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, 2001
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 001-15811
MARKEL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1959284
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
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 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 August 3, 2001:
8,619,501
1
Markel Corporation
Form 10-Q
Index
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Consolidated Balance Sheets-- 3
June 30, 2001 and December 31, 2000
Consolidated Statements of Operations and Comprehensive Income (Loss)-- 4
Quarters and Six Months Ended June 30, 2001 and 2000
Consolidated Statements of Changes in Shareholders' Equity-- 5
Six Months Ended June 30, 2001 and 2000
Consolidated Statements of Cash Flows-- 6
Six Months Ended June 30, 2001 and 2000
Notes to Consolidated Financial Statements-- 7
June 30, 2001
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 13
Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2001 2000
- ----------------------------------------------------------------------------------------------------------------
(dollars in thousands)
ASSETS
Investments, available-for-sale, at estimated fair value
Fixed maturities (cost of $2,360,042 in 2001 and $2,322,616 in 2000) $2,406,810 $2,374,008
Equity securities (cost of $331,003 in 2001 and $291,385 in 2000) 512,927 431,126
Short-term investments (estimated fair value approximates cost) 54,909 80,710
- ----------------------------------------------------------------------------------------------------------------
Total Investments, Available-For-Sale 2,974,646 2,885,844
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 224,699 250,320
Receivables 219,113 223,114
Accrued premium income 163,135 160,048
Reinsurance recoverable on unpaid losses 1,110,310 989,470
Reinsurance recoverable on paid losses 161,293 114,963
Deferred policy acquisition costs 160,757 130,644
Prepaid reinsurance premiums 167,359 139,272
Intangible assets 387,615 402,999
Other assets 176,285 176,479
- ----------------------------------------------------------------------------------------------------------------
Total Assets $5,745,212 $5,473,153
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $3,121,604 $3,037,006
Unearned premiums 801,599 701,663
Payables to insurance companies 168,699 138,242
Convertible notes payable (estimated fair value of $114,444 in 2001) 113,298 --
Long-term debt (estimated fair value of $282,474 in 2001 and $569,127 in 2000) 276,713 573,111
Other liabilities 128,205 120,759
Company-Obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary
Trust Holding Solely Junior Subordinated Deferrable Interest Debentures
of Markel Corporation (estimated fair value of $136,125 in 2001
and $130,742 in 2000) 150,000 150,000
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities 4,760,118 4,720,781
- ----------------------------------------------------------------------------------------------------------------
Shareholders' equity
Common stock 524,912 325,914
Retained earnings 311,027 302,000
Accumulated other comprehensive income
Net unrealized holding gains on fixed maturities and equity securities,
net of taxes of $80,043 in 2001 and $66,897 in 2000 148,649 124,236
Cumulative translation adjustments, net of taxes of $273 in 2001
and $120 in 2000 506 222
- ----------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 985,094 752,372
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $5,745,212 $5,473,153
- ----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------------------------
2001 2000 2001 2000
-------- -------- -------- --------
(dollars in thousands, except per share data)
OPERATING REVENUES
Earned premiums $260,553 $281,659 $539,334 $402,188
Net investment income 42,138 43,836 85,694 66,682
Net realized gains (losses) from investment sales (2,599) (9,847) 7,770 (4,342)
Other -- 47 -- 94
- ------------------------------------------------------------------------------------------------------
Total Operating Revenues 300,092 315,695 632,798 464,622
- ------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Losses and loss adjustment expenses 183,486 220,593 382,531 293,652
Underwriting, acquisition and insurance expenses 96,496 96,799 193,780 144,110
Amortization of intangible assets 7,692 7,184 15,384 8,777
- ------------------------------------------------------------------------------------------------------
Total Operating Expenses 287,674 324,576 591,695 446,539
- ------------------------------------------------------------------------------------------------------
Operating Income (Loss) 12,418 (8,881) 41,103 18,083
Interest expense 10,883 14,985 26,029 22,257
- ------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 1,535 (23,866) 15,074 (4,174)
Income tax expense (benefit) 723 (5,966) 6,030 (452)
- ------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 812 $(17,900) $ 9,044 $ (3,722)
- ------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
Unrealized gains on securities, net of taxes
Net holding gains (losses) arising during the period $ 16,383 $ (5,309) $ 29,464 $ (1,800)
Less reclassification adjustments for gains (losses)
included in net income 1,689 6,378 (5,051) 2,823
- ------------------------------------------------------------------------------------------------------
Net unrealized gains 18,072 1,069 24,413 1,023
Currency translation adjustments, net of taxes 4,398 -- 284 --
- ------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income 22,470 1,069 24,697 1,023
- ------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $ 23,282 $(16,831) $ 33,741 $ (2,699)
- ------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE
Basic $ 0.09 $ (2.44) $ 1.10 $ (0.57)
Diluted $ 0.09 $ (2.44) $ 1.10 $ (0.57)
- ------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Six Months Ended
June 30,
--------------------
2001 2000
- ---------------------------------------------------------------------------------------------------
(dollars in thousands)
Common Stock
Balance at beginning of period $325,914 $ 25,625
Issuance of common stock and other equity 198,998 298,316
- ---------------------------------------------------------------------------------------------------
Balance at end of period $524,912 $323,941
- ---------------------------------------------------------------------------------------------------
Retained Earnings
Balance at beginning of period $302,000 $342,426
Net income (loss) 9,044 (3,722)
Repurchase of common stock and other (17) (7,392)
- ---------------------------------------------------------------------------------------------------
Balance at end of period $311,027 $331,312
- ---------------------------------------------------------------------------------------------------
Accumulated Other Comprehensive Income
Unrealized gains
Balance at beginning of period $124,236 $ 15,368
