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 June 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 July 28, 1998:
5,503,212
1
<PAGE>
Markel Corporation
Form 10-Q
Index
<TABLE>
<CAPTION>
<S> <C>
Page Number
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets--
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Income and Comprehensive Income--
Quarters and Six Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows--
Six Months Ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements--
June 30, 1998 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C>
June 30, December 31,
1998 1997
- -------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
ASSETS
Investments, available-for-sale, at estimated fair value
Fixed maturities (cost of $1,061,887 in 1998 and $1,037,807 in 1997) $1,088,839 $ 1,063,191
Equity securities (cost of $171,634 in 1998 and $147,601
in 1997) 300,252 253,385
Short-term investments (estimated fair value
approximates cost) 61,870 91,744
- -------------------------------------------------------------------------------------------------------------
Total Investments, Available-For-Sale 1,450,961 1,408,320
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 1,171 1,309
Receivables 67,735 67,573
Reinsurance recoverable on unpaid losses 207,188 225,405
Reinsurance recoverable on paid losses 23,159 15,530
Deferred policy acquisition costs 39,731 36,816
Prepaid reinsurance premiums 40,848 39,758
Property and equipment 9,393 10,068
Intangible assets 36,314 37,331
Other assets 24,550 27,990
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,901,050 $ 1,870,100
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 947,498 $ 971,157
Unearned premiums 200,895 192,815
Payables to insurance companies 28,885 29,148
Long-term debt (estimated fair value of $97,235 in 1998 and $96,197 in 1997) 93,192 93,166
Other liabilities 79,672 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 $162,518 in 1998 and $159,132
in 1997) 150,000 150,000
- -------------------------------------------------------------------------------------------------------------
Total Liabilities 1,500,142 1,513,296
- -------------------------------------------------------------------------------------------------------------
Shareholders' equity
Common stock 25,126 24,660
Retained earnings 274,662 246,885
Accumulated other comprehensive income
Net unrealized gains on fixed maturities and equity securities, net
of taxes 101,120 85,259
- ------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 400,908 356,804
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,901,050 $ 1,870,100
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
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MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
<TABLE>
<CAPTION>
<S> <C>
Quarter Ended Six Months Ended
June 30, June 30,
------------------------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING REVENUES
Earned premiums $ 84,526 $ 84,132 $ 163,424 $ 165,803
Net investment income 17,158 16,797 34,728 33,503
Net realized gains(losses) from
investment sales 6,207 418 9,620 (160)
Other 257 353 459 1,027
- ------------------------------------------------------------------------------------------
Total Operating Revenues 108,148 101,700 208,231 200,173
- ------------------------------------------------------------------------------------------
OPERATING EXPENSES
Losses and loss adjustment expenses 53,559 54,506 103,086 107,156
Underwriting, acquisition and insurance
expenses 29,331 28,912 57,398 57,226
Amortization of intangible assets 508 596 1,017 1,193
- ------------------------------------------------------------------------------------------
Total Operating Expenses 83,398 84,014 161,501 165,575
- ------------------------------------------------------------------------------------------
Operating Income 24,750 17,686 46,730 34,598
Interest expense 5,097 5,210 10,181 10,244
- ------------------------------------------------------------------------------------------
Income Before Income Taxes 19,653 12,476 36,549 24,354
Income tax expense 4,717 2,754 8,772 5,842
- ------------------------------------------------------------------------------------------
NET INCOME $ 14,936 $ 9,722 $ 27,777 $ 18,512
- ------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains on securities, net of taxes
Unrealized gains arising during
the period $ 863 $ 28,164 $ 22,114 $22,080
Less reclassification adjustments
for gains (losses) included
in net income (4,035) (272) (6,253) 104
- ------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) (3,172) 27,892 15,861 22,184
- ------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 11,764 $ 37,614 $ 43,638 $ 40,696
- ------------------------------------------------------------------------------------------
NET INCOME PER SHARE
Basic $ 2.71 $ 1.77 $ 5.05 $ 3.38
Diluted $ 2.64 $ 1.72 $ 4.92 $ 3.28
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
<S> <C>
Six Months Ended
June 30,
---------------------
1998 1997
- ------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net Income $ 27,777 $ 18,512
Adjustments to reconcile net income to net cash provided
by operating activities (16,807) 8,022
- ------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 10,970 26,534
- ------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of fixed maturities and equity securities 190,464 311,108
Proceeds from maturities of fixed maturities 56,822 28,519
Cost of fixed maturities and equity securities purchased (292,032) (448,045)
Net change in short-term investments 29,874 (59,439)
Net proceeds from sale of building -- 6,500
Other 3,298 (1,813)
- ------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (11,574) (163,170)
