-----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, OOWFsGIaKXWo8PaAgm+3mSDvHuSwV2fbj1y5cCYWRlepJVCxjD6liKTIsoFgPHvJ BHESmeU0rkimF6aPKhGP0w== 0000916641-98-001144.txt : 19981029 0000916641-98-001144.hdr.sgml : 19981029 ACCESSION NUMBER: 0000916641-98-001144 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981028 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: 98732075 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 September 30, 1998 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _____ to _____ Commission File Number 1-13051 MARKEL CORPORATION (Exact name of registrant as specified in its charter) Virginia 54-0292420 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 4551 Cox Road, Glen Allen, Virginia 23060-3382 (Address of principal executive offices) (Zip code) (804) 747-0136 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Number of shares of the registrant's common stock outstanding at October 28, 1998: 5,515,988 Markel Corporation Form 10-Q Index Page Number PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Balance Sheets-- September 30, 1998 and December 31, 1997 3 Consolidated Statements of Income and Comprehensive Income-- Quarters and Nine Months Ended September 30, 1998 and 1997 4 Consolidated Statements of Cash Flows-- Nine Months Ended September 30, 1998 and 1997 5 Notes to Consolidated Financial Statements-- September 30, 1998 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K 13 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements MARKEL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets
September 30, December 31, -------------------------------------------------- 1998 1997 -------------------------------------------------- (dollars in thousands) ASSETS Investments, available-for-sale, at estimated fair value Fixed maturities (cost of $1,070,861 in 1998 and $1,037,807 in 1997) $ 1,115,280 $ 1,063,191 Equity securities (cost of $184,591 in 1998 and $147,601 in 1997) 281,981 253,385 Short-term investments (estimated fair value approximates cost) 65,599 91,744 ----------- ----------- Total Investments, Available-For-Sale 1,462,860 1,408,320 ----------- ----------- Cash and cash equivalents 1,367 1,309 Receivables 73,691 67,573 Reinsurance recoverable on unpaid losses 199,957 225,405 Reinsurance recoverable on paid losses 17,844 15,530 Deferred policy acquisition costs 42,338 36,816 Prepaid reinsurance premiums 41,997 39,758 Property and equipment 9,167 10,068 Intangible assets 35,806 37,331 Other assets 24,373 27,990 ----------- ----------- Total Assets $ 1,909,400 $ 1,870,100 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Unpaid losses and loss adjustment expenses $ 943,738 $ 971,157 Unearned premiums 211,076 192,815 Payables to insurance companies 26,689 29,148 Long-term debt (estimated fair value of $100,253 in 1998 and $96,197 in 1997) 93,205 93,166 Other liabilities 80,546 77,010 Company-Obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable Interest Debentures of Markel Corporation (estimated fair value of $147,300 in 1998 and $159,132 in 1997) 150,000 150,000 ----------- ----------- Total Liabilities 1,505,254 1,513,296 ----------- ----------- Shareholders' equity Common stock 25,213 24,660 Retained earnings 286,757 246,885 Accumulated other comprehensive income Net unrealized gains on fixed maturities and equity securities, net of taxes 92,176 85,259 ----------- ----------- Total Shareholders' Equity 404,146 356,804 ----------- ----------- Total Liabilities and Shareholders' Equity $ 1,909,400 $ 1,870,100 =========== =========== See accompanying notes to consolidated financial statements.