Net unrealized holding gains arising during the period, net of taxes 24,413 1,023
- ---------------------------------------------------------------------------------------------------
Balance at end of period 148,649 16,391
Cumulative translation adjustment
Balance at beginning of period 222 --
Cumulative translation adjustments, net of taxes 284 --
- ---------------------------------------------------------------------------------------------------
Balance at end of period 506 --
- ---------------------------------------------------------------------------------------------------
Balance at end of period $149,155 $ 16,391
- ---------------------------------------------------------------------------------------------------
Shareholders' Equity at End of Period $985,094 $671,644
- ---------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended
June 30,
---------------------
2001 2000
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
OPERATING ACTIVITIES
Net Income (Loss) $ 9,044 $ (3,722)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities 13,095 (6,056)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Operating Activities 22,139 (9,778)
- -----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of fixed maturities and equity securities 477,790 406,713
Proceeds from maturities of fixed maturities 70,758 34,643
Cost of fixed maturities and equity securities purchased (630,703) (354,410)
Net change in short-term investments 25,801 14,000
Acquisition of insurance company, net of cash acquired -- (208,392)
Sale of insurance company shell, net of cash sold -- 12,482
Other (5,592) (7,945)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (61,946) (102,909)
- -----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Additions to long-term debt and convertible notes payable 147,943 370,000
Repayments and repurchases of long-term debt (332,239) (126,488)
Issuance of common stock 197,991 --
Other 990 (4,206)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 14,685 239,306
- -----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (25,122) 126,619
Exchange on foreign currency cash balances (499) (489)
Cash and cash equivalents at beginning of period 250,320 129,055
- -----------------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents At End Of Period $ 224,699 $ 255,185
- -----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - June 30, 2001
1. Principles of Consolidation
The consolidated balance sheet as of June 30, 2001, the related consolidated
statements of operations and comprehensive income (loss) for the quarters and
six months ended June 30, 2001 and 2000, the consolidated statements of changes
in shareholders' equity and the consolidated statements of cash flows for the
six months ended June 30, 2001 and 2000, 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.
Certain reclassifications of prior year's amounts have been made to conform with
2001 presentations.
2. Net Income (Loss) per share
Net income (loss) per share was determined by dividing net income (loss) by the
applicable shares outstanding (in thousands):
Quarter Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------
Net income (loss), as reported (basic and diluted) $ 812 $(17,900) $9,044 $(3,722)
- ------------------------------------------------------------------------------------------------------------
Average basic common shares outstanding 8,603 7,344 8,187 6,540
Dilutive potential common shares 53 -- 56 --
- ------------------------------------------------------------------------------------------------------------
Average diluted shares outstanding 8,656 7,344 8,243 6,540
- ------------------------------------------------------------------------------------------------------------
Because the Company reported a net loss for the quarter and six month period
ended June 30, 2000, dilutive potential common shares were not included in the
calculation of earnings per share.
3. Reinsurance
The table below summarizes the effect of reinsurance on premiums written and
earned (dollars in thousands):
Quarter Ended June 30,
- ------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------
Written Earned Written Earned
Direct $343,324 $324,327 $ 299,876 $288,011
Assumed 24,022 28,345 35,726 76,939
Ceded (88,453) (92,119) (104,995) (83,291)
- ------------------------------------------------------------------------
Net premiums $278,893 $260,553 $ 230,607 $281,659
- ------------------------------------------------------------------------
7
3. Reinsurance (continued)
Six Months Ended June 30,
- ------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------
Written Earned Written Earned
Direct $ 733,715 $ 643,550 $ 452,649 $ 429,212
Assumed 100,571 75,696 42,311 96,539
Ceded (212,483) (179,912) (143,620) (123,563)
- ------------------------------------------------------------------------
Net premiums $ 621,803 $ 539,334 $ 351,340 $ 402,188
- ------------------------------------------------------------------------
Incurred losses and loss adjustment expenses are net of reinsurance recoveries
of $176.8 million and $68.5 million for the quarters ended June 30, 2001 and
2000, respectively, and $312.6 million and $94.4 million for the six months
ended June 30, 2001 and 2000, respectively.
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 the Company. 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. Convertible Notes Payable
During the second quarter of 2001, the Company issued $408 million face amount,
$113 million net proceeds, of Liquid Yield Option Notes(TM) (LYONs). The LYONs
are zero coupon senior notes convertible into Markel common shares under certain
conditions. The issue price of $283.19 per LYON represented a yield to maturity
of 4.25% per annum, with an initial conversion price of $243.53 per Markel
common share. The final maturity of the LYONs is June 5, 2031. Contingent cash
interest and contingent principal may be payable to the holders of the LYONs
under certain circumstances.
Each $1,000 principal amount at maturity of the LYONs will be convertible into
1.1629 shares of Markel common stock upon the occurrence of any of the following
events: if the closing price of Markel common shares on the New York Stock
Exchange exceeds specified levels, if the credit rating of the LYON's is reduced
below specified levels, if the Company calls the LYON's for redemption, or if
the Company is party to certain mergers or consolidations.
Holders may require the Company to repurchase the LYONs on June 5th of 2002,
2004, 2006, 2011,
8
5. Convertible Notes Payable (continued)
2016, 2021 and 2026 at their accreted value on these dates. The Company may
choose to pay the purchase price for such repurchases 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.
During the second quarter of 2001, the Company used a portion of the LYON's net
proceeds to repay $100 million of balances outstanding under its revolving
credit facility.