- ------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net proceeds from issuance of Company-Obligated Mandatorily Redeemable
Preferred Capital Securities -- 148,166
Repayments of long-term debt -- (21,577)
Other 466 176
- ------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 466 126,765
- ------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (138) (9,871)
Cash and cash equivalents at beginning of period 1,309 11,054
- ------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,171 $ 1,183
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--June 30, 1998
1. Principles of Consolidation
The consolidated balance sheet as of June 30, 1998, the related consolidated
statements of income and comprehensive income for the quarters and six months
ended June 30, 1998 and 1997, and the consolidated statements of cash flows for
the six months ended June 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>
<S> <C>
Quarter Ended Six Months Ended
June 30, June 30,
------------------------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------
Net income, as reported $ 14,936 $ 9,722 $ 27,777 $ 18,512
Dividends on redeemable preferred stock -- (4) -- (8)
- ------------------------------------------------------------------------------------------
Basic and diluted income $ 14,936 $ 9,718 $ 27,777 $ 18,504
- ------------------------------------------------------------------------------------------
Average common shares outstanding 5,502 5,485 5,499 5,475
Dilutive potential common shares 152 174 152 171
- ------------------------------------------------------------------------------------------
Average diluted shares outstanding 5,654 5,659 5,651 5,646
- ------------------------------------------------------------------------------------------
</TABLE>
3. Reinsurance
The table below summarizes the effect of reinsurance on premiums written and
earned (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
Quarter Ended June 30,
- -----------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------
Written Earned Written Earned
Direct $ 119,147 $ 104,261 $ 107,969 $ 106,245
Assumed 1,760 1,712 2,063 1,541
Ceded (26,940) (21,447) (24,230) (23,654)
- -----------------------------------------------------------------------------------------
Net premiums $ 93,967 $ 84,526 $ 85,802 $ 84,132
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Six Months Ended June 30,
- ------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------
Written Earned Written Earned
Direct $ 214,671 $ 203,200 $ 204,577 $ 213,058
Assumed 2,956 3,299 3,207 3,260
Ceded (47,213) (43,075) (46,009) (50,515)
- ------------------------------------------------------------------------------------------
Net premiums $ 170,414 $ 163,424 $ 161,775 $ 165,803
- ------------------------------------------------------------------------------------------
</TABLE>
6
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3. Reinsurance Continued
Incurred losses and loss adjustment expenses are net of reinsurance recoveries
of $17.1 million and $23.2 million for the quarters ended June 30, 1998 and
1997, respectively and $29.9 million and $41.3 million for the six months ended
June 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 unrealized gains on
securities arising during the period less classification adjustments for gains
(losses) included in net income. The related tax expense (benefit) on unrealized
gains (losses) on securities was $0.5 million and $11.9 million for the quarter
and six months ended June 30, 1998 and $15.2 million and $11.9 million for the
same periods in 1997. The related tax expense (benefit) on the reclassification
adjustments for gains (losses) included in net income was $2.2 million and $3.4
million for the quarter and six months ended June 30, 1998 and $0.1 million and
$(0.1) 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 is
currently evaluating what its meaningful reporting segments will be under SFAS
No. 131.
7
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Quarter and Six Months ended June 30, 1998 compared to Quarter and Six Months
ended June 30, 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, 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 by significant underwriting
area:
<TABLE>
<CAPTION>
Gross Premium Volume
Quarter Ended June 30, Six Months Ended June 30,
- -----------------------------------------------------------------------------------
1998 1997 (DOLLARS IN THOUSANDS) 1998 1997
- -----------------------------------------------------------------------------------
<S> <C>
$ 34,607 $ 33,385 Excess and Surplus Lines $ 59,560 $ 61,960
32,459 28,964 Professional/Products Liability 63,215 59,613
20,974 20,108 Specialty Program Insurance 39,285 38,652
13,987 15,573 Specialty Personal and
Commercial Lines 21,794 23,767
17,227 11,742 Brokered Excess and Surplus Lines 31,865 22,853
903 968 Other 1,798 2,032
- -----------------------------------------------------------------------------------
$ 120,157 $ 110,740 Total $ 217,517 $ 208,877
- -----------------------------------------------------------------------------------
</TABLE>
Gross premium volume was $120.2 million for the second quarter and $217.5
million for the six month period in 1998 compared to $110.7 million and $208.9
million, respectively, for the same periods last year. Growth in the employment
practices program and the Brokered Excess and Surplus Lines unit offset declines
in other products including the Markel special property, directors' and
officers', financial institutions and the Excess and Surplus Lines unit's
casualty and property programs. The declines in these programs were due to
aggressive competition in the Company's markets. The Company has maintained its
underwriting standards at the expense of premium growth.
