-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SopHIXDey1vFh8sfQe4aKSs1NMbdfR8A8/iIATe15jxCT0PUOZ1S1ppo55ktqJh/ 2MTOja1+ckpHYkZN3lqd6Q== 0000916641-97-000435.txt : 19970502 0000916641-97-000435.hdr.sgml : 19970502 ACCESSION NUMBER: 0000916641-97-000435 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970501 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARKEL CORP CENTRAL INDEX KEY: 0000803509 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 540292420 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15458 FILM NUMBER: 97593137 BUSINESS ADDRESS: STREET 1: 4551 COX RD CITY: GLEN ALLEN STATE: VA ZIP: 23060-3382 BUSINESS PHONE: 8047470136 MAIL ADDRESS: STREET 1: P O BOX 2009 CITY: GLEN ALLEN STATE: VA ZIP: 23058-2009 10-Q 1 1ST QUARTER 10-Q 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, 1997 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _____ to _____ Commission File Number 0-15458 MARKEL CORPORATION (Exact name of registrant as specified in its charter) Virginia 54-0292420 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 4551 Cox Road, Glen Allen, Virginia 23060-3382 (Address of principal executive offices) (Zip code) (804) 747-0136 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Number of shares of the registrant's common stock outstanding at April 29, 1997: 5,481,455 1 Markel Corporation Form 10-Q Index Page Number ----------- PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Balance Sheets-- March 31, 1997 and December 31, 1996 3 Consolidated Statements of Income-- Three Months Ended March 31, 1997 and 1996 4 Consolidated Statements of Cash Flows-- Three Months Ended March 31, 1997 and 1996 5 Notes to Consolidated Financial Statements-- March 31, 1997 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 12 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements MARKEL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets
March 31, December 31, ----------------------- 1997 1996 - ------------------------------------------------------------------------------------------------------- (dollars in thousands) ASSETS Investments, available-for-sale, at estimated fair value Fixed maturities (cost of $956,991 in 1997 and $879,401 in 1996) $ 948,881 $ 885,874 Equity securities (cost of $138,536 in 1997 and $132,558 in 1996) 205,173 193,395 Short-term investments (estimated fair value approximates cost) 119,883 51,507 - ------------------------------------------------------------------------------------------------------- Total investments, available-for-sale 1,273,937 1,130,776 - ------------------------------------------------------------------------------------------------------- Cash and cash equivalents 278 11,054 Receivables 53,832 58,336 Reinsurance recoverable on unpaid losses 209,083 210,518 Reinsurance recoverable on paid losses 10,917 11,631 Deferred policy acquisition costs 36,768 37,979 Prepaid reinsurance premiums 40,491 44,881 Property and equipment 15,348 15,434 Intangible assets 38,700 39,297 Other assets 53,213 45,391 - ------------------------------------------------------------------------------------------------------- Total assets $1,732,567 $1,605,297 ======================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Unpaid losses and loss adjustment expenses $ 937,366 $ 935,582 Unearned premiums 190,764 200,852 Payables to insurance companies 21,228 23,870 Long-term debt (estimated fair value of $97,624 in 1997 and $115,191 in 1996) 99,704 114,691 Other liabilities 61,961 61,967 Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable Interest Debentures of the Company 150,000 -- - ------------------------------------------------------------------------------------------------------- Total liabilities 1,461,023 1,336,962 - ------------------------------------------------------------------------------------------------------- Shareholders' equity Common stock 24,478 24,347 Retained earnings 209,023 200,237 Net unrealized gains on fixed maturities and equity securities, net of taxes 38,043 43,751 - ------------------------------------------------------------------------------------------------------- Total shareholders' equity 271,544 268,335 - ------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,732,567 $1,605,297 =======================================================================================================
See accompanying notes to consolidated financial statements. 3 MARKEL CORPORATION AND SUBSIDIARIES Consolidated Statements of Income
Three Months Ended March 31, -------------------------- 1997 1996 - ------------------------------------------------------------------------------------ (dollars in thousands, except per share data) Operating revenues Earned premiums $81,671 $76,797 Net investment income 16,706 12,284 Net realized gains (losses) from investment sales (578) 2,974 Other 674 935 - ------------------------------------------------------------------------------------ Total operating revenues 98,473 92,990 - ------------------------------------------------------------------------------------ Operating expenses Losses and loss adjustment expenses 52,650 54,552 Underwriting, acquisition and insurance expenses 28,314 24,730 Other -- 450 Amortization of intangible assets 597 675 - ------------------------------------------------------------------------------------ Total operating expenses 81,561 80,407 - ------------------------------------------------------------------------------------ Operating income 16,912 12,583 Interest expense 5,034 2,029 - ------------------------------------------------------------------------------------ Income before income taxes 11,878 10,554 Income taxes 3,088 2,744 - ------------------------------------------------------------------------------------ Net income $ 8,790 $ 7,810 ==================================================================================== Earnings per share Primary $ 1.56 $ 1.38 - ------------------------------------------------------------------------------------ Fully diluted $ 1.56 $ 1.38 ====================================================================================
