2017
Markel
Corporation
Annual Report & Form 10-K
T H E C O R P O R AT E P R O F I L E
Markel Corporation is a diverse financial holding company
serving a variety of niche markets. Our principal business markets
and underwrites specialty insurance products.
In each of our businesses, 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 and
operating profits and superior investment returns to build
shareholder value.
T H E M A R K E L S T Y L E
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 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 relation ship 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
F I N A N C I A L H I G H L I G H T S
(dollars in millions, except per share data)
Gross premium volume
Net written premiums
Earned premiums
U.S. GAAP combined ratio
Total operating revenues
Net income to shareholders
Comprehensive income to shareholders
Total investments, cash and cash equivalents and restricted
cash and cash equivalents (invested assets)
Total assets
Senior long-term debt and other debt
Shareholders’ equity
Debt to capital
P E R S H A R E D ATA
Common shares outstanding (at year end, in thousands)
Diluted net income
Book value
Growth in book value
O P E R AT I N G H I G H L I G H T S
2017
2016
2015
$ 5,507
4,418
4,248
$ 4,797
4,001
3,866
$ 4,633
3,819
3,824
105%
92%
89%
6,062
395
1,175
$ 20,570
32,805
3,099
9,504
5,612
456
667
$ 19,059
25,875
2,575
8,461
5,370
583
233
$ 18,181
24,939
2,239
7,834
25%
23%
22%
13,904
$ 25.81
$ 683.55
13,955
$ 31.27
$ 606.30
13,959
$ 41.74
$ 561.23
13%
8%
3%
• Book value per share increased to $683.55, representing a compound annual growth rate of 13%
and 11% over the one-year and five-year periods, respectively
• Total operating revenues surpassed $6 billion
• Strong investment performance with an increase in net unrealized gains on investments of over
$1 billion
• Combined ratio of 105%, including 13 points of catastrophe losses
• Growth in our insurance operations included the acquisition of SureTec, a surety company
primarily offering contract, commercial and court bonds, and State National, which added
a premier fronting platform and collateral protection coverages to our operations
• Growth in our Markel Ventures operations included the acquisition of Costa Farms, a grower
of house and garden plants
Contents
Letter to Business Partners
Business Overview
Risk Factors
Selected Financial Data
Management’s Report on Internal
Control over Financial Reporting
Reports of Independent Registered
Public Accounting Firm
2
12
38
46
48
49, 50
Consolidated Financial Statements
Notes to Consolidated Financial
Statements
Management’s Discussion & Analysis
Critical Accounting Estimates
Safe Harbor and Cautionary Statement
Other Information
Directors and Executive Officers
Index for Form 10-K
51
55
115
117
160
162
164
165
2017
To Our Business Partners
At Markel, we aspire to build one of “The World’s
annual report as a public company in 1986. Namely,
Great Companies.”
as we said then, “our corporate strategy is one of
diversification and specialization.”
Here is our annual report to you for 2017. In it, we
review the year that just ended, as well as our plans
We serve customers anywhere and everywhere around
and dreams for the future. We try to write everything
the globe. We do so by providing them with insurance
that we would want to know about Markel if our roles
and financial backstops to protect them when
were reversed.
unforeseen events create havoc. We help them put
Humpty Dumpty back together when things fall apart.
We define a great company as one that serves its
We also provide customers with an array of necessary
customers, associates, and shareholders, consistently
industrial equipment, vital information services,
and dependably over time. As we do so we grow in
housing, personal products, and healthcare services
every dimension.
to help them operate their businesses and live life
to its fullest.
We’re proud of our record over multiple decades, and
we are incredibly optimistic about our ability to
We serve our associates by operating a “values” based
continue on this path in the future. The design and
company. The Markel Style describes our unchanging
components of Markel are unique. Our strategy
cultural values that we offer to associates of Markel.
remains the same as what we stated in our initial
We provide a home that rewards and celebrates
F I N A N C I A L H I G H L I G H T S
(in millions, except per share data)
2017
2016
2015
2014
2013
2012
2011
2010
2009
Total operating revenues
Gross written premiums
Combined ratio
Investment portfolio
Portfolio per share
Net income (loss) to shareholders
Comprehensive income (loss)
to shareholders
Shareholders’ equity
Book value per share
5-Year CAGR in book
value per share (1)
2
105%
$ 6,062% 5,612% 5,370% 5,134% 4,323% 3,000% 2,630% 2,225% 2,069%
$ 5,507% 4,797% 4,633% 4,806% 3,920% 2,514% 2,291% 1,982% 1,906%
95%
$ 20,570% 19,059% 18,181% 18,638% 17,612% 9,333% 8,728% 8,224% 7,849%
$1,479.45%1,365.72% 1,302.48%1,334.89%1,259.26% 969.23% 907.20% 846.24% 799.34%
202%
$ 395%
583% 321%
456%
281%
253%
267%
142%
102%
92%
89%
95%
97%
97%
97%
667%
$ 1,175%
431% 591%
$ 9,504% 8,461% 7,834% 7,595% 6,674% 3,889% 3,388% 3,172% 2,774%
$ 683.55% 606.30% 561.23% 543.96% 477.16% 403.85% 352.10% 326.36% 282.55%
233% 936% 459% 504% 252%
11%
11%
11%
14%
17%
9%
9%
13%
11%)
(1) CAGR— compound annual growth rate
creative, hardworking, talented people motivated
beautiful tapestry. That tapestry depicts the narrative
by the idea of service to our customers. We are
of “building one of the world’s great companies.”
