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 September 30, 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 October 28,
1998: 5,515,988
<PAGE>
Markel Corporation
Form 10-Q
Index
Page Number
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets--
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income and Comprehensive Income--
Quarters and Nine Months Ended September 30, 1998 and 1997
4
Consolidated Statements of Cash Flows--
Nine Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements--
September 30, 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 13
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
--------------------------------------------------
1998 1997
--------------------------------------------------
<S> <C> <C>
(dollars in thousands)
ASSETS
Investments, available-for-sale, at estimated fair value
Fixed maturities (cost of $1,070,861 in 1998 and $1,037,807 in 1997) $ 1,115,280 $ 1,063,191
Equity securities (cost of $184,591 in 1998 and $147,601 in 1997) 281,981 253,385
Short-term investments (estimated fair value approximates cost) 65,599 91,744
----------- -----------
Total Investments, Available-For-Sale 1,462,860 1,408,320
----------- -----------
Cash and cash equivalents 1,367 1,309
Receivables 73,691 67,573
Reinsurance recoverable on unpaid losses 199,957 225,405
Reinsurance recoverable on paid losses 17,844 15,530
Deferred policy acquisition costs 42,338 36,816
Prepaid reinsurance premiums 41,997 39,758
Property and equipment 9,167 10,068
Intangible assets 35,806 37,331
Other assets 24,373 27,990
----------- -----------
Total Assets $ 1,909,400 $ 1,870,100
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 943,738 $ 971,157
Unearned premiums 211,076 192,815
Payables to insurance companies 26,689 29,148
Long-term debt (estimated fair value of $100,253 in 1998 and $96,197 in 1997) 93,205 93,166
Other liabilities 80,546 77,010
Company-Obligated Mandatorily Redeemable Preferred Capital Securities of
Subsidiary
Trust Holding Solely Junior Subordinated Deferrable Interest Debentures of
Markel Corporation (estimated fair value of $147,300 in 1998 and $159,132
in 1997) 150,000 150,000
----------- -----------
Total Liabilities 1,505,254 1,513,296
----------- -----------
Shareholders' equity
Common stock 25,213 24,660
Retained earnings 286,757 246,885
Accumulated other comprehensive income
Net unrealized gains on fixed maturities and equity securities, net of
taxes 92,176 85,259
----------- -----------
Total Shareholders' Equity 404,146 356,804
----------- -----------
Total Liabilities and Shareholders' Equity $ 1,909,400 $ 1,870,100
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
----------------------------------------------
1998 1997 1998 1997
----------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Earned premiums $ 84,665 $ 84,650 $ 248,089 $ 250,453
Net investment income 18,409 17,441 53,137 50,944
Net realized gains from investment sales 1,814 8,277 11,434 8,117
Other 206 244 665 1,271
-------- -------- --------- ---------
Total Operating Revenues 105,094 110,612 313,325 310,785
-------- -------- --------- ---------
OPERATING EXPENSES
Losses and loss adjustment expenses 54,207 54,313 157,293 161,469
Underwriting, acquisition and insurance expenses 29,356 29,714 86,754 86,940
Amortization of intangible assets 508 562 1,525 1,755
-------- -------- --------- ---------
Total Operating Expenses 84,071 84,589 245,572 250,164
-------- -------- --------- ---------
Operating Income 21,023 26,023 67,753 60,621
Interest expense 5,109 4,984 15,290 15,228
-------- -------- --------- ---------
Income Before Income Taxes 15,914 21,039 52,463 45,393
Income tax expense 3,819 5,051 12,591 10,893
-------- -------- --------- ---------
Net Income $ 12,095 $ 15,988 $ 39,872 $ 34,500
-------- -------- --------- ---------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains (losses) on securities, net of taxes
Net unrealized gains (losses) arising during the period $(7,765) $ 22,134 $ 14,349 $ 44,214
Less reclassification adjustments for gains included in net income
Total Other Comprehensive Income (Loss) (1,179) (5,380) (7,432) (5,276)
-------- -------- --------- ---------
Comprehensive Income (8,944) 16,754 6,917 38,938
-------- -------- --------- ---------
NET INCOME PER SHARE $ 3,151 $ 32,742 $ 46,789 $ 73,438
-------- -------- --------- ---------
Basic
Diluted
$ 2.20 $ 2.91 $ 7.25 $ 6.29
$ 2.14 $ 2.82 $ 7.07 $ 6.10
-------- -------- --------- ---------
