-----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, HIfi2ZWcmmOQFCDY/bPVUsWs5svP7AMtSJqYgwQovOZU7galT7l7C/Nd9x5jGsnQ 9JeIE83oB85lg8K9N+3Qiw== 0000916641-98-000300.txt : 19980330 0000916641-98-000300.hdr.sgml : 19980330 ACCESSION NUMBER: 0000916641-98-000300 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NYSE 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-K405 SEC ACT: SEC FILE NUMBER: 001-13051 FILM NUMBER: 98575115 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-K405 1 MARKEL 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1997 Commission File Number 1-13051 MARKEL CORPORATION (Exact name of registrant as specified in its charter) A Virginia Corporation IRS Employer Identification No. 54-0292420 4551 Cox Road, Glen Allen, Virginia 23060-3382 (Address of principal executive offices) (Zip code) Telephone (804) 747-0136 (Registrant's telephone number including area code) Securities Registered Pursuant to Section 12(b) of the Act: Common Stock, no par value New York Stock Exchange (title and class and name of the exchange on which registered) Securities Registered Pursuant to Section 12(g) of the Act: None 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy of information statements incorporated by reference in Part III of this Form 10-K or any any amendment to this Form 10-K. [X] The aggregate market value of the shares of the registrant's Common Stock held by non-affiliates as of January 31, 1998 was approximately $662,686,140. The number of shares of the registrant's Common Stock outstanding at January 31, 1998: 5,497,862. Documents Incorporated By Reference The portions of the registrant's Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 19, 1998, referred to in Part III. Index and Cross References - Form 10-K Annual Report Item No. Page Part I 1. Business 12-23 1a. Executive Officers of the Registrant 63 2. Properties (note 5) 35-36 3. Legal Proceedings (note 14) 43 4. Submission of Matters to a Vote of Security Holders NONE Part II 5. Market for the Registrant's Common Equity and Related Stockholder Matters 62 6. Selected Financial Data 24-25 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 50-61 8. Financial Statements and Supplementary Data The response to this item is submitted in Item 14. 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures NONE Part III 10. Directors and Executive Officers of the Registrant* 11. Executive Compensation* 12. Security Ownership of Certain Beneficial Owners and Management* 13. Certain Relationships and Related Transactions* Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K a. Documents filed as part of this Form 10-K (1) Financial Statements Consolidated Balance Sheets at December 31, 1997 and 1996 26 Consolidated Statements of Income and Comprehensive Income for the Year Ended December 31, 1997, 1996, and 1995 27 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1997, 1996, and 1995 28 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995 29 Notes to Consolidated Financial Statements for the Years Ended December 31, 1997, 1996, and 1995 30-47 (2) Schedules have been omitted since they either are not required or are not applicable,or the information called for is shown in the Consolidated Financial Statements. (3) Index to Exhibits b. Reports on Form 8-K. No reports on Form 8-K were filed during the fourth quarter of 1997. c. See Index to Exhibits and Item 14a(3) d. See Index to Financial Statements and Item 14a(2) *Items Number 10,11,12, and 13 will be incorporated by reference from the Registrant's 1998 Proxy Statement pursuant to instructions G(1) and G(3) of the General Instructions to Form 10-K. THE CORPORATE PROFILE Markel Corporation markets and underwrites specialty insurance products and programs to a variety of niche markets. In each of these markets, we seek to provide quality products and excellent customer service so that we can be a market leader. Our financial goals are to earn consistent underwriting profits and superior investment returns to build shareholder value. THE MARKEL STYLE Markel has a Commitment to Success. We believe in hard work and a zealous pursuit of excellence while keeping a sense of humor. Our creed is honesty and fairness in all of our dealings. The Markel way is to seek to be a market leader in each of our pursuits. We seek to know our customers' needs and to provide our customers with quality products and service. Our pledge to our shareholders is that we will build the financial value of our Company. We respect our relationship with our suppliers and have a commitment to our communities. We are encouraged to look for a better way to do things...to challenge management. We have the ability to make decisions or alter a course quickly. The Markel approach is one of spontaneity and flexibility. This requires a respect for authority but a disdain of bureaucracy. At Markel, we hold the individual's right to self-determination in the highest light, providing an atmosphere in which people can reach their personal potential. Being results oriented, we are willing to put aside individual concerns in the spirit of teamwork to achieve success. Above all, we enjoy what we are doing. There is excitement at Markel, one that comes from innovating, creating, striving for a better way, sharing success with others...winning. Highlights FINANCIAL HIGHLIGHTS (in millions, except per share data) 1997 1996 1995 - -------------------------------------------------------------------- Gross premium volume $ 423 $ 414 $ 402 Net written premiums 330 313 298 Earned premiums 333 307 285 Net income 50 47 34 Comprehensive income 92 56 75 GAAP combined ratio 99% 100% 99% - --------------------------------------------------------------------- Total investments $1,408 $1,131 $ 909 Total assets 1,870 1,605 1,315 Long-term debt 93 115 107 8.71% Capital Securities 150 -- -- Shareholders' equity 357 268 213 Debt to total capital 28% 30% 33% - --------------------------------------------------------------------- PER SHARE DATA Common shares outstanding (in thousands) 5,474 5,458 5,422 Net income $ 8.92 $ 8.30 $ 6.15 Total investments $257.27 $207.18 $167.57 Book value $ 65.18 $ 49.16 $ 39.37 Growth in book value 33% 25% 53% - --------------------------------------------------------------------- OPERATING HIGHLIGHTS o Underwriting profits for the sixth consecutive year and the eleventh year out of the past twelve o Investment portfolio increases 25% to $1.4 billion, or $257 per share o Book value per share increases to $65.18, a 33% increase for the year and a five year compound annual growth rate of 26% o Markel Corporation begins trading on the New York Stock Exchange under the symbol MKL o Over 250 Markel associates and two outside directors participate in a Company-sponsored stock loan program, purchasing approximately $6.3 million of Markel stock Net Income Total Investments Book Value Per Share ($ in millions) ($ in millions) ($ per share) [GRAPH] [GRAPH] [GRAPH] 1987 1992 1997 1987 1992 1997 1987 1992 1997 7 26 50 43 434 1,408 4.66 20.24 65.18 To Our Business Partners: Virtually every measurement system involves the element of time. In this year's letter, we will discuss the relevance of time in measuring results and how we focus on the value of long-term thinking. In December new business was disappointing, but investment returns were excellent. Financial results in the fourth quarter set company records, and 1997 was an excellent year. This past summer our camp insurance business suffered more large losses than usual; however, we enjoyed good results among most of our other lines of business. Since the Northridge earthquake in January 1994, the earthquake business has been great, yet current prices have declined to levels which suggest many have forgotten what can happen. The insurance industry has experienced a cyclical softening of prices since 1987 much longer than any previous cyclical downturn. Maybe it's not a coincidence that the investment cycle has enjoyed an equally impressive run in the opposite direction. Monthly, quarterly and even annual results do not necessarily mean much if your goal is to build shareholder value over a long period of time. Yes, 1997 was a good year, but we are especially proud to report that in the past five years, we have compounded book value per share at a 26% rate, and since our initial public offering in 1986, we have compounded book value per share at a 31% rate. 1997 Results In spite of a very difficult property and casualty insurance market, our results in 1997 set records in just about every measure. For the sixth consecutive year and eleven of the last twelve, we reported underwriting profits with a combined ratio of 99%. Earned premiums grew only 8% to $332.9 million; however, investment income increased 34% to $68.7 million. The strong investment environment also allowed us to realize $15.8 million in investment gains. Total revenues increased 14% to $419.0 million. Net income was $50.4 million, or $8.92 per diluted share. In addition, the net unrealized appreciation of our investment portfolio increased $41.5 million, resulting in comprehensive income of $91.9 million. Also during 1997 we further strengthened an already strong balance sheet: total investments increased to $1.4 billion; provisions for loss reserves continued to be, in our opinion, very strong; we raised $150 million in 49 year trust preferred securities and increased shareholders' equity by 33% to $356.8 million, or $65.18 per share. For many years we have spoken of the importance of measuring growth in book value. This year the accounting profession recognized the same thing by adopting the concept of comprehensive income. This is a measure of total performance because it includes both net income and changes in unrealized gains or losses. Over the past five years, our net income amounted to $173.8 million; cumulative unrealized gains were $73.1 million; and comprehensive income was $246.9 million. The variations year to year are shown below: Comprehensive Income (dollars in millions)
Years Ended December 31, ---------------------------------------------------- 1993 1994 1995 1996 1997 Total - ------------------------------------------------------------------------------------------ Net income $23.6 $18.6 $34.5 $46.7 $50.4 $173.8 Changes in unrealized gains (losses) 10.3 (28.7) 40.3 9.7 41.5 73.1 - ------------------------------------------------------------------------------------------ Comprehensive income (loss) $33.9 $(10.1) $74.8 $56.4 $91.9 $246.9 - ------------------------------------------------------------------------------------------
3 These results point out two significant facts. First, unrealized gains represent an important part of the value created for shareholders. In the past five years, almost 30% of our comprehensive income came from this source. Secondly, and certainly not to be forgotten, changes in unrealized gains from year to year can be quite unpredictable. Having a long-term view is especially important when looking at investment results. New York Stock Exchange In June 1997 we were listed on the New York Stock Exchange. While we were generally pleased with NASDAQ and certainly enjoyed a great deal of support from NASDAQ market making firms, it was our desire to try to reduce the spread between the bid and asked prices of our stock. We believe this has occurred and we are pleased to be a NYSE listed firm. We continue to see no valid reason to split our shares. (In fact, NYSE fees are based on number of outstanding shares, so we save money by not splitting.) However we would caution our fellow shareholders and 4 potential new shareholders to be thoughtful when buying or selling our stock. If you see a $2 spread between the bid and asked prices, remember that it represents only a 1.3% spread on a $160 stock price. Most transactions in other securities are likely to be more expensive. Additionally, we enjoy a very loyal base of shareholders and have low share turnover. As a result, the stock price can move on very little volume so it is wise to be patient when buying or selling. Intrinsic Value During 1997 our share price increased from $90 to $156, a 73% increase. As previously mentioned, our business results were the best ever, and book value grew by 33% per share. Ideally, the growth in share prices and the growth in intrinsic value should be identical. This rarely happens in the short term but should occur over long periods of time. We are hopeful that the increase in our share price in 1997 represents an alignment of our share price with the long-term growth in our intrinsic value. We want to share with you important information about your company so you can estimate its intrinsic value. We have no desire for our stock to trade at levels either significantly higher or lower than its intrinsic value. Unfortunately there is no exact science in determining that number. Today the stock is priced higher in relationship to many determinants of value than in previous years; however, we remain committed to building book value at a 20% annual rate, and we think the Company will continue to be an excellent investment for those with a long-term view. Accounting Cycle Due to the number of estimates required in the insurance accounting cycle and management's great leeway in setting those estimates, quarterly and annual accounting periods do not reflect the complete picture of an insurance business. Only when viewed over a much longer time period can you begin to determine accurate results. Insurance for property along coastal areas subject to hurricanes is more at risk during hurricane season, which runs from June to November. Likewise, hurricane activity varies greatly from year to year. While 1997 was a very mild season for hurricanes, that certainly doesn't have much meaning when trying to estimate the risk for the 1998 season. The same applies to insurance for earth- 5 quakes. The ground has been relatively still since 1994 when Northridge shook violently; yet surely another earthquake will occur. Based on the declining prices for this coverage, you would think the property and casualty insurance industry has no memory. Other insurance products like professional liability coverages require a long period of time for claims to be reported and paid. Long-tail insurance represents yet another problem for the annual accounting cycle. While premiums are collected today, claims are not paid for many years. At the end of each accounting cycle, estimates are made with regard to outstanding losses. These estimates are just that, estimates. They may be too high or too low but never exact. Unfortunately, many companies report lower losses than are actually occurring in order to inflate current income. This cannot go on forever; companies can underestimate reserves, but claims are settled in cash. Loss Reserving We have often described our philosophy in setting conservative loss reserves. Our standard has consistently been to set reserves at a level which we believe are more likely redundant than deficient. The very nature of the insurance business is that surprises in loss occurrences will happen from time to time. Usually surprises represent bad news. Unfortunately, we are not immune 6 to surprises. But we have been successful in avoiding a negative impact on our loss reserves from these surprises because we establish reserves to cover that unpredictable but inevitable event. We seek to allow for that by establishing a margin of safety in our reserves. This policy again proved sound in 1997 when we determined that it would be prudent to add an additional $28 million to our reserves for environmental and toxic tort claims. While our existing reserves were more than adequate to cover this development, we certainly thought our previous estimates had been sufficient, and we can say the same today. We think the specific reserves for environmental and toxic losses are adequate but if they are not, we have made provisions which give us a margin of safety. Investments Our investment activities continue to be very important to our success in building shareholder value. In 1997 the stock market was unusually strong and interest rates trended down which helped us achieve exceptional investment results. The total returns from equities were 31.4% and from fixed maturity securities were 9.2%. As a result our portfolio produced a total return of 12.8%. Over the past ten years our total weighted average annual return was 10.3%. With the stock market trading at all time highs, we are cautious and concerned about where the market might be headed; however, we have never tried to time the market. We focus on individual securities of companies which we believe will generate good returns, and we invest in these companies at what we believe to be fair values. Fortunately, we own many good companies which are building value and we continue to invest in more which we believe will add value in the future. The general decline in interest rates has added to the total return in our fixed maturity securities. This is certainly a double edged sword as lower interest rates will make it more difficult to earn high rates of return on this portfolio in the future. With our fixed income portfolio, we will continue to invest in very high quality securities with fairly short durations. We will continue to take advantage of our tax position to invest in tax-exempt securities where they will add value. Acquisitions Over the past several years, we have developed our business through the growth of existing businesses as well as through acquisitions. In January 1997 we raised $150 million to help fund future acquisitions, so it seems appropriate to look back at our acquisition history and evaluate our performance. (Also, an interested investor asked us to do so.) Our most important acquisition was the purchase of Shand Morahan and Evanston Insurance Company. We initially invested in 1987 and acquired the remaining interest in 1990. Our total investment was less than $85 million. 7 When we acquired the company, it was suffering from several major problems as a result of the very competitive professional liability insurance market of the early 1980s but was well on the way to solving them. Since we purchased the company, we have received more than $83 million in dividends. In 1997 the business generated over $100 million in earned premiums at a small underwriting profit and investment income on a portfolio of almost $650 million. The current equity in this business is approximately $210 million. We wish we could do many more transactions just like this. In 1989 we acquired a book of business from the Rhulen Agency which placed program business in an unrelated insurance company. In the years following this transaction, we transformed the agency business into a full service insurance company which now trades as Markel Insurance Company. In addition to the original acquisition, we have contributed an insurance company to this business for a total investment of approximately $57 million. No dividends have been received from this investment, although we expect to see them in the future. In 1997 the business reported earned premiums of $68 million and an improving, but still unacceptable, underwriting loss. At this point in time, we believe the difference between our reported underwriting loss and an underwriting profit is equal to the difference between the actuarial point estimates and our more conservative margin of safety. The investment portfolio generated by this business amounts to approximately $178 million. We have not yet achieved our return on investment objectives with 8 this business; however, our total return in 1997 was approximately 15%. In spite of the less than desired return, we believe this business will be a significant contributor in the future. The Lincoln Insurance Company was acquired for $24 million in 1995. Our purchase anticipated merging selected business into our excess and surplus lines unit and liquidating the balance of the business. In the short time we owned the company, we received a total of $35 million in dividends and proceeds from the sale of the licenses. We continue to manage the runoff of $22 million in claims liabilities with a like amount of invested assets. In 1997 we enjoyed almost $6 million in premium volume from this acquisition. Our return on this investment was good, but unfortunately it is nonrecurring. Our most recent transaction was the purchase of Investors Insurance Group in late 1996. This company also had a difficult history and found itself with several problems. About a year before we acquired the company, they began their third reorganization in five years. We knew and respected the new management team and believed it could become an important part of our organization. The purchase price was $38 million. In 1997 this business generated approximately $30 million in earned premiums with a combined ratio of slightly over 100%. Invested assets are approximately $160 million. Total return on our investment in 1997 was about 18%. At year end 1997 the equity in this business amounts to $46 million. While it is probably too early to make a meaningful evaluation of this transaction, we are clearly pleased and excited about the opportunity that Investors brings to us. We continue to believe that future acquisitions will be an important part of our growth and development. We look at many opportunities but find few that meet our requirements. We expect an acquisition to have the ability to earn underwriting profits and contribute to our goal of building book value at a 20% annual rate. In addition over the years we have developed a strong corporate culture; one we call The Markel Style. In any acquisition, we expect the people involved to embrace and be comfortable with our corporate values. Markel Associates The Markel Style is our value system. It describes how we conduct our business. Among the values we believe in are "a pursuit of excellence, honesty and fairness in all of our dealings...a respect for authority but a disdain of bureaucracy." Our organization today includes 830 associates. With such a large group, it is not easy to build a strong corporate culture; however, it has been and will con- 9 tinue to be an important part of our success. One of the primary reasons for this success is that we have a large group with long tenure. Over 25% (227) of our associates have been with the company for ten years or more. Over forty associates have been with the company for twenty years or more. Another important fact is that all Markel associates own stock in the Company, and many have very significant investments. Several years ago we essentially eliminated the use of our stock option plans and instead have offered our associates stock purchase plans with subsidized interest on loans used for the purpose of purchasing Company stock. This past year over 250 associates participated in the plan and purchased over $6.3 million in stock. Our goal, of course, is for our associates to be and feel like owners of the Company. We believe this will promote The Markel Style, encourage everyone to work hard and enjoy what they are doing and focus on building long-term value. We recently lost a much loved associate, Jim Brinson. Affectionately called "the Governor," Jim began his career at Markel in 1948. Jim was always a big producer, no matter what we asked him to sell. At age 75 he asked if he could cut back his work schedule to 30 hours a week. He continued this schedule until his death at age 82. Jim exemplified The Markel Style. Associates like Jim who embrace our core values are the reason that we are successful. 