6. Other Comprehensive Income
Other comprehensive income is composed of net holding gains (losses) on
securities arising during the period less reclassification adjustments for gains
(losses) included in net income. Other comprehensive income also includes
foreign currency translation adjustments subsequent to the acquisition of Markel
International in March of 2000. The related tax expense (benefit) on net holding
gains (losses) on securities arising during the period was $8.8 million and
$15.9 million for the quarter and six months ended June 30, 2001 and $(2.8)
million and $(1.0) million for the same periods in 2000. The related tax expense
(benefit) on the reclassification adjustments for gains (losses) included in net
income was $(0.9) million and $2.7 million for the quarter and six months ended
June 30, 2001, respectively and $(3.5) million and $(1.5) million for the same
periods in 2000. The related tax expense on the currency translation adjustments
was $2.4 million and $0.2 million for the quarter and six months ended June 30,
2001.
7. Acquisition
On March 24, 2000, the Company became a holding company for Markel North
America, Inc. and completed its acquisition of Markel International. The Company
issued approximately 1.75 million Markel common shares and contingent value
rights (CVR) and paid approximately $325 million in cash to Markel International
shareholders in the transaction. Total consideration was approximately $658
million, including $31.2 million of Markel International shares purchased in the
open market prior to the acquisition date. Each former shareholder of Markel
North America, Inc. received for each Markel North America, Inc. share, one
common share of the Company. The acquisition was accounted for using the
purchase method of accounting. 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 borrowed $245 million under its $400 million revolving
credit facility to fund a portion of the acquisition. In addition, $175 million
of Markel International debt remained outstanding. The Company's results include
Markel International's results since the date of acquisition. Effective as of
March 31, 2001, Markel North America, Inc. was merged with and into the Company.
Effective March 30, 2001 the CVRs issued in connection with the acquisition of
Markel International were extinguished pursuant to the terms of the Contingent
Value Rights Agreement (the Agreement). Under the Agreement the CVRs were
automatically extinguished when the Current Market Value, as defined by the
Agreement, of the Company's common stock, was greater than or equal to the
target price of $185 per share. The Current Market Value of the Company's common
stock exceeded $185 per share during the 20 consecutive trading day period ended
as of the close of trading on the New York Stock Exchange on March 30, 2001.
9
7. Acquisition (continued)
a) The following table summarizes, on a pro forma basis, the Company's
unaudited consolidated results of operations as if the purchase of Markel
International had taken place on January 1, 2000 after giving effect to certain
adjustments, including amortization of goodwill and other intangibles, increased
interest expense on debt related to the acquisition, lower investment income due
to cash used to fund a portion of the transaction, and related income tax
effects. Markel International's nonrecurring and transaction related expenses in
the first quarter of 2000, prior to the acquisition by the Company, were
excluded from the pro forma financial information. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had the acquisition occurred on January 1, 2000 (dollars in
thousands, except per share amounts).
Six Months Ended
June 30,
----------------
2000
- ----------------------------------------------------------
Total operating revenues $ 624,114
Net income (loss) (29,822)
- ----------------------------------------------------------
Net income (loss) per share
Basic $ (4.06)
Diluted $ (4.06)
- ----------------------------------------------------------
b) The following summary reconciles cash paid for the acquisition of Markel
International (dollars in thousands).
Fair value of assets acquired, net of cash acquired $ 2,856,825
Fair value of liabilities assumed (2,353,303)
Common stock and other equity issued (295,130)
- ------------------------------------------------------------------
Net cash paid for acquisition 208,392
Cash acquired in acquisition 154,883
- ------------------------------------------------------------------
Cash paid for acquisition $ 363,275
- ------------------------------------------------------------------
8. Segment Reporting Disclosures
Markel North America includes the Excess and Surplus Lines and Specialty
Admitted segments. Markel International includes two operating segments: the
London Company Market and the Lloyd's Market. Markel International's results
have been included in the Company's operating results since the date of
acquisition. Prior year amounts have been reclassified to conform with 2001
presentations.
All investing activities are included in the Investing operating segment.
Discontinued programs and non-strategic insurance subsidiaries are included in
Other (Discontinued Lines) 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.
10
8. Segment Reporting Disclosures (continued)
Segment profit or loss for the Markel North America and Markel International
operating divisions is measured by underwriting profit or loss. Segment profit
for the Investing operating segment is measured by net investment income and net
realized gains or losses.
The Company does not allocate assets to the Markel North America or the Markel
International operating divisions for management reporting purposes. The total
investment portfolio, cash and cash equivalents are allocated to the Investing
operating segment.
The Company does not allocate capital expenditures for long-lived assets to any
of its operating segments for management reporting purposes.