3 MARKEL CORPORATION AND SUBSIDIARIES Consolidated Statements of Income and Comprehensive Income
Quarter Ended Nine Months Ended September 30, September 30, ---------------------------------------------- 1998 1997 1998 1997 ---------------------------------------------- (dollars in thousands, except per share data) OPERATING REVENUES Earned premiums $ 84,665 $ 84,650 $ 248,089 $ 250,453 Net investment income 18,409 17,441 53,137 50,944 Net realized gains from investment sales 1,814 8,277 11,434 8,117 Other 206 244 665 1,271 -------- -------- --------- --------- Total Operating Revenues 105,094 110,612 313,325 310,785 -------- -------- --------- --------- OPERATING EXPENSES Losses and loss adjustment expenses 54,207 54,313 157,293 161,469 Underwriting, acquisition and insurance expenses 29,356 29,714 86,754 86,940 Amortization of intangible assets 508 562 1,525 1,755 -------- -------- --------- --------- Total Operating Expenses 84,071 84,589 245,572 250,164 -------- -------- --------- --------- Operating Income 21,023 26,023 67,753 60,621 Interest expense 5,109 4,984 15,290 15,228 -------- -------- --------- --------- Income Before Income Taxes 15,914 21,039 52,463 45,393 Income tax expense 3,819 5,051 12,591 10,893 -------- -------- --------- --------- Net Income $ 12,095 $ 15,988 $ 39,872 $ 34,500 -------- -------- --------- --------- OTHER COMPREHENSIVE INCOME (LOSS) Unrealized gains (losses) on securities, net of taxes Net unrealized gains (losses) arising during the period $(7,765) $ 22,134 $ 14,349 $ 44,214 Less reclassification adjustments for gains included in net income Total Other Comprehensive Income (Loss) (1,179) (5,380) (7,432) (5,276) -------- -------- --------- --------- Comprehensive Income (8,944) 16,754 6,917 38,938 -------- -------- --------- --------- NET INCOME PER SHARE $ 3,151 $ 32,742 $ 46,789 $ 73,438 -------- -------- --------- --------- Basic Diluted $ 2.20 $ 2.91 $ 7.25 $ 6.29 $ 2.14 $ 2.82 $ 7.07 $ 6.10 -------- -------- --------- --------- See accompanying notes to consolidated financial statements.
4 MARKEL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows
Nine Months Ended September 30, ---------------------- 1998 1997 ---------------------- (dollars in thousands) OPERATING ACTIVITIES Net Income $ 39,872 $ 34,500 Adjustments to reconcile net income to net cash provided by operating activities (1,073) 12,663 ----------- -------- Net Cash Provided By Operating Activities 38,799 47,163 ----------- -------- INVESTING ACTIVITIES Proceeds from sales of fixed maturities and equity securities 320,942 456,412 Proceeds from maturities of fixed maturities 84,594 37,600 Cost of fixed maturities and equity securities purchased (469,677) (630,509) Net change in short-term investments 26,145 (56,011) Net proceeds from sale of building -- 6,500 Other (1,298) 2,187 ----------- -------- Net Cash Used By Investing Activities (39,294) (183,821) ----------- -------- FINANCING ACTIVITIES Net proceeds from issuance of Company-Obligated Mandatorily Redeemable Preferred Capital Securities -- 148,137 Repayments of long-term debt -- (21,577) Other 553 (70) ----------- -------- Net Cash Provided By Financing Activities 553 126,490 ----------- -------- Increase (Decrease) in cash and cash equivalents 58 (10,168) Cash and cash equivalents at beginning of period 1,309 11,054 ----------- -------- Cash And Cash Equivalents At End Of Period $ 1,367 $ 886 =========== ======== See accompanying notes to consolidated financial statements.