See accompanying notes to consolidated financial statements. 4 MARKEL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows
March 31, ------------------ 1997 1996 - ----------------------------------------------------------------------------------------------------------- (dollars in thousands) Operating Activities Net income $ 8,790 $ 7,810 Adjustments to reconcile net income to net cash provided by operating activities 739 15,078 - ----------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 9,529 22,888 - ----------------------------------------------------------------------------------------------------------- Investing Activities Proceeds from sales of fixed maturities and equity securities 172,691 117,564 Proceeds from maturities of fixed maturities 20,894 21,338 Cost of fixed maturities and equity securities purchased (278,005) (191,972) Net change in short-term investments (68,376) 31,697 Other (802) (1,180) - ----------------------------------------------------------------------------------------------------------- Net cash used by investing activities (153,598) (22,553) - ----------------------------------------------------------------------------------------------------------- Financing Activities Net proceeds from issuance of company obligated mandatorily redeemable preferred securities 148,166 -- Repayments of long-term debt (15,000) -- Other 127 49 - ----------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 133,293 49 - ----------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (10,776) 384 Cash and cash equivalents at beginning of period 11,054 18,315 - ----------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 278 $ 18,699 ===========================================================================================================
See accompanying notes to consolidated financial statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--March 31, 1997 1. Principles of Consolidation The consolidated balance sheet as of March 31, 1997 and the related consolidated statements of income and cash flows for the three months ended March 31, 1997 and 1996, 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, ---------------------------- 1997 1996 - --------------------------------------------------------------------------------------------------------- Net income, as reported $8,790 $ 7,810 Dividends on redeemable preferred stock (4) (4) - --------------------------------------------------------------------------------------------------------- Primary and fully diluted income $ 8,786 $ 7,806 ========================================================================================================= Average common shares outstanding 5,464 5,424 Shares applicable to common stock equivalents 179 236 - --------------------------------------------------------------------------------------------------------- Average primary shares outstanding 5,643 5,660 Additional dilution attributable to common stock equivalents 4 8 - --------------------------------------------------------------------------------------------------------- Average fully diluted shares outstanding 5,647 5,668 =========================================================================================================
6 3. Reinsurance The table below summarizes the effect of reinsurance on premiums written and earned (dollars in thousands):
Three Months Ended March 31, - ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Written Earned Written Earned Direct $ 96,608 $ 106,813 $ 92,117 $ 95,781 Assumed 1,144 1,719 2,059 4,176 Ceded (21,779) (26,861) (21,262) (23,160) - ---------------------------------------------------------------------------------------------------------------------------------- Net premiums $ 75,973 $ 81,671 $ 72,914 $ 76,797 ==================================================================================================================================
Incurred losses and loss adjustment expenses are net of reinsurance recoveries of $18.1 million and $12.6 million for the three months ended March 31, 1997 and 1996, 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 the Company's 8.71% Junior Subordinated 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. Payments of distributions and other amounts due on the Capital Securities (to the extent the Trust has funds on hand legally available for the payment of such distributions) are irrevocably guaranteed by the Company (the Guarantee). Taken together, the Company's obligations under the Debentures, the Indenture, the Declaration and the Guarantee provide, in the aggregate, a full, irrevocable and unconditional guarantee of payments of distributions and other amounts due on the Capital Securities. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Three Months ended March 31, 1997 compared to Three Months ended March 31, 1996 The Company underwrites specialty insurance products and programs to 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/casualty insurance for nonstandard and hard-to-place risks is underwritten on an excess and surplus lines basis. 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. Specialty program insurance includes coverage for camps, youth and recreation, child care, health and fitness and agribusiness organizations, as well as accident and health insurance for colleges. The Company also underwrites personal and commercial property and liability coverage for watercraft, motorcycles, automobiles, mobile homes, dwellings and commercial freight companies. The brokered excess and surplus lines unit writes hard to place, large general liability and products liability 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, - ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 (amounts in thousands) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- $ 28,575 $ 29,045 Excess & Surplus Lines $ 19,982 $ 18,139 30,649 31,195 Professional/Products Liability 25,584 31,559 18,544 20,746 Specialty Program Insurance 17,215 16,436 8,194 13,562 Specialty Personal and Commercial Lines 11,830 8,719 11,111 -- Brokered Excess and Surplus Lines 7,036 -- 1,064 2,797 Other 24 1,944 - ---------------------------------------------------------------------------------------------------------------------------------- $ 98,137 $ 97,345 Total $ 81,671 $ 76,797 ==================================================================================================================================
Gross premium volume for the first quarter in 1997 increased to $98.1 million from $97.3 million for the same period in the prior year. Aggressive competition in many of the Company's markets contributed to decreased premium volume which was offset by the acquisition of Investors Insurance Holding Corp. (Investors). Excess and surplus lines gross premium volume was $28.6 million compared to $29.0 million in 1996. Increased production in the property and excess and umbrella programs was mitigated by decreases in the special property and casualty programs. Premiums from professional/products liability insurance were $30.6 million compared to $31.2 million a year ago. Growth in the employment practices line was more than offset by lower production from other lines, including medical malpractice and the special risk programs. 8 Gross premiums from specialty program insurance were $18.5 million compared to $20.7 million in the first quarter of 1996. Increased competition in the youth and recreation program and re-underwriting portions of the agribusiness program contributed to the decrease. Specialty personal and commercial lines premiums declined to $8.2 million from $13.6 million in 1996. The division has decreased gross premium volume while it restructures segments of its book of business. Premiums from Brokered Excess and Surplus Lines totaled $11.1 million in the first quarter of 1997. This new underwriting unit was the result of the purchase of Investors on October 31, 1996. Other gross premiums totaled $1.1 million compared to $2.8 million in 1996. Other gross premium volume included facultative reinsurance placed by the Professional/Products Liability unit and run-off business related to Lincoln Insurance Company. While certain of the Company's products may be adversely affected by the increased competition and lower rates which characterize a "soft" insurance market, the Company does not intend to relax underwriting standards or rates 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 77% in the first quarter of 1997 compared to 75% in the prior year. The increase reflects higher retentions in the specialty personal and commercial lines division. Total operating revenues rose 6% to $98.5 million from $93.0 million in the prior year. First quarter earned premiums were $81.7 million compared to $76.8 million for the first quarter of 1996. The 6% advance resulted primarily from the purchase of Investors. Net investment income increased 36% to $16.7 million from $12.3 million a year ago. The increase reflected the impact of significant growth in the Company's investment portfolio due to the acquisition of Investors, the issuance of $150 million of Capital Securities in January 1997 and operating cash flows. Realized losses were $0.6 million for the first quarter in 1997 compared to realized gains of $3.0 million last year. Variability in the timing of realized investment gains or losses is to be expected and often results from interest rate volatility which affects the market values of fixed maturities and equity investments. Total operating expenses for the first quarter were $81.6 million compared to $80.4 million in 1996. The increase resulted primarily from higher variable expenses associated with higher earned premiums. 9 Following is a comparison of selected data from the Company's operations (in thousands):
Three Months Ended March 31, ----------------------------------- 1997 1996 - -------------------------------------------------------------------------------------------------------- Gross premium volume $ 98,137 $ 97,345 Net premiums written $ 75,973 $ 72,914 Net retention 77% 75% Earned premiums $ 81,671 $ 76,797 Losses and loss adjustment expenses $ 52,650 $ 54,552 Underwriting, acquisition and insurance expenses $ 28,314 $ 24,730 GAAP ratios Loss ratio 64% 71% Expense ratio 35% 32% - -------------------------------------------------------------------------------------------------------- Combined ratio 99% 103% ========================================================================================================
