-----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, Dw7Kxl0SDh8J21Vhu6LsrmHCkAcaYXrNCR6mhKwCWx59l+dCHe4Td3bTM3dWASGF 7W4MTv02uSiCjvMHEugcWw== 0000916641-98-000844.txt : 19980803 0000916641-98-000844.hdr.sgml : 19980803 ACCESSION NUMBER: 0000916641-98-000844 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980729 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-Q SEC ACT: SEC FILE NUMBER: 001-13051 FILM NUMBER: 98672811 BUSINESS ADDRESS: STREET 1: 4551 COX RD CITY: GLEN ALLEN STATE: VA ZIP: 23060-3382 BUSINESS PHONE: 8047470136 MAIL ADDRESS: STREET 1: P O BOX 2009 CITY: GLEN ALLEN STATE: VA ZIP: 23058-2009 10-Q 1 MARKEL CORPORATION 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [ X ] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 1998 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _____ to _____ Commission File Number 1-13051 MARKEL CORPORATION (Exact name of registrant as specified in its charter) Virginia 54-0292420 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 4551 Cox Road, Glen Allen, Virginia 23060-3382 (Address of principal executive offices) (Zip code) (804) 747-0136 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Number of shares of the registrant's common stock outstanding at July 28, 1998: 5,503,212 1 Markel Corporation Form 10-Q Index
Page Number PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Balance Sheets-- June 30, 1998 and December 31, 1997 3 Consolidated Statements of Income and Comprehensive Income-- Quarters and Six Months Ended June 30, 1998 and 1997 4 Consolidated Statements of Cash Flows-- Six Months Ended June 30, 1998 and 1997 5 Notes to Consolidated Financial Statements-- June 30, 1998 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION: Item 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits and Reports on Form 8-K 12
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements MARKEL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets
June 30, December 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) ASSETS Investments, available-for-sale, at estimated fair value Fixed maturities (cost of $1,061,887 in 1998 and $1,037,807 in 1997) $1,088,839 $ 1,063,191 Equity securities (cost of $171,634 in 1998 and $147,601 in 1997) 300,252 253,385 Short-term investments (estimated fair value approximates cost) 61,870 91,744 - ------------------------------------------------------------------------------------------------------------- Total Investments, Available-For-Sale 1,450,961 1,408,320 - ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 1,171 1,309 Receivables 67,735 67,573 Reinsurance recoverable on unpaid losses 207,188 225,405 Reinsurance recoverable on paid losses 23,159 15,530 Deferred policy acquisition costs 39,731 36,816 Prepaid reinsurance premiums 40,848 39,758 Property and equipment 9,393 10,068 Intangible assets 36,314 37,331 Other assets 24,550 27,990 - ------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 1,901,050 $ 1,870,100 - ------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Unpaid losses and loss adjustment expenses $ 947,498 $ 971,157 Unearned premiums 200,895 192,815 Payables to insurance companies 28,885 29,148 Long-term debt (estimated fair value of $97,235 in 1998 and $96,197 in 1997) 93,192 93,166 Other liabilities 79,672 77,010 Company-Obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable Interest Debentures of Markel Corporation (estimated fair value of $162,518 in 1998 and $159,132 in 1997) 150,000 150,000 - ------------------------------------------------------------------------------------------------------------- Total Liabilities 1,500,142 1,513,296 - ------------------------------------------------------------------------------------------------------------- Shareholders' equity Common stock 25,126 24,660 Retained earnings 274,662 246,885 Accumulated other comprehensive income Net unrealized gains on fixed maturities and equity securities, net of taxes 101,120 85,259 - ------------------------------------------------------------------------------------------------------------ Total Shareholders' Equity 400,908 356,804 - ------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,901,050 $ 1,870,100 - ------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 3 MARKEL CORPORATION AND SUBSIDIARIES Consolidated Statements of Income and Comprehensive Income