5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--September 30, 1998 1. Principles of Consolidation The consolidated balance sheet as of September 30, 1998, the related consolidated statements of income and comprehensive income for the quarters and nine months ended September 30, 1998 and 1997, and the consolidated statements of cash flows for the nine months ended September 30, 1998 and 1997, are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such consolidated financial statements have been included. Such adjustments consist only of normal recurring items. Interim results are not necessarily indicative of results of operations for the full year. The consolidated financial statements and notes are presented as permitted by Form 10-Q, and do not contain certain information included in the Company's annual consolidated financial statements and notes. 2. Net Income per share Net Income per share was determined by dividing net income, as adjusted below, by the applicable shares outstanding (in thousands):
Quarter Ended Nine Months Ended September 30, September 30, -------------------- --------------------- 1998 1997 1998 1997 ------ ------ ------ ------ Net income, as reported $ 12,095 $ 15,988 $ 39,872 $ 34,500 Dividends on redeemable preferred stock -- -- -- (8) -------- ---------- -------- -------- Basic and diluted income $ 12,095 $ 15,988 $ 39,872 $ 34,492 -------- ---------- -------- -------- Average basic common shares outstanding 5,509 5,492 5,503 5,481 Dilutive potential common shares 140 177 140 169 -------- ---------- -------- -------- Average diluted shares outstanding 5,649 5,669 5,643 5,650 ======== ========== ======== ========
3. Reinsurance The table below summarizes the effect of reinsurance on premiums written and earned (dollars in thousands): Quarter Ended September 30, --------------------------------------------- 1998 1997 ------ ------ Written Earned Written Earned ------- ------ ------- ------ Direct $ 116,707 $ 105,504 $ 109,575 $ 106,394 Assumed 948 947 1,498 1,641 Ceded (23,958) (21,786) (22,545) (23,385) --------- --------- --------- --------- Net premiums $ 93,697 $ 84,665 $ 88,528 $ 84,650 ========= ========= ========= ========= Nine Months Ended September 30, --------------------------------------------- 1998 1997 -------- -------- Written Earned Written Earned ------- ------ ------- ------ Direct $ 331,378 $ 308,704 $ 314,152 $ 319,452 Assumed 3,904 4,246 4,705 4,901 Ceded (71,171) (64,861) (68,554) (73,900) --------- --------- --------- --------- Net premiums $ 264,111 $ 248,089 $ 250,303 $ 250,453 ========= ========= ========= ========= 6 3. Reinsurance Continued Incurred losses and loss adjustment expenses are net of reinsurance recoveries of $12.7 million and $10.9 million for the quarters ended September 30, 1998 and 1997, respectively and $42.6 million and $52.2 million for the nine months ended September 30, 1998 and 1997, respectively. 4. Company Obligated Mandatorily Redeemable Preferred Securities (Capital Securities) On January 8, 1997 the Company arranged the sale of $150 million of 8.71% Capital Securities issued under an Amended and Restated Declaration of Trust dated January 13, 1997 (The Declaration) by Markel Capital Trust I (the Trust), a statutory business trust sponsored and wholly-owned by Markel Corporation. Proceeds from the sale of the Capital Securities were used to purchase $154,640,000 aggregate principal amount of the Company's 8.71% Junior Subordinated Deferrable Interest Debentures (the Debentures) due January 1, 2046, issued to the Trust under an indenture dated January 13, 1997 (the Indenture). The Debentures are the sole assets of the Trust. The Company has the right to defer interest payments on the Debentures for up to five years. The Capital Securities and related Debentures are redeemable by the Company on or after January 1, 2007. Taken together, the Company's obligations under the Debentures, the Indenture, the Declaration and a guarantee made by the Company provide, in the aggregate, a full, irrevocable and unconditional guarantee of payments of distributions and other amounts due on the Capital Securities. 5. Comprehensive Income Other comprehensive income (loss) was composed of net unrealized gains (losses) on securities arising during the period less reclassification adjustments for gains included in net income. The related tax expense (benefit) on net unrealized gains (losses) on securities was $(4.2) million and $7.7 million, respectively, for the quarter and nine months ended September 30, 1998 and $11.9 million and $23.8 million for the same periods in 1997. The related tax expense on the reclassification adjustments for gains included in net income was $0.6 million and $4.0 million, respectively, for the quarter and nine months ended September 30, 1998 and $2.9 million and $2.8 million for the same periods in 1997. 