a) Following is a summary of segment disclosures:
Segment Revenues
Quarter Ended June 30, Six Months Ended June 30,
- -----------------------------------------------------------------------------
2001 2000 (dollars in thousands) 2001 2000
- -----------------------------------------------------------------------------
$118,174 $ 81,956 Excess and Surplus Lines $227,969 $159,474
32,743 29,134 Specialty Admitted 64,246 56,936
20,933 52,878 London Company Market 58,293 57,075
72,858 55,815 Lloyd's Market 140,108 60,322
39,539 33,989 Investing 93,464 62,340
15,845 61,876 Other (Discontinued Lines) 48,718 68,381
- -----------------------------------------------------------------------------
$300,092 $315,648 Total $632,798 $464,528
=============================================================================
Segment Profit (Loss)
Quarter Ended June 30, Six Months Ended June 30,
- -----------------------------------------------------------------------------
2001 2000 (dollars in thousands) 2001 2000
- -----------------------------------------------------------------------------
$ 2,285 $ (72) Excess and Surplus Lines $ 8,432 $ 3,862
195 1,761 Specialty Admitted (397) 3,474
(1,363) (7,232) London Company Market (8,634) (8,982)
(12,487) (12,413) Lloyd's Market (18,336) (13,684)
39,539 33,989 Investing 93,464 62,340
(8,059) (17,777) Other (Discontinued Lines) (18,042) (20,244)
- -----------------------------------------------------------------------------
$ 20,110 $ (1,744) Total $ 56,487 $ 26,766
=============================================================================
Combined Ratios
Quarter Ended June 30, Six Months Ended June 30,
- -----------------------------------------------------------------------------
2001 2000 (dollars in thousands) 2001 2000
- -----------------------------------------------------------------------------
98% 100% Excess and Surplus Lines 96% 98%
99% 94% Specialty Admitted 101% 94%
107% 114% London Company Market 115% 116%
117% 122% Lloyd's Market 113% 123%
151% 129% Other (Discontinued Lines) 137% 130%
- -----------------------------------------------------------------------------
107% 113% Consolidated 107% 109%
=============================================================================
11
8. Segment Reporting Disclosures (continued)
Segment Assets (dollars in thousands)
June 30,
-----------------------
2001 2000
- -------------------------------------------------------
Investing $3,199,345 $2,906,689
Other 2,545,867 2,358,523
- -------------------------------------------------------
Total $5,745,212 $5,265,212
=======================================================
b) The following summary reconciles significant segment items to the Company's
consolidated financial statements (dollars in thousands):
Quarter Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
- -----------------------------------------------------------------------------------
Operating Revenues
Segment revenues $300,092 $315,648 $632,798 $464,528
Other -- 47 -- 94
- -----------------------------------------------------------------------------------
Total Operating Revenues $300,092 $315,695 $632,798 $464,622
===================================================================================
- -----------------------------------------------------------------------------------
Income (loss) before income taxes
Segment profit (loss) $ 20,110 $ (1,744) $ 56,487 $ 26,766
Unallocated amounts
Amortization expense (7,692) (7,184) (15,384) (8,777)
Interest expense (10,883) (14,985) (26,029) (22,257)
Other -- 47 -- 94
- -----------------------------------------------------------------------------------
Income (Loss) Before Income Taxes $ 1,535 $(23,866) $ 15,074 $ (4,174)
===================================================================================
9. Derivative Financial Instruments
The Company adopted Financial Accounting Standards Board Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by SFAS No. 137 and 138, effective January 1,
2001. The standard requires that all derivatives be recorded as an asset or
liability, at estimated fair value, regardless of the purpose or intent for
holding the derivative. If a derivative does not qualify as a hedge under SFAS
No. 133, all gains or losses from the change in the derivative's estimated fair
value are recognized in earnings. The gains or losses from the change in
estimated fair value of derivatives that qualify as hedges under SFAS No. 133
are recognized in earnings or other comprehensive income depending on the type
of hedge relationship.
The Company has entered into forward foreign exchange contracts which have been
designated as hedges of net investments in foreign operations. The contracts are
recorded at fair value, with the change in fair value recorded in cumulative
translation adjustments (CTA) to the extent the change is equal to or less than
the offsetting adjustment recorded in CTA that arose by translating the hedged
foreign operation's financial statements to the Company's reporting currency. To
the extent the change in the fair value of the forward contracts is greater than
the adjustment of the net investment, it is included in earnings.
12
9. Derivative Financial Instruments (continued)
At June 30, 2001, the Company held positions in forward foreign exchange
contracts with an aggregate notional amount of $55.3 million to buy United
Kingdom Sterling. Contracts mature in June of 2002. The fair value of the
unsettled forward contracts was a cumulative loss of $2.1 million at June 30,
2001 and was included in Other Liabilities on the accompanying consolidated
balance sheets. The change in the fair value of the forward contracts for the
quarter and the six month period ended June 30, 2001 was a loss of $1.7 million
and $5.0 million, respectively. For the quarter and six month period of 2001,
$1.9 million of the change in fair value of the forward contracts was included
in earnings with the difference included in CTA.
The Company held $222.4 million and $242.0 million of corporate bonds with
embedded put options as of June 30, 2001 and December 31, 2000, respectively.
These embedded derivatives are clearly and closely related to the host contracts
and therefore are not accounted for separately under SFAS No. 133 as amended.
In March 2001 the Company entered into a $50 million notional amount interest
rate swap to hedge interest rate risk associated with a portion of its variable
rate revolving credit facility. Under the interest rate swap agreement, the
Company pays 4.70% fixed interest and receives three month LIBOR. The swap
expires March 26, 2002. During the second quarter of 2001, the hedged debt was
repaid. Accordingly the swap was recorded at fair value with changes in fair
value recognized in earnings. The fair value of the swap at June 30, 2001 was a
liability of $0.3 million all of which was recognized in earnings during the
second quarter of 2001.
The contingent cash interest and contingent principal features of the LYON's are
embedded derivatives required to be accounted for separately under SFAS No. 133
as amended. The fair value of the contingent cash interest and the contingent
principal features at June 30, 2001 and the change in the fair value since
issuance in June of 2001 were not material.
10. Contingencies
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 exemplary damages in
connection with alleged reinsurance agreements. The Company believes it has
numerous defenses to these claims, including the defense that the alleged
reinsurance agreements were not valid. The Company intends to vigorously defend
this matter; however, it cannot predict the outcome at this time.
On May 29, 2001 Reliance Insurance Company was placed in rehabilitation by the
Pennsylvania Insurance Department. At June 30, 2001 and December 31, 2000,
Reliance Insurance Company and its affiliates owed the Company approximately
$33.4 million in reinsurance recoverables for paid and unpaid losses. These
balances were considered in the normal course of assessing the collectability of
reinsurance recoverables.
The Company has other contingencies that arise in the normal conduct of its
operations. In the opinion of management, the resolutions of these contingencies
are not expected to have a material impact on the Company's financial condition
or results of operations. However, adverse outcomes are possible and could
negatively impact the Company's financial condition or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Quarter and Six Months ended June 30, 2001 compared to Quarter and Six Months
ended June 30, 2000
The Company markets and underwrites specialty insurance products and programs to
a variety of niche markets.
13
In each of these markets, the Company seeks to be a market leader. The financial
goals of the Company are to earn consistent underwriting profits and superior
investment returns to build shareholder value.
