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, 1998
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _____ to _____
Commission File Number 1-13051
MARKEL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-0292420
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
4551 Cox Road, Glen Allen, Virginia 23060-3382
(Address of principal executive offices) (Zip code)
(804) 747-0136
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ X ] No [ ]
Number of shares of the registrant's common stock outstanding at April 28, 1998:
5,500,232
1
Markel Corporation
Form 10-Q
Index
Page Number
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets--
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Income and Comprehensive Income--
Three Months Ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows--
Three Months Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements--
March 31, 1998 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,
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
ASSETS
Investments, available-for-sale, at estimated fair value
Fixed maturities (cost of $1,050,282 in 1998 and $1,037,807 in 1997) $ 1,075,112 $ 1,063,191
Equity securities (cost of $165,237 in 1998 and $147,601 in 1997) 300,856 253,385
Short-term investments (estimated fair value approximates cost) 64,655 91,744
- -----------------------------------------------------------------------------------------------------------------------------
Total Investments, Available-For-Sale 1,440,623 1,408,320
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 1,169 1,309
Receivables 62,874 67,573
Reinsurance recoverable on unpaid losses 210,671 225,405
Reinsurance recoverable on paid losses 12,108 15,530
Deferred policy acquisition costs 36,403 36,816
Prepaid reinsurance premiums 37,850 39,758
Property and equipment 9,640 10,068
Intangible assets 36,822 37,331
Other assets 24,652 27,990
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,872,812 $ 1,870,100
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 950,622 $ 971,157
Unearned premiums 188,457 192,815
Payables to insurance companies 24,331 29,148
Long-term debt (estimated fair value of $96,627 in 1998 and $96,197 in 1997) 93,179 93,166
Other liabilities 77,157 77,010
Company-Obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary
Trust Holding Solely Junior Subordinated Deferrable Interest Debentures
of Markel Corporation 150,000 150,000
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities 1,483,746 1,513,296
- -----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Common stock 25,048 24,660
Retained earnings 259,726 246,885
Accumulated other comprehensive income
Net unrealized gains on fixed maturities and equity securities, net of taxes 104,292 85,259
- -----------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 389,066 356,804
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 1,872,812 $ 1,870,100
- -----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
Three Months Ended
March 31,
----------------------------
1998 1997
- -------------------------------------------------------------------------------------------------
(dollars in thousands,
except per share data)
OPERATING REVENUES
Earned premiums $ 78,898 $ 81,671
Net investment income 17,570 16,706
Net realized gains(losses) from investment sales 3,413 (578)
Other 202 674
- -------------------------------------------------------------------------------------------------
Total Operating Revenues 100,083 98,473
- -------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Losses and loss adjustment expenses 49,527 52,650
Underwriting, acquisition and insurance expenses 28,067 28,314
Amortization of intangible assets 509 597
- -------------------------------------------------------------------------------------------------
Total Operating Expenses 78,103 81,561
- -------------------------------------------------------------------------------------------------
Operating Income 21,980 16,912
Interest expense 5,084 5,034
- -------------------------------------------------------------------------------------------------
Income Before Income Taxes 16,896 11,878
Income tax expense 4,055 3,088
- -------------------------------------------------------------------------------------------------
Net Income $ 12,841 $ 8,790
- -------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains on securities
Unrealized gains (losses) arising during the period, net of
taxes of $11,443 in 1998 and $3,275 in 1997 $ 21,251 $ (6,084)
Less reclassification adjustments for gains (losses) included
in net income, net of taxes of $1,195 in 1998 and $202
in 1997 (2,218) 376
- -------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) 19,033 (5,708)
- -------------------------------------------------------------------------------------------------
Comprehensive Income $ 31,874 $ 3,082
- -------------------------------------------------------------------------------------------------
NET INCOME PER SHARE
Basic $ 2.34 $ 1.61
Diluted $ 2.27 $ 1.56
- -------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
OPERATING ACTIVITIES
Net Income $ 12,841 $ 8,790
Adjustments to reconcile net income to net cash provided by operating activities (12,902) 739
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) By Operating Activities (61) 9,529
- -----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of fixed maturities and equity securities 92,542 172,691