Quarter Ended Six Months Ended June 30, June 30, ------------------------------------------ 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING REVENUES Earned premiums $ 84,526 $ 84,132 $ 163,424 $ 165,803 Net investment income 17,158 16,797 34,728 33,503 Net realized gains(losses) from investment sales 6,207 418 9,620 (160) Other 257 353 459 1,027 - ------------------------------------------------------------------------------------------ Total Operating Revenues 108,148 101,700 208,231 200,173 - ------------------------------------------------------------------------------------------ OPERATING EXPENSES Losses and loss adjustment expenses 53,559 54,506 103,086 107,156 Underwriting, acquisition and insurance expenses 29,331 28,912 57,398 57,226 Amortization of intangible assets 508 596 1,017 1,193 - ------------------------------------------------------------------------------------------ Total Operating Expenses 83,398 84,014 161,501 165,575 - ------------------------------------------------------------------------------------------ Operating Income 24,750 17,686 46,730 34,598 Interest expense 5,097 5,210 10,181 10,244 - ------------------------------------------------------------------------------------------ Income Before Income Taxes 19,653 12,476 36,549 24,354 Income tax expense 4,717 2,754 8,772 5,842 - ------------------------------------------------------------------------------------------ NET INCOME $ 14,936 $ 9,722 $ 27,777 $ 18,512 - ------------------------------------------------------------------------------------------ OTHER COMPREHENSIVE INCOME (LOSS) Unrealized gains on securities, net of taxes Unrealized gains arising during the period $ 863 $ 28,164 $ 22,114 $22,080 Less reclassification adjustments for gains (losses) included in net income (4,035) (272) (6,253) 104 - ------------------------------------------------------------------------------------------ Total Other Comprehensive Income (Loss) (3,172) 27,892 15,861 22,184 - ------------------------------------------------------------------------------------------ COMPREHENSIVE INCOME $ 11,764 $ 37,614 $ 43,638 $ 40,696 - ------------------------------------------------------------------------------------------ NET INCOME PER SHARE Basic $ 2.71 $ 1.77 $ 5.05 $ 3.38 Diluted $ 2.64 $ 1.72 $ 4.92 $ 3.28 - ------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 4 MARKEL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows
Six Months Ended June 30, --------------------- 1998 1997 - ------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES Net Income $ 27,777 $ 18,512 Adjustments to reconcile net income to net cash provided by operating activities (16,807) 8,022 - ------------------------------------------------------------------------------------------ Net Cash Provided By Operating Activities 10,970 26,534 - ------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Proceeds from sales of fixed maturities and equity securities 190,464 311,108 Proceeds from maturities of fixed maturities 56,822 28,519 Cost of fixed maturities and equity securities purchased (292,032) (448,045) Net change in short-term investments 29,874 (59,439) Net proceeds from sale of building -- 6,500 Other 3,298 (1,813) - ------------------------------------------------------------------------------------------ Net Cash Used By Investing Activities (11,574) (163,170) - ------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Net proceeds from issuance of Company-Obligated Mandatorily Redeemable Preferred Capital Securities -- 148,166 Repayments of long-term debt -- (21,577) Other 466 176 - ------------------------------------------------------------------------------------------ Net Cash Provided By Financing Activities 466 126,765 - ------------------------------------------------------------------------------------------ Decrease in cash and cash equivalents (138) (9,871) Cash and cash equivalents at beginning of period 1,309 11,054 - ------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,171 $ 1,183 - ------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--June 30, 1998 1. Principles of Consolidation The consolidated balance sheet as of June 30, 1998, the related consolidated statements of income and comprehensive income for the quarters and six months ended June 30, 1998 and 1997, and the consolidated statements of cash flows for the six months ended June 30, 1998 and 1997, are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such consolidated financial statements have been included. Such adjustments consist only of normal recurring items. Interim results are not necessarily indicative of results of operations for the full year. The consolidated financial statements and notes are presented as permitted by Form 10-Q, and do not contain certain information included in the Company's annual consolidated financial statements and notes. 2. Net Income per share Net Income per share was determined by dividing net income, as adjusted below, by the applicable shares outstanding (in thousands):