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
----------------------
(dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 39,872 $ 34,500
Adjustments to reconcile net income to net cash provided by operating activities (1,073) 12,663
----------- --------
Net Cash Provided By Operating Activities 38,799 47,163
----------- --------
INVESTING ACTIVITIES
Proceeds from sales of fixed maturities and equity securities 320,942 456,412
Proceeds from maturities of fixed maturities 84,594 37,600
Cost of fixed maturities and equity securities purchased (469,677) (630,509)
Net change in short-term investments 26,145 (56,011)
Net proceeds from sale of building -- 6,500
Other (1,298) 2,187
----------- --------
Net Cash Used By Investing Activities (39,294) (183,821)
----------- --------
FINANCING ACTIVITIES
Net proceeds from issuance of Company-Obligated Mandatorily Redeemable
Preferred Capital Securities -- 148,137
Repayments of long-term debt -- (21,577)
Other 553 (70)
----------- --------
Net Cash Provided By Financing Activities 553 126,490
----------- --------
Increase (Decrease) in cash and cash equivalents 58 (10,168)
Cash and cash equivalents at beginning of period 1,309 11,054
----------- --------
Cash And Cash Equivalents At End Of Period $ 1,367 $ 886
=========== ========
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--September 30, 1998
1. Principles of Consolidation
The consolidated balance sheet as of September 30, 1998, the related
consolidated statements of income and comprehensive income for the quarters and
nine months ended September 30, 1998 and 1997, and the consolidated statements
of cash flows for the nine months ended September 30, 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. Net Income per share
Net Income per share was determined by dividing net income, as adjusted below,
by the applicable shares outstanding (in thousands):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income, as reported $ 12,095 $ 15,988 $ 39,872 $ 34,500
Dividends on redeemable preferred stock -- -- -- (8)
-------- ---------- -------- --------
Basic and diluted income $ 12,095 $ 15,988 $ 39,872 $ 34,492
-------- ---------- -------- --------
Average basic common shares outstanding 5,509 5,492 5,503 5,481
Dilutive potential common shares 140 177 140 169
-------- ---------- -------- --------
Average diluted shares outstanding 5,649 5,669 5,643 5,650
======== ========== ======== ========
</TABLE>
3. Reinsurance
The table below summarizes the effect of reinsurance on premiums written and
earned (dollars in thousands):
Quarter Ended September 30,
---------------------------------------------
1998 1997
------ ------
Written Earned Written Earned
------- ------ ------- ------
Direct $ 116,707 $ 105,504 $ 109,575 $ 106,394
Assumed 948 947 1,498 1,641
Ceded (23,958) (21,786) (22,545) (23,385)
--------- --------- --------- ---------
Net premiums $ 93,697 $ 84,665 $ 88,528 $ 84,650
========= ========= ========= =========
Nine Months Ended September 30,
---------------------------------------------
1998 1997
-------- --------
Written Earned Written Earned
------- ------ ------- ------
Direct $ 331,378 $ 308,704 $ 314,152 $ 319,452
Assumed 3,904 4,246 4,705 4,901
Ceded (71,171) (64,861) (68,554) (73,900)
--------- --------- --------- ---------
Net premiums $ 264,111 $ 248,089 $ 250,303 $ 250,453
========= ========= ========= =========
6
<PAGE>
3. Reinsurance Continued
Incurred losses and loss adjustment expenses are net of reinsurance recoveries
of $12.7 million and $10.9 million for the quarters ended September 30, 1998 and
1997, respectively and $42.6 million and $52.2 million for the nine months ended
September 30, 1998 and 1997, respectively.
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. Comprehensive Income
Other comprehensive income (loss) was composed of net unrealized gains (losses)
on securities arising during the period less reclassification adjustments for
gains included in net income. The related tax expense (benefit) on net
unrealized gains (losses) on securities was $(4.2) million and $7.7 million,
respectively, for the quarter and nine months ended September 30, 1998 and $11.9
million and $23.8 million for the same periods in 1997. The related tax expense
on the reclassification adjustments for gains included in net income was $0.6
million and $4.0 million, respectively, for the quarter and nine months ended
September 30, 1998 and $2.9 million and $2.8 million for the same periods in
1997.