6. Segment Information Disclosures In June 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 is effective for years beginning after December 15, 1997. This statement does not need to be applied to interim financial statements in the initial year of its application. This standard supersedes SFAS No. 14 and establishes new disclosure requirements about products and services, geographic areas and major customers on an annual and quarterly basis. The standard requires companies to disclose qualitative and quantitative segment data on the basis that is used by management for evaluating segment performance and deciding how to allocate resources. The Company currently expects that it will have three reporting segments for purposes of SFAS No. 131: Excess and Surplus Lines, Specialty Admitted and Investing. Excess and Surplus Lines will include the underwriting units: Excess and Surplus Lines, Professional/Products Liability and Brokered Excess and Surplus Lines. Specialty Admitted will include the underwriting units: Specialty Program Insurance and Specialty Personal and Commercial Lines. Investing will include all investing activities. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Quarter and Nine Months ended September 30, 1998 compared to Quarter and Nine Months ended September 30, 1997 The Company underwrites specialty insurance products and programs for niche markets. Significant areas of underwriting include Excess and Surplus Lines, Professional/ Products Liability, Specialty Program Insurance, Specialty Personal and Commercial Lines, and Brokered Excess and Surplus Lines. Property and casualty insurance for nonstandard and hard-to-place risks is underwritten by the Excess and Surplus Lines unit. Professional liability coverage is offered to physicians and health professionals, insurance companies, attorneys and architects and engineers. Special risk programs provide products liability insurance for manufacturers and distributors and tailored coverages for other unique exposures. In addition, employment practices liability coverage is offered. Specialty Program Insurance includes coverage for camps, youth and recreation, child care, health and fitness and agribusiness organizations, as well as accident and medical insurance for colleges. The Company also underwrites personal and commercial property and liability coverages for watercraft, motorcycles and automobiles. The Brokered Excess and Surplus Lines unit writes hard-to-place, large general liability, products liability and property accounts. Following is a comparison of gross premium volume by significant underwriting area: Gross Premium Volume Quarter Ended September 30, Nine Months Ended September 30, - -------------------------------- ------------------------------- 1998 1997 (dollars in thousands) 1998 1997 ---- ---- ---------------------- ---- ---- $ 30,312 $ 31,757 Excess and Surplus Lines $ 89,872 $ 93,717 29,771 27,265 Professional/Products Liability 92,986 86,878 26,816 28,708 Specialty Program Insurance 66,101 67,360 12,124 13,443 Specialty Personal and Commercial Lines 33,918 37,210 18,558 10,611 Brokered Excess and Surplus Lines 50,423 33,464 680 621 Other 2,478 2,653 - --------- --------- --------- --------- $ 118,261 $ 112,405 Total $ 335,778 $ 321,282 ========= ========= ========= ========= Gross premium volume was $118.3 million for the third quarter and $335.8 million for the nine month period in 1998 compared to $112.4 million and $321.3 million, respectively, for the same periods last year. Growth in the employment practices program and the Brokered Excess and Surplus Lines unit more than offset declines in other products including the Excess and Surplus Lines unit's casualty program, Specialty Program's youth and recreation programs, and Professional/Products Liabilities' financial institutions, scaffolding and directors' and officers' programs. The declines in these programs were due to aggressive competition in the Company's markets as well as corrective actions to achieve underwriting profits. The Company has maintained its underwriting standards at the expense of premium growth. Excess and Surplus Lines third quarter gross premium volume was $30.3 million compared to $31.8 million in 1997. For the nine month period, gross premium volume was $89.9 million compared to $93.7 million last year. Increased production in the inland marine program was more than offset by decreases due to intense competition in the casualty, Markel special property, and property programs. Third quarter gross premium volume from Professional/Products Liability grew 9% to $29.8 million from $27.3 million a year earlier. For the nine month period, Professional/Products Liability gross premium volume advanced 7% to $93.0 million from $86.9 million last year. Growth in the employment practices and specified professions programs was partially offset by lower production from other lines, including financial institutions, scaffolding and the directors' and officers' liability programs. 