Proceeds from maturities of fixed maturities 18,482 20,894
Cost of fixed maturities and equity securities purchased (142,207) (278,005)
Net change in short-term investments 26,643 (68,376)
Other 4,073 (802)
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (467) (153,598)
- -----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net proceeds from issuance of Company-Obligated Mandatorily Redeemable
Preferred Capital Securities -- 148,166
Repayments of long-term debt -- (15,000)
Other 388 127
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 388 133,293
- -----------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (140) (10,776)
Cash and cash equivalents at beginning of period 1,309 11,054
- -----------------------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents At End Of Period $ 1,169 $ 278
- -----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--March 31, 1998
1. Principles of Consolidation
The consolidated balance sheet as of March 31, 1998, the related consolidated
statements of income and comprehensive income for the three months ended March
31, 1998 and 1997, and the consolidated statements of cash flows for the three
months ended March 31, 1998 and 1997, 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,
-----------------------------
1998 1997
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Net income, as reported $ 12,841 $ 8,790
Dividends on redeemable preferred stock -- (4)
- -------------------------------------------------------------------------------------------------
Basic and diluted income $ 12,841 $ 8,786
- -------------------------------------------------------------------------------------------------
Average common shares outstanding 5,497 5,464
Dilutive potential common shares 154 179
- -------------------------------------------------------------------------------------------------
Average diluted shares outstanding 5,651 5,643
- -------------------------------------------------------------------------------------------------
3. Reinsurance
The table below summarizes the effect of reinsurance on premiums written and
earned (dollars in thousands):
Three Months Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Written Earned Written Earned
Direct $ 95,524 $ 98,939 $ 96,608 $ 106,813
Assumed 1,196 1,587 1,144 1,719
Ceded (20,273) (21,628) (21,779) (26,861)
- ---------------------------------------------------------------------------------------------------------------------------
Net premiums $ 76,447 $ 78,898 $ 75,973 $ 81,671
- ---------------------------------------------------------------------------------------------------------------------------
Incurred losses and loss adjustment expenses are net of reinsurance recoveries
of $12.8 million and $18.1 million for the three months ended March 31, 1998 and
1997, respectively.
6
4. Company Obligated Mandatorily Redeemable Preferred Securities (Capital
Securities)
On January 8, 1997 the Company arranged the sale of $150 million of 8.71%
Capital Securities issued under an Amended and Restated Declaration of Trust
dated January 13, 1997 (The Declaration) by Markel Capital Trust I (the Trust),
a statutory business trust sponsored and wholly-owned by Markel Corporation.
Proceeds from the sale of the 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
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 Capital Securities.
5. Segment Information Disclosures
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 is effective for years
beginning after December 15, 1997. This statement does not need to be applied to
interim financial statements in the initial year of its application. This
standard supersedes SFAS No. 14 and establishes new disclosure requirements
about products and services, geographic areas and major customers on an annual
and quarterly basis. The standard requires companies to disclose qualitative and
quantitative segment data on the basis that is used by management for evaluating
segment performance and deciding how to allocate resources. The Company is
currently evaluating what its meaningful reporting segments will be under SFAS
No. 131.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months ended March 31, 1998 compared to Three Months ended March 31, 1997
The Company underwrites specialty insurance products and programs for niche
markets. Significant areas of underwriting include excess and surplus lines,
professional and products liability, specialty programs, specialty personal and
commercial lines, and brokered excess and surplus lines. Property and casualty
insurance for nonstandard and hard-to-place risks is underwritten by the excess
and surplus lines unit. Professional liability coverage is offered to physicians
and health professionals, insurance companies, 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. In addition, employment practices liability coverage is
offered. Specialty program insurance includes coverage for camps, youth and
recreation, child care, health and fitness and agribusiness organizations, as
well as accident and medical insurance for colleges. The Company also
underwrites personal and commercial property and liability coverages for
watercraft, motorcycles, automobiles, mobile homes and dwellings. The brokered
excess and surplus lines unit writes hard-to-place, large general liability,
products liability and property accounts.