6. 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 currently expects that it will have three reporting segments for
purposes of SFAS No. 131: Excess and Surplus Lines, Specialty Admitted and
Investing. Excess and Surplus Lines will include the underwriting units: Excess
and Surplus Lines, Professional/Products Liability and Brokered Excess and
Surplus Lines. Specialty Admitted will include the underwriting units:
Specialty Program Insurance and Specialty Personal and Commercial Lines.
Investing will include all investing activities.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Quarter and Nine Months ended September 30, 1998 compared to Quarter and Nine
Months ended September 30, 1997
The Company underwrites specialty insurance products and programs for niche
markets. Significant areas of underwriting include Excess and Surplus Lines,
Professional/ Products Liability, Specialty Program Insurance, 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, 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 and automobiles. 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 by significant underwriting
area:
Gross Premium Volume
Quarter Ended September 30, Nine Months Ended September 30,
- -------------------------------- -------------------------------
1998 1997 (dollars in thousands) 1998 1997
---- ---- ---------------------- ---- ----
$ 30,312 $ 31,757 Excess and Surplus Lines $ 89,872 $ 93,717
29,771 27,265 Professional/Products Liability 92,986 86,878
26,816 28,708 Specialty Program Insurance 66,101 67,360
12,124 13,443 Specialty Personal and Commercial
Lines 33,918 37,210
18,558 10,611 Brokered Excess and Surplus Lines 50,423 33,464
680 621 Other 2,478 2,653
- --------- --------- --------- ---------
$ 118,261 $ 112,405 Total $ 335,778 $ 321,282
========= ========= ========= =========
Gross premium volume was $118.3 million for the third quarter and $335.8 million
for the nine month period in 1998 compared to $112.4 million and $321.3 million,
respectively, for the same periods last year. Growth in the employment practices
program and the Brokered Excess and Surplus Lines unit more than offset declines
in other products including the Excess and Surplus Lines unit's casualty
program, Specialty Program's youth and recreation programs, and
Professional/Products Liabilities' financial institutions, scaffolding and
directors' and officers' programs. The declines in these programs were due to
aggressive competition in the Company's markets as well as corrective actions to
achieve underwriting profits. The Company has maintained its underwriting
standards at the expense of premium growth.
Excess and Surplus Lines third quarter gross premium volume was $30.3 million
compared to $31.8 million in 1997. For the nine month period, gross premium
volume was $89.9 million compared to $93.7 million last year. Increased
production in the inland marine program was more than offset by decreases due to
intense competition in the casualty, Markel special property, and property
programs.
Third quarter gross premium volume from Professional/Products Liability grew 9%
to $29.8 million from $27.3 million a year earlier. For the nine month period,
Professional/Products Liability gross premium volume advanced 7% to $93.0
million from $86.9 million last year. Growth in the employment practices and
specified professions programs was partially offset by lower production from
other lines, including financial institutions, scaffolding and the directors'
and officers' liability programs.
8
<PAGE>
Gross premiums from Specialty Program Insurance were $26.8 million for the third
quarter compared to $28.7 million in the third quarter of 1997. For the nine
month period, gross premiums were $66.1 million compared to $67.4 million last
year. Growth in the animal mortality, amateur sports and surety programs was
more than offset by declines in the youth and recreation, health and fitness and
child care programs.
Specialty Personal and Commercial Lines premiums declined to $12.1 million for
the third quarter and $33.9 million for the nine month period from $13.4 million
and $37.2 million, respectively, in 1997. Decreased premium volume was due to
the continued restructuring of certain programs and aggressive competition.
Premiums from Brokered Excess and Surplus Lines rose 75% to $18.6 million in the
third quarter of 1998 compared to $10.6 million in 1997. For the nine month
period, premiums advanced 51% to $50.4 million compared to $33.5 million last
year. The increase was due to higher gross premium volume in the unit's casualty
and excess and umbrella departments. These increases were due to the unit's
focus on providing quality service and underwriting expertise to a core group of
producers.
Other gross premiums totaled $0.7 million in the third quarter of 1998 and $2.5
million for the nine month period compared to $0.6 million and $2.7 million,
respectively, 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 was 79% for the third quarter
and the nine month period of 1998 compared to 79% for the third quarter and 78%
for the nine month period in 1997. The increase for the nine month period was
primarily due to a new reinsurance treaty structure in the Specialty Program
Insurance unit and higher retentions in the Professional/Products Liability
unit.