Quarter Ended Six Months Ended June 30, June 30, ------------------------------------------ 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------ Net income, as reported $ 14,936 $ 9,722 $ 27,777 $ 18,512 Dividends on redeemable preferred stock -- (4) -- (8) - ------------------------------------------------------------------------------------------ Basic and diluted income $ 14,936 $ 9,718 $ 27,777 $ 18,504 - ------------------------------------------------------------------------------------------ Average common shares outstanding 5,502 5,485 5,499 5,475 Dilutive potential common shares 152 174 152 171 - ------------------------------------------------------------------------------------------ Average diluted shares outstanding 5,654 5,659 5,651 5,646 - ------------------------------------------------------------------------------------------
3. Reinsurance The table below summarizes the effect of reinsurance on premiums written and earned (dollars in thousands):
Quarter Ended June 30, - ----------------------------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------------------------------- Written Earned Written Earned Direct $ 119,147 $ 104,261 $ 107,969 $ 106,245 Assumed 1,760 1,712 2,063 1,541 Ceded (26,940) (21,447) (24,230) (23,654) - ----------------------------------------------------------------------------------------- Net premiums $ 93,967 $ 84,526 $ 85,802 $ 84,132 - -----------------------------------------------------------------------------------------
Six Months Ended June 30, - ------------------------------------------------------------------------------------------ 1998 1997 - ------------------------------------------------------------------------------------------ Written Earned Written Earned Direct $ 214,671 $ 203,200 $ 204,577 $ 213,058 Assumed 2,956 3,299 3,207 3,260 Ceded (47,213) (43,075) (46,009) (50,515) - ------------------------------------------------------------------------------------------ Net premiums $ 170,414 $ 163,424 $ 161,775 $ 165,803 - ------------------------------------------------------------------------------------------
6 3. Reinsurance Continued Incurred losses and loss adjustment expenses are net of reinsurance recoveries of $17.1 million and $23.2 million for the quarters ended June 30, 1998 and 1997, respectively and $29.9 million and $41.3 million for the six months ended June 30, 1998 and 1997, respectively. 4. Company Obligated Mandatorily Redeemable Preferred Securities (Capital Securities) On January 8, 1997 the Company arranged the sale of $150 million of 8.71% Capital Securities issued under an Amended and Restated Declaration of Trust dated January 13, 1997 (The Declaration) by Markel Capital Trust I (the Trust), a statutory business trust sponsored and wholly-owned by Markel Corporation. Proceeds from the sale of the Capital Securities were used to purchase $154,640,000 aggregate principal amount of the Company's 8.71% Junior Subordinated Deferrable Interest Debentures (the Debentures) due January 1, 2046, issued to the Trust under an indenture dated January 13, 1997 (the Indenture). The Debentures are the sole assets of the Trust. The Company has the right to defer interest payments on the Debentures for up to five years. The Capital Securities and related Debentures are redeemable by the Company on or after January 1, 2007. Taken together, the Company's obligations under the Debentures, the Indenture, the Declaration and a guarantee made by the Company provide, in the aggregate, a full, irrevocable and unconditional guarantee of payments of distributions and other amounts due on the Capital Securities. 5. Comprehensive Income Other comprehensive income (loss) was composed of unrealized gains on securities arising during the period less classification adjustments for gains (losses) included in net income. The related tax expense (benefit) on unrealized gains (losses) on securities was $0.5 million and $11.9 million for the quarter and six months ended June 30, 1998 and $15.2 million and $11.9 million for the same periods in 1997. The related tax expense (benefit) on the reclassification adjustments for gains (losses) included in net income was $2.2 million and $3.4 million for the quarter and six months ended June 30, 1998 and $0.1 million and $(0.1) million for the same periods in 1997. 