10 Profitable Growth In managing our company we have consistently tried to focus on generating long-term results. We have sought to build shareholder value not just for the next quarter or year but with a view to the next ten or even twenty years. In contrast, today's fast paced world is one where almost everyone is focused on today's activities and results. Typical measures of success are often oriented to short-term results. The line from a Broadway play, "Instant gratification just isn't quick enough" typifies this short-term focus. But today's instant gratification will be long forgotten five years down the road. The insurance business continues to be competitive, and profitable growth is extremely difficult to achieve. Anyone can write more business if they are willing to meet unrealistic pricing demands and operate at inadequate returns, or even a loss. Those willing to optimistically estimate loss experience can even fool themselves for a short while. But in the end, these strategies do not work. Losses must be both accounted for and ultimately paid. While we would prefer to grow quickly, the current environment demands patience. Those who resist the temptation to write business recklessly will be rewarded. Ten years from now, we want to be able to tell you, our shareholders, of additional years of record earnings and exceptional growth in shareholder value. Underwriting profit, not growth, will continue to be our standard. We thank our Markel associates for their hard work, dedication and commitment to success, and we thank you for your loyal support, encouragement and confidence in our future. Alan I. Kirshner Chairman of the Board and Chief Executive Officer Anthony F. Markel President and Chief Operating Officer Steven A. Markel Vice Chairman Darrell D. Martin Executive Vice President and Chief Financial Officer Markel Corporation & Subsidiaries BUSINESS OVERVIEW Markel Corporation (the Company), an insurance holding company, writes specialty insurance products and programs for a variety of niche markets through its insurance subsidiaries. The Company believes that its specialty product focus and niche market strategy enable it to develop expertise and specialized market knowledge. SPECIALTY INSURANCE - ------------------------------------------------------------------------------- The specialty insurance market differs from the standard market where insurance rates and forms are highly regulated by state insurance departments, products and coverages are largely uniform with relatively predictable exposures and companies tend to compete for customers primarily on the basis of price. In contrast, the specialty market provides coverage for risks that do not fit the underwriting criteria of the standard carriers. Competition tends to focus less on price and more on availability, service and other value-based considerations. While specialty market exposures may have higher insurance risks than their standard market counterparts, Markel manages these risks to achieve higher financial returns. To reach its financial and operational goals, the Company must have extensive knowledge and expertise in the specialty areas being marketed and underwritten. Most of the Company's risks are considered on an individual basis, and restricted limits, deductibles, exclusions and surcharges are employed in order to respond to distinctive risk characteristics. MARKETS - ------------------------------------------------------------------------------- The Company competes in two distinct areas of the specialty insurance market; the excess and surplus lines segment (E&S) and the specialty admitted segment. The E&S market focuses on hard to place risks and risks that admitted insurers specifically refuse to write. E&S eligibility allows the Company's insurance subsidiaries to underwrite nonstandard market risks with more flexible policy forms and unregulated premium rates. This typically results in coverages that are more restrictive and more expensive than the standard admitted market. In 1996 the E&S market represented approximately $9.2 billion, or 3.3%, of the entire $280.0 billion property and casualty (P&C) industry.* The Company is the fifth largest domestic E&S writer in the United States as measured by direct premium writings.* Three of the Company's underwriting units, Excess and Surplus Lines, Professional/Products Liability and Brokered Excess and Surplus Lines, write in the E&S market. In 1997, on a consolidated basis, the Company controlled $292.8 million of E&S business. The Company also writes business in the specialty admitted market. Most of these risks are unique and hard to place in the standard market, but for marketing and regulatory reasons, must remain with an admitted insurance company. In 1996 the specialty admitted market represented $5.4 billion, or 1.9%, of the entire P&C industry as measured by direct premium writings.* The specialty admitted market is subject to more state regulation than the E&S market, particularly with regard to rate and form filing requirements, restrictions on the ability to exit lines of business, premium tax payments and membership in various state associations, such as state guaranty funds and assigned risk plans. * According to the 1997 A.M. Best Company Special Report, Solvency Study of the Excess and Surplus Lines Industry. 12 Two of the Company's underwriting units, Specialty Program Insurance and Specialty Personal and Commercial Lines, write in the specialty admitted market. In 1997, on a consolidated basis, the Company controlled $130.5 million of specialty admitted business. COMPETITION - ------------------------------------------------------------------------------- The Company's underwriting operations compete with numerous insurance companies, risk retention groups, insurance buying groups and alternative self-insurance mechanisms. Competition may take the form of lower prices, broader coverages, greater product flexibility, higher quality services or higher ratings by independent rating agencies. In all of its markets, the Company competes by developing specialty products to satisfy well-defined market needs and by maintaining relationships with brokers and insureds who rely on the Company's expertise. This expertise in offering and underwriting products that are not readily available is the Company's principal means of competition. The Company offers over forty major product lines, each with its own distinct competitive environment. In all of its products, the Company competes with innovative ideas, appropriate pricing, expense control and quality service to policyholders, agents and brokers. Few barriers exist to prevent insurers from entering into the Company's segments of the P&C industry, but many of the larger P&C insurance companies have historically been unwilling to write specialty coverages. The P&C industry is currently experiencing a soft market due to what is perceived by many as excessive amounts of capital in the industry. In an attempt to utilize their capital, many insurance companies often seek to write additional premium without regard for its ultimate profitability. Admitted standard companies are now writing programs that previously were written almost exclusively in the specialty admitted or E&S markets. This additional competition from the standard market has reduced rates and led to broader coverage being offered to many of the Company's customers. In response to this additional competition, the Company has maintained its underwriting standards at the expense of growth in premium volume. The Company does not expect the current soft market conditions to abate until more rational pricing and capital allocation takes place in the P&C industry. 13 Markel Corporation & Subsidiaries BUSINESS OVERVIEW (continued) UNDERWRITING PHILOSOPHY - ------------------------------------------------------------------------------- By focusing on market niches where it has underwriting expertise, the Company seeks to earn consistent underwriting profits. Underwriting profits are a key component of the Company's strategy. The ability to achieve consistent underwriting profits demonstrates knowledge and expertise, commitment to superior customer service and the ability to manage insurance risk. The Company has earned an underwriting profit in each of the past six years and in eleven of the past twelve years. The following graph shows Markel's GAAP combined ratio as compared to the P&C industry for the past five years: Combined Ratios (Combined ratios chart appears here. Plot points are below) Combined Ratios 1993 1994 1995 1996 1997 ---- ---- ----- ---- ---- Markel Corporation 97% 97% 99% 100% 99% Industry Average* 116% 107% 109% 106% 102% * Source A.M. Best Co., Inc. Industry Average is estimated for 1997. THE UNDERWRITING UNITS - ------------------------------------------------------------------------------ The Company has five underwriting units focused on specific niches within the E&S and specialty admitted markets. Excess and Surplus Lines, Professional/Products Liability and Brokered Excess and Surplus Lines write business in the E&S market. The Brokered Excess and Surplus Lines unit was formed with the purchase of Investors Insurance Holding Corp. (Investors) in 1996. Specialty Program Insurance and Specialty Personal and Commercial Lines write business in the specialty admitted market. TOTAL GROSS PREMIUM VOLUME ($423 million) [GRAPH] Excess and Surplus Lines 31% Professional/Products Liability 27% Specialty Program Insurance 20% Specialty Personal and Commercial Lines 11% Brokered Excess and Surplus Lines 11% -------- 100% 14 EXCESS AND SURPLUS LINES The Excess and Surplus Lines unit (E&S unit) writes a variety of coverages, focusing on light-to-medium casualty exposures for businesses such as artisan contractors, habitational risks, restaurants and bars, child and adult care facilities, vacant properties, office buildings and light manufacturing operations. The E&S unit also writes property insurance on classes of business ranging from small, single location risks to large, multi-state, multi-location risks. Property coverages consist principally of fire and allied lines, such as windstorm, hail and water damage and more specialized property coverages. The E&S unit also offers coverages for heavier property risks, including earthquake, through its Markel special property division (MSP). These risks are typically larger and are of a low frequency/high severity nature. During 1997 the E&S unit expanded its inland marine facility with the addition of a book of business previously underwritten by another carrier. The E&S unit also established an ocean marine (OM) facility in 1997. Examples of risks that OM writes are marinas, hull coverage, cargo and builders risk for yacht manufacturers. Most of the E&S unit's business is generated by approximately 142 professional surplus lines general agents who have limited quoting and binding authority. MSP produces business on a brokerage basis through approximately 40 wholesale brokers who specialize in heavy property risks. The E&S unit seeks to be a substantial underwriter for its producers in order to enhance the likelihood of receiving the most desirable underwriting opportunities. The E&S unit writes the majority of its business in Essex Insurance Company (Essex). Essex is admitted in Delaware and is eligible to write E&S insurance in 49 states and the District of Columbia. EXCESS AND SURPLUS LINES GROSS PREMIUM VOLUME ($130 million) [graph] Casualty 40% Markel Special Property 32% Property 14% Inland Marine 4% Other 10% ---- 100% Markel Corporation & Subsidiaries BUSINESS OVERVIEW (continued) PROFESSIONAL/PRODUCTS LIABILITY The Professional/Products Liability unit markets specialty professional liability coverages, including medical malpractice and specialized medical coverages, professional liability for lawyers, architects and engineers, agents and brokers and management consultants. Errors and omissions coverage is targeted to mutual fund advisors, investment advisors and insurance companies. Products liability insurance for manufacturers and distributors is provided through the special risks program. In addition, directors' and officers' liability coverage and employment practices liability coverages are offered. Over the past five years, the Professional/Products Liability unit successfully entered the emerging employment practices liability insurance (EPLI) market. EPLI provides coverage for the defense of alleged inappropriate employment practices not typically covered under traditional business coverages. While virtually all businesses have a need for this coverage, the unit designed its EPLI program for middle market firms with 25 to 250 employees, as this niche appears to be the most underserved by other insurers. Business is written nationwide and is developed through approximately 300 wholesale brokers. The Professional/Products Liability unit writes the majority of its business in Evanston Insurance Company (EIC). EIC is admitted in Illinois and is eligible to write E&S insurance in 48 states and the District of Columbia. PROFESSIONAL/PRODUCTS LIABILITY GROSS PREMIUM VOLUME ($116 million) [graph] Medical Malpractice and Specified Medical 29% Special Risks 20% Specified Professions 12% Financial Institutions E&O 10% Employment Practices Liability 10% Other 19% ---- 100% BROKERED EXCESS AND SURPLUS LINES Brokered Excess and Surplus Lines (Brokered E&S) is the most recent addition to Markel. This unit was created with the purchase of Investors in the Fall of 1996. The Brokered E&S unit's area of expertise is hard to place, large general liability and products liability accounts. Products liability risks include sporting goods manufacturers, bicycle manufacturers, discontinued products, toy manufacturers and importers and automobile parts manufacturers. The unit also offers special event and other unique coverages and writes property coverages on mercantile and industrial sites. In 1997 the unit wrote approximately $46 million of gross written premium with 73% produced in its casualty programs and the remainder generated by the unit's property programs. The unit operates through approximately 95 wholesale brokers and writes the majority of its business in Investors Insurance Company of America (IICA). IICA is eligible to write E&S insurance in 48 states and the District of Columbia and is admitted in New York and New Jersey. 16 SPECIALTY PROGRAM INSURANCE Specialty Program Insurance focuses on providing total insurance programs for businesses engaged in similar, but highly specialized, activities. These activities typically do not fit the risk profiles of standard insurers which makes complete coverage difficult to obtain from a single insurer. The Specialty Program Insurance operation is organized into six business units, which concentrate on particular markets and customer groups. The camp and youth recreation division serves children's summer camps, conference centers and youth organizations such as YM/YWCA's and Boys' and Girls' Clubs. The agriculture division specializes in insurance coverages for horse-related risks, such as horse mortality coverage, and property and liability coverages for horse farms and boarding, breeding and training facilities. Liability insurance for sports organizations, and accident and medical insurance for colleges, universities and private schools are sold through the sports liability, accident and medical division. The child care division develops and markets insurance programs for child care centers, nursery schools, Head Start programs, Montessori schools and private schools. Gymnastic schools, health clubs, and martial arts and dance schools are serviced by the health and fitness division. The contract surety bond division provides surety bonds for small and transitional contractors. The majority of Specialty Program Insurance business is produced by approximately 4,000 retail insurance agents. Management grants very limited underwriting authority to carefully selected agents and controls agency business through regular audits and pre-approvals. Certain products and programs are also marketed directly to consumers or through wholesale producers. Specialty Program Insurance is underwritten by Markel Insurance Company (MIC). MIC is licensed to write P&C insurance in all 50 states, including the domicile state of Illinois, and the District of Columbia. SPECIALTY PROGRAM INSURANCE GROSS PREMIUM VOLUME ($86 million) [graph] Camp and Youth Recreation 31% Agriculture 25% Accident and Medical 15% Health and Fitness 14% Child Care 8% Other 7% ---- 100% 17 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- BUSINESS OVERVIEW (continued) SPECIALTY PERSONAL AND COMMERCIAL LINES Specialty Personal and Commercial Lines markets and underwrites its insurance products in niche markets that are overlooked by large admitted carriers. The recreational products division concentrates on watercraft and motorcycle coverages. The watercraft program markets personal insurance coverage for yachts and high performance boats; while small fishing ventures and rentals, such as jet skis, are the focus of the commercial marine department. The motorcycle program's target market is mature riders of high value bikes. The property division provides coverage for mobile homes and dwellings which do not qualify for standard homeowner's coverage. In addition, the Specialty Personal and Commercial Lines unit markets a series of insurance products designed to meet the collateral protection needs of automobile lenders. The special transportation division insures commercial vehicles including taxi cab fleets and difficult to place physical damage coverages. Specialty Personal and Commercial Lines products are characterized by high numbers of transactions, low average premiums and creative solutions for underserved and emerging markets. The unit distributes most of its products through wholesale brokers, retail agents and affinity groups. The motorcycle program is marketed directly to the consumer, using direct mail and telephone promotion as well as relationships with various motorcycle manufacturers, dealers and associations. The Specialty Personal and Commercial Lines unit writes the majority of its business in Markel American Insurance Company (MAIC). MAIC is licensed to write P&C business in 47 states, including its state of domicile, Virginia, and the District of Columbia and is in the process of applying for licenses in other states. SPECIALTY PERSONAL AND COMMERCIAL LINES GROSS PREMIUM VOLUME ($45 million) [graph] Watercraft 41% Property 35% Motorcycle 15% Special Transportation 7% Other 2% ---- 100% 18 REINSURANCE - ----------------------------------------------------------------------------- The Company enters into reinsurance agreements in order to reduce its liability on individual risks and to enable it to underwrite policies with higher limits. During the past several years, Markel has reduced its reliance on reinsurance by steadily increasing retentions on its profitable current book of business and through commutations with pre-1987 reinsurers of Shand/Evanston. Markel strives to minimize credit exposure to reinsurers and maintains a margin of safety through adherence to its internal reinsurance guidelines. To become a reinsurance partner of Markel, prospective companies generally must: (i) maintain an A.M. Best rating of "A" (Excellent), (ii) maintain capital and surplus of $100 million and (iii) provide collateral for recoverables in excess of an individually established amount (usually $10 million). In addition, foreign reinsurers must provide collateral equal to 100% of recoverables (with the exception of Lloyd's syndicates). The following table shows Markel's top ten active reinsurers at December 31, 1997. These ten reinsurers represent 73% of Markel's $240.9 million reinsurance recoverable. Reinsurers A.M. Best Rating Reinsurance Recoverable - ------------------------------------------------------------------------------- American Reinsurance A++ $ 38,711 TIG Reinsurance A 34,301 Trenwick America Reinsurance A+ 21,619 Underwriters Reinsurance A+ 17,154 Zurich Reinsurance A 16,929 St. Paul Fire and Marine A+ 12,106 Chartwell Reinsurance A 11,384 USF&G A 8,413 Folksamerica Reinsurance A 7,282 Signet Star Reinsurance A 7,038 Other reinsurers -- 65,998 - ------------------------------------------------------------------------------- Total reinsurance recoverable on paid and unpaid losses $ 240,935 - ------------------------------------------------------------------------------- Reinsurance treaties are generally subject to cancellation by the Company or the reinsurers on the anniversary date and are subject to renegotiation annually. The reinsurer remains responsible for all business produced prior to termination. Treaties also typically contain provisions concerning ceding commissions, required reports to the reinsurers, responsibility for taxes, arbitration in the event of a dispute and provisions allowing the Company to demand that a reinsurer post letters of credit or assets as security if a reinsurer becomes an "unapproved" reinsurer under applicable state laws and regulations. 