UNITED STATES
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 March 31, 1996
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 0-15458
MARKEL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-0292420
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
4551 Cox Road, Glen Allen, Virginia 23060-3382
(Address of principal executive offices)
(Zip code)
(804) 747-0136
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ X ] No [ ]
Number of shares of the registrant's common stock outstanding at March 29, 1996:
5,425,743
1
Markel Corporation
Form 10-Q
Index
Page Number
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets--
March 31, 1996 and December 31, 1995 3
Consolidated Statements of Income--
Three Months Ended March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows--
Three Months Ended March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements--
March 31, 1996 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 11
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
-------------------------------------------------
1996 1995
(dollars in thousands)
ASSETS
Investments, available-for-sale, at estimated fair value
Fixed maturities (cost of $725,105 in 1996 and $683,568 in 1995) $ 725,241 $ 706,055
Equity securities (cost of $118,367 in 1996 and $104,538 in 1995) 152,471 134,346
Short-term investments (estimated fair value approximates cost) 36,485 68,182
------------- -------------
Total investments, available-for-sale 914,197 908,583
------------- -------------
Cash and cash equivalents 18,699 18,315
Receivables 49,565 47,210
Reinsurance recoverable on unpaid losses 159,346 159,141
Reinsurance recoverable on paid losses 12,074 20,404
Deferred policy acquisition costs 32,584 32,024
Prepaid reinsurance premiums 39,044 39,728
Property and equipment 27,076 27,729
Intangible assets 41,277 41,657
Other assets 25,596 19,746
------------- -------------
Total assets $ 1,319,458 $ 1,314,537
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 750,685 $ 734,409
Unearned premiums 166,131 170,697
Payables to insurance companies 20,401 17,247
Long-term debt (estimated fair value of $104,710 in 1996 and $109,189 in 1995) 106,702 106,689
Other liabilities 65,973 72,053
------------- -------------
Total liabilities 1,109,892 1,101,095
------------- -------------
Shareholders' equity
Common stock 23,167 23,118
Retained earnings 164,143 156,333
Net unrealized gains on fixed maturities and equity securities,
net of taxes 22,256 33,991
------------- -------------
Total shareholders' equity 209,566 213,442
------------- -------------
Total liabilities and shareholders' equity $ 1,319,458 $ 1,314,537
============= =============
See accompanying notes to consolidated financial statements.
3
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended
March 31,
----------------------------
1996 1995
------- -------
(dollars in thousands,
except per share data)
Operating revenues
Earned premiums $76,797 $65,784
Net investment income 12,284 8,368
Net realized gains from investment sales 2,974 1,563
Other 935 810
------- -------
Total operating revenues 92,990 76,525
------- -------
Operating expenses
Losses and loss adjustment expenses 54,552 42,023
Underwriting, acquisition and insurance expenses 24,730 22,605
Other 450 417
Amortization of intangible assets 675 703
------- -------
Total operating expenses 80,407 65,748
------- -------
Operating income 12,583 10,777
Interest expense 2,029 1,939
------- -------
Income before income taxes 10,554 8,838
Income taxes 2,744 2,298
------- -------
Net income $ 7,810 $ 6,540
======= =======
Earnings per share
Primary $ 1.38 $ 1.17
------- -------
Fully diluted $ 1.38 $ 1.17
======= =======
See accompanying notes to consolidated financial statements.
4
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
1996 1995
--------- ---------
(dollars in thousands)
Operating Activities
Net income $ 7,810 $ 6,540
Adjustments to reconcile net income to net cash provided by operating activities 15,078 42,977
--------- ---------
Net cash provided by operating activities 22,888 49,517
--------- ---------
Investing Activities
Proceeds from sales of fixed maturities and equity securities 117,564 103,668
Proceeds from maturities of fixed maturities 21,338 5,268
Cost of fixed maturities and equity securities purchased (191,972) (162,711)
Net change in short-term investments 31,697 (2,484)
Other (1,180) (1,013)
--------- ---------
Net cash used by investing activities (22,553) (57,272)
--------- ---------
Financing Activities
Other 49 19
--------- ---------
Net cash provided by financing activities 49 19
--------- ---------
Increase (decrease) in cash and cash equivalents 384 (7,736)
Cash and cash equivalents at beginning of period 18,315 10,229
--------- ---------
Cash and cash equivalents at end of period $ 18,699 $ 2,493
========= =========
See accompanying notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--March 31, 1996
1. Principles of Consolidation
The consolidated balance sheet as of March 31, 1996 and the related consolidated
statements of income and cash flows for the three months ended March 31, 1996
and 1995, are unaudited. In the opinion of management, all adjustments necessary
for a fair presentation of such consolidated financial statements have been
included. Such adjustments consist only of normal recurring items. Interim
results are not necessarily indicative of results of operations for the full
year.