Underwriting profitability is measured by the combined ratio of losses and expenses to earned premiums. The Company reported a significantly improved combined ratio of 99% in the first quarter of 1997 compared to 103% in 1996. The Company's loss ratio was 64% compared to 71% in the prior year. The 1997 loss ratio compares favorably to 1996 due to winter storm losses and underwriting losses in the professional liability book of business in 1996. The 1997 expense ratio was 35% compared to 32% in 1996. The increase is due to high acquisition and overhead expenses at the Company's specialty personal and commercial lines division. The division has decreased premium volume while it restructures segments of its book of business. 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 1997, income from core underwriting and investing operations increased to $9.6 million, or $1.71 per primary share, from $6.4 million, or $1.13 per primary share, in 1996. The increase was due to higher net investment income from the larger investment portfolio and underwriting profits. The Company's effective tax rate for the first quarter of both years was 26% of income before income taxes. First quarter 1997 net income rose 13% to $8.8 million compared to $7.8 million in 1996. The 1997 increase is due to higher net investment income and underwriting profitability offset by lower realized gains. Financial Condition as of March 31, 1997 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. 10 The Company's short-term investments provide liquidity for projected claims, reinsurance costs and operating expenses. For the three month period ended March 31, 1997, the Company reported net cash provided by operating activities of $9.5 million, compared to net cash provided by operating activities of $22.9 million for the same period in 1996. The decrease was due to various large claims payments and slowed growth in gross premium volume in the first quarter of 1997. For the three month period ended March 31, 1997, the Company reported net cash used by investing activities of $153.6 million compared to $22.6 million in 1996. The difference was primarily due to the Company's investment of the $150 million Capital Securities offering proceeds. At March 31, 1997 the Company's fixed maturity and equity investments comprised approximately 74% and 16% of total investments, respectively. The Company expects variability in its realized and unrealized investment gains due to interest rate volatility as well as other economic conditions. In January 1997 the Company arranged the sale of $150 million of 8.71% Capital Securities issued by Markel Capital Trust I, a statutory business trust sponsored by Markel Corporation. Proceeds from the sale of the Capital Securities were used to purchase the Company's 8.71% Junior Subordinated Debentures due January 1, 2046. The Capital Securities and related Debentures are redeemable by the Company on or after January 1, 2007. The Company used $15 million of the proceeds of the offering to reduce indebtedness under its revolving credit facility in the first quarter of 1997. The remainder will be used for general corporate purposes. As of March 31, 1997 the unused balances available under the Company's revolving credit facility totaled $150 million compared to $135 million at December 31, 1996. Shareholders' equity at March 31, 1997 was $271.5 million compared to $268.3 million at December 31, 1996. Book value per share rose to $49.56 at March 31, 1997 from $49.16 at December 31, 1996. 11 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) Reports on Form 8-K: i) The Company filed a Report on Form 8-K dated January 10, 1997 reporting under items 5 with respect to the Company's arrangement for the sale of $150 million of 8.71% Capital Securities to be issued by Markel Capital Trust I, a statutory business trust sponsored by the Company. ii) The Company filed a Report on Form 8-K dated February 6, 1997 reporting under item 5 with respect to the Company's release of annual earnings and other information. 12 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, this 30th day of April, 1997. 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 Exhibit Index Number Description 4 The registrant hereby agrees to furnish to the Securities and Exchange Commission a copy of all instruments defining the rights of holders of long-term debt of the registrant and subsidiaries shown on the Consolidated Balance Sheet of registrant at March 31, 1997 and the respective Notes thereto. 27 Financial Data Schedule * * Filed electronically with the Commission's operational EDGAR system. EX-27 2 EXHIBIT 27 - FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from the financial statements contained in the Form 10-Q for the quarterly period ended March 31, 1997 for Markel Corporation and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1997 MAR-31-1997 948,881 0 0 205,173 0 0 1,273,937 278 10,917 36,768 1,732,567 937,366 190,764 0 0 99,704 0 0 24,478 247,066 1,732,567 81,671 16,706 (578) 674 52,650 19,802 8,512 11,878 3,088 8,790 0 0 0 8,790 1.56 1.56 0 0 0 0 0 0 0
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