19 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- BUSINESS OVERVIEW (continued) INVESTMENTS - -------------------------------------------------------------------------------- The Company's business philosophy clearly recognizes the importance of both underwriting profits and superior investment returns to build shareholder value. The Company relies on sound underwriting practices to produce investable funds with minimum underwriting risk. Approximately three quarters of the Company's investable assets come from premiums paid by policyholders. Policyholder funds are invested predominately in high quality corporate, government and municipal bonds with relatively short durations. The balance, comprised of shareholder funds, is available to be invested in equity securities, which over the long run, have produced higher returns relative to fixed income investments. The Company seeks to invest in companies with the potential for appreciation and hold these investments over the long term. Total investment returns include items which impact net income, such as net investment income and realized gains and losses from the sales of investments, as well as items which do not impact net income, such as changes in unrealized gains and losses. The Company does not intend to lower the quality of its investment portfolio in order to enhance or maintain yields. Further, the Company's focus on long-term total investment returns may result in variability in the level of realized and unrealized investment gains and losses from one period to the next. The ultimate success of the Company's investment strategy is evident from the review of total investment returns over several years. The following table presents taxable equivalent total returns for Markel's investment portfolio for the past five years: ANNUAL TAXABLE EQUIVALENT TOTAL RETURNS - ---------------------------------------
5 Year 10 Year Weighted Weighted Average Average Years Ended December 31, Annual Annual 1993 1994 1995 1996 1997 Return Return - ------------------------------------------------------------------------------------------- Equities 28.7% (3.3)% 29.7% 26.9% 31.4% 24.7% 21.1% Fixed maturities 9.1% (0.2)% 13.9% 4.8% 9.2% 7.9% 8.6% Total portfolio 11.8% (1.1)% 15.7% 7.5% 12.8% 10.3% 10.3% - ------------------------------------------------------------------------------------------- Ending portfolio balance (in millions) $ 597 $ 612 $ 909 $ 1,131 $ 1,408 - -------------------------------------------------------------------------------------------
The Company's investment performance also benefited from continued growth in the investment portfolio over the past ten years. The portfolio increased to $1.4 billion at December 31, 1997 from $43.1 million at December 31, 1987. The Company monitors its portfolio to ensure that credit risk does not exceed prudent levels. Standard and Poor's Corp. (S&P) and Moody's Investors Service (Moody's) provide corporate and municipal debt ratings based on their assessment of the credit quality of an obligor with respect to a specific obligation. S&P's ratings range from "AAA" (capacity to pay interest and repay principal is extremely strong) to "D" (debt is in payment default). Securities with ratings of "BBB" or higher are referred to as "investment grade" securities. Debt rated "BB" and below is regarded by S&P as having predominately speculative characteristics with respect to capacity to pay interest and repay principal. Moody's ratings range from "Aaa" to "C" with ratings of "Baa" or higher considered "investment grade." The Company's fixed maturity portfolio has an average rating of "AA", with 88% rated "A" or better by at least one nationally recognized rating organization. The Company's policy is to minimize its investments in fixed maturity securities that are unrated or rated below 20 investment grade. The following chart shows the Company's fixed maturity portfolio, at estimated fair value, by rating category at December 31, 1997: CREDIT QUALITY OF FIXED MATURITY PORTFOLIO ($1,063 million) [graph] AAA/AA 69% A 19% BBB 9% Other 3% ---- 100% Approximately 73% of the investment portfolio is managed directly by officers of the Company, with the approval of the Boards of Directors of the insurance companies. Approximately 24% of the Company's cash and investments is managed by Hamblin Watsa Investment Counsel Ltd., a Canadian investment management firm which is controlled by V. Prem Watsa, a Director of the Company. The remainder of the portfolio is managed by other independent portfolio managers. SHAREHOLDER VALUE - -------------------------------------------------------------------------------- The Company's financial goals are to earn consistent underwriting profits and superior investment returns to build shareholder value. More specifically, the Company assesses its effectiveness in building shareholder value through the measurement of growth in book value per share. The Company believes that growth in book value per share is the most comprehensive measure of its success due to the fact that it includes all underwriting and investing results. The Company has a stated objective to grow book value per share by 20% annually. Over the past five years, the Company has grown book value per share at a compound annual rate of 26%. The following graph presents Markel's book value per share for the past five years: BOOK VALUE PER SHARE ($ per share) [GRAPH] 1993 1994 1995 1996 1997 27.83 25.71 39.37 49.16 65.18 21 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- BUSINESS OVERVIEW (continued) REGULATORY ENVIRONMENT - -------------------------------------------------------------------------------- The Company's insurance subsidiaries are subject to regulation and supervision by the insurance regulatory authorities of the various jurisdictions in which they conduct business. Regulation is intended for the benefit of policyholders rather than shareholders. Insurance regulatory authorities have broad regulatory, supervisory and administrative powers relating to solvency standards, the licensing of insurers and their agents, the approval of forms and policies used, the nature of, and limitations on, insurers' investments, the form and content of annual statements and other reports on the financial condition of such insurers and the establishment of reserves. The Company is also subject to state laws regulating insurance holding companies. Under these laws, insurance departments may, at any time, examine the Company, require disclosure of material transactions by the holding company, require approval of certain extraordinary transactions, such as extraordinary dividends from an insurance subsidiary to the holding company, or require approval of changes in control of an insurer or an insurance holding company. The laws of the domicile states of the Company's insurance subsidiaries govern the amount of dividends which may be paid to the Company. Generally, statutes in the domicile states of the Company's insurance subsidiaries require prior approval for payment of "extraordinary" as opposed to "ordinary" dividends. At December 31, 1997, the Company's insurance subsidiaries may pay up to $45.6 million during the following twelve months under the ordinary dividend regulations without prior regulatory approval. RATINGS - -------------------------------------------------------------------------------- Financial stability and strength are important purchase considerations of policyholders and insurance agents and brokers. Because an insurance premium paid today purchases coverage for losses that might not be paid for many years, the financial viability of the insurer is of critical concern. Various rating agencies provide information to assist buyers in their search for financially sound insurers. A.M. Best Co., Inc. (Best) publishes Best's Insurance Reports, Property-Casualty and assigns ratings to P&C insurance companies based on quantitative criteria, such as profitability, leverage and liquidity as well as qualitative assessments, such as the spread of risk, the adequacy and soundness of reinsurance, the quality and estimated market value of assets, the adequacy of loss reserves and surplus and the competence, experience and integrity of management. Best's letter ratings range from "A++" (superior) to "F" (in liquidation). S&P and Duff & Phelps' Credit Rating Co. (Duff & Phelps) provide analytical and statistical information on the solvency and liquidity of major U.S. licensed insurance companies. These claims paying ability (CPA) ratings concern only the likelihood of timely payment of policyholder obligations and are not intended to refer to the ability of either the rated company or its parent or subsidiary to pay non-policy obligations such as debt or commercial paper. The S&P CPA ratings range from "AAA" (superior financial security) to "R" (regulatory action). The Duff & Phelps CPA rating categories range from "AAA" (risk factors are negligible) to "DD" (under order of liquidation). 22 The following table sets forth the various ratings currently assigned to the Company's insurance subsidiaries:
Company A.M. Best S&P Duff & Phelps - -------------------------------------------------------------------------------------------------- Essex Insurance Company A (excellent) A (good financial security) A+ (high claims paying ability) Evanston Insurance Company A (excellent) A (good financial security) A+ (high claims paying ability) Investors Insurance Company of America A-(excellent) A (good financial security) A+ (high claims paying ability) Markel Insurance Company A-(excellent) A (good financial security) A+ (high claims paying ability) Markel American Insurance Company A (excellent) A (good financial security) A+ (high claims paying ability) - ---------------------------------------------------------------------------------------------------
ASSOCIATES - -------------------------------------------------------------------------------- At December 31, 1997, the Company and its consolidated subsidiaries employed 830 persons, four of whom were executive officers. The Company believes that, as a service organization, its continued profitability and growth are dependent upon the talent and enthusiasm its associates bring to their jobs. The Company has structured incentive compensation plans and stock purchase plans to encourage associates to think and act like owners. Associates are offered many opportunities to become shareholders. Every associate eligible to participate in the Company's retirement program, a 401(k) plan, receives a portion of the Company's contribution in Markel stock and may purchase stock with their own contributions. Stock may be acquired through a payroll deduction plan, and associates have been given the opportunity to purchase stock with low interest financing partially subsidized by the Company. Under Markel's incentive compensation plans, associates may earn a meaningful bonus based on individual performance and the Company's performance. At December 31, 1997, the Company estimated associates' ownership, including executive officers and directors, at approximately 33% of the Company. The Company believes that employee stock ownership and rewarding value-added performance aligns associates' interests with the interests of non-employee shareholders. 23 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- SELECTED FINANCIAL DATA (dollars in millions, except per share data)
---------------------------------------- 1997 1996 1995 ---------------------------------------- RESULTS OF OPERATIONS (1) - ------------------------------------------------------------------------------------------ Earned premiums $ 333 $ 307 $ 285 Net investment income 69 51 43 Total operating revenues 419 367 344 Net income 50 47 34 Comprehensive income 92 56 75 - ------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE (2) - ------------------------------------------------------------------------------------------- Core operations $ 7.43 $ 6.03 $ 5.15 Net realized gains 1.82 0.58 1.39 Nonrecurring items -- 2.05 -- Amortization expense (0.33) (0.36) (0.39) Net income $ 8.92 $ 8.30 $ 6.15 - ------------------------------------------------------------------------------------------- FINANCIAL POSITION (1)(3)(4) - -------------------------------------------------------------------------------------------- Total investments $ 1,408 $ 1,131 $ 909 Total assets 1,870 1,605 1,315 Unpaid losses and loss adjustment expenses 971 936 734 Long-term debt 93 115 107 8.71% Capital Securities 150 -- -- Shareholders' equity 357 268 213 - -------------------------------------------------------------------------------------------- RATIO ANALYSIS - -------------------------------------------------------------------------------------------- GAAP combined ratio 99% 100% 99% Investment yield (5) 5% 5% 6% Total return (6) 13% 8% 15% Debt to total capital (7) 28% 30% 33% - -------------------------------------------------------------------------------------------- PER SHARE DATA (2) - -------------------------------------------------------------------------------------------- Common shares outstanding (in thousands) 5,474 5,458 5,422 Total investments $ 257.27 $ 207.18 $ 167.57 Book value $ 65.18 $ 49.16 $ 39.37 Growth in book value 33% 25% 53% 5-Year CAGR in book value (8) 26% 26% 31% Closing stock price $ 156.13 $ 90.00 $ 75.50 - --------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- (1)In December 1990 the Company acquired the remaining ownership interests of a previously unconsolidated subsidiary, Shand/Evanston Group, Inc. (Shand/Evanston). Assets and liabilities reflect the consolidation of Shand/Evanston beginning in 1990, and income reflects the consolidation of the revenues and expenses of Shand/Evanston in 1991 and subsequent years. (2) All per share amounts have been restated to reflect a 20% stock dividend in 1989. (3) The change in accounting for net unrealized gains (losses) on fixed maturities in accordance with provisions of Statement of Financial Accounting Standards No. 115 affects 1993 and subsequent years. 24
----------------------------------------------------------------------------- 1994 1993 1992 1991 1990 ----------------------------------------------------------------------------- RESULTS OF OPERATIONS (1) - --------------------------------------------------------------------------------------------------------------------------- Earned premiums $ 243 $ 193 $ 153 $ 152 $ 33 Net investment income 29 24 27 31 7 Total operating revenues 280 235 206 223 73 Net income 19 24 26 14 6 Comprehensive income (10) 34 26 39 5 - --------------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE (2) - --------------------------------------------------------------------------------------------------------------------------- Core operations $ 3.77 $ 3.31 $ 3.03 $ 2.63 $ 1.76 Net realized gains 0.45 1.83 0.89 0.94 0.13 Nonrecurring items -- -- 1.90 0.28 (0.41) Amortization expense (0.89) (0.91) (1.18) (1.15) (0.43) Net income $ 3.33 $ 4.23 $ 4.64 $ 2.70 $ 1.05 - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION (1)(3)(4) - --------------------------------------------------------------------------------------------------------------------------- Total investments $ 612 $ 597 $ 434 $ 415 $ 360 Total assets 1,103 1,135 1,129 700 670 Unpaid losses and loss adjustment expenses 653 688 733 346 302 Long-term debt 101 78 101 94 127 8.71% Capital Securities -- -- -- -- -- Shareholders' equity 139 151 109 83 55 - --------------------------------------------------------------------------------------------------------------------------- RATIO ANALYSIS - --------------------------------------------------------------------------------------------------------------------------- GAAP combined ratio 97% 97% 97% 106% 81% Investment yield (5) 5% 5% 6% 7% 10% Total return (6) (2%) 11% 7% 16% 8% Debt to total capital (7) 42% 34% 48% 53% 70% - --------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA (2) - --------------------------------------------------------------------------------------------------------------------------- Common shares outstanding (in thousands) 5,387 5,414 5,403 5,332 5,323 Total investments $ 113.55 $ 110.27 $ 80.27 $ 77.91 $ 67.59 Book value $ 25.71 $ 27.83 $ 20.24 $ 15.59 $ 10.27 Growth in book value (8%) 38% 30% 52% (12%) 5-Year CAGR in book value (8) 17% 25% 34% 35% -- Closing stock price $ 41.50 $ 39.38 $ 31.25 $ 22.00 $ 11.75 - ---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------- 1989 1988 10-Year CAGR(8) ---------------------------------------------------- RESULTS OF OPERATIONS (1) - -------------------------------------------------------------------------------------------------- Earned premiums $ 24 $ 20 38% Net investment income 5 4 42% Total operating revenues 48 37 31% Net income 14 11 22% Comprehensive income 14 12 29% - ----------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE (2) - ----------------------------------------------------------------------------------------------- Core operations $ 1.33 $ 1.61 24% Net realized gains 0.89 0.28 -- Nonrecurring items 0.65 0.45 -- Amortization expense (0.25) (0.05) -- Net income $ 2.62 $ 2.29 19% - ----------------------------------------------------------------------------------------------- FINANCIAL POSITION (1)(3)(4) - ----------------------------------------------------------------------------------------------- Total investments $ 66 $ 51 42% Total assets 196 147 34% Unpaid losses and loss adjustment expenses 31 27 -- Long-term debt 44 24 -- 8.71% Capital Securities -- -- -- Shareholders' equity 60 45 33% - ----------------------------------------------------------------------------------------------- RATIO ANALYSIS - ----------------------------------------------------------------------------------------------- GAAP combined ratio 78% 84% -- Investment yield (5) 8% 8% -- Total return (6) 11% 11% -- Debt to total capital (7) 42% 35% -- - ----------------------------------------------------------------------------------------------- PER SHARE DATA (2) - ----------------------------------------------------------------------------------------------- Common shares outstanding (in thousands) 5,401 5,220 -- Total investments $ 12.31 $ 9.71 38% Book value $ 11.69 $ 9.22 30% Growth in book value 27% 98% -- 5-Year CAGR in book value (8) -- -- -- Closing stock price $ 22.50 $ 15.42 -- - ----------------------------------------------------------------------------------------------- (4) The gross reinsurance reporting provisions of Statement of Financial Accounting Standards No. 113 affect 1992 and subsequent years. (5) Investment yield reflects net investment income as a percent of average invested assets. (6) Total return includes net investment income, net realized investment gains and the change in market value during the period as a percent of average invested assets. (7) The 8.71% Capital Securities are treated as 50% debt and 50% equity by the Company. (8) CAGR - compound annual growth rate 25 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ (dollars in the thousands) ASSETS Investments, available-for-sale, at estimated fair value Fixed maturities (cost of $1,037,807 in 1997 and $879,401 in 1996) $ 1,063,191 $ 885,874 Equity securities (cost of $147,601 in 1997 and $132,558 in 1996) 253,385 193,395 Short-term investments (estimated fair value approximates cost) 91,744 51,507 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS, AVAILABLE-FOR-SALE 1,408,320 1,130,776 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents 1,309 11,054 Receivables 67,573 58,336 Reinsurance recoverable on unpaid losses 225,405 210,518 Reinsurance recoverable on paid losses 15,530 11,631 Deferred policy acquisition costs 36,816 37,979 Prepaid reinsurance premiums 39,758 44,881 Property and equipment 10,068 15,434 Intangible assets 37,331 39,297 Other assets 27,990 45,391 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 1,870,100 $ 1,605,297 - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Unpaid losses and loss adjustment expenses $ 971,157 $ 935,582 Unearned premiums 192,815 200,852 Payables to insurance companies 29,148 23,870 Long-term debt (estimated fair value of $96,197 in 1997 and $115,191 in 1996) 93,166 114,691 Other liabilities 77,010 61,967 Company-Obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable Interest Debentures of Markel Corporation 150,000 -- - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 1,513,296 1,336,962 - ------------------------------------------------------------------------------------------------------------------------------------ Shareholders' equity Common stock 24,660 24,347 Retained earnings 246,885 200,237 Accumulated other comprehensive income Net unrealized holding gains on fixed maturities and equity securities, net of taxes of $45,909 in 1997 and $23,559 in 1996 85,259 43,751 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 356,804 268,335 Commitments and contingencies - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,870,100 $ 1,605,297 - ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 26 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, - --------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) OPERATING REVENUES Earned premiums $ 332,878 $ 307,453 $ 285,146 Net investment income 68,653 51,168 42,981 Net realized gains from investment sales 15,834 5,013 11,952 Other 1,682 3,102 3,496 - --------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING REVENUES 419,047 366,736 343,575 - --------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Losses and loss adjustment expenses 210,061 202,378 186,655 Underwriting, acquisition and insurance expenses 120,076 105,032 96,113 Other -- 1,275 1,642 Loss on building -- 10,380 -- Amortization of intangible assets 2,435 2,655 2,778 - --------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 332,572 321,720 287,188 - --------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 86,475 45,016 56,387 - --------------------------------------------------------------------------------------------------------------------------- Interest expense 20,124 8,016 8,460 - --------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 66,351 37,000 47,927 Income tax expense (benefit) 15,924 (9,672) 13,435 - --------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 50,427 $ 46,672 $ 34,492 - --------------------------------------------------------------------------------------------------------------------------- OTHER COMPREHENSIVE INCOME Unrealized gains on securities Unrealized holding gains arising during the period, net of taxes of $27,892 in 1997, $7,010 in 1996 and $25,872 in 1995 $ 51,800 $ 13,018 $ 48,046 Less reclassification adjustments for gains included in net income, net of taxes of $5,542 in 1997, $1,755 in 1996 and $4,183 in 1995 (10,292) (3,258) (7,769) - --------------------------------------------------------------------------------------------------------------------------- TOTAL OTHER COMPREHENSIVE INCOME 41,508 9,760 40,277 - --------------------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME $ 91,935 $ 56,432 $ 74,769 - --------------------------------------------------------------------------------------------------------------------------- NET INCOME PER SHARE Basic $ 9.20 $ 8.58 $ 6.38 Diluted $ 8.92 $ 8.30 $ 6.15 - ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 27 Markel Corporation & Subsidiaries ------------------------------------------------ CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated Other Common Common Retained Comprehensive Shares Stock Earnings Income Total - --------------------------------------------------------------------------------------------------------------------------- (in thousands) Shareholders' Equity at January 1, 1995 5,387 $ 22,929 $ 121,858 $ (6,286) $ 138,501 Net income -- -- 34,492 -- 34,492 Net unrealized holding gains arising during the period, net of taxes -- -- -- 40,277 40,277 - --------------------------------------------------------------------------------------------------------------------------- Comprehensive income 74,769 Issuance of common stock 35 189 -- -- 189 Other -- -- (17) -- (17) . - --------------------------------------------------------------------------------------------------------------------------- Shareholders' Equity at December 31, 1995 5,422 23,118 156,333 33,991 213,442 Net income -- -- 46,672 -- 46,672 Net unrealized holding gains arising during the period, net of taxes -- -- -- 9,760 9,760 - --------------------------------------------------------------------------------------------------------------------------- Comprehensive income 56,432 Issuance of common stock 68 1,229 -- -- 1,229 Repurchase of common stock (32) -- (2,751) -- (2,751) Other -- -- (17) -- (17) - --------------------------------------------------------------------------------------------------------------------------- Shareholders' Equity at December 31, 1996 5,458 24,347 200,237 43,751 268,335 Net income -- -- 50,427 -- 50,427 Net unrealized holding gains arising during the period, net of taxes -- -- -- 41,508 41,508 - --------------------------------------------------------------------------------------------------------------------------- Comprehensive income 91,935 Issuance of common stock 41 313 -- -- 313 Repurchase of common stock (25) -- (3,771) -- (3,771) Other -- -- (8) -- (8) - --------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY AT DECEMBER 31, 1997 5,474 $ 24,660 $ 246,885 $ 85,259 $ 356,804 - ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 28 ----------------------------------------------------\ CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, - --------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) OPERATING ACTIVITIES Net income $ 50,427 $ 46,672 $ 34,492 Adjustments to reconcile net income to net cash provided by operating activities Deferred income tax expense (benefit) (557) (15,345) 1,374 Depreciation and amortization 7,307 10,934 11,088 Loss on building -- 10,380 -- Net realized gains from investment sales (15,834) (5,013) (11,952) Proceeds from reinsurer commutations and other settlements 2,969 6,544 82,637 Increase in receivables (2,669) (5,208) (296) Decrease (increase) in deferred policy acquisition costs 1,163 (1,044) (3,563) Increase in unpaid losses and loss adjustment expenses, net 13,820 40,819 43,133 Increase (decrease) in unearned premiums, net (2,914) 6,009 12,393 Increase (decrease) in payables to insurance companies 5,278 2,581 (7,270) Increase (decrease) in current income taxes 4,313 (2,702) (894) Other 5,340 (275) 7,867 - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 68,643 94,352 169,009 - --------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Proceeds from sales of fixed maturities and equity securities 636,212 439,072 586,121 Proceeds from maturities of fixed maturities 55,722 66,512 35,993 Cost of fixed maturities and equity securities purchased (863,785) (591,034) (793,058) Net change in short-term investments (40,237) 16,675 13,076 Sale (acquisitions) of insurance companies, net of cash 9,230 (35,049) (21,747) Net proceeds from sales of buildings 6,500 -- 19,068 Additions to property and equipment (4,612) (3,952) (4,509) Other (177) (248) (1,989) - --------------------------------------------------------------------------------------------------------------------------- NET CASH USED BY INVESTING ACTIVITIES (201,147) (108,024) (167,045) - --------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net proceeds from issuance of Company-Obligated Mandatorily Redeemable Preferred Capital Securities 148,123 -- -- Additions to long-term debt -- 40,500 27,500 Repayments and repurchases of long-term debt (21,577) (32,550) (21,550) Other (3,787) (1,539) 172 - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 122,759 6,411 6,122 - --------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (9,745) (7,261) 8,086 Cash and cash equivalents at beginning of year 11,054 18,315 10,229 - --------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,309 $ 11,054 $ 18,315 - ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 29 Markel Corporation & Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies 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. a) PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS. Generally accepted accounting principles require management to make estimates and assumptions when preparing financial statements. Actual results could differ from those estimates. The consolidated financial statements include the accounts of Markel Corporation and all subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated in consolidation. The Company's operations comprise one business segment, the property and casualty insurance industry. b) INVESTMENTS. All investments are considered available-for-sale and are recorded at estimated fair value, generally based on quoted market prices. The net unrealized gains or losses on investments, net of deferred income taxes, are included in accumulated other comprehensive income in shareholders' equity. A decline in the fair value of any investment below cost that is deemed other than temporary is charged to earnings, resulting in a new cost basis for the security. Premiums and discounts are amortized or accreted over the lives of the related fixed maturities as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the first in, first out method. c) CASH EQUIVALENTS. The Company considers overnight deposits to be cash equivalents for purposes of the consolidated statements of cash flows. d) DEFERRED POLICY ACQUISITION COSTS. Costs directly related to the acquisition of insurance premiums, such as commissions to agents and brokers, are deferred and amortized over the related policy period, generally one year. If it is determined that future policy revenues on existing policies are not adequate to cover related costs and expenses, deferred policy acquisition costs are charged to earnings. e) PROPERTY AND EQUIPMENT. Owned property and equipment are stated at cost less accumulated depreciation. Depreciation and amortization of buildings and equipment are calculated using the straight-line method over the respective estimated service lives. f) INTANGIBLE ASSETS. Policy renewal rights represent the value attributable to renewal rights for lines of businesses acquired and are amortized using either the straight-line or accelerated methods over the estimated lives of the businesses acquired, generally seven to ten years. Goodwill is amortized using the straight-line method, generally over 40 years. The Company assesses the recoverability of goodwill by determining whether the amortization of the balance over its remaining life can be recovered through the undiscounted future operating cash flows of the acquired operations. g) REVENUE RECOGNITION. Insurance premiums are earned on a pro rata basis over the policy period, generally one year. Profit-sharing commissions from reinsurers are recognized when earned and are netted against policy acquisition costs. Reinsurance premiums ceded are netted against premiums written. h) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES. Unpaid losses and loss adjustment expenses are based on evaluations of reported claims and estimates for losses and loss adjustment expenses incurred but not reported. Estimates for losses and loss adjustment expenses 30 1. Summary of Significant Accounting Policies (continued) incurred but not reported are based on reserve development studies. The reserves recorded are estimates, and the ultimate liability may be greater than or less than the estimates; however, management believes the reserves are adequate. i) INCOME TAXES. Deferred tax assets and liabilities are recorded in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109 the Company records deferred income taxes which reflect the net tax effect of the temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and their respective tax bases. j) EARNINGS PER SHARE. The Company adopted the provisions of SFAS No. 128, Earnings Per Share, effective December 31, 1997 and restated all prior years. Prior to this statement, the Company followed the provisions of Accounting Principles Board (APB) No. 15, Earnings Per Share. SFAS No. 128 replaces the presentation of primary earnings per share (EPS) with basic EPS and the presentation of fully diluted EPS with diluted EPS. Basic EPS is computed by dividing net income, less required dividends on redeemable preferred stock, by the weighted average number of common shares outstanding during the year. Diluted EPS is computed using the weighted average number of common shares outstanding during the year, including the effect of common equivalent shares attributable to stock options. k) STOCK OPTION PLANS. The Company adopted the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation, effective January 1, 1996. SFAS No. 123 requires entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. As allowed by SFAS No. 123, the Company has chosen to follow the provisions of APB No. 25. Pro forma disclosure of net income and EPS is required as if the fair value based method of SFAS No. 123 had been applied. l) LONG-LIVED ASSETS. If an asset is considered to be impaired, the impairment equals the amount by which the carrying amount of the asset exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. m) COMPREHENSIVE INCOME. As of December 31, 1997, the Company adopted the provisions of SFAS No. 130, Reporting Comprehensive Income, for all years presented. This statement establishes standards for reporting and displaying comprehensive income and its components. The purpose of reporting comprehensive income is to report all changes in equity of an enterprise that result from recognized transactions and other economic events of the period. Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income, such as unrealized gains and losses on certain investments in debt and equity securities and foreign currency items. n) DERIVATIVES. From time to time, the Company uses derivative financial instruments to hedge foreign currency risk and market risk in its investment portfolio. When held, derivative instruments are matched against specific securities and their fair values are determined based on current settlement costs. Derivative positions held by the Company at December 31, 1997 and 1996 were immaterial. o) RECLASSIFICATIONS. Certain reclassifications of prior years' amounts have been made to conform with 1997 presentations. 31 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. Investments - -------------------------------------------------------------------------------- a) Following is a summary of investments (dollars in thousands):
December 31, 1997 - --------------------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------------- Fixed maturities U.S. Treasury securities and obligations of U.S. government agencies $ 299,546 $ 3,344 $ (465) $ 302,425 Obligations of states, municipalities and political subdivisions 361,688 10,713 (125) 372,276 Public utilities 43,614 1,689 (79) 45,224 Convertibles and bonds with warrants 4,799 380 (14) 5,165 All other corporate bonds 328,160 10,442 (501) 338,101 - --------------------------------------------------------------------------------------------------------------------------- Total fixed maturities 1,037,807 26,568 (1,184) 1,063,191 Equity securities Banks, trusts and insurance companies 53,918 43,811 (119) 97,610 Industrial, miscellaneous and all other 89,969 63,163 (1,454) 151,678 Nonredeemable preferred stock 3,714 405 (22) 4,097 - --------------------------------------------------------------------------------------------------------------------------- Total equity securities 147,601 107,379 (1,595) 253,385 Short-term investments 91,744 -- -- 91,744 - --------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS $ 1,277,152 $ 133,947 $ (2,779) $ 1,408,320 - ---------------------------------------------------------------------------------------------------------------------------
December 31, 1996 - --------------------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------------------- Fixed maturities U.S. Treasury securities and obligations of U.S. government agencies $ 215,550 $ 1,634 $ (1,612) $ 215,572 Obligations of states, municipalities and political subdivisions 218,475 4,004 (692) 221,787 Public utilities 54,845 1,194 (1,004) 55,035 Convertibles and bonds with warrants 33,869 2,222 (553) 35,538 All other corporate bonds 356,193 4,402 (3,185) 357,410 Redeemable preferred stock 469 63 -- 532 - --------------------------------------------------------------------------------------------------------------------------- Total fixed maturities 879,401 13,519 (7,046) 885,874 Equity securities Banks, trusts and insurance companies 46,095 23,537 (1,182) 68,450 Industrial, miscellaneous and all other 82,789 39,145 (349) 121,585 Nonredeemable preferred stock 3,674 21 (335) 3,360 - --------------------------------------------------------------------------------------------------------------------------- Total equity securities 132,558 62,703 (1,866) 193,395 Short-term investments 51,507 -- -- 51,507 - --------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS $ 1,063,466 $ 76,222 $ (8,912) $ 1,130,776 - ---------------------------------------------------------------------------------------------------------------------------