The consolidated financial statements and notes are presented as permitted by
Form 10-Q, and do not contain certain information included in the Company's
annual consolidated financial statements and notes.
2. Earnings per share
Earnings per share was determined by dividing net income, as adjusted below, by
the applicable shares outstanding (in thousands):
Three Months Ended
March 31,
------------------
1996 1995
------- ------
Net income, as reported $7,810 $6,540
Dividends on redeemable preferred stock (4) (4)
------- ------
Primary and fully diluted income $7,806 $6,536
======= ======
Average common shares outstanding 5,424 5,388
Shares applicable to common stock equivalents 236 182
------- ------
Average primary shares outstanding 5,660 5,570
Additional dilution attributable to common
stock equivalents 8 16
------- ------
Average fully diluted shares outstanding 5,668 5,586
======= ======
6
3. Reinsurance
The table below summarizes the effect of reinsurance on premiums written and
earned (dollars in thousands):
Three Months Ended March 31,
------------------------------------------
1996 1995
------------------- --------------------
Written Earned Written Earned
Direct $ 92,117 $ 95,781 $ 80,546 $ 78,176
Assumed 2,059 4,176 16,967 11,890
Ceded (21,262) (23,160) (27,734) (24,282)
-------- -------- -------- --------
Net premiums $ 72,914 $ 76,797 $ 69,779 $ 65,784
======== ======== ======== ========
Incurred losses and loss adjustment expenses are net of reinsurance recoveries
of $12.6 million and $17.8 million for the three months ended March 31, 1996 and
1995, respectively.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months ended March 31, 1996 compared to Three Months ended March 31, 1995
The Company underwrites specialty insurance products and programs to niche
markets. Significant areas of underwriting include professional and products
liability, excess and surplus lines, specialty programs and specialty personal
and commercial lines. Professional liability coverage is offered to physicians
and health professionals, insurance companies, directors and officers, attorneys
and architects and engineers. Special risk programs provide products liability
insurance for manufacturers and distributors and tailored coverages for other
unique exposures. Property/casualty insurance for nonstandard and hard-to-place
risks is underwritten on an excess and surplus lines basis. Specialty program
insurance includes coverage for camps, youth and recreation, child care, health
and fitness and agribusiness organizations, as well as accident and health
insurance for colleges. The Company also underwrites personal and commercial
property and liability coverage for watercraft, motorcycles, automobiles, mobile
homes, dwellings and commercial freight companies, and maintains wholesale and
retail brokerage operations that produce business primarily for its insurance
subsidiaries.
Following is a comparison of gross premium volume and earned premiums by
significant underwriting area:
Gross Premium Volume Earned Premiums
---------------------------- ----------------------------
Three Months Ended March 31, Three Months Ended March 31,
---------------------------- ----------------------------
1996 1995 (amounts in thousands) 1996 1995
-------- -------- --------------------------------------- -------- --------
$ 31,195 $ 32,295 Professional/Products Liability $ 31,559 $ 27,347
29,045 26,299 Excess & Surplus Lines 18,139 16,657
20,746 23,671 Specialty Program Insurance 16,436 16,237
13,562 8,172 Specialty Personal and Commercial Lines 8,719 5,084
2,797 4,650 Other 1,944 459
-------- -------- --------------------------------------- -------- --------
$ 97,345 $ 95,087 Total $ 76,797 $ 65,784
======== ======== ======================================= ======== ========
Gross premium volume for the first quarter in 1996 increased to $97.3 million
from $95.1 million for the same period in the prior year.
Premiums from professional/products liability insurance were $31.2 million
compared to $32.3 million a year ago. Growth in the specified medical
professions product line was more than offset by lower production from other
lines, including directors' and officers' professional liability and the special
risk programs.
Excess and surplus lines gross premium volume grew 10% to $29.0 million from
$26.3 million in 1995. Production from the specialty property insurance program
continued to show significant growth. Growth was also prompted by a new excess
and umbrella program.
Gross premiums from specialty program insurance were $20.7 million compared to
$23.7 million in the first quarter of 1995. Increased competition in the health
and fitness and agribusiness programs contributed to the decrease.
8
Specialty personal and commercial lines premiums rose sharply to $13.6 million
from $8.2 million in 1995. Several recently added programs, including property
coverage for mobile homes and low value dwellings, liability coverage for
commercial autos and physical damage coverage for personal autos contributed
$11.0 million to quarterly production compared to $6.3 million for the same
period last year.
Other gross premiums totaled $2.8 million compared to $4.7 million in 1995.
Other gross premium volume included production from the Company's brokerage
operations.
Total operating revenues rose 22% to $93.0 million from $76.5 million in the
prior year. First quarter earned premiums were $76.8 million compared to $65.8
million for the first quarter of 1995. The 17% advance resulted primarily from
higher gross premium volume throughout 1995 attributed to new products and
increasing retentions in our core products.