8 Gross premiums from Specialty Program Insurance were $26.8 million for the third quarter compared to $28.7 million in the third quarter of 1997. For the nine month period, gross premiums were $66.1 million compared to $67.4 million last year. Growth in the animal mortality, amateur sports and surety programs was more than offset by declines in the youth and recreation, health and fitness and child care programs. Specialty Personal and Commercial Lines premiums declined to $12.1 million for the third quarter and $33.9 million for the nine month period from $13.4 million and $37.2 million, respectively, in 1997. Decreased premium volume was due to the continued restructuring of certain programs and aggressive competition. Premiums from Brokered Excess and Surplus Lines rose 75% to $18.6 million in the third quarter of 1998 compared to $10.6 million in 1997. For the nine month period, premiums advanced 51% to $50.4 million compared to $33.5 million last year. The increase was due to higher gross premium volume in the unit's casualty and excess and umbrella departments. These increases were due to the unit's focus on providing quality service and underwriting expertise to a core group of producers. Other gross premiums totaled $0.7 million in the third quarter of 1998 and $2.5 million for the nine month period compared to $0.6 million and $2.7 million, respectively, in 1997. Other gross premium volume primarily consisted of facultative reinsurance placed by the Professional/Products Liability unit. Currently many of the Company's products are being adversely affected by increased competition and lower rates in the property and casualty market. The Company does not intend to relax underwriting standards in order to sustain premium volume. Further, the volume of premiums written may vary significantly with the Company's decision to alter its product concentration to maintain or improve underwriting profitability. The Company enters into reinsurance agreements in order to reduce its liability on individual risks and enable it to underwrite policies with higher limits. The Company's net retention of gross premium volume was 79% for the third quarter and the nine month period of 1998 compared to 79% for the third quarter and 78% for the nine month period in 1997. The increase for the nine month period was primarily due to a new reinsurance treaty structure in the Specialty Program Insurance unit and higher retentions in the Professional/Products Liability unit. Following is a comparison of earned premiums by significant underwriting area: Earned Premiums Quarter Ended September 30, Nine Months Ended September 30, --------------------------- ------------------------------- 1998 1997 (dollars in thousands) 1998 1997 ---- ---- ---- ---- $ 21,126 $ 21,695 Excess and Surplus Lines $ 64,758 $ 62,601 26,713 25,871 Professional/Products Liability 77,286 77,502 16,287 16,967 Specialty Program Insurance 46,864 51,068 10,568 12,228 Specialty Personal and Commercial Lines 30,247 37,175 9,971 7,882 Brokered Excess and Surplus Lines 28,926 22,121 - 7 Other 8 (14) - -------- -------- --------- -------- $ 84,665 $ 84,650 Total $ 248,089 $250,453 ======== ======== ========= ======== Total operating revenues for the third quarter were $105.1 million compared to $110.6 million in the prior year. For the nine month period, operating revenues rose to $313.3 million from $310.8 million a year ago. 9 Earned premiums were $84.7 million for the third quarter and $248.1 million for the nine month period compared to $84.7 million for the third quarter and $250.5 million for the nine month period of 1997. Earned premium volume reflected competitive market conditions. In response to this competition, the Company has maintained its underwriting standards at the expense of premium growth. Third quarter net investment income increased to $18.4 million from $17.4 million a year ago. For the nine month period, net investment income increased to $53.1 million from $50.9 million for the same period last year. The increases were the result of operating cash flows which added to the Company's investment portfolio, partially offset by lower interest rates. Net realized gains were $1.8 million for the third quarter in 1998 and $11.4 million for the nine month period compared to net realized gains of $8.3 million and $8.1 million, respectively, last year. Variability in the timing of realized and unrealized investment gains or losses is to be expected. Total operating expenses for the third quarter were $84.1 million compared to $84.6 million in 1997. Total operating expenses for the nine month period were $245.6 million compared to $250.2 million a year ago. The decreases resulted primarily from larger underwriting profits in both periods of 1998 as compared to 1997. Following is a comparison of selected data from the Company's operations (dollars in thousands):