6. Segment Information Disclosures In June 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 is effective for years beginning after December 15, 1997. This statement does not need to be applied to interim financial statements in the initial year of its application. This standard supersedes SFAS No. 14 and establishes new disclosure requirements about products and services, geographic areas and major customers on an annual and quarterly basis. The standard requires companies to disclose qualitative and quantitative segment data on the basis that is used by management for evaluating segment performance and deciding how to allocate resources. The Company is currently evaluating what its meaningful reporting segments will be under SFAS No. 131. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Quarter and Six Months ended June 30, 1998 compared to Quarter and Six Months ended June 30, 1997 The Company underwrites specialty insurance products and programs for niche markets. Significant areas of underwriting include Excess and Surplus Lines, Professional and Products Liability, Specialty Programs, Specialty Personal and Commercial Lines, and Brokered Excess and Surplus Lines. Property and casualty insurance for nonstandard and hard-to-place risks is underwritten by the excess and surplus lines unit. Professional liability coverage is offered to physicians and health professionals, insurance companies, attorneys and architects and engineers. Special risk programs provide products liability insurance for manufacturers and distributors and tailored coverages for other unique exposures. In addition, employment practices liability coverage is offered. Specialty Program Insurance includes coverage for camps, youth and recreation, child care, health and fitness and agribusiness organizations, as well as accident and medical insurance for colleges. The Company also underwrites personal and commercial property and liability coverages for watercraft, motorcycles, automobiles, mobile homes and dwellings. The Brokered Excess and Surplus Lines unit writes hard-to-place, large general liability, products liability and property accounts. Following is a comparison of gross premium volume by significant underwriting area:
Gross Premium Volume Quarter Ended June 30, Six Months Ended June 30, - ----------------------------------------------------------------------------------- 1998 1997 (DOLLARS IN THOUSANDS) 1998 1997 - ----------------------------------------------------------------------------------- $ 34,607 $ 33,385 Excess and Surplus Lines $ 59,560 $ 61,960 32,459 28,964 Professional/Products Liability 63,215 59,613 20,974 20,108 Specialty Program Insurance 39,285 38,652 13,987 15,573 Specialty Personal and Commercial Lines 21,794 23,767 17,227 11,742 Brokered Excess and Surplus Lines 31,865 22,853 903 968 Other 1,798 2,032 - ----------------------------------------------------------------------------------- $ 120,157 $ 110,740 Total $ 217,517 $ 208,877 - -----------------------------------------------------------------------------------
Gross premium volume was $120.2 million for the second quarter and $217.5 million for the six month period in 1998 compared to $110.7 million and $208.9 million, respectively, for the same periods last year. Growth in the employment practices program and the Brokered Excess and Surplus Lines unit offset declines in other products including the Markel special property, directors' and officers', financial institutions and the Excess and Surplus Lines unit's casualty and property programs. The declines in these programs were due to aggressive competition in the Company's markets. The Company has maintained its underwriting standards at the expense of premium growth. Excess and Surplus Lines second quarter gross premium volume was $34.6 million compared to $33.4 million in 1997. For the six month period, gross premium volume was $59.6 million compared to $62.0 million last year. Increased production in the inland marine program was more than offset by decreases due to intense competition in the Markel special property, casualty and property programs. Second quarter gross premium volume from Professional/Products Liability grew 12% to $32.5 million from $29.0 million a year earlier. For the six month period, Professional/Products Liability gross premium volume advanced 6% to $63.2 million from $59.6 million last year. Growth in the employment practices and specified professions programs was partially offset by lower production from other lines, including financial institutions and the directors' and officers' liability programs. 