Net investment income increased 47% to $12.3 million from $8.4 million a year
ago. The increase reflected the impact of higher yields and significant growth
in the Company's investment portfolio over the past year.
Realized gains were $3.0 million for the first quarter in 1996 compared to $1.6
million last year. Variability in the timing of realized investment gains is to
be expected and often results from interest rate volatility which affects the
market values of fixed maturities and equity investments.
Total operating expenses for the first quarter were $80.4 million compared to
$65.7 million in 1995. The 22% increase resulted primarily from higher variable
expenses associated with higher earned premiums.
Following is a comparison of selected data from the Company's operations (in
thousands):
Three Months Ended
March 31,
-------------------
1996 1995
-------- --------
Gross premium volume $ 97,345 $ 95,087
Net premiums written $ 72,914 $ 69,779
Net retention 75% 73%
Earned premiums $ 76,797 $ 65,784
Losses and loss adjustment expenses $ 54,552 $ 42,023
Underwriting, acquisition and insurance expenses $ 24,730 $ 22,605
GAAP ratios
Loss ratio 71% 64%
Expense ratio 32% 34%
-------- --------
Combined ratio 103% 98%
======= =======
The first quarter combined loss and expense ratio was 103% compared to 98% last
year. The loss ratio increased to 71% from 64% in 1995. There are two primary
reasons for this increase. The first relates to concerns about pricing adequacy
on a portion of the medical malpractice book of business. The Company is
reevaluating risk selection and pricing for these exposures. In addition, winter
storm losses adversely impacted the first quarter loss ratio. The 1996 expense
9
ratio, 32% compared to 34% in 1995, was favorably impacted by contingent profit
commissions and the increase in earned premiums.
In evaluating its operating performance, the Company focuses on core
underwriting and investing results before consideration of realized gains or
losses from the sales of investments and expenses related to the amortization of
intangible assets. Management believes this is a better indicator of the
Company's operating performance because it reduces the variability in results
associated with realized investment gains or losses and eliminates the impact of
accounting conventions which do not reflect current operating costs. For the
first quarter of 1996, income from core underwriting and investing operations
increased to $6.4 million from $6.1 million in 1995. Higher net investment
income and growth in earned premiums were partially offset by underwriting
losses.
The Company's effective tax rate for the first quarter in both years was 26% of
income before income taxes.
First quarter 1996 net income was $7.8 million compared to $6.5 million in 1995.
Relative to 1995, first quarter net income reflected higher net investment
income, earned premiums and realized gains which were partially offset by
underwriting losses.
Financial Condition as of March 31, 1996
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. The Company's short-term investments provide
liquidity for projected claims, reinsurance costs and operating expenses.
For the three month period ended March 31, 1996, the Company reported net cash
provided by operating activities of $22.9 million, compared to net cash provided
by operating activities of $49.5 million for the same period in 1995. In the
prior year, operating cash flow was affected by the collection of $28 million
following the amendment of an indemnification agreement with one of the sellers
of the Company's Shand/Evanston subsidiary.
For the three month period ended March 31, 1996, the Company reported net cash
used by investing activities of $22.6 million. The Company's invested assets
increased to $914.2 million at March 31, 1996 from $908.6 million at December
31, 1995. The unrealized appreciation of the Company's investment portfolio
decreased $18.1 million since December 31, 1995. As of March 31, 1996, the
estimated fair value of the Company's fixed maturity investments was
approximately equal to cost, while the estimated fair value of its equity
investments exceeded cost by $34.1 million. At March 31, 1996 the Company's
fixed maturity and equity investments comprised approximately 79% and 17% of
total investments, respectively. The Company expects variability in its realized
and unrealized investment gains due to interest rate volatility as well as other
economic conditions.
10
As of March 31, 1996 and December 31, 1995, the unused balances available under
the Company's revolving credit facility totaled $33.0 million.
Shareholders' equity at March 31, 1996 was $209.6 million compared to $213.4
million at December 31, 1995. During the quarter, net unrealized investment
gains, net of taxes, decreased by $11.7 million.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The Exhibits to this Report are listed in the Exhibit Index.
(b) No reports on Form 8-K were filed during the quarter ended March 31, 1996.
11
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 30th day of April, 1996.
Markel Corporation
By Alan I. Kirshner
---------------------------------
Alan I. Kirshner
Chief Executive Officer
(Principal Executive Officer)
By Anthony F. Markel
---------------------------------
Anthony F. Markel
President
(Principal Operating Officer)
By Steven A. Markel
---------------------------------
Steven A. Markel
Vice Chairman
By Darrell D. Martin
---------------------------------
Darrell D. Martin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
12
Exhibit Index
Number Description
27 Financial Data Schedule *
* Filed electronically with the Commission's operational EDGAR system.