Quarter Ended Nine Months Ended September 30, September 30, --------------- ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Gross premium volume $ 118,261 $ 112,405 $ 335,778 $ 321,282 Net premiums written $ 93,697 $ 88,528 $ 264,111 $ 250,303 Net retention 79% 79% 79% 78% Earned premiums $ 84,665 $ 84,650 $ 248,089 $ 250,453 Losses and loss adjustment expenses $ 54,207 $ 54,313 $ 157,293 $ 161,469 Underwriting, acquisition and insurance expenses $ 29,356 $ 29,714 $ 86,754 $ 86,940 Underwriting profit $ 1,102 $ 623 $ 4,042 $ 2,044 GAAP ratios Loss ratio 64% 64% 63% 64% Expense ratio 35% 35% 35% 35% --------- --------- --------- --------- Combined ratio 99% 99% 98% 99% ========= ========= ========= =========
Underwriting profitability is measured by the combined ratio of losses and expenses to earned premiums. For the third quarter the combined ratio was flat at 99% compared to 1997. The combined ratio decreased to 98% for the nine month period compared to 99% in 1997. The quarterly loss ratio remained steady at 64% compared to 1997. For the nine month period, the loss ratio decreased to 63% compared to 64% in 1998. The lower loss ratio in 1997 was due to continued favorable loss reserve development and corrective actions in certain lines of business. The third quarter and nine month period expense ratios were flat at 35% compared to both periods in the prior year. In evaluating its operating performance, the Company focuses on core underwriting and investing results before consideration of realized gains or losses from the sales of investments and expenses related to the amortization of intangible assets. Management believes this is a better indicator of the Company's operating performance because it reduces the variability in results associated with realized investment gains or losses and eliminates the impact of accounting conventions which do not reflect current operating costs. For the third quarter of 1998, income from core underwriting and investing operations increased to $11.3 million, or $2.01 per diluted share, from $11.0 million, or $1.94 per diluted share, in 1997. For the nine month period, income from core operations increased to $33.7 million, or $5.98 per diluted share, from $30.6 million, or $5.41 per diluted share, in 1997. The increase in both periods was due to underwriting profitability supported by higher net investment income. 10 The Company's effective tax rate was 24% for the third quarter of 1998 and 1997 and for the nine month period in both 1998 and 1997. Third quarter 1998 net income was $12.1 million compared to $16.0 million in 1997. The decrease was due to lower realized gains in the third quarter of 1998. Net income for the nine month period increased to $39.9 million compared to $34.5 million last year. The increase was due to increased underwriting profitability and higher realized gains. Comprehensive income for the third quarter of 1998 was $3.2 million, or $0.56 per diluted share, compared to comprehensive income of $32.7 million, or $5.78 per diluted share, in the third quarter of 1997. The decrease was primarily the result of the net decrease in unrealized gains of $1.58 per diluted share in the third quarter of 1998 compared to the net increase in unrealized gains of $2.96 per diluted share in 1997. For the nine month period, comprehensive income was $46.8 million, or $8.29 per diluted share, compared to comprehensive income of $73.4 million, or $13.00 per diluted share, last year. The decrease was primarily the result of the net increase in unrealized gains of $1.22 per diluted share in the nine month period of 1998 compared to the net increase in unrealized gains of $6.90 per diluted share in the nine month period of 1997. Financial Condition as of September 30, 1998 The Company's insurance operations collect premiums and pay current claims, reinsurance costs and operating expenses. Premiums collected and positive cash flows from the insurance operations are invested primarily in short-term investments and long-term bonds. Short-term investments held by the Company's insurance subsidiaries provide liquidity for projected claims, reinsurance costs and administrative expenses. For the nine month period ended September 30, 1998, the Company reported net cash provided by operating activities of $38.8 million, compared to $47.2 million for the same period in 1997. The decrease was due to various large claims payments in the first nine months of 1998 partially offset by increased investment income and underwriting profitability. For the nine month period ended September 30, 1998, the Company reported net cash used by investing activities of $39.3 million compared to $183.8 million in 1997. The difference was primarily due to the Company's investment of the net proceeds of the $150 million 8.71% Capital Securities offering during the first quarter of 1997. In January 1997 the Company arranged the sale of $150 million of 8.71% Capital Securities. The proceeds are primarily invested in short-term securities. These short-term investments are earning lower net investment income than the associated interest expense on the 8.71% Capital Securities. The Company continues to evaluate long-term investment options for the proceeds that will contribute to the Company's goal of 20% annual growth in book value per share. As of September 30, 1998 and December 31, 1997, the unused balances available under the Company's revolving credit facility totaled $250 million and $150 million, respectively. In April 1998 the Company arranged a $250 million, five year, revolving credit facility with a group of banks which replaced the Company's existing $150 million credit facility. Funds under the facility are available for general corporate purposes. Shareholders' equity at September 30, 1998 was $404.1 million compared to $356.8 million at December 31, 1997. Book value per share rose to $73.29 at September 30, 1998 from $65.18 at December 31, 1997. 11 Other Matters Tender Offer On October 20, 1998, the Company's newly formed subsidiary , MG Acquisition Corp., commenced a tender offer for all outstanding common shares of Gryphon Holdings Inc. (Gryphon). The offer is an all cash offer at $18.00 net per share. The offer is set to expire on December 4, 1998 unless otherwise extended. The Company estimates that the total amount of funds required to complete an acquisition of Gryphon is approximately $126 million. The Company intends to obtain such funds from its current cash and investment holdings and through the use of its $250 million revolving credit facility. At September 30, 1998 the Company had $250 million available for borrowing under the credit facility. The Year 2000 The Year 2000 issue affects virtually all companies and organizations. Many companies have existing computer applications which use only two digits to identify a year in the date field. These applications were designed and developed without considering the impact of the century change. If not corrected these computer applications may fail or create erroneous results in the year 2000. The Company's Year 2000 strategy The Company has created a Year 2000 team involving associates from all areas in the organization and has charged them with implementing the Company's Year 2000 project. The team has been in place since September of 1997. The project's scope includes all information technology (IT), both internally developed and purchased from third parties, material vendors, producer and customer relationships, and an assessment of the Company's underwriting exposure as a result of the insurance products written by the Company's underwriting units. In addition, the Company is evaluating the Year 2000 exposure to issuers included as part of its investment portfolio. The Company has completed the assessment phase for its material IT systems and is currently in the remediation and testing phases. The Company anticipates that it will complete the remediation and testing phases for its IT systems by December 31, 1998. The Company has been in contact with its material business partners to determine their state of readiness with regard to the Year 2000 issue and the potential impact on the Company. The Company has identified the following general categories of business partners as material to the Company's ability to conduct its operations: software, hardware and telecommunication providers, banks and investment brokers, material holdings in the Company's investment portfolio, insurance producers, reinsurers and reinsurance intermediaries, major insurance clients and utilities. Where the Company has determined that the relationship with a business partner is material to its ability to conduct normal operations, the Company has sent letters to the business partner requesting an update on the status of its Year 2000 initiative. Where deemed necessary, the Company is following up with the business partner to obtain further information. Based on the assurances of these business partners and the Company's internal reviews of information provided, the Company has not currently identified a material business partner that will be noncompliant. However, there can be no assurances that all material business partners will be compliant and such noncompliance could have a material effect on the Company's financial position and results of operations. The Company expects to complete its review of material business partners by December 31, 1998. 