8 Gross premiums from Specialty Program Insurance were $21.0 million for the second quarter compared to $20.1 million in the second quarter of 1997. For the six month period, gross premiums were $39.3 million compared to $38.7 million last year. Growth in the animal mortality, amateur sports and surety programs was partially offset by declines in the health and fitness and child care programs. Specialty Personal and Commercial Lines premiums declined to $14.0 million for the second quarter and $21.8 million for the six month period from $15.6 million and $23.8 million, respectively, in 1997. Decreased premium volume was due to aggressive competition and the continued restructuring of certain programs. Premiums from Brokered Excess and Surplus Lines rose 47% to $17.2 million in the second quarter of 1998 compared to $11.7 million in 1997. For the six month period, premiums advanced 39% to $31.9 million compared to $22.9 million last year. The increase was due to higher gross premium volume in the unit's casualty and excess and umbrella departments. Other gross premiums totaled $0.9 million in the second quarter of 1998 and $1.8 million for the six month period compared to $1.0 million and $2.0 million, respectively, in 1997. Other gross premium volume primarily consisted of facultative reinsurance placed by the Professional/Products Liability unit. Currently many of the Company's products are being adversely affected by increased competition and lower rates in the property and casualty market. The Company does not intend to relax underwriting standards in order to sustain premium volume. Further, the volume of premiums written may vary significantly with the Company's decision to alter its product concentration to maintain or improve underwriting profitability. The Company enters into reinsurance agreements in order to reduce its liability on individual risks and enable it to underwrite policies with higher limits. The Company's net retention of gross premium volume was 78% for the second quarter and the six month period of 1998 compared to 77% for both periods of the prior year. The increase was primarily due to a new reinsurance treaty structure in the Specialty Program Insurance unit and higher retentions in the Professional/Products Liability unit. Following is a comparison of earned premiums by significant underwriting area:
Earned Premiums Quarter Ended June 30, Six Months Ended June 30, - --------------------------------------------------------------------------------- 1998 1997 (DOLLARS IN THOUSANDS) 1998 1997 - --------------------------------------------------------------------------------- $ 22,974 $ 20,924 Excess and Surplus Lines $ 43,632 $ 40,906 26,171 26,047 Professional/Products Liability 50,573 51,631 15,785 16,886 Specialty Program Insurance 30,577 34,101 9,261 13,117 Specialty Personal and Commercial Lines 19,679 24,947 10,334 7,203 Brokered Excess and Surplus Lines 18,955 14,239 1 (45) Other 8 (21) - --------------------------------------------------------------------------------- $ 84,526 $ 84,132 Total $ 163,424 $ 165,803 - ---------------------------------------------------------------------------------
Total operating revenues for the second quarter rose 6% to $108.1 million from $101.7 million in the prior year. For the six month period, operating revenues rose 4% to $208.2 million from $200.2 million a year ago. Earned premiums were $84.5 million for the second quarter and $163.4 million for the six month period compared to $84.1 million for the second quarter and $165.8 million for the six month period of 1997. The flat earned premium volume was due to competitive market conditions. In response to this competition, the Company has maintained its underwriting standards at the expense of premium growth. 9 Second quarter net investment income increased to $17.2 million from $16.8 million a year ago. For the six month period, net investment income increased to $34.7 million from $33.5 million for the same period last year. The increases were the result of operating cash flows which added to the Company's investment portfolio. Realized gains were $6.2 million for the second quarter in 1998 and $9.6 million for the six month period compared to realized gains of $0.4 million and realized losses of $0.2 million, respectively, last year. Variability in the timing of realized and unrealized investment gains or losses is to be expected. Total operating expenses for the second quarter were $83.4 million compared to $84.0 million in 1997. Total operating expenses for the six month period were $161.5 million compared to $165.6 million a year ago. The decreases resulted primarily from larger underwriting profits in both periods of 1998 as compared to 1997. Following is a comparison of selected data from the Company's operations (dollars in thousands):