Excess and Surplus Lines second quarter gross premium volume was $34.6 million
compared to $33.4 million in 1997. For the six month period, gross premium
volume was $59.6 million compared to $62.0 million last year. 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.
Second quarter gross premium volume from Professional/Products Liability grew
12% to $32.5 million from $29.0 million a year earlier. For the six month
period, Professional/Products Liability gross premium volume advanced 6% to
$63.2 million from $59.6 million last year. Growth in the employment practices
and specified professions programs was partially offset by lower production from
other lines, including financial institutions and the directors' and officers'
liability programs.
8
<PAGE>
Gross premiums from Specialty Program Insurance were $21.0 million for the
second quarter compared to $20.1 million in the second quarter of 1997. For the
six month period, gross premiums were $39.3 million compared to $38.7 million
last year. Growth in the animal mortality, amateur sports and surety programs
was partially offset by declines in the health and fitness and child care
programs.
Specialty Personal and Commercial Lines premiums declined to $14.0 million for
the second quarter and $21.8 million for the six month period from $15.6 million
and $23.8 million, respectively, in 1997. Decreased premium volume was due to
aggressive competition and the continued restructuring of certain programs.
Premiums from Brokered Excess and Surplus Lines rose 47% to $17.2 million in the
second quarter of 1998 compared to $11.7 million in 1997. For the six month
period, premiums advanced 39% to $31.9 million compared to $22.9 million last
year. The increase was due to higher gross premium volume in the unit's casualty
and excess and umbrella departments.
Other gross premiums totaled $0.9 million in the second quarter of 1998 and $1.8
million for the six month period compared to $1.0 million and $2.0 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 78% for the second quarter
and the six month period of 1998 compared to 77% for both periods of 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/Products Liability unit.
Following is a comparison of earned premiums by significant underwriting area:
<TABLE>
<CAPTION>
<S> <C>
Earned Premiums
Quarter Ended June 30, Six Months Ended June 30,
- ---------------------------------------------------------------------------------
1998 1997 (DOLLARS IN THOUSANDS) 1998 1997
- ---------------------------------------------------------------------------------
$ 22,974 $ 20,924 Excess and Surplus Lines $ 43,632 $ 40,906
26,171 26,047 Professional/Products Liability 50,573 51,631
15,785 16,886 Specialty Program Insurance 30,577 34,101
9,261 13,117 Specialty Personal and
Commercial Lines 19,679 24,947
10,334 7,203 Brokered Excess and Surplus Lines 18,955 14,239
1 (45) Other 8 (21)
- ---------------------------------------------------------------------------------
$ 84,526 $ 84,132 Total $ 163,424 $ 165,803
- ---------------------------------------------------------------------------------
</TABLE>
Total operating revenues for the second quarter rose 6% to $108.1 million from
$101.7 million in the prior year. For the six month period, operating revenues
rose 4% to $208.2 million from $200.2 million a year ago.
Earned premiums were $84.5 million for the second quarter and $163.4 million for
the six month period compared to $84.1 million for the second quarter and $165.8
million for the six month period of 1997. The flat earned premium volume was due
to competitive market conditions. In response to this competition, the Company
has maintained its underwriting standards at the expense of premium growth.
9
<PAGE>
Second quarter net investment income increased to $17.2 million from $16.8
million a year ago. For the six month period, net investment income increased to
$34.7 million from $33.5 million for the same period last year. The increases
were the result of operating cash flows which added to the Company's investment
portfolio.
Realized gains were $6.2 million for the second quarter in 1998 and $9.6 million
for the six month period compared to realized gains of $0.4 million and realized
losses of $0.2 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 second quarter were $83.4 million compared to
$84.0 million in 1997. Total operating expenses for the six month period were
$161.5 million compared to $165.6 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 Six Months Ended
June 30, June 30,
-------------------- ---------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross premium volume $ 120,157 $ 110,740 $ 217,517 $ 208,877
Net premiums written $ 93,967 $ 85,802 $ 170,414 $ 161,775
Net retention 78% 77% 78% 77%
Earned premiums $ 84,526 $ 84,132 $ 163,424 $ 165,803
Losses and loss adjustment expenses $ 53,559 $ 54,506 $ 103,086 $ 107,156
Underwriting, acquisition and insurance
expenses $ 29,331 $ 28,912 $ 57,398 $ 57,226
Underwriting profit $ 1,636 $ 714 $ 2,940 $ 1,421
GAAP ratios
Loss ratio 63% 65% 63% 65%
Expense ratio 35% 34% 35% 34%
- ------------------------------------------------------------------------------------------
Combined ratio 98% 99% 98% 99%
- ------------------------------------------------------------------------------------------
</TABLE>
Underwriting profitability is measured by the combined ratio of losses and
expenses to earned premiums. For the second quarter and six month period, the
combined ratio was 98% compared to 99% for the comparable periods of 1997. The
second quarter and six month period loss ratio decreased to 63% from 65% in both
periods of the prior year. The decreases were due to continued favorable loss
reserve development. The second quarter and six month period expense ratio was
35% compared to 34% for the comparable periods of 1997. The expense ratios for
both periods of 1997 were favorably impacted by the recognition of contingent
reinsurance profit commissions.