On March 24, 2000, the Company completed its acquisition of Terra Nova (Bermuda)
Holdings Ltd. As a result the Company realigned its operations with Terra Nova
(Bermuda) Holdings Ltd. becoming the Company's international division, Markel
International, and the Company's existing domestic operations becoming Markel
North America. The acquisition was accounted for as a purchase transaction and
accordingly, Markel International has been included in the Company's operating
results since the date of acquisition.
Markel North America includes the Excess and Surplus Lines segment which is
comprised of four underwriting units and the Specialty Admitted segment which
consists of two underwriting units. The Excess and Surplus Lines segment writes
property and casualty insurance for nonstandard and hard-to-place risks
including catastrophe-exposed property, professional liability, products
liability, general liability, commercial umbrella and other coverages tailored
for unique exposures. The 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. These underwriting units
write specialty program insurance for well-defined niche markets and personal
and commercial property and liability coverages.
Markel International includes two segments: the London Company Market and the
Lloyd's Market. The London Company Market consists of the operations of Terra
Nova Insurance Company Limited. The Lloyd's Market includes Markel Capital
Limited, which is the corporate capital provider for four Lloyd's syndicates
managed by Markel Syndicate Management Limited. Markel International's operating
units write specialty property, casualty, marine and aviation insurance and
reinsurance on a worldwide basis. The majority of Markel International's
business comes from the United Kingdom and United States.
Discontinued lines of business and non-strategic insurance subsidiaries are
included in Other (Discontinued Lines) for segment reporting purposes.
Following is a comparison of gross premium volume by significant underwriting
area:
Gross Premium Volume
Quarter Ended June 30, Six Months Ended June 30,
- -----------------------------------------------------------------------------
2001 2000 (dollars in thousands) 2001 2000
- -----------------------------------------------------------------------------
$194,155 $140,872 Excess and Surplus Lines $376,414 $262,556
41,324 34,745 Specialty Admitted 74,938 61,499
29,500 38,696 London Company Market 85,262 42,626
102,119 83,485 Lloyd's Market 281,082 87,006
248 37,804 Other (Discontinued Lines) 16,590 41,273
- -----------------------------------------------------------------------------
$367,346 $335,602 Total $834,286 $494,960
=============================================================================
Gross premium volume was $367.3 million for the second quarter and $834.3
million for the six month period in 2001 compared to $335.6 million and $495.0
million, respectively, for the same periods of 2000. Gross premium volume for
2000 included Markel International since its acquisition on March 24, 2000.
Discontinued Lines consisted primarily of discontinued Markel International
programs.
Markel North America gross written premiums for the second quarter and six month
period increased 34% and 39%, respectively, due to increased submission activity
and price increases across all business units. Excess and Surplus Lines gross
premium volume increased 38% to $194.2 million in the second quarter of 2001
from $140.9 million a year ago. For the six month period, gross premium volume
increased 43% to $376.4 million in
14
2001 from $262.6 million in 2000. The growth in both periods was due to
increased submission activity in most programs, price increases and new
programs. The most significant area of growth in both periods were in the
Brokered Excess and Surplus Lines unit. Premium volume for the Brokered Excess
and Surplus Lines unit grew 52% to $57.5 million for the second quarter of 2001
compared to $37.9 million for the same period in 2000. For the six month period,
premium volume for the Brokered Excess and Surplus Lines unit grew 66% to $115.0
million in 2001 from $69.3 million in the prior year.
Specialty Admitted Lines gross premium volume in the second quarter of 2001
increased 19% to $41.3 million compared to $34.7 million in 2000. For the six
month period of 2001, gross premium volume increased 22% to $74.9 million in
2001 from $61.5 million in the prior year. The increase in both periods was
primarily due to higher submissions, new programs and price increases.
In the second quarter of 2001, Markel International's gross premium volume
increased 8% to $131.6 million from $122.2 million in 2000. Gross premium volume
for the six months ended June 30, 2001 was $366.3 million compared to $129.6
million for the same period of 2000. The increase for the second quarter was
primarily due to a 22% increase in gross premium volume for the Lloyd's Market
due to growth in marine and energy writings partially offset by a 24% decrease
in premium volume in the London Company Market due to the discontinuance of
unprofitable programs. The increase in gross written premium for the six month
period of 2001 was primarily due the inclusion of Markel International for the
entire period of 2001.
Beginning in late 1999, signs of market hardening, that is stricter coverage
terms and higher prices, began to emerge in the United States. Markel North
America's submissions and premium writings have increased substantially during
2001. In many product lines, prices are increasing for the first time in many
years. The Company anticipates that the North American insurance market will
continue to tighten and provide a favorable environment for growth in its
domestic operations. Markel International remained on target to produce between
$600 million and $650 million of gross premium volume in 2001. Although at a
slower pace than in the United States, the pricing environment in the London
Market is improving. Premium volume may vary significantly with the Company's
decision to alter its product concentration to maintain or improve underwriting
profitability.
The Company enters into reinsurance agreements in order to reduce its liability
on individual risks and enable it to underwrite policies with higher limits. The
Company's net retention of gross premium volume increased to 76% in the second
quarter of 2001 compared to 69% in 2000. Net retention of gross premium volume
for the six month period increased to 75% compared to 71% in 2000. The increase
in retention rate in both periods was primarily due to lower retentions for
Markel International during the comparable periods of 2000 as a result of the
purchase in 2000 of additional reinsurance on certain of its discontinued lines
of business.
Total operating revenues for the second quarter of 2001 were $300.1 million
compared to $315.7 million in the prior year. For the six month period,
operating revenues rose to $632.8 million from $464.6 million in 2000. The
decrease in operating revenues for the second quarter was primarily attributed
to lower earned premium for Markel International and for Discontinued Lines
offset in part by higher earned premium for Markel North America. The increase
for the six month period was primarily due to the inclusion of Markel
International results for the entire six month period of 2001 and to higher
earned premium for Markel North America.