12 The Company has conducted a comprehensive review of its underwriting guidelines and has made the decision to exclude Year 2000 exposures from virtually all insurance policies. The Company began adding exclusions to policies in early 1998. Additionally it is the Company's position that Year 2000 exposures are not fortuitous losses and thus are not covered under insurance policies even without specific exclusions. For these reasons, the Company believes that its exposure to Year 2000 claims will not be material. However, as was the case with environmental exposures, changing social and legal trends may create unintended coverage for exposures by reinterpreting insurance contracts and exclusions. It is impossible to predict what, if any, exposure insurance companies may ultimately have for Year 2000 claims whether coverage for the issue is specifically excluded or included. The cost of the Company's Year 2000 project is estimated to be $1.0 million. Approximately $0.5 million of this amount was incurred as of September 30, 1998. The remainder of the estimated cost of the project is expected to be incurred in the fourth quarter of 1998 and throughout 1999. All costs of the Year 2000 project have been expensed as incurred. The Company has not established a contingency plan for noncompliance of its IT systems as it expects all of its IT systems to be Year 2000 compliant by December 31, 1998. At this time, the Company is not aware of any material business partners that will not be Year 2000 compliant. If the Company becomes aware of noncompliant business partners, one option will be to evaluate using other vendors. The Company expects its review of material business partners to be completed by December 31, 1998. At that time the Company will be able to evaluate the need to replace any material business partners. In many instances the establishment of a contingency plan is not possible or is cost prohibitive. In these situations, noncompliance by the Company or its material business partners could have a material adverse impact on the Company's financial position and results of operations. "Safe Harbor" Statement This is a "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. Certain statements contained herein are forward-looking statements that involve risks and uncertainties. Future actual results may materially differ from those in these statements because of many factors. For instance, insurance industry price competition has made it more difficult to attract and retain adequately priced business. State regulatory actions can impede the Company's ability to charge adequate rates and efficiently allocate capital. Also the frequency and severity of natural catastrophes are highly variable. Economic conditions and interest rate volatility can have significant impacts on the market value of fixed maturity and equity investments. The business community's state of readiness for the Year 2000 and the Company's potential underwriting exposure to Year 2000 claims are difficult to predict with any certainty. Accordingly, the Company's premium growth, underwriting and investing results have been and will continue to be potentially materially affected by these factors. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The Exhibits to this Report are listed in the Exhibit Index. (b) No reports on Form 8-K were filed during the quarter ended September 30, 1998 13 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, this 28th day of October, 1998. Markel Corporation By Alan I. Kirshner ----------------------- Alan I. Kirshner Chief Executive Officer (Principal Executive Officer) By Anthony F. Markel ----------------------- Anthony F. Markel President (Principal Operating Officer) By Steven A. Markel ------------------------ Steven A. Markel Vice Chairman By Darrell D. Martin ------------------------ Darrell D. Martin Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 14 Exhibit Index Number Description 27 Financial Data Schedule for period ended September 30, 1998 * * Filed electronically with the Commission's operational EDGAR system EX-27 2 MARKEL CORPORATION EXHIBIT 27
7 This schedule contains summary financial information extracted from the financial statements contained in the Form 10-Q for the quarterly period ended September 30, 1998 for Markel Corporation and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1998 SEP-30-1998 1,115,280 0 0 281,981 0 0 1,462,860 1,367 17,844 42,338 1,909,400 943,738 211,076 0 0 93,205 0 0 25,213 378,933 1,909,400 248,089 53,137 11,434 665 157,293 60,611 26,143 52,463 12,591 39,872 0 0 0 39,872 7.25 7.07 0 0 0 0 0 0 0 Does not include Company-Obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable Interest Debentures of Markel Corporation. Markel adopted Statement of Financial Accounting Standards No. 128 "Earnings Per Share" effective December 31, 1997. The Financial Data Schedules tags and refer to Basic EPS and Diluted EPS, respectively, as these terms are set forth in Statement of Financial Accounting Standards No. 128. Available on an annual basis only.
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