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,
- ------------------------------------------------------------------------------------------------------------------
1998 1997 (dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------------------
$ 24,953 $ 28,575 Excess and Surplus Lines $ 20,658 $ 19,982
30,756 30,649 Professional/Products Liability 24,402 25,584
18,311 18,544 Specialty Program Insurance 14,792 17,215
7,807 8,194 Specialty Personal and Commercial Lines 10,418 11,830
14,638 11,111 Brokered Excess and Surplus Lines 8,621 7,036
895 1,064 Other 7 24
- ------------------------------------------------------------------------------------------------------------------
$97,360 $ 98,137 Total $78,898 $ 81,671
- ------------------------------------------------------------------------------------------------------------------
Gross premium volume for the first quarter in 1998 was $97.4 million compared to
$98.1 million in the same period in the prior year. Aggressive competition in
many of the Company's markets contributed to decreased premium volume. The
Company has maintained its underwriting standards at the expense of premium
growth.
Excess and surplus lines gross premium volume was $25.0 million compared to
$28.6 million in 1997. Increased production in the inland marine program was
more than offset by decreases due to intense competition in the Markel special
property, casualty and property programs.
Premiums from professional/products liability insurance were $30.8 million
compared to $30.6 million a year ago. Growth in the employment practices and
specified professions programs was offset by lower production from other lines,
including financial institutions and directors' and officers' liability
programs.
Gross premiums from specialty program insurance were $18.3 million compared to
$18.5 million in the first quarter of 1997. Increased competition in the youth
and recreation and health and fitness programs contributed to the decrease.
Specialty personal and commercial lines premiums declined to $7.8 million from
$8.2 million in 1997. The division has decreased gross premium volume while it
restructures segments of its book of business.
8
Premiums from Brokered Excess and Surplus Lines totaled $14.6 million in the
first quarter of 1998 compared to $11.1 million in 1997. The increase was due to
higher gross premium volume in the unit's casualty department mitigated by
decreased gross premium volume in the property department.
Other gross premiums totaled $0.9 million compared to $1.1 million in 1997.
Other gross premium volume primarily consisted of facultative reinsurance placed
by the Professional/Products Liability unit.
Currently many of the Company's products are being adversely affected by
increased competition and lower rates in the property and casualty market. The
Company does not intend to relax underwriting standards in order to sustain
premium volume. Further, the volume of premiums written may vary significantly
with the Company's decision to alter its product concentration to maintain or
improve underwriting profitability.
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 79% in the first
quarter of 1998 compared to 77% in the prior year. The increase was primarily
due to a new reinsurance treaty structure in the Specialty Program Insurance
unit and higher retentions in the professional and products liability unit.
Total operating revenues rose to $100.1 million from $98.5 million in the prior
year. First quarter earned premiums were $78.9 million compared to $81.7 million
for the first quarter of 1997. The decrease was due to competitive market
conditions over the past several years which have resulted in a decline in gross
premium growth.
Net investment income increased 5% to $17.6 million in the first quarter from
$16.7 million a year ago. The increase was the result of operating cash flows
during 1997 which added to the Company's investment portfolio.
Realized gains were $3.4 million for the first quarter in 1998 compared to
realized losses of $0.6 million last year. Variability in the timing of realized
and unrealized investment gains or losses is to be expected.
Total operating expenses for the first quarter were $78.1 million compared to
$81.6 million in 1997. The decrease resulted primarily from lower variable
expenses associated with lower earned premiums.