15
Following is a comparison of earned premiums by significant underwriting area:
Earned Premiums
Quarter Ended June 30, Six Months Ended June 30,
- -----------------------------------------------------------------------------
2001 2000 (dollars in thousands) 2001 2000
- -----------------------------------------------------------------------------
$118,174 $ 81,956 Excess and Surplus Lines $227,969 $159,474
32,743 29,134 Specialty Admitted 64,246 56,936
20,933 52,878 London Company Market 58,293 57,075
72,858 55,815 Lloyd's Market 140,108 60,322
15,845 61,876 Other (Discontinued Lines) 48,718 68,381
- -----------------------------------------------------------------------------
$260,553 $281,659 Total $539,334 $402,188
=============================================================================
Second quarter earned premiums were $260.6 million compared to $281.7 million in
2000. Six month earned premiums were $539.3 million compared to $402.2 million
in 2000. Earned premiums for Markel North America rose 36% and 35%,
respectively, in the second quarter and six month period of 2001 compared to the
same periods of 2000. The increase in both periods was primarily due to growth
in Excess and Surplus Lines earned premiums due to increased gross premium
volume. Markel International's earned premiums decreased 14% for the second
quarter of 2001 while its earned premiums increased 69% for the six months ended
June 30, 2001. The decrease for the second quarter of 2001 was primarily due to
lower earned premiums in the London Company Market due to the cancellation of
unprofitable programs partially offset by higher earned premiums in the Lloyd's
Market due to higher gross premium volume. The increase in earned premiums for
the six month period of 2001 was primarily due the inclusion of Markel
International for the entire period of 2001. Other earned premiums decreased in
both periods of 2001 due to the run off of discontinued lines at Markel
International.
Second quarter 2001 net investment income was $42.1 million compared to $43.8
million in the prior year. The decrease was due to lower investment yields
partially offset by a larger investment portfolio. Net investment income for the
six month period rose to $85.7 million from $66.7 million in 2000. The increase
was due to the acquisition of Markel International.
In the second quarter, the Company incurred $2.6 million of net realized losses
compared to $9.8 million of net losses in 2000. For the six month period of
2001, net realized investment gains were $7.8 million compared to net losses of
$4.3 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 $287.7 million compared to
$324.6 million in 2000. Total operating expenses for the six month period were
$591.7 million compared to $446.5 million a year ago. The decrease in operating
expenses in the second quarter of 2001 was primarily due to lower variable costs
associated with lower earned premiums and lower underwriting losses for Markel
International and Discontinued Lines compared to the same period of 2000. The
increase for the six month period was primarily due to the acquisition of Markel
International which occurred March 24, 2000.
16
Following is a comparison of selected data from the Company's operations
(dollars in thousands):
Quarter Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------
Gross premium volume $367,346 $335,602 $834,286 $494,960
Net premiums written $278,893 $230,607 $621,803 $351,340
Net retention 76% 69% 75% 71%
Earned premiums $260,553 $281,659 $539,334 $402,188
Losses and loss adjustment expenses $183,486 $220,593 $382,531 $293,652
Underwriting, acquisition and insurance expenses $ 96,496 $ 96,799 $193,780 $144,110
Underwriting loss $(19,429) $(35,733) $(36,977) $(35,574)
U.S. GAAP ratios
Loss ratio 70% 78% 71% 73%
Expense ratio 37% 35% 36% 36%
- -------------------------------------------------------------------------------------------------
Combined ratio 107% 113% 107% 109%
- -------------------------------------------------------------------------------------------------
Underwriting performance is measured by the combined ratio of losses and
expenses to earned premiums. The Company reported a combined ratio of 107% in
the second quarter of 2001 compared to a combined ratio of 113% in the second
quarter of 2000. For the six month period of 2001, the Company reported a
combined ratio of 107% compared to 109% for the same period of 2000. The
Company's underwriting loss in both periods was primarily due to underwriting
losses at Markel International and in Discontinued Lines, partially offset by
continued underwriting profits in Markel North America. The improvement in the
combined ratios for both periods was primarily due to improved underwriting
performance for Markel International and lower underwriting losses in
Discontinued Lines.
Markel North America continued to produce solid underwriting profits in the
quarter and six month period ended June 30, 2001. Markel North America's core
underwriting units reported a combined ratio of 98% for the second quarter and
97% for the six month period of 2001 compared to 99% and 97%, respectively, for
the same periods of 2000. In the second quarter of 2001, underwriting losses at
the Brokered Excess and Surplus Lines unit, caused by unfavorable reserve
development, were offset by strong performance in the other Markel North America
units. Unfavorable development emerged in Brokered Excess and Surplus Lines'
1997 to 1999 long-tail casualty and excess and umbrella programs and its
discontinued New York contractors program. Price increases and risk selection
changes have been implemented to improve the unit's underwriting results. All
Markel North America units benefited from an improved pricing environment.
The combined ratio for Excess and Surplus Lines decreased to 98% and 96%,
respectively, for the second quarter and six month period of 2001 from 100% and
98%, respectively, for the same periods of 2000. The decrease in the combined
ratio for both periods of 2001 was primarily attributed to lower expense ratios
for all operating units in the segment due to higher premium volume offset in
part by unfavorable reserve development in the Brokered Excess and Surplus Lines
unit. The combined ratio for Specialty Admitted was 99% and 101%, respectively,
for the second quarter and six month period of 2001 compared to combined ratios
of 94% in both periods of 2000. The increase in both periods of 2001 was the
result of lower favorable loss reserve development partially offset by an
improved expense ratio due to higher volume.