32 2. Investments (continued) b) The amortized cost and estimated fair value of fixed maturities at December 31, 1997 are shown below by contractual maturity (dollars in thousands): Estimated Amortized Fair Cost Value - -------------------------------------------------------------------------------- Due in one year or less $ 97,782 $ 97,987 Due after one year through five years 219,123 221,435 Due after five years through ten years 274,964 282,521 Due after ten years 445,938 461,248 - -------------------------------------------------------------------------------- TOTAL $ 1,037,807 $ 1,063,191 - -------------------------------------------------------------------------------- Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties, and the lenders may have the right to put the securities back to the borrower. Based on expected maturities, the estimated average duration of the fixed maturities was 4.5 years. c) Components of net investment income are as follows (dollars in thousands): Years Ended December 31, - -------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Interest Municipal bonds (tax-exempt) $ 16,130 $ 8,824 $ 6,900 Taxable bonds 43,051 36,823 31,042 Short-term investments, including overnight deposits 3,986 4,447 3,969 Dividends on equity securities 8,670 4,474 3,675 - -------------------------------------------------------------------------------- 71,837 54,568 45,586 Less investment expenses 3,184 3,400 2,605 - -------------------------------------------------------------------------------- NET INVESTMENT INCOME $ 68,653 $ 51,168 $ 42,981 - -------------------------------------------------------------------------------- 33 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. Investments (continued) d) The following table presents the Company's realized gains and losses from investment sales and the change in gross unrealized gains (losses) (dollars in thousands): Years Ended December 31, ---------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Realized gains Fixed maturities $ 9,454 $ 5,618 $ 13,861 Equity securities 12,568 5,480 9,838 - -------------------------------------------------------------------------------- 22,022 11,098 23,699 - -------------------------------------------------------------------------------- Realized losses Fixed maturities (4,615) (5,853) (9,281) Equity securities (1,573) (232) (2,466) - -------------------------------------------------------------------------------- (6,188) (6,085) (11,747) - -------------------------------------------------------------------------------- NET REALIZED GAINS FROM INVESTMENT SALES $ 15,834 $ 5,013 $ 11,952 - -------------------------------------------------------------------------------- Change in gross unrealized gains (losses) Fixed maturities $ 18,911 $ (16,014) $ 41,356 Equity securities 44,947 31,029 20,610 - -------------------------------------------------------------------------------- NET INCREASE $ 63,858 $ 15,015 $ 61,966 - -------------------------------------------------------------------------------- e) Investments with a carrying value of $33.9 million and $41.9 million were on deposit with regulatory authorities at December 31, 1997 and 1996, respectively. f) At December 31, 1997, there were no investments in any one issuer, other than U.S. Treasury securities, that exceeded 10% of shareholders' equity. 3. Receivables - -------------------------------------------------------------------------------- Following are the components of receivables (dollars in thousands): December 31, ---------------------- 1997 1996 - -------------------------------------------------------------------------------- Agents' balances and premiums in course of collection $ 54,759 $ 47,356 Less allowance for doubtful receivables 2,763 2,694 - -------------------------------------------------------------------------------- 51,996 44,662 Other 15,577 13,674 - -------------------------------------------------------------------------------- RECEIVABLES $ 67,573 $ 58,336 - -------------------------------------------------------------------------------- 34 4. Deferred Policy Acquisition Costs The following reflects the amounts of policy costs deferred and amortized (dollars in thousands): Years Ended December 31, --------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Balance, beginning of year $ 37,979 $ 32,024 $ 26,064 Policy acquisition costs deferred 79,356 76,327 72,748 Amortization charged to expense (80,519) (70,372) (66,788) - -------------------------------------------------------------------------------- DEFERRED POLICY ACQUISITION COSTS $ 36,816 $ 37,979 $ 32,024 - -------------------------------------------------------------------------------- The following reflects the components of underwriting, acquisition and insurance expenses (dollars in thousands): Years Ended December 31, ---------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Amortization of policy acquisition costs $ 80,519 $ 70,372 $ 66,788 Other operating expenses 39,557 34,660 29,325 - -------------------------------------------------------------------------------- UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES $120,076 $ 105,032 $ 96,113 - -------------------------------------------------------------------------------- 5. Property and Equipment Following are the components of property and equipment (dollars in thousands): December 31, - -------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------- Land $ 689 $ 2,372 Buildings and building equipment 375 14,015 Furniture and equipment 28,154 26,229 Other 140 94 - -------------------------------------------------------------------------------- 29,358 42,710 Less accumulated depreciation and amortization 19,290 27,276 - -------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT $ 10,068 $ 15,434 - -------------------------------------------------------------------------------- Depreciation and amortization expense of property and equipment was $3.5 million, $6.0 million and $6.0 million for the years ended December 31, 1997, 1996 and 1995, respectively. Total rental expense for the years ended December 31, 1997, 1996 and 1995 was approximately $4.2 million, $2.7 million and $1.9 million, respectively. As part of the purchase of Shand/Evanston in 1987, the Company acquired Shand's headquarters building in Evanston, Illinois. The estimated fair value of the building had fallen significantly since 1987 due to escalating property taxes and reduced demand for office space in Evanston. In response to a purchase offer, the Company decided to dispose of the building and immediately recognized a $10.4 million ($6.8 million after tax) loss in 1996. The sale of the building was completed in 1997. 35 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. Property and Equipment (continued) During 1995 the Company entered into sale-leaseback agreements related to its home office facilities in Richmond, Virginia. The Company sold the properties which house its corporate offices and Richmond-based underwriting units for approximately $19.1 million and concurrently entered into ten to twelve year lease agreements with the buyers. The Company realized a $4.9 million gain on the sale of the properties which is being deferred and amortized over the terms of the operating leases. In addition, the Company has other office facilities, furniture and equipment under operating leases with remaining terms ranging from 4 months to 60 months. Minimum annual rental commitments for noncancelable operating leases at December 31, 1997 are as follows (dollars in thousands): Years Ending December 31, - -------------------------------------------------------------------------------- 1998 $ 4,649 1999 4,772 2000 3,970 2001 3,379 2002 3,185 2003 and thereafter 8,454 - -------------------------------------------------------------------------------- TOTAL $ 28,409 - -------------------------------------------------------------------------------- 6. Intangible Assets Following are the components of intangible assets (dollars in thousands): December 31, ---------------------- 1997 1996 - -------------------------------------------------------------------------------- Goodwill $ 35,668 $ 36,035 Policy renewal rights 1,663 3,262 - -------------------------------------------------------------------------------- INTANGIBLE ASSETS $ 37,331 $ 39,297 - -------------------------------------------------------------------------------- Accumulated amortization related to intangible assets was $19.6 million and $17.6 million at December 31, 1997 and 1996, respectively. - -------------------------------------------------------------------------------- 7. Income Taxes Income tax expense (benefit) on income before income taxes, substantially all of which was federal tax expense, consists of (dollars in thousands): Years Ended December 31, ------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Current $ 16,481 $ 5,673 $ 12,061 Deferred (557) (15,345) 1,374 - -------------------------------------------------------------------------------- INCOME TAX EXPENSE (BENEFIT) $ 15,924 $ (9,672) $ 13,435 - -------------------------------------------------------------------------------- The Company made income tax payments of $12.2 million in 1997, $8.4 million in 1996 and $13.0 million in 1995. Current income taxes payable were $0.9 million at December 31, 1997. At December 31, 1996, current income taxes recoverable were $3.4 million. 36 7. Income Taxes (continued) Reconciliations of the U.S. corporate income tax rate and the effective tax rate on income before income taxes are as follows: Years Ended December 31, - -------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- U.S. corporate tax rate 35% 35% 35% Tax-exempt investment income (9) (9) (6) Difference between financial reporting and tax bases of assets acquired -- (53) -- Other (2) 1 (1) - -------------------------------------------------------------------------------- EFFECTIVE TAX RATE 24% (26%) 28% - -------------------------------------------------------------------------------- The components of the net deferred tax asset are as follows (dollars in thousands): December 31, - -------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------- Assets Income reported in different periods for financial reporting and tax purposes $ 9,721 $ 11,793 Unpaid losses and loss adjustment expenses, nondeductible portion for income tax purposes 51,521 51,765 Unearned premiums, adjustment for income tax purposes 10,714 10,918 Other 1,573 717 - -------------------------------------------------------------------------------- Total gross deferred tax assets 73,529 75,193 - -------------------------------------------------------------------------------- Liabilities Property and equipment, depreciation 182 1,123 Deferred policy acquisition costs 12,886 13,293 Investments, net unrealized gains 45,909 23,559 Differences between financial reporting and tax bases of assets acquired 13,420 13,837 Other 812 1,267 - -------------------------------------------------------------------------------- Total gross deferred tax liabilities 73,209 53,079 - -------------------------------------------------------------------------------- NET DEFERRED TAX ASSET $ 320 $ 22,114 - -------------------------------------------------------------------------------- The Company believes that a valuation allowance with respect to the realization of the total gross deferred tax assets is not necessary. The Company expects to realize the majority of its gross deferred tax assets existing at December 31, 1997 through the reversal of existing temporary differences and the application of the carryback provisions of the Internal Revenue Code. The Company expects to generate future taxable income, excluding the effect of future originating temporary differences, to realize the remaining gross deferred tax assets. In 1996 the Internal Revenue Service completed an examination of the 1994 and prior federal tax returns and made no material adjustments. 37 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. Unpaid Losses And Loss Adjustment Expenses The following table sets forth a reconciliation of beginning and ending reserves for losses and loss adjustment expenses (dollars in thousands): Years Ended December 31, - -------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES, BEGINNING OF YEAR $ 725,064 $ 575,268 $ 471,996 Commutations and other settlements 745 6,544 54,637 Reserves for losses and loss adjustment expenses of acquired insurance companies -- 117,499 35,233 - -------------------------------------------------------------------------------- RESTATED NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES, BEGINNING OF YEAR $ 725,809 $ 699,311 $ 561,866 Incurred losses and loss adjustment expenses Current year 236,037 226,495 195,448 Prior years (25,976) (24,117) (8,793) - -------------------------------------------------------------------------------- TOTAL INCURRED LOSSES AND LOSS ADJUSTMENT EXPENSES 210,061 202,378 186,655 - -------------------------------------------------------------------------------- Payments Current year 44,382 52,158 42,002 Prior years 145,736 124,467 131,251 - -------------------------------------------------------------------------------- TOTAL PAYMENTS 190,118 176,625 173,253 - -------------------------------------------------------------------------------- NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES, END OF YEAR 745,752 725,064 575,268 - -------------------------------------------------------------------------------- Reinsurance recoverable on unpaid losses 225,405 210,518 159,141 - -------------------------------------------------------------------------------- GROSS RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES, END OF YEAR $ 971,157 $ 935,582 $ 734,409 - -------------------------------------------------------------------------------- The provision for prior years decreased in 1997, 1996 and 1995. Inherent in the Company's reserving practices is the desire to establish reserves that are more likely redundant than deficient. Furthermore, the Company's philosophy is to price its insurance products to make an underwriting profit, not to increase written premiums. 38 8. Unpaid Losses And Loss Adjustment Expenses (continued) Management continually attempts to improve its loss estimation process by refining its ability to analyze loss development patterns, claims payments and other information, but many reasons remain for potential adverse development of estimated ultimate liabilities. For example, the uncertainties inherent in the loss estimation process have become increasingly subject to changes in social and legal trends. In recent years, these trends have expanded the liability of insureds, established new liabilities and reinterpreted contracts to provide unanticipated coverage long after the related policies were written. Such changes from past experience significantly affect the ability of insurers to estimate reserves for unpaid losses and related expenses. Management recognizes the higher variability associated with certain exposures and books of business and considers this factor when establishing loss reserves. Management currently believes the Company's gross and net reserves, including the reserves for environmental impairment liability and toxic tort exposures, are adequate. The Company has shown cumulative redundancies in 1987 and subsequent years. The net reserves for losses and loss adjustment expenses maintained by the Company's insurance subsidiaries are equal under both statutory and generally accepted accounting principles. However, certain reserves for claim handling expenses are maintained by the Company's underwriting management subsidiaries, in accordance with the contractual obligations of these subsidiaries. As a result, the consolidated net reserves for losses and loss adjustment expenses will be different from the statutory net reserves for losses and loss adjustment expenses. - -------------------------------------------------------------------------------- 9. Long-Term Debt Long-term debt consists of the following (dollars in thousands): December 31, - -------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------- 7.25% notes, due November 1, 2003, interest payable semi-annually, net of unamortized discount of $284 in 1997 and $359 in 1996 $ 93,166 $ 99,641 6.06% borrowings under $150 million revolving credit facility -- 15,000 Other -- 50 - -------------------------------------------------------------------------------- LONG-TERM DEBT $ 93,166 $ 114,691 - -------------------------------------------------------------------------------- The notes due November 1, 2003 are not redeemable or subject to any sinking fund requirements and have an effective cost of approximately 7.54%. During 1997 the Company repurchased $6.55 million of its 7.25% notes. The estimated fair value of the Company's long-term debt is based on quoted market prices at the reporting date. In 1996 the Company arranged a syndicated revolving credit facility which provides up to $150 million for working capital and other general corporate purposes. The Company may select from various interest rate options for balances outstanding under the facility. The Company pays a commitment fee of .15% on the unused portion of the facility. The facility is a revolving credit facility until October 1, 1998. Any outstanding balances at that date are converted to a four year term loan. 39 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. Long-Term Debt (continued) Following is a schedule of future principal payments due on long-term debt as of December 31, 1997 (dollars in thousands): Years Ending December 31, - -------------------------------------------------------------------------------- 1998 -- 1999 -- 2000 -- 2001 -- 2002 -- 2003 and thereafter $ 93,166 - -------------------------------------------------------------------------------- TOTAL $ 93,166 - -------------------------------------------------------------------------------- The Company paid $7.6 million, $7.7 million and $8.4 million in interest on long-term debt during the years ended December 31, 1997, 1996 and 1995, respectively. - -------------------------------------------------------------------------------- 10. Company-Obligated Mandatorily Redeemable Preferred Capital Securities (8.71% 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 8.71% 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 8.71% Capital Securities. In 1997 the Company paid $6.1 million in interest on the 8.71% Capital Securities. - -------------------------------------------------------------------------------- 11. Shareholders' Equity a) The Company has 15,000,000 shares of no par value common stock authorized, of which 5,473,982 and 5,458,077 shares were outstanding at December 31, 1997 and 1996, respectively. The Company is authorized to issue up to 2,069,200 shares of preferred stock, $1.00 par value per share, in one or more series and to fix the powers, designations, preferences and rights of each series. There were 11,269 shares of Series A redeemable preferred stock outstanding at December 31, 1996. These shares were included in other liabilities at a redemption value of $28.50 per share and carried a cumulative dividend of $1.50 per share, payable semi-annually. During 1997 the Company repurchased all remaining shares of the Series A redeemable preferred stock. b) The Company has three stock option or stock award plans for employees and directors; the 1986 Stock Option Plan which expired on November 3, 1996, the 1989 Non-employee Director Stock Option Plan and the 1993 Incentive Stock Plan. At December 31, 1997, there were 190,779 shares, 60,000 shares and 100,000 shares reserved for issuance under the 1986 plan, the 1989 plan and the 1993 plan, respectively. The 1986 and the 1993 plans are administered by the Compensation Committee of the Company's Board of Directors. The 1993 plan provides for the 40 11. Shareholders' Equity (continued) award of incentive stock options, stock appreciation rights or incentive stock awards to employees of the Company. The 1989 plan is administered by the Company's Board of Directors and provides for the award of non-statutory stock options to the non-employee directors. Options are granted at a price not less than market price on the date of the grant and are exercisable within a period established by the Committee or the Board at the time of the grant, but not earlier than six months from the date of grant. Options expire either five or ten years from the date of grant. At December 31, 1997, the Company had 36,000 options available for grant under the 1989 plan and 97,500 options, stock appreciation rights or incentive stock awards available for grant under the 1993 plan. Stock option transactions are summarized below:
Years Ended December 31, - --------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise 1997 Price 1996 Price 1995 price - --------------------------------------------------------------------------------------------- Options outstanding at January 1 264,250 $ 26 339,582 $ 24 382,421 $ 23 Granted 2,500 144 5,000 87 -- -- Exercised (48,031) 17 (75,332) 22 (40,919) 12 Canceled (1,440) 39 (5,000) 22 (1,920) 32 - ---------------------------------------------------------------------------------------------- Options outstanding at December 31 217,279 $ 29 264,250 $ 26 339,582 $ 24 - ---------------------------------------------------------------------------------------------- Options exercisable at December 31 180,283 210,735 255,274 Options available for grant at December 31 133,500 136,000 151,215 - ----------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable - ---------------------------------------------------- --------------------------------------- Weighted Weighted Weighted Range of Average Average Average Exercise Number Remaining Exercise Number Exercise Prices Outstanding Contractual Life Price Exercisable Price - ---------------------------------------------------------------------------------------------- $ 10 to 15 48,783 1.7 years $ 13 48,783 $ 13 16 to 22 77,256 1.8 19 77,256 19 23 to 33 4,500 4.4 26 3,600 26 34 to 47 79,240 3.7 41 50,644 41 87 5,000 8.8 87 -- -- 144 2,500 9.8 144 -- -- - ---------------------------------------------------------------------------------------------- $ 10 to 144 217,279 2.8 years $ 29 180,283 $ 24 - ----------------------------------------------------------------------------------------------