Following is a comparison of earned premiums by significant underwriting area:
Earned Premiums
Quarter Ended September 30, Nine Months Ended September 30,
--------------------------- -------------------------------
1998 1997 (dollars in thousands) 1998 1997
---- ---- ---- ----
$ 21,126 $ 21,695 Excess and Surplus Lines $ 64,758 $ 62,601
26,713 25,871 Professional/Products Liability 77,286 77,502
16,287 16,967 Specialty Program Insurance 46,864 51,068
10,568 12,228 Specialty Personal and Commercial
Lines 30,247 37,175
9,971 7,882 Brokered Excess and Surplus Lines 28,926 22,121
- 7 Other 8 (14)
- -------- -------- --------- --------
$ 84,665 $ 84,650 Total $ 248,089 $250,453
======== ======== ========= ========
Total operating revenues for the third quarter were $105.1 million compared to
$110.6 million in the prior year. For the nine month period, operating revenues
rose to $313.3 million from $310.8 million a year ago.
9
<PAGE>
Earned premiums were $84.7 million for the third quarter and $248.1 million for
the nine month period compared to $84.7 million for the third quarter and $250.5
million for the nine month period of 1997. Earned premium volume reflected
competitive market conditions. In response to this competition, the Company has
maintained its underwriting standards at the expense of premium growth.
Third quarter net investment income increased to $18.4 million from $17.4
million a year ago. For the nine month period, net investment income increased
to $53.1 million from $50.9 million for the same period last year. The increases
were the result of operating cash flows which added to the Company's investment
portfolio, partially offset by lower interest rates.
Net realized gains were $1.8 million for the third quarter in 1998 and $11.4
million for the nine month period compared to net realized gains of $8.3 million
and $8.1 million, respectively, last year. Variability in the timing of realized
and unrealized investment gains or losses is to be expected.
Total operating expenses for the third quarter were $84.1 million compared to
$84.6 million in 1997. Total operating expenses for the nine month period were
$245.6 million compared to $250.2 million a year ago. The decreases resulted
primarily from larger underwriting profits in both periods of 1998 as compared
to 1997.
Following is a comparison of selected data from the Company's operations
(dollars in thousands):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
--------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross premium volume $ 118,261 $ 112,405 $ 335,778 $ 321,282
Net premiums written $ 93,697 $ 88,528 $ 264,111 $ 250,303
Net retention 79% 79% 79% 78%
Earned premiums $ 84,665 $ 84,650 $ 248,089 $ 250,453
Losses and loss adjustment expenses $ 54,207 $ 54,313 $ 157,293 $ 161,469
Underwriting, acquisition and insurance expenses $ 29,356 $ 29,714 $ 86,754 $ 86,940
Underwriting profit $ 1,102 $ 623 $ 4,042 $ 2,044
GAAP ratios
Loss ratio 64% 64% 63% 64%
Expense ratio 35% 35% 35% 35%
--------- --------- --------- ---------
Combined ratio 99% 99% 98% 99%
========= ========= ========= =========
</TABLE>
Underwriting profitability is measured by the combined ratio of losses and
expenses to earned premiums. For the third quarter the combined ratio was flat
at 99% compared to 1997. The combined ratio decreased to 98% for the nine month
period compared to 99% in 1997. The quarterly loss ratio remained steady at 64%
compared to 1997. For the nine month period, the loss ratio decreased to 63%
compared to 64% in 1998. The lower loss ratio in 1997 was due to continued
favorable loss reserve development and corrective actions in certain lines of
business. The third quarter and nine month period expense ratios were flat at
35% compared to both periods in the prior year.
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
third quarter of 1998, income from core underwriting and investing operations
increased to $11.3 million, or $2.01 per diluted share, from $11.0 million, or
$1.94 per diluted share, in 1997. For the nine month period, income from core
operations increased to $33.7 million, or $5.98 per diluted share, from $30.6
million, or $5.41 per diluted share, in 1997. The increase in both periods was
due to underwriting profitability supported by higher net investment income.
10
<PAGE>
The Company's effective tax rate was 24% for the third quarter of 1998 and 1997
and for the nine month period in both 1998 and 1997.