explicit about our commitment to integrity and
continuous improvement. Our culture is not for
We’re pleased to report to you that we continued to
everyone, but it is attractive to those who seek what
weave that multi decade tapestry in 2017.
we offer. We’ve also found that it applies and works
all around the world.
Progress did not take place in a straight line in 2017.
It almost never does. This report will appropriately
We serve our shareholders by producing financial
discuss the financial impact of the record setting
results which reflect our skills at serving our
catastrophes that took place last year. Those financial
customers and associates. Excellent financial results
losses should not obscure or diminish the progress we
create the opportunity to grow, to do more, and offer
made in the rest of our insurance operations, our
more, over time. Without financial progress, our ability
Markel Ventures activities, in our investment portfolio,
to serve customers and associates disappears.
and in the development and continuity of our
management team.
The 2017 financial statements accompanying this
letter provide you with numbers that reflect this year’s
At the bottom of the page in this letter we show a
economic progress towards the goal of “building one
table that depicts 21 years of our key financial
of the world’s great companies.” As is the case with
highlights. The constant and annually recurring review
any single year, those numbers tell only part of our
of decades of financial results helps us to remain
story. Over the course of time though, the numbers
focused on the long term.
become more robust and meaningful. They
continuously reveal more chapters of the book. The
We’ve made great progress over decades not just in
numbers themselves become inseparable threads in a
narrow financial terms. Our story demonstrates
personal progress and accomplishment for many
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
20-Year
1997 CAGR(1)
99%)
$ 1,977)% 2,551% 2,576% 2,200% 2,262% 2,092% 1,770% 1,397)% 1,094)%
$ 2,213)% 2,359% 2,536% 2,401% 2,518% 2,572% 2,218% 1,774)% 1,132)%
114%)
419% 14%
423% 14%
99% —%
$ 6,893)% 7,775% 7,524% 6,588% 6,317% 5,350% 4,314% 3,591)% 3,136)% 1,625% 1,483% 1,410% 14%
$702.34)% 780.84% 752.80% 672.34% 641.49% 543.31% 438.79% 365.70)% 427.79)% 290.69% 268.49% 257.51% 9%
$ (59)% 406% 393%
50% 11%
524% 426%
595% 437%
98%
101%
99% 103% 124%)
75% (126)% (28)%
165% 123%
148%
101%
57%
41%
88%
87%
96%
$ (403)% 337% 551%
92% 14%
82%
$ 2,181)% 2,641% 2,296% 1,705% 1,657% 1,382% 1,159% 1,085)% 752)%
357% 18%
$222.20)% 265.26% 229.78% 174.04% 168.22% 140.38% 117.89% 110.50)% 102.63)% 68.59% 77.02% 65.18% 12%
(40)%
68%
383% 425%
273% 222%
(77)%
64%
73%
10%)
18%
16%
11%
20%
13%
13%
18%)
21%)
22%
23%
26% —%
3
people. It is a composite story of resilience,
investment portfolio with returns of 26% on our
adaptability, creativity, dependability, and
equity holdings and 3% on our fixed income holdings.
conservatism. And it is a story which carries the
implication of continuity and replicability into the
We produced an overall underwriting loss of $205
future. The story of Markel is one of excellent initial
million in 2017 vs underwriting profits of $317
design, and thousands of subsequent actions, ideas,
million in 2016 and Markel Ventures EBITDA was
and iterations, which keep our story moving forward
$178 million in 2017 vs $165 million last year. In
every single day.
total our comprehensive income was $1.2 billion in
2017 vs $667 million in 2016 and we repurchased
In 1997 at the beginning of this 21 year chart we
$111 million of our own common stock during the
reported that we had 830 associates.
course of the year.
As we write this letter, there are over 15,000.