The pro forma impact of stock options granted in 1997 and 1996 had no effect on basic or diluted earnings per share. 41 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. Shareholders' Equity (continued) c) Earnings per share is determined by dividing net income, as adjusted below, by the applicable shares outstanding (in thousands): Years Ended December 31, - -------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Net income as reported $ 50,427 $ 46,672 $ 34,492 Dividends on redeemable preferred stock (8) (17) (17) - -------------------------------------------------------------------------------- Basic and diluted income $ 50,419 $ 46,655 $ 34,475 - -------------------------------------------------------------------------------- Average common shares outstanding 5,483 5,438 5,405 Shares applicable to common stock equivalents 169 185 200 - -------------------------------------------------------------------------------- Average diluted shares outstanding 5,652 5,623 5,605 - -------------------------------------------------------------------------------- Basic shares represent average common shares outstanding. Diluted shares include average common shares outstanding and common equivalent shares attributable to stock options. Average closing common stock market prices are used to calculate the dilutive effect attributable to stock options. - -------------------------------------------------------------------------------- 12. Employee Benefit Plan The Company maintains a defined contribution plan, the Markel Corporation Retirement Savings Plan, in accordance with Section 401(k) of the Internal Revenue Code. The plan requires the Company to contribute, on an annual basis, 6% of each participating employee's compensation plus a matching contribution of 100% of the first 2% and 50% of the next 2% of each participating employee's contribution. Annual expenses relating to this plan were $2.6 million, $2.2 million and $1.9 million in 1997, 1996 and 1995, respectively. - -------------------------------------------------------------------------------- 13. Reinsurance The Company enters into reinsurance agreements in order to reduce its liability on individual risks and enable it to underwrite policies with higher limits. In a reinsurance transaction, an insurance company transfers, or cedes, all or part of its exposure in return for a portion of the premium. The ceding of the insurance does not legally discharge the ceding company from its primary liability for the full amount of the policies, and the ceding company is required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. The table below summarizes the effect of reinsurance on premiums written and earned (dollars in thousands):
Years Ended December 31, - -------------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------------- Written Earned Written Earned Written Earned Direct $ 413,252 $ 422,574 $ 398,412 $ 391,942 $ 366,739 $ 349,417 Assumed 7,395 6,938 8,058 11,062 23,879 26,158 Ceded (90,684) (96,634) (93,011) (95,551) (93,079) (90,429) - -------------------------------------------------------------------------------------- Net Premiums $ 329,963 $ 332,878 $ 313,459 $ 307,453 $ 297,539 $ 285,146 - --------------------------------------------------------------------------------------
42 13. Reinsurance (continued) Incurred losses and loss adjustment expenses are net of reinsurance recoveries of $82.0 million, $51.2 million and $63.9 million for the years ended December 31, 1997, 1996 and 1995, respectively. Since 1993 the Company has pursued the commutation, or termination, of contracts with certain reinsurers of Shand/Evanston's 1987 and prior books of business. The objectives of the commutations were to reduce credit risks and eliminate administrative expenses associated with the runoff of reinsurance placed with certain inactive reinsurers. Primarily as a result of the commutation program, during 1997 the Company reassumed exposures for ceded unpaid losses and loss adjustment expenses in exchange for $3.0 million. In 1996 and 1995 reinsurer commutations and other settlements totaled $6.5 million and $54.6 million, respectively. In all years, pricing for commutations was based on ceded unpaid losses and loss adjustment expenses at the date of commutation plus other factors deemed appropriate by management. The recording of commutations had no effect on the Company's results of operations in 1997, 1996 and 1995. The percentage of assumed earned premiums to net earned premiums for the years ended December 31, 1997, 1996 and 1995 was approximately 2%, 4% and 9%, respectively. - -------------------------------------------------------------------------------- 14. Contingencies The Company has contingencies that arise in the normal conduct of its operations. In the opinion of management, the resolutions of these contingencies are not expected to have a material impact on the Company's financial condition. - -------------------------------------------------------------------------------- 15. Related Party Transactions The Company purchases investment counseling services from Hamblin Watsa Investment Counsel Ltd., a company in which a director of the Company has a significant interest. The cost of such services was $705,000, $674,000 and $618,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The Company pays commissions to Gary Markel & Associates, Inc. and Gary Markel Surplus Lines Brokerage, Inc., entities owned by a director of the Company. The commissions paid were $487,000, $467,000 and $424,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 43 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 16. Statutory Financial Information The following table includes selected information for the Company's wholly-owned insurance subsidiaries as filed with insurance regulatory authorities (dollars in thousands): Years Ended December 31, - -------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Net income $ 50,427 $ 27,424 $ 42,181 - -------------------------------------------------------------------------------- Statutory capital and surplus $ 334,025 $ 282,774 $ 224,833 - -------------------------------------------------------------------------------- The Company's insurance company subsidiaries are subject to certain regulatory restrictions on the payment of dividends or advances to the Company. As of December 31, 1997, $288.4 million of the insurance subsidiaries' statutory surplus was so restricted. In converting from statutory accounting principles to generally accepted accounting principles, typical adjustments include deferral of policy acquisition costs, a provision for deferred federal income taxes and the inclusion of net unrealized gains or losses in shareholders' equity relating to fixed maturities. - -------------------------------------------------------------------------------- 17. Acquisition On October 31, 1996, the Company acquired Investors Insurance Holding Corp. and its subsidiaries (Investors). The acquisition was accounted for using the purchase method of accounting. Total consideration paid to the shareholders of Investors was $38.1 million which approximated the fair value of the net assets acquired. The Company funded the transaction with available cash and borrowings of approximately $15.0 million under existing lines of credit. The acquisition's effect on the Company's earnings was not significant in 1996. The table below summarizes, on a pro forma basis, the Company's consolidated results of operations as if the purchase of Investors had taken place as of January 1, 1995 (dollars in thousands, except per share amounts): Years Ended December 31, - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- Total operating revenues $ 405,899 $ 389,397 Net income 39,469 29,508 - -------------------------------------------------------------------------------- Net income per share Basic $ 7.26 $ 5.46 Diluted $ 7.02 $ 5.26 - -------------------------------------------------------------------------------- Investors' results had a dilutive effect on the Company's pro forma results of operations in 1996 and 1995 due to significant loss reserve strengthening at Investors. The Company does not expect that Investors' loss reserves will require additional strengthening in future years. 44 18. Markel Corporation (Parent Company Only) Financial Information CONDENSED BALANCE SHEETS
December 31, - ------------------------------------------------------------------------------------------ 1997 1996 - ------------------------------------------------------------------------------------------ (dollars in thousands) ASSETS Investments, available-for-sale, at estimated fair value Fixed maturities (cost of $129,109 in 1997) $ 129,530 $ -- Equity securities (cost of $13,439 in 1997) 15,793 -- Short-term investments (estimated fair value approximates cost) 35,494 17,618 - ------------------------------------------------------------------------------------------- TOTAL INVESTMENTS, AVAILABLE-FOR-SALE 180,817 17,618 - ------------------------------------------------------------------------------------------- Cash and cash equivalents 649 1,562 Investments in consolidated subsidiaries 393,174 336,301 Notes receivable due from subsidiaries 48,226 49,694 Other assets 20,500 10,757 - ------------------------------------------------------------------------------------------- TOTAL ASSETS $ 643,366 $ 415,932 - ------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current income taxes payable $ 810 $ 281 Deferred income taxes 6,297 13,070 Long-term debt 93,166 114,641 Other liabilities 31,649 19,605 8.71% Junior Subordinated Deferrable Interest Debentures 154,640 -- - ------------------------------------------------------------------------------------------- TOTAL LIABILITIES 286,562 147,597 - ------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 356,804 268,335 - ------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 643,366 $ 415,932 - -------------------------------------------------------------------------------------------
45 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 18. Markel Corporation (Parent Company Only) Financial Information (continued) CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, - --------------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------------- (dollars in thousands) REVENUES Net investment income $ 11,816 $ 2,585 $ 3,879 Cash dividends on common stock of consolidated subsidiaries 29,125 31,841 35,459 Other 1,051 1,471 129 - --------------------------------------------------------------------------------------------------- TOTAL REVENUES 41,992 35,897 39,467 - --------------------------------------------------------------------------------------------------- EXPENSES Interest 20,306 8,016 8,460 Other 644 205 3,144 - --------------------------------------------------------------------------------------------------- TOTAL EXPENSES 20,950 8,221 11,604 - --------------------------------------------------------------------------------------------------- INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF CONSOLIDATED SUBSIDIARIES AND INCOME TAXES 21,042 27,676 27,863 Equity in undistributed earnings of consolidated subsidiaries 23,666 15,655 5,139 Income tax benefit 5,719 3,341 1,490 - --------------------------------------------------------------------------------------------------- NET INCOME $ 50,427 $ 46,672 $ 34,492 - --------------------------------------------------------------------------------------------------- OTHER COMPREHENSIVE INCOME Unrealized gains on securities Unrealized holding gains arising during the period, net of taxes of $1,334 in 1997 $ 2,477 $ -- $ -- Consolidated subsidiaries' unrealized holding gains arising during the period, net of taxes of $26,558 in 1997, $7,010 in 1996 and $25,872 in 1995 49,323 13,018 48,046 - --------------------------------------------------------------------------------------------------- 51,800 13,018 48,046 - --------------------------------------------------------------------------------------------------- Less reclassification adjustments for gains included in net income, net of taxes of $363 in 1997 and $501 in 1996 (673) (931) -- Less consolidated subsidiaries' reclassification adjustments for gains included in net income, net of taxes of $5,179 in 1997, $1,254 in 1996 and $4,183 in 1995 (9,619) (2,327) (7,769) - --------------------------------------------------------------------------------------------------- (10,292) (3,258) (7,769) - --------------------------------------------------------------------------------------------------- TOTAL OTHER COMPREHENSIVE INCOME 41,508 9,760 40,277 - --------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME $ 91,935 $ 56,432 $ 74,769 - ---------------------------------------------------------------------------------------------------
46 18. Markel Corporation (Parent Company Only) Financial Information (continued) CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, - ------------------------------------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------------------------------ (dollars in thousands) OPERATING ACTIVITIES Net income $ 50,427 $ 46,672 $ 34,492 Adjustments to reconcile net income to net cash provided by operating activities (15,471) (3,608) (3,181) - ------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 34,956 43,064 31,311 - ------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Proceeds from sales of fixed maturities and equity securities 5,918 1,472 3,147 Proceeds from maturities of fixed maturities 2,047 2,524 1,516 Cost of fixed maturities and equity securities purchased (152,551) (4,030) (4,626) Net change in short-term investments (17,876) (3,878) 1,562 Decrease (increase) in notes receivable due from subsidiaries 1,468 (4,470) (4,005) Capital contribution to subsidiaries (4,640) -- (9,500) Sale (acquisition) of insurance companies 15,791 (38,050) (24,281) Other (1,424) (1,263) (96) - ------------------------------------------------------------------------------------------------ NET CASH USED BY INVESTING ACTIVITIES (151,267) (47,695) (36,283) - ------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Net proceeds from issuance of 8.71% Junior Subordinated Deferrable Interest Debentures 152,763 -- -- Dividends to subsidiaries (51) (1,080) (1,080) Additions to long-term debt -- 40,500 27,500 Repayments and repurchases of long-term debt (21,527) (32,500) (21,500) Repurchase of preferred stock from subsidiaries (12,000) -- -- Other (3,787) (1,539) 172 - ----------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 115,398 5,381 5,092 - ----------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (913) 750 120 Cash and cash equivalents at beginning of year 1,562 812 692 - ------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 649 $ 1,562 $ 812 - ------------------------------------------------------------------------------------------------
47 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT [kpmg logo] The Board of Directors and Shareholders Markel Corporation: We have audited the accompanying consolidated balance sheets of Markel Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Markel Corporation and its subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Richmond, Virginia February 3, 1998 48 QUARTERLY INFORMATION The following table presents the quarterly results of consolidated operations for 1997, 1996 and 1995 (dollars in thousands, except per share amounts):
Mar. 31 June 30 Sept. 30 Dec. 31 - --------------------------------------------------------------------------------------------------------------------------- 1997 Operating revenues $ 98,473 $ 101,700 $ 110,612 $ 108,262 Income before income taxes 11,878 12,476 21,039 20,958 Net income 8,790 9,722 15,988 15,927 Comprehensive income 3,082 37,614 32,742 18,497 Net income per share Basic $ 1.61 $ 1.77 $ 2.91 $ 2.90 Diluted 1.56 1.72 2.82 2.81 Common stock price ranges High $ 113 1/2 $ 131 $ 157 1/2 $ 161 Low 89 102 1/2 127 1/2 144 1996 Operating revenues $ 92,990 $ 83,672 $ 90,367 $ 99,707 Income before income taxes 10,554 10,117 11,144 5,185 Net income 7,810 26,090 8,469 4,303 Comprehensive income (3,925) 22,740 14,721 22,896 Net income per share Basic $ 1.44 $ 4.81 $ 1.56 $ 0.79 Diluted 1.38 4.61 1.50 0.76 Common stock price ranges High $ 91 $ 94 1/2 $ 93 $ 92 Low 72 1/2 78 85 83 1995 Operating revenues $ 76,525 $ 82,565 $ 91,543 $ 92,942 Income before income taxes 8,838 11,286 12,835 14,968 Net income 6,540 8,352 8,984 10,616 Comprehensive income 19,755 21,585 14,034 19,395 Net income per share Basic $ 1.21 $ 1.54 $ 1.66 $ 1.96 Diluted 1.17 1.49 1.59 1.88 Common stock price ranges High $ 48 1/4 $ 57 $ 75 1/2 $ 75 1/2 Low 40 3/4 47 1/4 56 1/4 67 1/2
49 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- In 1997 gross premium volume totaled $423.3 million compared to $413.6 million in 1996 and $402.1 in 1995. Following is a comparison of gross premium volume by significant underwriting unit (dollars in thousands): Years Ended December 31, - -------------------------------------------------------------------------------- GROSS PREMIUM VOLUME 1997 1996 1995 - -------------------------------------------------------------------------------- Excess and Surplus Lines $ 130,028 $ 121,356 $ 104,841 Professional/Products Liability 113,704 118,891 127,245 Specialty Program Insurance 85,645 92,333 102,336 Specialty Personal and Commercial Lines 44,871 64,706 44,456 Brokered Excess and Surplus Lines 45,795 6,809 -- Other 3,300 9,511 23,212 - -------------------------------------------------------------------------------- Total $ 423,343 $ 413,606 $ 402,090 - -------------------------------------------------------------------------------- Excess and Surplus Lines premiums grew 7% in 1997 to $130.0 million and 16% in 1996 to $121.4 million from $104.8 million in 1995. The 1997 increase was due to growth in the inland marine, excess and umbrella and Markel special property programs. The increase in 1996 was the result of growth in casualty premiums due to the selective renewal of portions of the Lincoln Insurance Company (LIC) book of business, growth in the Markel special property program, as well as growth in the excess and umbrella program and the excess and surplus lines (E&S) property unit. Growth in both years was achieved despite significant competition in the E&S market. Premiums from Professional/Products Liability insurance totaled $113.7 million in 1997 compared to $118.9 million in 1996 and $127.2 million in 1995. In 1997 growth in the employment practices product line was more than offset by lower production in the directors' and officers' liability, specified medical, financial institutions and the medical malpractice programs. In 1996 growth in the employment practices product line was mitigated by lower production in the medical malpractice and the special risks programs. The decline in both years was due to continued aggressive competition in the professional liability markets and changes in risk selection in certain programs. Premiums from Specialty Program Insurance totaled $85.6 million in 1997 compared to $92.3 million in 1996 and $102.3 million in 1995. Lower premium volume due to intense competition in the camp and youth recreation division accounted for the majority of the decrease in 1997. Also in 1997 the unit began directly placing all of its workers' compensation business with another insurance carrier. In 1996 premium volume was adversely affected by intense competition and the nonrenewal of certain underperforming lines of business. Specialty Personal and Commercial Lines premiums were $44.9 million in 1997 compared to 1996 premiums of $64.7 million and 1995 premiums of $44.5 million. During 1997 an improved economy helped increase production in the recreational products division which was more than offset by the discontinuance of two unprofitable auto insurance programs and a change in the distribution system of a third auto program for lenders. New programs added in 1996 and 1995, including several auto related products and property coverage for mobile homes and dwellings, contributed $43.2 million to 1996 production. (Premium chart appears here. Plot points are below). Premiums (in millions) 1995 1996 1997 gross premium volume $402 $414 $423 net premium volume $298 $313 $350 50 Premiums from Brokered Excess and Surplus Lines increased to $45.8 million in 1997 from $6.8 million in 1996. This new underwriting unit was the result of the purchase of Investors Insurance Holding Corp. (Investors) on October 31, 1996. Other gross premium volume was $3.3 million in 1997 compared to $9.5 million in 1996 and $23.2 million in 1995. In 1997 other gross premium volume primarily consisted of facultative reinsurance placed by the Professional/Products Liability unit. Prior years also included runoff business related to LIC and the Company's brokerage unit which was sold in the Fall of 1996. Currently many of the Company's products are being adversely affected by increased competition and lower rates in the property and casualty market. The Company does not intend to relax underwriting standards in order to sustain premium volume. Further, the volume of premiums written may vary significantly with the Company's decision to alter its product concentration to maintain or improve underwriting profitability. The Company enters into reinsurance agreements in order to reduce its liability on individual risks and enable it to underwrite