Chairman
/s/ Darrell D. Martin
Darrell D. Martin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Paul W. Springman
Paul W. Springman
Executive Vice President
/s/ Thomas S. Gayner
Thomas S. Gayner
Chief Investment Officer
22
Exhibit Index
Description
23