Markel International's combined ratio improved for the quarter and six month
period of 2001 compared to the same periods in the prior year. However, Markel
International's combined ratio increased to 115% in the second quarter of 2001
compared to 112% in the first quarter of 2001 primarily due to a higher expense
ratio. Premium volume has fallen by design as the Company has reunderwritten
Markel International's book of business. However, the Company has not reduced
Markel International's expenses in-line with planned premium reductions.
Examples of costs leading to Markel International's higher expense ratio were
severance, office relocation and program runoff costs. The Company will continue
working to align Markel International's expenses with its premium writings and
to establish an organizational structure that is able to take full advantage of
market opportunities. As of January 1, 2002, the Company will consolidate its
syndicates at Lloyd's into one syndicate and will reorganize all underwriting
units by product area. These initiatives are designed to enable Markel
International to reduce costs and strengthen underwriting focus.
17
For the second quarter of 2001, the combined ratio for the London Company Market
and Lloyd's Market was 107% and 117%, respectively, compared to 114% and 122%,
respectively, for the same period of 2000. The combined ratio for the London
Company Market and Lloyd's Market was 115% and 113%, respectively, for the six
months of 2001 compared to 116% and 123%, respectively, for the same period of
2000. The improvement in both segments for both periods of 2001 was primarily
due to lower loss ratios partially offset by higher expense ratios.
The underwriting loss from Discontinued Lines decreased in the second quarter
and six month periods of 2001 to $8.1 million and $18.0 million, respectively,
compared to $17.8 million and $20.2 million, respectively, in 2000. As Markel
International's discontinued programs run off, the negative impact of
Discontinued Lines should decrease. At June 30, 2001 there was approximately $31
million of Discontinued Lines unearned premiums remaining on the Company's
balance sheet.
Management continues to monitor claims and reinsurance experience on Markel
International's pre-acquisition business and Gryphon discontinued lines. The
Company also continues to closely monitor recent unfavorable development at its
Brokered Excess and Surplus Lines unit. The Company believes that its reserves
are adequate; however adverse experience is possible and could result in reserve
increases in the future.
Amortization of intangible assets was $7.7 million in the second quarter of 2001
compared to $7.2 million last year. For the six month period ended June 30,
2001, amortization of intangible assets was $15.4 million compared to $8.8
million in 2000. The increase for the six month period was due to the
amortization of goodwill and other intangibles from the Markel International
acquisition.
Interest expense was $10.9 million in the second quarter of 2001 compared to
$15.0 million in 2000. The decrease for the second quarter was due to a
reduction in the Company's long-term debt. During the first quarter of 2001, the
Company used proceeds of the February 2001 common stock offering and other cash
from operations to repay $227 million of long-term debt. Interest expense was
$26.0 million for the six month period of 2001 compared to $22.3 million last
year. The increase was a result of increased borrowings related to the
acquisition of Markel International.
The Company reported tax expense of 47% and 40%, respectively, for the second
quarter and six month period of 2001 compared to tax benefit of 25% and 11% in
2000. The increase was primarily due to the increase in nondeductible goodwill
amortization and other nondeductible costs as a result of the Markel
International acquisition. After its acquisition by the Company, Markel
International became subject to taxation in the United States.
In evaluating its operating performance, the Company focuses on core
underwriting and investing results before consideration of net realized gains or
losses from the sales of investments and expenses related to the amortization of
intangible assets and any nonrecurring items (earnings for core operations).
Although earnings from core operations does not replace operating income or net
income computed in accordance with accounting principles generally accepted in
the United States as a measure of profitability, management focuses on this
performance measure because it reduces the variability in results associated
with net realized investment gains or losses and eliminates the impact of
accounting conventions which do not reflect current operating costs. Second
quarter income from core operations was $1.06 per share compared to a loss from
core operations of $.71 per share in 2000. For the six months of 2001, income
from core operations was $2.11 per share compared to income from core operations
of $1.06 per share in the prior year. The improved results for both periods of
2001 were due primarily to lower underwriting losses from Discontinued Lines and
Markel International.
18
Comprehensive income was $2.69 per share for the second quarter of 2001 compared
to a comprehensive loss of $2.29 per share in 2000. The increase was due to
higher net income, the increased market value of the Company's investment
portfolio and favorable currency translation adjustments. For the six month
period ended June 30, 2001, comprehensive income was $4.09 per share compared to
a loss of $0.41 per share in 2000. The increase in 2001 was primarily due to the
increased market value of the Company's investment portfolio and higher net
income.
Financial Condition as of June 30, 2001
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.
The Company's invested assets and cash and cash equivalents were $3.2 billion at
June 30, 2001 compared to $3.1 billion at December 31, 2000.
For the six month period ended June 30, 2001, the Company reported net cash
provided by operating activities of $22.1 million, compared to net cash used by
operating activities of $9.8 million for the same period in 2000. The increase
in cash provided by operations was primarily due to a $42.9 million improvement
in operating cash flow from Markel North America operations due to higher gross
premium volume and a $8.5 million improvement in cash flow from Markel
International operations due to lower underwriting losses partially offset by an
additional $19.5 million of cash outflows for Gryphon's discontinued programs.
As discontinued programs run off at Markel International and at Gryphon, the
Company anticipates that operating cash flows will improve.
For the six month period ended June 30, 2001, the Company reported net cash used
by investing activities of $61.9 million compared to $102.9 million in 2000. The
difference was primarily the result of the Company's acquisition of Markel
International during 2000.