Quarter Ended Six Months Ended June 30, June 30, -------------------- --------------------- 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------ Gross premium volume $ 120,157 $ 110,740 $ 217,517 $ 208,877 Net premiums written $ 93,967 $ 85,802 $ 170,414 $ 161,775 Net retention 78% 77% 78% 77% Earned premiums $ 84,526 $ 84,132 $ 163,424 $ 165,803 Losses and loss adjustment expenses $ 53,559 $ 54,506 $ 103,086 $ 107,156 Underwriting, acquisition and insurance expenses $ 29,331 $ 28,912 $ 57,398 $ 57,226 Underwriting profit $ 1,636 $ 714 $ 2,940 $ 1,421 GAAP ratios Loss ratio 63% 65% 63% 65% Expense ratio 35% 34% 35% 34% - ------------------------------------------------------------------------------------------ Combined ratio 98% 99% 98% 99% - ------------------------------------------------------------------------------------------
Underwriting profitability is measured by the combined ratio of losses and expenses to earned premiums. For the second quarter and six month period, the combined ratio was 98% compared to 99% for the comparable periods of 1997. The second quarter and six month period loss ratio decreased to 63% from 65% in both periods of the prior year. The decreases were due to continued favorable loss reserve development. The second quarter and six month period expense ratio was 35% compared to 34% for the comparable periods of 1997. The expense ratios for both periods of 1997 were favorably impacted by the recognition of contingent reinsurance profit commissions. In evaluating its operating performance, the Company focuses on core underwriting and investing results before consideration of realized gains or losses from the sales of investments and expenses related to the amortization of intangible assets. Management believes this is a better indicator of the Company's operating performance because it reduces the variability in results associated with realized investment gains or losses and eliminates the impact of accounting conventions which do not reflect current operating costs. For the second quarter of 1998, income from core underwriting and investing operations increased to $11.3 million, or $2.01 per diluted share, from $9.9 million, or $1.75 per diluted share, in 1997. For the six month period, income from core operations increased to $22.4 million, or $3.96 per diluted share, from $19.5 million, or $3.46 per diluted share, in 1997. The increase in both periods was due to underwriting profitability supported by higher net investment income. The Company's effective tax rate for the second quarter of 1998 was 24% of income before income taxes compared to 22% in the second quarter of 1997. The tax rate was 24% for the six month period in both 1998 and 1997. 10 Second quarter 1998 net income rose 54% to $14.9 million from $9.7 million in 1997. The six month 1998 net income increased 50% to $27.8 million compared to $18.5 million last year. The increase was due to increased underwriting profitability and higher realized gains. Comprehensive income for the second quarter of 1998 was $11.8 million, or $2.08 per diluted share, compared to comprehensive income of $37.6 million, or $6.65 per diluted share, in the second quarter of 1997. The decrease was primarily the result of the net change in unrealized losses of $0.56 per diluted share in the second quarter of 1998 compared to the net change in unrealized gains of $4.93 per diluted share in 1997. For the six month period, comprehensive income was $43.6 million, or $7.72 per diluted share, compared to comprehensive income of $40.7 million, or $7.21 per diluted share, last year. The increase was due to substantially higher net income partially offset by lower net change in unrealized gains in the six month period of 1998 compared to 1997. FINANCIAL CONDITION AS OF JUNE 30, 1998 The Company's insurance operations collect premiums and pay current claims, reinsurance commissions and operating expenses. Premiums collected and positive cash flows from the insurance operations are invested primarily in short-term investments and long-term bonds. Short-term investments held by the Company's insurance subsidiaries provide liquidity for projected claims, reinsurance costs and operating expenses. For the six month period ended June 30, 1998, the Company reported net cash provided by operating activities of $11.0 million, compared to $26.5 million for the same period in 1997. The decrease was due to various large claims payments in the first six months of 1998. For the six month period ended June 