Third quarter 1998 net income was $12.1 million compared to $16.0 million in
1997. The decrease was due to lower realized gains in the third quarter of 1998.
Net income for the nine month period increased to $39.9 million compared to
$34.5 million last year. The increase was due to increased underwriting
profitability and higher realized gains. Comprehensive income for the third
quarter of 1998 was $3.2 million, or $0.56 per diluted share, compared to
comprehensive income of $32.7 million, or $5.78 per diluted share, in the third
quarter of 1997. The decrease was primarily the result of the net decrease in
unrealized gains of $1.58 per diluted share in the third quarter of 1998
compared to the net increase in unrealized gains of $2.96 per diluted share in
1997. For the nine month period, comprehensive income was $46.8 million, or
$8.29 per diluted share, compared to comprehensive income of $73.4 million, or
$13.00 per diluted share, last year. The decrease was primarily the result of
the net increase in unrealized gains of $1.22 per diluted share in the nine
month period of 1998 compared to the net increase in unrealized gains of $6.90
per diluted share in the nine month period of 1997.
Financial Condition as of September 30, 1998
The Company's insurance operations collect premiums and pay current claims,
reinsurance costs 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 administrative expenses.
For the nine month period ended September 30, 1998, the Company reported net
cash provided by operating activities of $38.8 million, compared to $47.2
million for the same period in 1997. The decrease was due to various large
claims payments in the first nine months of 1998 partially offset by increased
investment income and underwriting profitability.
For the nine month period ended September 30, 1998, the Company reported net
cash used by investing activities of $39.3 million compared to $183.8 million in
1997. 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.
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.
As of September 30, 1998 and December 31, 1997, the unused balances available
under the Company's revolving credit facility totaled $250 million and $150
million, respectively. 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 under the facility are
available for general corporate purposes.
Shareholders' equity at September 30, 1998 was $404.1 million compared to $356.8
million at December 31, 1997. Book value per share rose to $73.29 at September
30, 1998 from $65.18 at December 31, 1997.
11
<PAGE>
Other Matters
Tender Offer
On October 20, 1998, the Company's newly formed subsidiary , MG Acquisition
Corp., commenced a tender offer for all outstanding common shares of Gryphon
Holdings Inc. (Gryphon). The offer is an all cash offer at $18.00 net per share.
The offer is set to expire on December 4, 1998 unless otherwise extended. The
Company estimates that the total amount of funds required to complete an
acquisition of Gryphon is approximately $126 million. The Company intends to
obtain such funds from its current cash and investment holdings and through the
use of its $250 million revolving credit facility. At September 30, 1998 the
Company had $250 million available for borrowing under the credit facility.
The Year 2000
The Year 2000 issue affects virtually all companies and organizations. Many
companies have existing computer applications which use only two digits to
identify a year in the date field. These applications were designed and
developed without considering the impact of the century change. If not corrected
these computer applications may fail or create erroneous results in the year
2000.
The Company's Year 2000 strategy
The Company has created a Year 2000 team involving associates from all areas in
the organization and has charged them with implementing the Company's Year 2000
project. The team has been in place since September of 1997. The project's scope
includes all information technology (IT), both internally developed and
purchased from third parties, material vendors, producer and customer
relationships, and an assessment of the Company's underwriting exposure as a
result of the insurance products written by the Company's underwriting units. In
addition, the Company is evaluating the Year 2000 exposure to issuers included
as part of its investment portfolio.
The Company has completed the assessment phase for its material IT systems and
is currently in the remediation and testing phases. The Company anticipates that
it will complete the remediation and testing phases for its IT systems by
December 31, 1998.
The Company has been in contact with its material business partners to determine
their state of readiness with regard to the Year 2000 issue and the potential
impact on the Company. The Company has identified the following general
categories of business partners as material to the Company's ability to conduct
its operations: software, hardware and telecommunication providers, banks and
investment brokers, material holdings in the Company's investment portfolio,
insurance producers, reinsurers and reinsurance intermediaries, major insurance
clients and utilities.
Where the Company has determined that the relationship with a business partner
is material to its ability to conduct normal operations, the Company has sent
letters to the business partner requesting an update on the status of its Year
2000 initiative. Where deemed necessary, the Company is following up with the
business partner to obtain further information. Based on the assurances of these
business partners and the Company's internal reviews of information provided,
the Company has not currently identified a material business partner that will
be noncompliant. However, there can be no assurances that all material business
partners will be compliant and such noncompliance could have a material effect
on the Company's financial position and results of operations. The Company
expects to complete its review of material business partners by December 31,
1998.