For the six month period ended June 30, 2001, the Company reported net cash
provided by financing activities of $14.7 million compared to $239.3 million in
2000. On February 27, 2001, the Company issued 1,288,940 shares of common stock
and received net proceeds of approximately $198 million. The common stock was
sold pursuant to the Company's shelf registration statement covering the
issuance from time to time of approximately $400 million of various securities
by the Company. Net proceeds from the offering along with other cash from
operations were used to repay and retire outstanding debt of approximately $227
million during the first quarter of 2001. During the second quarter of 2001, the
Company issued $408 million face amount, $113 million net proceeds, of Liquid
Yield Option Notes(TM) (LYONs). The LYONs are zero coupon senior notes
convertible into the Company's common stock under certain conditions. Contingent
cash interest and contingent principal may be payable in certain circumstances
and the LYON's holders may require the Company to repurchase the LYONs at
specified anniversary dates. During the second quarter, the Company used a
portion of the LYON's net proceeds to repay $100 million of balances outstanding
under its revolving credit facility. During the six months of 2000, the net cash
provided by financing activities was primarily due to borrowings under the
Company's revolving credit facility used to fund a portion of the Markel
International acquisition.
Shareholders' equity at June 30, 2001 was $985.1 million compared to $752.4
million at December 31, 2000.
19
Book value per common share was $114.29 at June 30, 2001, compared to $102.63 at
December 31, 2000. The increases were primarily due to the Company's common
stock offering in February 2001.
Impact of Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (Statement) No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill. Statement 142 will
require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 will also require
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141 immediately and
Statement 142 effective January 1, 2002. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 will continue to be
amortized prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
In connection with the transitional goodwill impairment evaluation, Statement
142 will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle in the Company's statement of operations.
As of the date of adoption, the Company expects to have unamortized goodwill in
the amount of $357.3 million and unamortized identifiable intangible assets in
the amount of $14.9 million, all of which will be subject to the transition
provisions of Statements 141 and 142. Amortization expense related to goodwill
was $15.7 million and $9.6 million for the year ended December 31, 2000 and the
six months ended June 30, 2001, respectively. Because of the extensive effort
needed to comply with adopting Statements 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these Statements on the Company's
financial statements at the date of this report, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
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
20
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, interest rate risk associated with
investments in fixed maturities and foreign exchange risk at Markel
International. The Company has no material commodity risk.
The Company's market risks at June 30, 2001 have not materially changed from
those identified at December 31, 2000.
Safe Harbor Statement
This is a "Safe Harbor" statement under the Private Securities Litigation Reform
Act of 1995. Certain statements contained herein are forward-looking statements
that involve risks and uncertainties. Future actual results may materially
differ from those in these statements because of many factors. The Company's
anticipated premium writings are based on current knowledge and assume no
significant changes in products, personnel or adverse changes in market
conditions. Changing legal and social trends and inherent uncertainties in the
loss estimation process can adversely impact the adequacy of loss reserves. The
Company continues to closely monitor reinsurance programs and exposures. Adverse
experience in these programs could lead to additional charges. Regulatory
actions can impede the Company's ability to charge adequate rates and
efficiently allocate capital. Economic conditions and interest rate volatility
can have significant impact on the market value of fixed maturity and equity
investments and foreign currency exchange rates. The Company's premium growth,
underwriting and investment results have been and will continue to be
potentially materially affected by these factors. Additional factors which could
affect the Company are discussed in the Company's reports on Forms 8-K, 10-Q and
10-K.
21
PART II. OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders
The Corporation's Annual Meeting was held on May 16, 2001, 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, 2001. The
results of the meeting were as follows:
Election of Directors For Withheld
- --------------------- --- --------
Alan I. Kirshner 7,310,332 467,580
Anthony F. Markel 7,304,975 472,937
Steven A. Markel 7,737,757 40,155
Darrell D. Martin 7,306,723 471,189
Mark J. Byrne 7,559,288 218,624
Douglas E. Eby 7,737,737 40,175
Thomas S. Gayner 7,305,984 471,928
Leslie A. Grandis 7,555,070 222,842
Stewart M. Kasen 7,740,542 37,370
Gary L. Markel 7,563,132 214,780
Ratification of Selection of Auditors:
Abstentions and Brokers
For Against Non-Votes
--- ------- ---------
7,753,930 11,050 12,932
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The Exhibits to this Report are listed in the Exhibit Index.
(b)(1) On May 30, 2001, the Company filed a report on Form 8-K reporting under
Item 5 that the Company entered into an Underwriting Agreement to provide for
the sale of $355,000,000 aggregate principal at maturity of Liquid Yield Option
Notes (TM) due 2031 (LYONs).
(b)(2) On June 12, 2001, the Company filed a report on Form 8-K reporting under
Item 5 that the underwriter for the recently completed offering of LYONs
exercised and closed on its over allotment option to acquire an additional
$53,000,000 aggregate principal amount at maturity of LYONs.
22
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 8th day of August, 2001.
The Company
By /s/ Alan I. Kirshner
-------------------------------
Alan I. Kirshner
Chief Executive Officer
(Principal Executive Officer)
By /s/ Anthony F. Markel
-------------------------------
Anthony F. Markel
President
(Principal Operating Officer)
By /s/ Steven A. Markel
-------------------------------
Steven A. Markel
Vice Chairman
By /s/ Darrell D. Martin
-------------------------------
Darrell D. Martin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
23
Exhibit Index
Number Description
3(i) Amended and Restated Articles of Incorporation, as amended (3.1)a
3(ii) Bylaws, as amended (3.2)b
4 The registrant hereby agrees to furnish to the Securities and
Exchange Commission a copy of all instruments defining the rights
of holders of convertible notes payable and long-term debt of the
registrant and subsidiaries shown on the Consolidated Balance
Sheet of the registrant at June 30, 2001 and the respective Notes
thereto, included in the Quarterly Report on Form 10-Q.
a. Incorporated by reference from the exhibit shown in parentheses filed with
the Commission in the Registrant's report on Form 10-Q for the quarter ended
March 31, 2000.
b. Incorporated by reference from Exhibit 4.2 to S-4 Registration Statement No.
333-88609, dated October 7, 1999
24