policies with higher limits. The Company's net retention of gross premium volume increased to 78% in 1997 compared to 76% in 1996 and 74% in 1995. The increase in 1997 reflected higher retentions in the Specialty Personal and Commercial Lines unit. In 1996 the increase was due to a new reinsurance treaty structure in the Specialty Program Insurance unit. Total operating revenues increased 14% to $419.0 million in 1997 from $366.7 million in 1996. Operating revenues in 1996 were 7% above the $343.6 million reported in 1995. In 1997 growth in earned premiums and substantially higher net investment income and realized gains accounted for the increase in revenues. In 1996 growth in earned premiums and higher net investment income more than offset lower realized gains from the sales of investments. Earned premiums advanced 8% to $332.9 million in 1997 and 8% to $307.5 million in 1996 from $285.1 million in 1995. Following is a comparison of earned premiums by significant underwriting unit (dollars in thousands): Years Ended December 31, - -------------------------------------------------------------------------------- EARNED PREMIUMS 1997 1996 1995 - -------------------------------------------------------------------------------- Excess and Surplus Lines $ 84,244 $ 76,089 $ 70,160 Professional/Products Liability 102,075 110,154 112,988 Specialty Program Insurance 67,778 68,906 64,582 Specialty Personal and Commercial Lines 48,622 45,102 25,181 Brokered Excess and Surplus Lines 30,170 4,957 -- Other (11) 2,245 12,235 - -------------------------------------------------------------------------------- Total $ 332,878 $ 307,453 $ 285,146 - -------------------------------------------------------------------------------- 51 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Excess and Surplus Lines earned premiums rose 11% in 1997 to $84.2 million and 8% in 1996 to $76.1 million from $70.2 million in 1995. Higher gross premium volume over the past several years accounted for the increases. Premiums earned from Professional/Products Liability insurance decreased 7% in 1997 to $102.1 million and decreased 3% in 1996 to $110.2 million from $113.0 million in 1995. The 1997 and 1996 declines resulted from lower gross premium volume over the past three years as a result of the extremely competitive professional liability market. Specialty Program Insurance earned premiums decreased 2% to $67.8 million in 1997 and increased 7% to $68.9 million in 1996 from $64.6 million in 1995. The decline in 1997 was due to lower gross premium volume. The growth in 1996 was caused by increased retentions of gross premium volume over the past several years and growth in gross premiums in 1995. Specialty Personal and Commercial Lines earned premiums rose 8% in 1997 to $48.6 million and 79% in 1996 to $45.1 million from $25.2 million in 1995. The increase was due to significant growth in gross premium volume in 1996 and 1995 from new programs as well as established programs. Premiums earned from Brokered Excess and Surplus Lines increased in 1997 to $30.2 million from $5.0 million in 1996. Net investment income increased 34% in 1997 to $68.7 million and 19% in 1996 to $51.2 million from $43.0 million in 1995. The increase in 1997 reflected the impact of significant growth in the Company's investment portfolio due to the acquisition of Investors, the issuance of $150.0 million of 8.71% Capital Securities in January 1997 and operating cash flows. The 1996 increase reflected the impact of significant growth in the investment portfolio due to the purchase of Investors and operating cash flows. Invested assets grew 25% in 1997 to $1.4 billion and 24% in 1996 to $1.1 billion from $908.6 million in 1995. Net realized gains from the sales of investments totaled $15.8 million in 1997 compared to $5.0 million in 1996 and $12.0 million in 1995. Over the past three years, the Company has experienced variability in its realized and unrealized investment gains. The fluctuations are primarily the result of interest rate volatility which influences the market values of fixed maturity and equity investments. The Company's investment strategy seeks to maximize total investment returns over a long-term period. The Company's focus on long-term total investment returns may result in variability in the level of realized and unrealized investment gains and losses from one period to the next. (Investment Earnings chart appears here. Plot points are below). Investment Earnings (in millions) 1995 1996 1997 [S] [C] net realized gains $ 12 $ 5 $ 16 net investment income $ 43 $ 51 $ 69 ------ ----- ------- Investment earnings $ 55 $ 56 $ 85 Total operating expenses, which included losses and loss adjustment expenses, underwriting, acquisition and insurance expenses, other operating expenses, amortization of intangible assets and a nonrecurring item in 1996, were $332.6 million in 1997 compared to $321.7 million in 1996 and $287.2 million in 1995. Higher variable expenses associated with higher earned premiums accounted for the majority of the increase in 1997 and 1996. As part of the purchase of Shand/Evanston in 1987, the Company acquired Shand's headquarters building in Evanston, Illinois. The estimated fair value of the building had fallen significantly since 1987 due to escalating property taxes and reduced demand for office space in Evanston. In response to a purchase offer, the Company decided to dispose of the building and immediately recognized a $10.4 million, nonrecurring, non-cash loss in 1996. 52 The following is a comparison of selected data from the Company's operations (dollars in thousands):
Years Ended December 31, - ------------------------------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------------------------ Gross premium volume $ 423,343 $ 413,606 $ 402,090 Net premiums written $ 329,963 $ 313,459 $ 297,539 Net retention 78% 76% 74% Earned premiums $ 332,878 $ 307,453 $ 285,146 Losses and loss adjustment expenses $ 210,061 $ 202,378 $ 186,655 Underwriting, acquisition and insurance expenses $ 120,076 $ 105,032 $ 96,113 Underwriting profit $ 2,741 $ 43 $ 2,378 GAAP RATIOS Loss ratio 63% 66% 65% Expense ratio 36% 34% 34% - ------------------------------------------------------------------------------------------- COMBINED RATIO 99% 100% 99% - -------------------------------------------------------------------------------------------
The combined ratio measures the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums. The loss ratio for 1997 decreased to 63% from 66% in 1996 and from 65% in 1995. The 1997 loss ratio compared favorably to 1996 due to winter storm and Hurricane Fran property losses and underwriting losses in the professional liability book of business in 1996. The storm losses and professional liability underwriting losses in 1996 were also responsible for the increase in the loss ratio in 1996 compared to 1995. The expense ratio was 36% in 1997 compared to 34% in 1996 and 1995. The 1997 expense ratio increased due to higher policy acquisition and overhead expenses which were partially offset by contingent profit commissions from reinsurers. The 1996 expense ratio benefited from the recognition of contingent profit commissions which offset higher acquisition costs in several of the Company's recently added lines of business. Interest expense increased to $20.1 million in 1997 compared to $8.0 million in 1996 and $8.5 million in 1995. The 1997 increase was due to the issuance of the 8.71% Capital Securities in January 1997. The 1996 decrease was due to the repayment, late in 1995, of the majority of the debt incurred for the purchase of LIC. 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, expenses related to the amortization of intangible assets and any nonrecurring items. Management believes this is a better indicator of the Company's performance because it reduces the variability in results associated with realized gains or losses and also eliminates the impact of accounting transactions which do not reflect current operating costs. Income from core underwriting and investing operations advanced to $42.0 million in 1997 which represented a 23% increase over 1996. In 1996 income from core operations rose 17% to $33.9 million from $28.9 million in 1995. The 1997 and 1996 increases were due to continued underwriting profitability and higher net investment income, resulting primarily from larger investment portfolios. (Earnings from Core Operations chart appears here. Plot points are below). Earnings from Core Operations (per diluted share) 1995 1996 1997 $5.15 $6.03 $7.43 53 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Net income was $50.4 million in 1997 compared to $46.7 million in 1996 and $34.5 million in 1995. The growth in 1997 was due to substantial increases in net investment income and realized investment gains. In 1996 growth in net investment income was partially offset by a decrease in realized investment gains. Also during 1996, the Company recognized an $18.4 million nonrecurring tax benefit which was partially offset by the recognition of the building loss of $6.8 million, net of taxes. Comprehensive income was $91.9 million in 1997 compared to $56.4 million in 1996 and $74.8 in 1995. The growth in 1997 was due to higher net income and higher other comprehensive income as a result of increased unrealized holding gains on equity and fixed maturity securities. The decrease in comprehensive income in 1996 was due to lower other comprehensive income as a result of lower unrealized holding gains on equity and fixed maturity securities compared to 1995 mitigated by higher net income. CLAIMS AND RESERVES - -------------------------------------------------------------------------------- The Company maintains reserves for specific claims incurred and reported, reserves for claims incurred but not reported (IBNR) and reserves for uncollectible reinsurance. Reserves for reported claims are based primarily on case-by-case evaluations of the claims and their potential for adverse development. Reserves for reported claims consider the Company's estimate of the ultimate cost to settle the claims, including investigation and defense of lawsuits resulting from the claims, and may be subject to adjustment for differences between costs originally estimated and costs subsequently re-estimated or incurred. Generally accepted accounting principles require that reserves for claims incurred but not reported be based on the estimated ultimate cost of settling claims, including the effects of inflation and other social and economic factors, using past experience adjusted for current trends and any other factors that would modify past experience. The Company also evaluates and adjusts reserves for uncollectible reinsurance in accordance with its collection experience and the development of the gross reserves. Ultimate liability may be greater or less than current reserves. In the insurance industry there is always the risk that reserves may prove inadequate. Reserves are continually monitored by the Company using new information on reported claims and a variety of statistical techniques. Anticipated inflation is reflected implicitly in the reserving process through analysis of cost trends and the review of historical development. The Company does not discount its reserves for losses and loss adjustment expenses to reflect estimated present value. 54 The following table represents the development of the Company's balance sheet reserves for the period 1987 through 1997 (in thousands):
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Net reserves restated for commutations, acquisitions and other $ 486,197 487,445 508,517 511,186 557,736 569,951 598,681 619,776 671,629 725,247 745,752 - ------------------------------------------------------------------------------------------------------------------------------------ Paid (cumulative) as of: One year later 79,318 54,180 65,810 52,545 83,720 95,084 151,413 135,947 124,467 145,736 Two years later 111,929 89,973 116,418 107,209 156,256 217,180 253,418 219,133 227,640 Three years later 140,161 131,899 154,798 160,808 253,424 297,034 307,831 286,926 Four years later 176,442 160,942 194,199 242,670 318,298 331,709 353,325 Five years later 195,152 199,982 258,412 297,914 346,009 361,214 Six years later 230,109 261,185 310,448 320,766 367,636 Seven years later 285,296 312,210 331,842 337,735 Eight years later 335,971 332,622 346,213 Nine years later 355,460 346,002 Ten years later 368,179 Reserves re-estimated as of: One year later 498,624 497,389 503,051 506,808 548,147 563,712 596,455 610,983 647,512 699,271 Two years later 495,890 478,047 500,962 494,930 543,085 553,375 582,745 585,849 620,739 Three years later 477,996 475,171 493,615 490,933 529,882 538,126 564,583 563,333 Four years later 486,622 480,335 486,805 479,933 514,165 521,906 559,482 Five years later 495,106 477,506 475,616 464,311 501,265 524,532 Six years later 492,077 466,916 459,264 452,954 507,776 Seven years later 483,339 449,730 448,751 464,268 Eight years later 465,837 441,298 461,379 Nine years later 457,879 454,972 Ten years later 472,782 Cumulative redundancy $ 13,415 32,473 47,138 46,918 49,960 45,419 39,199 56,443 50,890 25,976 - ------------------------------------------------------------------------------------------------------------------------------------ Cumulative % 3% 7% 9% 9% 9% 8% 7% 9% 8% 4% Gross liability, end of year, restated for acquisitions and other 852,257 853,201 795,745 863,177 925,861 971,157 Reinsurance recoverable, restated for commutations, acquisitions 282,306 254,520 175,969 191,548 200,614 225,405 and other - ------------------------------------------------------------------------------------------------------------------------------------ Net liability, end of year, restated for commutations, acquisitions 569,951 598,681 619,776 671,629 725,247 745,752 and other - ------------------------------------------------------------------------------------------------------------------------------------ Gross re-estimated liability 859,187 812,763 740,093 815,523 926,382 Re-estimated recoverable 334,655 253,281 176,760 194,784 227,111 - ------------------------------------------------------------------------------------------------------------------------------------ Net re-estimated liability 524,532 559,482 563,333 620,739 699,271 - ------------------------------------------------------------------------------------------------------------------------------------ Gross cumulative redundancy (deficiency) (6,930) 40,438 55,652 47,654 (521) - ------------------------------------------------------------------------------------------------------------------------------------
55 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The first line of the table shows net reserves for losses and loss adjustment expenses restated for reinsurer commutations, acquisitions and other items, and is the result of adding the reserves for losses and loss adjustment expenses as originally estimated at the end of each year and all prior years to reserves reassumed through commutations and other activities, including acquisitions, completed in recent years. The upper portion of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. The lower portion of the table shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year, including cumulative payments made since the end of the respective year. For example, the 1992 liability for losses and loss adjustment expenses at the end of 1992 for 1992 and all prior years, adjusted for commutations, acquisitions and other, was originally estimated to be $570.0 million. Five years later, as of December 31, 1997, this amount was re-estimated to be $524.5 million, of which $361.2 million had been paid, leaving a reserve of $163.3 million for losses and loss adjustment expenses for 1992 and prior years remaining unpaid as of December 31, 1997. Cumulative redundancy represents the change in the estimate from the original balance sheet date to the date of the current estimate. For example, the 1992 liability for losses and loss adjustment expenses developed a $45.4 million redundancy from December 31, 1992 to December 31, 1997, five years later. Conditions and trends that have affected the development of liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on the table. The gross cumulative redundancies (deficiencies) for 1996 and prior years are presented before deductions for reinsurance. Gross deficiencies and redundancies may be significantly more or less than net deficiencies and redundancies depending on the nature and extent of applicable reinsurance. The re-estimated reserves for 1987 and prior increased $14.9 million in 1997. This development was the result of reserve strengthening by management for environmental impairment liability (EIL) and toxic tort claims. Inherent volatility in EIL and toxic tort claims and management's desire to maintain reserves for all lines of business that are more likely redundant than deficient necessitated the reserve increases. ENVIRONMENTAL MATTERS - -------------------------------------------------------------------------------- From 1980 to 1985, Shand/Evanston offered EIL insurance to large companies which generated or transported toxic wastes. The EIL coverage was designed to fill gaps in an insured's general liability coverage to the extent a gap would have existed and was offered as a primary policy with an "Other Insurance" clause. To the extent that other insurance was not valid and collectible, Shand/Evanston's EIL policy was intended to perform as primary coverage provided that all other terms and conditions of the policy were met. To the extent that other insurance was valid and collectible, the policy was intended to perform as excess coverage. All EIL policies were underwritten on a claims made basis, and in almost all instances, with policy limits that included the costs of defense and related expenses. This book of business was reinsured with numerous reinsurers, and Shand/Evanston's original retentions were less than 5% of policy limits. Policy limits ranged from $1 million per impairment with $2 million in the aggregate to $30 million per impairment with $60 million in the aggregate. 56 - -------------------------------------------------------------------------------- Shand/Evanston's defenses in EIL claims have generally been policy specific and have included defenses of non-disclosure and misrepresentation on policy applications, policy exclusions including site limitations, late assertion of claims and the existence of other valid and collectible insurance. Following is an analysis of the Company's net outstanding reserves for Shand/Evanston's EIL exposures. Commutations include reinsurer commutations completed in 1997 as well as changes in reserves related to reinsurer commutations occurring in earlier years. (dollars in thousands) Years Ended December 31, - -------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Case reserves $ 685 $ 665 $ 579 Case and IBNR reserves reassumed through commutations 19,653 14,730 13,125 - -------------------------------------------------------------------------------- TOTAL $ 20,338 $ 15,395 $ 13,704 - -------------------------------------------------------------------------------- Net paid losses and loss adjustment expenses $ 2,905 $ 3,616 $ 14,894 - -------------------------------------------------------------------------------- Shand/Evanston carried net EIL case and IBNR reserves for losses and loss adjustment expenses of $20.3 million at December 31, 1997 compared to $15.4 million at December 31, 1996 and $13.7 million at December 31, 1995. The Company's goal is to close EIL claims as aggressively as reasonably possible. The increase in 1997 and 1996 reserves was due to development on existing claims as well as limited new claim activity. In some cases, the Company may be entitled to subrogation against other primary insurers. No specific provision for these potential recoveries is made when establishing loss and loss adjustment expense reserves for EIL. As of December 31, 1997, Shand/Evanston's net retention of case and IBNR reserves related to EIL was approximately 81% of gross EIL case and IBNR reserves. Inception to date net paid losses and loss adjustment expenses for EIL related exposures totaled $117.9 million at December 31, 1997, of which approximately $9.9 million was litigation related expense. There were 10 active site exposures related to EIL at December 31, 1997 and December 31, 1996 compared to 9 active site exposures at December 31, 1995. The 10 active site exposures at December 31, 1997 represented 10 insureds. Management believes future exposure to valid claims is limited because coverage was afforded on a claims made basis. Shand/Evanston's exposure to toxic tort related claims originated from umbrella, excess and commercial general liability (CGL) insurance it underwrote on an occurrence basis from the late 1970's to mid-1980's. The majority of the policies attach over a self-insured retention, deductible or other insurance. This book of business was reinsured with numerous reinsurers, and Shand/Evanston's original retention was less than 5% of policy limits. Policy limits ranged from $125,000 to $30 million. Toxic tort claims include property damage and clean-up related to pollution, as well as personal injury allegedly arising from exposure to hazardous materials. After 1986 Shand/Evanston underwrote CGL coverage using a claims made form which included a pollution exclusion that significantly reduced its exposure to toxic tort claims. 