Following is a comparison of selected data from the Company's operations
(dollars in thousands):
Three Months Ended
March 31,
-----------------------------
1998 1997
- -------------------------------------------------------------------------------------------------
Gross premium volume $ 97,360 $ 98,137
Net premiums written $ 76,447 $ 75,973
Net retention 79% 77%
Earned premiums $ 78,898 $ 81,671
Losses and loss adjustment expenses $ 49,527 $ 52,650
Underwriting, acquisition and insurance expenses $ 28,067 $ 28,314
Underwriting profit $ 1,304 $ 707
GAAP ratios
Loss ratio 63% 64%
Expense ratio 35% 35%
- -------------------------------------------------------------------------------------------------
Combined ratio 98% 99%
- -------------------------------------------------------------------------------------------------
9
Underwriting profitability is measured by the combined ratio of losses and
expenses to earned premiums. The Company reported a combined ratio of 98% in the
first quarter of 1998 compared to a combined ratio of 99% in 1997. The Company's
loss ratio was 63% compared to 64% in 1997. The 1998 loss ratio decreased due to
continued favorable loss reserve development and the absence of significant
winter weather property losses. The expense ratio was 35% in both periods.
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 1998, income from core underwriting and investing operations
increased to $11.0 million, or $1.96 per diluted share, from $9.6 million, or
$1.71 per diluted share, in 1997. The increase was due to higher net investment
income supported by underwriting profitability.
The Company's effective tax rate for the first quarter of 1998 was 24% of income
before income taxes compared to 26% in the first quarter of 1997. The decrease
in 1998 was due to a larger portion of the Company's investment portfolio being
allocated to tax-exempt municipal securities.
First quarter 1998 net income rose 46% to $12.8 million from $8.8 million in
1997. The increase is due to increased underwriting profitability and higher
realized gains. Comprehensive income increased sharply to $31.9 million, or
$5.64 per diluted share, compared to comprehensive income of $3.1 million, or
$0.55 per diluted share in 1997. The change was primarily the result of
increased unrealized gains of $3.37 per diluted share in the first quarter of
1998 compared to unrealized losses of $1.01 per diluted share in 1997. Higher
net income in 1998 as compared to the first quarter of 1997 also contributed to
the increase in comprehensive income.
Financial Condition as of March 31, 1998
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.
For the three month period ended March 31, 1998, the Company reported net cash
used by operating activities of $0.1 million, compared to net cash provided by
operating activities of $9.5 million for the same period in 1997. The decrease
was due to various large claims payments and a decline in gross premium volume
in the first quarter of 1998. The Company currently expects positive operating
cash flow throughout the remainder of 1998.
For the three month period ended March 31, 1998, the Company reported net cash
used by investing activities of $0.5 million compared to $153.6 million in 1996.
The difference was primarily due to the Company's investment of the net proceeds
of the $150 million 8.71% Capital Securities offering during the first quarter
of 1997.
At March 31, 1998 the Company's fixed maturity and equity investments comprised
approximately 75% and 21% of total investments, respectively. The Company
expects variability in its realized and unrealized investment gains or losses.
In January 1997 the Company arranged the sale of $150 million of 8.71% Capital
Securities. The proceeds are primarily invested in short-term securities. These
short-term investments are earning lower net investment income than the
associated interest expense on the 8.71% Capital Securities. The Company
continues to evaluate long-term investment options for the proceeds that will
contribute to the Company's goal of 20% annual growth in book value per share.
10
As of March 31, 1998 and December 31, 1997, the unused balances available under
the Company's revolving credit facility totaled $150 million. In April 1998 the
Company arranged a $250 million, five year, revolving credit facility with a
group of banks which replaced the Company's existing $150 million credit
facility. Funds are available under the facility for general corporate purposes.
Shareholders' equity at March 31, 1998 was $389.1 million compared to $356.8
million at December 31, 1997. Book value per share rose to $70.75 at March 31,
1998 from $65.18 at December 31, 1997.
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, 1998
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 29th day of April, 1998.
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
4 Credit Agreement dated April 23, 1998 among Markel
Corporation, the Lenders referred to therein and
First Union National Bank, as Agent *
27. Financial Data Schedule for period ended March 31,
1998 *
* Filed electronically with the Commission's operational EDGAR system
13