30, 1998, the Company reported net cash used by investing activities of $11.6 million compared to $163.2 million in 1997. The difference was primarily due to the Company's investment of the net proceeds of the $150 million 8.71% Capital Securities offering during the first quarter of 1997. In January 1997 the Company arranged the sale of $150 million of 8.71% Capital Securities. The proceeds are primarily invested in short-term securities. These short-term investments are earning lower net investment income than the associated interest expense on the 8.71% Capital Securities. The Company continues to evaluate long-term investment options for the proceeds that will contribute to the Company's goal of 20% annual growth in book value per share. As of June 30, 1998 and December 31, 1997, the unused balances available under the Company's revolving credit facility totaled $250 million and $150 million, respectively. In April 1998 the Company arranged a $250 million, five year, revolving credit facility with a group of banks which replaced the Company's existing $150 million credit facility. Funds under the facility are available for general corporate purposes. Shareholders' equity at June 30, 1998 was $400.9 million compared to $356.8 million at December 31, 1997. Book value per share rose to $72.85 at June 30, 1998 from $65.18 at December 31, 1997. "SAFE HARBOR" STATEMENT This is a "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. Certain statements contained herein are forward-looking statements that involve risks and uncertainties. Future actual results may materially differ from those in these statements because of many factors. For instance, insurance industry price competition has made it more difficult to attract and retain adequately priced business. State regulatory actions can 11 impede the Company's ability to charge adequate rates and efficiently allocate capital. Also the frequency and severity of natural catastrophes are highly variable. Economic conditions and interest rate volatility can have significant impacts on the market value of fixed maturity and equity investments. Accordingly, the Company's premium growth and underwriting results have been and will continue to be potentially materially affected by these factors. PART II. OTHER INFORMATION Item 4. Submissions of Matters to a Vote of Security Holders The Corporation's Annual Meeting was held on May 19, 1998, in Richmond, Virginia. At the Annual Meeting, shareholders elected directors for the ensuing year and ratified the selection by the Board of Directors of KPMG Peat Marwick LLP as the Company's independent auditors for the year ending December 31, 1998. The results of the meeting were as follows: Election of Directors For Withheld - --------------------- --- -------- Alan I. Kirshner 4,527,609 48,077 Anthony F. Markel 4,529,535 46,151 Steven A. Markel 4,529,535 46,151 Darrell D. Martin 4,527,609 48,077 Leslie A. Grandis 4,529,535 46,151 Stewart M. Kasen 4,530,383 45,303 Gary L. Markel 4,529,535 46,151 V. Prem Watsa 4,529,435 46,251 Ratification of Selection of Auditors: Abstentions and Brokers For Against Non-Votes 4,560,754 9,400 5,532 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The Exhibits to this Report are listed in the Exhibit Index. (b) No reports on Form 8-K were filed during the quarter ended June 30, 1998 12 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, this 28th day of July, 1998. Markel Corporation By Alan I. Kirshner --------------------------------- Alan I. Kirshner Chief Executive Officer (Principal Executive Officer) By Anthony F. Markel -------------------------------- Anthony F. Markel President (Principal Operating Officer) By Steven A. Markel -------------------------------- Steven A. Markel Vice Chairman By Darrell D. Martin -------------------------------- Darrell D. Martin Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 13 Exhibit Index Number Description 27 Financial Data Schedule for period ended June 30, 1998 * * Filed electronically with the Commission's operational EDGAR system 14 EX-27 2 EXHIBIT 27 - FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from the financial statements contained in the Form 10-Q for the quarterly period ended June 30, 1998 for Markel Corporation and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-1998 JUN-30-1998 1,088,839 0 0 300,252 0 0 1,450,961 1,171 23,159 39,731 1,901,050 947,498 200,985 0 0 93,192 0 0 25,126 375,782 1,901,050 163,424 34,728 9,620 459 103,086 39,382 18,016 36,549 8,772 27,777 0 0 0 27,777 5.05 4.92 0 0 0 0 0 0 0
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