12
<PAGE>
The Company has conducted a comprehensive review of its underwriting guidelines
and has made the decision to exclude Year 2000 exposures from virtually all
insurance policies. The Company began adding exclusions to policies in early
1998. Additionally it is the Company's position that Year 2000 exposures are not
fortuitous losses and thus are not covered under insurance policies even without
specific exclusions. For these reasons, the Company believes that its exposure
to Year 2000 claims will not be material. However, as was the case with
environmental exposures, changing social and legal trends may create unintended
coverage for exposures by reinterpreting insurance contracts and exclusions. It
is impossible to predict what, if any, exposure insurance companies may
ultimately have for Year 2000 claims whether coverage for the issue is
specifically excluded or included.
The cost of the Company's Year 2000 project is estimated to be $1.0 million.
Approximately $0.5 million of this amount was incurred as of September 30, 1998.
The remainder of the estimated cost of the project is expected to be incurred in
the fourth quarter of 1998 and throughout 1999. All costs of the Year 2000
project have been expensed as incurred.
The Company has not established a contingency plan for noncompliance of its IT
systems as it expects all of its IT systems to be Year 2000 compliant by
December 31, 1998. At this time, the Company is not aware of any material
business partners that will not be Year 2000 compliant. If the Company becomes
aware of noncompliant business partners, one option will be to evaluate using
other vendors. The Company expects its review of material business partners to
be completed by December 31, 1998. At that time the Company will be able to
evaluate the need to replace any material business partners. In many instances
the establishment of a contingency plan is not possible or is cost prohibitive.
In these situations, noncompliance by the Company or its material business
partners could have a material adverse impact on the Company's financial
position and results of operations.
"Safe Harbor" Statement
This is a "Safe Harbor" statement under the Private Securities Litigation Reform
Act of 1995. Certain statements contained herein are forward-looking statements
that involve risks and uncertainties. Future actual results may materially
differ from those in these statements because of many factors. For instance,
insurance industry price competition has made it more difficult to attract and
retain adequately priced business. State regulatory actions can impede the
Company's ability to charge adequate rates and efficiently allocate capital.
Also the frequency and severity of natural catastrophes are highly variable.
Economic conditions and interest rate volatility can have significant impacts on
the market value of fixed maturity and equity investments. The business
community's state of readiness for the Year 2000 and the Company's potential
underwriting exposure to Year 2000 claims are difficult to predict with any
certainty. Accordingly, the Company's premium growth, underwriting and investing
results have been and will continue to be potentially materially affected by
these factors.
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 September 30,
1998
13
<PAGE>
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 28th day of October, 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)
14
<PAGE>
Exhibit Index
Number Description
27 Financial Data Schedule for period ended September 30, 1998 *
* Filed electronically with the Commission's operational EDGAR system
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Form 10-Q for the quarterly period ended
September 30, 1998 for Markel Corporation and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 1,115,280
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 281,981
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,462,860
<CASH> 1,367
<RECOVER-REINSURE> 17,844
<DEFERRED-ACQUISITION> 42,338
<TOTAL-ASSETS> 1,909,400
<POLICY-LOSSES> 943,738
<UNEARNED-PREMIUMS> 211,076
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 93,205
<F1> 0
0
<COMMON> 25,213
<OTHER-SE> 378,933
<TOTAL-LIABILITY-AND-EQUITY> 1,909,400
248,089
<INVESTMENT-INCOME> 53,137
<INVESTMENT-GAINS> 11,434
<OTHER-INCOME> 665
<BENEFITS> 157,293
<UNDERWRITING-AMORTIZATION> 60,611
<UNDERWRITING-OTHER> 26,143
<INCOME-PRETAX> 52,463
<INCOME-TAX> 12,591
<INCOME-CONTINUING> 39,872
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,872
<EPS-PRIMARY><F2> 7.25
<EPS-DILUTED><F2> 7.07
<RESERVE-OPEN> 0
<PROVISION-CURRENT><F3> 0
<PROVISION-PRIOR><F3> 0
<PAYMENTS-CURRENT><F3> 0
<PAYMENTS-PRIOR><F3> 0
<RESERVE-CLOSE><F3> 0
<CUMULATIVE-DEFICIENCY><F3> 0
<FN>
<F1> Does not include Company-Obligated Mandatorily Redeemable Preferred Capital
Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable
Interest Debentures of Markel Corporation.
<F2> Markel adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" effective December 31, 1997. The Financial Data Schedules
tags<EPS PRIMARY> and<EPS DILUTED> refer to Basic EPS and Diluted EPS,
respectively, as these terms are set forth in Statement of Financial Accounting
Standards No. 128.
<F3> Available on an annual basis only.
</FN>
</TABLE>