57 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Insurance coverage issues and other uncertainties have made the estimation of reserves for toxic tort exposures difficult. The outcome of legal actions to determine general liability coverages related to toxic tort issues has been inconsistent among the states with respect to whether insurance coverage exists at all, what policies provide the coverage, when and if an insurer has a duty to defend, whether the release of contaminants is one or more "occurrence" for purposes of determining applicable policy limits, how pollution exclusions in policies should be applied and whether clean-up costs constitute property damage. Regulatory requirements regarding environmental matters are also inconsistent and change frequently. Following is an analysis of the Company's net outstanding reserves for Shand/Evanston's toxic tort exposures. Commutations include reinsurer commutations completed in 1997 as well as changes in reserves related to reinsurer commutations occurring in earlier years. (dollars in thousands) Years Ended December 31, - -------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Case reserves $ 1,660 $ 1,782 $ 2,197 IBNR reserves 2,147 1,354 1,589 Case and IBNR reserves reassumed through commutations 50,280 37,751 44,636 - -------------------------------------------------------------------------------- TOTAL $ 54,087 $ 40,887 $ 48,422 - -------------------------------------------------------------------------------- Net paid losses and loss adjustment expenses $ 8,152 $ 10,849 $ 1,504 - -------------------------------------------------------------------------------- Shand/Evanston carried net toxic tort case and IBNR reserves for losses and loss adjustment expenses of $54.1 million at December 31, 1997 compared to $40.9 million at December 31, 1996 and $48.4 million at December 31, 1995. The increase in net toxic tort reserves in 1997 was due to reserve strengthening by management. The decrease in net toxic tort reserves in 1996 was due to claims payments partially offset by increases due to commutations with reinsurers and adverse development in the underlying exposures. As of December 31, 1997, Shand/Evanston's net retention of case and IBNR reserves related to toxic torts was approximately 87% of gross toxic tort case and IBNR reserves. Inception to date net paid losses and loss adjustment expenses for toxic tort related exposures totaled $27.4 million, of which approximately $2.5 million was litigation related expense. During 1997 and 1996 the Company paid $3.8 million and $7.4 million, respectively, for breast implant product liability claims. The exposure had been fully reserved in prior years. At December 31, 1997, the Company has either paid or fully reserved all of its breast implant product liability exposure. There were 165 open claims related to toxic torts at December 31, 1997 compared to 210 at December 31, 1996 and 249 at December 31, 1995. Of the toxic tort claims open at December 31, 1997, approximately 10% were products liability asbestos or related claims. The average severity of toxic tort claims is substantially lower than the average severity of EIL claims. The Company's reserves for losses and loss adjustment expenses related to EIL and toxic tort exposures represent management's best estimate of ultimate settlement values. These reserves 58 - -------------------------------------------------------------------------------- are continually monitored by management, and the Company's statistical analysis of these reserves is reviewed by independent consulting actuaries. In addition, the Company continues to maintain unallocated IBNR reserves to further mitigate the impact of adverse development, if any, in these and other reserves. During 1997 the Company sold LIC with the Company retaining all of LIC's loss reserves and related assets including LIC's rights to indemnity from the former owners of LIC.The former owners of LIC have indemnified the Company against adverse development of losses and loss adjustment expenses and uncollectible reinsurance, if any, in an amount up to the Company's purchase price for LIC of approximately $24 million. This indemnification covers all of LIC's reserves, including environmental matters. At December 31, 1997, case and IBNR reserves for toxic tort claims attributable to LIC were $6.9 million. Exposures of these types are generally subject to significant uncertainty due to potential severity and an uncertain legal climate. Reserves for these types of claims could be subject to increases in the future; however, these reserves have been established in accordance with the Company's desire to have reserves of all types that are more likely redundant than deficient. LIQUIDITY AND CAPITAL RESOURCES - -------------------------------------------------------------------------------- The Company seeks to maintain prudent levels of liquidity and financial leverage for the protection of its policyholders, creditors and shareholders. The Company's targeted capital structure is approximately one-third debt to two-thirds equity. At December 31, 1997, the Company's debt to total capital ratio was 28%. In calculating its debt to total capital ratio, the Company treats the 8.71% Capital Securities as one-half debt and one-half equity. From time to time, the Company's debt to total capital ratio may increase due to business opportunities that may be financed in the short term with debt. In order to maintain strong liquidity, the Company seeks to maintain cash, short-term investments and fixed maturities of approximately two times annual interest expense at its holding company (Markel Corporation). At December 31, 1997, $165.7 million of cash, short-term investments and fixed maturities were held at Markel Corporation which approximated 8.2 times annual interest expense. The Company is holding the proceeds of the 8.71% Capital Securities offering at the holding company until the funds can be invested for the long term. The Company's insurance operations collect premiums and pay current claims, reinsurance costs and operating expenses. Premiums collected and positive cash flow 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. As a holding company, the Company receives cash from its subsidiaries as reimbursement for operating and other administrative expenses it incurs. The reimbursements are executed within the guidelines of various management agreements between the holding company and its subsidiaries. 59 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The holding company has historically relied upon dividends from its subsidiaries to meet debt service obligations. Under the insurance laws of the various states in which the Company's insurance subsidiaries are incorporated, an insurer is restricted in the amount of dividends it may pay without prior approval of regulatory authorities. Pursuant to such laws, at December 31, 1997, the Company's insurance subsidiaries could pay dividends of $45.6 million without prior regulatory approval. The Company's invested assets increased to $1.4 billion at December 31, 1997 from $1.1 billion at December 31, 1996. The increase in invested assets was due to the issuance of $150.0 million of 8.71% Capital Securities in January 1997, the increase in the market value of the Company's fixed maturity and equity investments and operating cash flows. (Invested Assets chart appears here. Plot points are below) Invested Assets (in millions) 1995 1996 1997 $909 $1,131 $1,408 Long-term debt decreased to $93.2 million at December 31, 1997 from $114.7 million at December 31, 1996. During 1997 the Company repurchased $6.55 million of its 7.25% notes. In 1996 the Company arranged a revolving credit facility which provides up to $150.0 million of funds for working capital and other general corporate purposes. As of December 31, 1997, there was no outstanding balance under the revolving credit facility as compared to $15.0 million outstanding at December 31, 1996. In January 1997 the Company arranged the sale of $150.0 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 Deferrable Interest Debentures due January 1, 2046. The Capital Securities and related Debentures are redeemable by the Company on or after January 1, 2007. The Company's insurance operations require capital to support premium writings. The National Association of Insurance Commissioners (NAIC) developed a model law and risk-based capital formula designed to help regulators identify P&C insurers that may be inadequately capitalized. Under the NAIC's requirements, an insurer must maintain total capital and surplus above a calculated threshold or face varying levels of regulatory action. The capital and surplus at December 31, 1997 of each of the Company's insurance subsidiaries was above the minimum regulatory threshold. OTHER MATTERS - -------------------------------------------------------------------------------- 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 change of the century. If not corrected these computer applications may fail or create erroneous results by the year 2000. The majority of the Company's material applications have been developed within the past several years, and the Company considered the Year 2000 issue during system development. The Company has implemented a due diligence plan to test all of its material systems for Year 2000 compliance. It is anticipated that all systems will be reviewed for compliance, and any necessary modification to applications will be completed by the end of 1998. In addition the Company is conducting a comprehensive review of its business practices to limit its exposure to Year 2000 claims from insureds and protect itself from potential Year 2000 problems experienced by its business partners. The Company does not expect the cost of external or 60 internal resources used to address Year 2000 compliance to be material to the Company's results of operations or financial position. IMPACT OF INFLATION - -------------------------------------------------------------------------------- Property and casualty insurance premiums are established before the amount of losses and loss adjustment expenses, or the extent to which inflation may affect such expenses, is known. Consequently, in establishing premiums, the Company attempts to anticipate the potential impact of inflation. Inflation is also considered by the Company in the determination and review of reserves for losses and loss adjustment expenses since portions of these reserves are expected to be paid over extended periods of time. The importance of continually reviewing reserves is even more pronounced in periods of extreme inflation. IMPACT OF ACCOUNTING STANDARDS - -------------------------------------------------------------------------------- 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 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. 61 Markel Corporation & Subsidiaries --------------------------------------------------------------------------- MARKET AND DIVIDEND INFORMATION - -------------------------------------------------------------------------------- Effective June 11, 1997, the Company's common stock began trading on the New York Stock Exchange under the symbol MKL. Prior to that time, the Company's stock traded in the NASDAQ stock market under the symbol MAKL. The number of shareholders of record as of January 31, 1998 was 473. The total number of shareholders, including those holding shares in "street name" or in brokerage accounts is estimated to be in excess of 3,500. The Company's current strategy is to retain earnings, permitting the Company to take advantage of expansion and acquisition opportunities. Consequently, the Company has never paid a cash dividend on its common stock. NASDAQ quotations through June 10, 1997 reflect a high sales price of $124.00 and a low sales price of $89.00. High and low closing sales prices as reported on the New York Stock Exchange composite tape for the remainder of the year were $161.00 and $122.00, respectively. See "Quarterly Information" on page 49 for additional quarterly sales price information. SHAREHOLDER RELATIONS, FORM 10-K - -------------------------------------------------------------------------------- This document represents Markel Corporation's Annual Report and Form 10-K which is filed with the Securities and Exchange Commission. Information about Markel Corporation, including exhibits filed as part of this Form 10-K, may be obtained by writing Mr. Bruce Kay, Vice President-Investor Relations, at the corporate offices, or by calling (800) 446-6671. ANNUAL SHAREHOLDERS' MEETING - -------------------------------------------------------------------------------- Shareholders of Markel Corporation are invited to attend the Annual Meeting to be held at The Jefferson Hotel, Franklin and Adams Streets, Richmond, Virginia at 4:30 p.m., May 19, 1998. TRANSFER AGENT - -------------------------------------------------------------------------------- First Union National Bank Shareholder Services Group-1153 1525 West W.T. Harris Boulevard 3C3 Charlotte, North Carolina 28288-1153 (800) 829-8432 CORPORATE OFFICES - -------------------------------------------------------------------------------- Markel Corporation 4551 Cox Road Glen Allen, Virginia 23060 (804) 747-0136 (800) 446-6671 62 --------------------------------------------------------------------------- DIRECTORS AND EXECUTIVE OFFICERS DIRECTORS - -------------------------------------------------------------------------------- Alan I. Kirshner Chairman of the Board and Chief Executive Officer Leslie A. Grandis Partner McGuire Woods Battle & Boothe, LLP Stewart M. Kasen Private Investor Anthony F. Markel President and Chief Operating Officer Gary L. Markel President Gary Markel & Associates, Inc. Steven A. Markel Vice Chairman Darrell D. Martin Executive Vice President and Chief Financial Officer V. Prem Watsa Principal Hamblin Watsa Investment Counsel Ltd. EXECUTIVE OFFICERS - -------------------------------------------------------------------------------- Alan I. Kirshner Chairman of the Board and Chief Executive Officer since 1986. He served as President from 1979 until March of 1992 and has been a Director of the Company since 1978. Age 62. Anthony F. Markel President and Chief Operating Officer since March of 1992. He served as Executive Vice President from 1979 until March of 1992 and has been a Director of the Company since 1978. Age 56. Steven A. Markel Vice Chairman since March of 1992. He served as Treasurer from 1986 to August of 1993, and Executive Vice President from 1986 to March of 1992 and has been a Director of the Company since 1978. Age 49. Darrell D. Martin Executive Vice President and Chief Financial Officer since March of 1992. He served as Chief Financial Officer from 1988 to March of 1992 and has been a Director of the Company since January 1991. Age 49. APPENDIX MARKEL CORPORATION ANNUAL REPORT ON FORM 10-K Statement of Differences 1. The pages in the electronic filing do not correspond to the pages in the printed document because there is more material on each page of the printed document. The printed Annual Report and Form 10-K also contains numerous charts, graphs and pictures not incorporated into the electronic Form 10-K. 2. The information on pages 64 and 65 of the printed document, i.e. the 10-K cover sheet and Index and Cross References, have been repositioned on pages 1 and 2 of the electronic document for ease of reference. 3. The information on pages 24 and 25 of the printed document, i.e. the Selected Financial Data has been repositioned over 3 consecutive pages of the electronic document for ease of use. The footnotes to the Selected Financial Data are meant to apply to all three pages of the electronic document. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. MARKEL CORPORATION By: Steven A. Markel ------------------- Vice Chairman March 27, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Alan I. Kirshner*, Chief Executive Officer and Chairman of the - ------------------ Board of Directors Anthony F. Markel*, President, Chief Operating Officer and - ------------------ Director Steven A. Markel*, Vice Chairman and Director - ----------------- Darrell D. Martin*, Executive Vice President, Chief Financial Officer - ----------------- and Director (Principal Accounting Officer) Leslie A. Grandis*, Director - ------------------ Stewart M. Kasen*, Director - ------------------ Gary L. Markel*, Director - ------------------ V. Prem Watsa*, Director - ------------------ *Signed as of March 27, 1998. Index to Exhibits 3 (i) Amended and Restated Articles of Incorporation, as amended (3.1)a 3 (ii) Bylaws, as amended (3.2)b 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 December 31, 1997, and the respective Notes thereto, included in this Annual Report on Form 10-K. Management Contracts or Compensatory Plans required to be filed (Items 10.1 -- 10.7) 10.1 Markel Corporation 1986 Stock Option Plan as amended (4(d))c 10.2 Markel Corporation 1989 Non-Employee Directors Stock Option Plan (A)d 10.3 Markel Corporation 1993 Incentive Stock Plan (10.3)e 10.4 Executive Employment Agreement between Markel Corporation and Alan I. Kirshner dated as of October 1, 1991 (10.5)f 10.5 Executive Employment Agreement between Markel Corporation and Anthony F. Markel dated as of October 1, 1991 (10.6)f 10.6 Executive Employment Agreement between Markel Corporation and Steven A. Markel dated as of October 1, 1991 (10.7)f 10.7 Executive Employment Agreement between Markel Corporation and Darrell D. Martin dated as of March 1, 1992 (10.8)f 10.8(a) Lease Agreement dated July 21, 1995 between Prudential Insurance Company of America and Registrant related to premises located at 4551 Cox Road, Glen Allen, Virginia (10.9a) g 10.8(b) Lease Agreement dated July 21, 1995 between Prudential Insurance Company of America and Registrant related to premises located at 4600 Cox Road, Glen Allen, Virginia (10.9b)g 21 Subsidiaries of Markel Corporation (21)h 23 Consent of independent auditors to incorporation by reference of certain reports into the Registrant's Registration Statements on Form S-8. 27 Financial Data Schedule a. Incorporated by reference from the exhibit shown in parentheses filed with the Commission in the Registrant's 1990 Form 10-K Annual Report b. Incorporated by reference from the exhibit shown in parentheses filed with the Commission in the Registrant's 1992 Form 10-K Annual Report c. Incorporated by reference from the exhibit shown in the parentheses filed with the Commission on May 25, 1989 in the Registrant's Registration Statement on Form S-8 (Registration No. 33-28921) d. Incorporated by reference from the exhibit shown in parentheses filed with the Commission in the Registrant's Proxy Statement for the Annual Meeting of Shareholders held on May 15, 1989, as filed with the Commission e. Incorporated by reference from the exhibit shown in parentheses filed with the Commission in the Registrant's 1994 Form 10-K Annual Report f. Incorporated by reference from the exhibit shown in the parentheses filed with the Commission in the Registrant's 1991 Form 10-K Annual Report Markel Corporation & Subsidiaries g. Incorporated by reference from the exhibit shown in parentheses filed with the Commission in the Registrant's 1995 Form 10-K Annual Report h. Incorporated by reference from the exhibit shown in parentheses filed with the Commission in the Registrant's 1996 Form 10-K Annual Report. EX-23 2 CONSENT OF INDEPENDENT AUDITORS Exhibit 23 Consent of Independent Auditors The Board of Directors Markel Corporation We consent to incorporation by reference in Registration Statements No. 33-28921, No. 33-46706 and No. 33-61598 on Form S-8 of Markel Corporation of our report dated February 3, 1998, relating to the consolidated balance sheets of Markel Corporation and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the Company's 1997 annual report on Form 10-K. KPMG PEAT MARWICK LLP Richmond, Virginia March 27, 1998 EX-27 3 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 FOR MARKEL CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 DEC-31-1997 1,063,191 0 0 253,385 0 0 1,408,320 1,309 15,530 36,816 1,870,100 971,157 192,815 0 0 93,166 0 0 24,660 332,144 1,870,100 332,878 68,653 15,834 1,682 210,061 80,519 39,557 66,351 15,924 50,427 0 0 0 50,427 9.20 8.92 725,809 236,037 (25,976) 44,382 145,736 745,752 (25,976)
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