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
second quarter of 1998, income from core underwriting and investing operations
increased to $11.3 million, or $2.01 per diluted share, from $9.9 million, or
$1.75 per diluted share, in 1997. For the six month period, income from core
operations increased to $22.4 million, or $3.96 per diluted share, from $19.5
million, or $3.46 per diluted share, in 1997. The increase in both periods was
due to underwriting profitability supported by higher net investment income.
The Company's effective tax rate for the second quarter of 1998 was 24% of
income before income taxes compared to 22% in the second quarter of 1997. The
tax rate was 24% for the six month period in both 1998 and 1997.
10
<PAGE>
Second quarter 1998 net income rose 54% to $14.9 million from $9.7 million in
1997. The six month 1998 net income increased 50% to $27.8 million compared to
$18.5 million last year. The increase was due to increased underwriting
profitability and higher realized gains. Comprehensive income for the second
quarter of 1998 was $11.8 million, or $2.08 per diluted share, compared to
comprehensive income of $37.6 million, or $6.65 per diluted share, in the second
quarter of 1997. The decrease was primarily the result of the net change in
unrealized losses of $0.56 per diluted share in the second quarter of 1998
compared to the net change in unrealized gains of $4.93 per diluted share in
1997. For the six month period, comprehensive income was $43.6 million, or $7.72
per diluted share, compared to comprehensive income of $40.7 million, or $7.21
per diluted share, last year. The increase was due to substantially higher net
income partially offset by lower net change in unrealized gains in the six month
period of 1998 compared to 1997.
FINANCIAL CONDITION AS OF JUNE 30, 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 six month period ended June 30, 1998, the Company reported net cash
provided by operating activities of $11.0 million, compared to $26.5 million for
the same period in 1997. The decrease was due to various large claims payments
in the first six months of 1998.
For the six month period ended June 30, 1998, the Company reported net cash used
by investing activities of $11.6 million compared to $163.2 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 June 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 June 30, 1998 was $400.9 million compared to $356.8
million at December 31, 1997. Book value per share rose to $72.85 at June 30,
1998 from $65.18 at December 31, 1997.
"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
11
<PAGE>
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.
Accordingly, the Company's premium growth and underwriting results
have been and will continue to be potentially materially affected by these
factors.
PART II. OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders
The Corporation's Annual Meeting was held on May 19, 1998, 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 Peat Marwick
LLP as the Company's independent auditors for the year ending December 31, 1998.
The results of the meeting were as follows:
Election of Directors For Withheld
- --------------------- --- --------
Alan I. Kirshner 4,527,609 48,077
Anthony F. Markel 4,529,535 46,151
Steven A. Markel 4,529,535 46,151
Darrell D. Martin 4,527,609 48,077
Leslie A. Grandis 4,529,535 46,151
Stewart M. Kasen 4,530,383 45,303
Gary L. Markel 4,529,535 46,151
V. Prem Watsa 4,529,435 46,251
Ratification of Selection of Auditors:
Abstentions and Brokers
For Against Non-Votes
4,560,754 9,400 5,532
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 June 30, 1998
12
<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 July, 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)
13
<PAGE>
Exhibit Index
Number Description
27 Financial Data Schedule for period ended June 30, 1998 *
* Filed electronically with the Commission's operational EDGAR system
14
<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
June 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 1,088,839
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 300,252
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,450,961
<CASH> 1,171
<RECOVER-REINSURE> 23,159
<DEFERRED-ACQUISITION> 39,731
<TOTAL-ASSETS> 1,901,050
<POLICY-LOSSES> 947,498
<UNEARNED-PREMIUMS> 200,985
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 93,192
0
0
<COMMON> 25,126
<OTHER-SE> 375,782
<TOTAL-LIABILITY-AND-EQUITY> 1,901,050
163,424
<INVESTMENT-INCOME> 34,728
<INVESTMENT-GAINS> 9,620
<OTHER-INCOME> 459
<BENEFITS> 103,086
<UNDERWRITING-AMORTIZATION> 39,382
<UNDERWRITING-OTHER> 18,016
<INCOME-PRETAX> 36,549
<INCOME-TAX> 8,772
<INCOME-CONTINUING> 27,777
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,777
<EPS-PRIMARY> 5.05
<EPS-DILUTED> 4.92
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