When we write this letter, we look back at previous
letters to give us a sense of how we’ve talked in years
Over the last two decades, 14,000 additional people
past. It is easy to see words and phrases such as
have joined the ranks of your company. We’ve built an
“transformational”, or “watershed events” in previous
organization in which our people can grow, learn new
annual reports. If we knew then, what we know now,
skills, take on new challenges, and fully utilize their
we might have saved those words for years like 2017.
abilities. We’ve also created opportunities for more
We hope by the time you finish reading this report
and more people to join us in our quest. A virtuous
that you’ll understand why we are using those words
cycle of serving our customers effectively and
again.
efficiently and producing sound financial results while
doing so creates this dynamic. “Rinse and repeat”, as
it says on the shampoo bottle.
It is a joy to report this record of growth over time and
we appreciate the associates, the customers, and the
providers of capital, who made it possible.
2017 Review
Here are the headlines from 2017:
1- 2017 broke the financial record for the highest
ever total level of insured catastrophes. Hurricanes
Harvey, Irma, Maria and Nate, along with wildfires
in California, earthquakes in Mexico, cyclones in
Asia, weather and crop damage in Europe, and
other events caused record financial losses
2- We acquired SureTec and State National in our
In 2017 we produced total revenues of $6.1 billion vs
insurance operations
$5.6 billion in 2016, up 8%. Our insurance premiums
3- We acquired Costa Farms in our Markel Venture
totaled $4.2 billion vs $3.9 billion, an increase of
operations
10%. Our Markel Ventures operations produced
4- We made these substantial acquisitions on our
revenues of $1.3 billion vs $1.2 billion, an increase of
base of internal equity capital and each share of
10%. We earned 10% on our publicly traded
your Markel stock owns a bigger business than it
4
did a year ago
Markel Corporation
5- We worked diligently to improve the efficiency and
total expected losses of $565 million. Across all our
effectiveness of our existing and new operations
lines of insurance coverages we paid out $2.2 billion
6- We earned record returns in our investment
in 2017 to help our customers recover from difficult
operations
events.
In total, your company grew by roughly one quarter in
The good news is that these payments demonstrate
total size and scale during 2017 with major
that our customers can count on us in their time of
acquisitions in our insurance and Markel Ventures
need. This is why people buy insurance in the first
businesses. We responded to, and served our
place. It also speaks to why we manage Markel in a
insurance customers effectively as they experienced
conservative and prudent way. We do so in order to
record natural catastrophes, and we earned record
have the ability to respond quickly, and appropriately,
investment returns.
to help our customers get back on their feet. We keep
our promises.
2017 stands as a transformational and watershed
year for Markel (yet again).
In each and every period of heavy catastrophes,
Taking each one of these items in order, here is a
operations. We’ve learned how to better select and
review of the headlines.
accept risks, and how to price those risks more
we’ve learned something about how to improve our
1- CATS, CATS, CATS
We wish that we were talking about internet videos
with this headline but unfortunately that is not the
case. In the insurance business, catastrophic events
get described with the shorthand term of CATs. 2017
set a new high water mark for the record books.
Financially, the insured loss toll exceeded every other
single year in human history.
appropriately. It is important to note that despite the
large dollar amount of our losses in 2017, those
amounts were in line with our estimates of what we
expected in the event of major catastrophes.
As we continue to offer insurance to our customers
to protect them in the event of catastrophic events,
we continue to iterate and adjust our prices and
exposures. If events become more common and more
costly, we adjust our prices accordingly, to maintain
the financial resources needed to pay claims when
Total industry losses from hurricanes Harvey, Irma and
they occur.
Maria along with the wildfires in California,
earthquakes in Mexico, cyclones in Asia, and European
weather events, currently are expected to exceed
$135 billion. As such, it is not surprising that our
losses from these events also set a new record. We
paid out claims of $159 million in response to the
catastrophic losses suffered by our customers, with
We also provide coverage and protect our clients more
efficiently and cost effectively than they could on
their own. We do so by maintaining a spread of
geographically dispersed exposures. Events in one
area tend not to affect other geographic areas. By
collecting and managing a pool of insurance risks
5
and premiums from all around the world, we can
Both companies contacted Markel when they
effectively offer protection and insurance to individual
considered their own futures. Our longstanding
policyholders at an efficient cost to our policyholders.
reputation and performance in helping companies
The geographic spread, in and of itself, creates an
flourish and grow, and our culture of integrity and
efficiency that allows us to offer protection to our
continuous improvement, created the opportunity for
clients at a lower cost.
us to engage in discussions with both firms.
Great companies do things "for their customers"
In the case of SureTec, the founder John Knox,
rather than "to their customers" and our ability to
contacted us directly, as he believed that Markel
efficiently operate a diverse pool of catastrophic risk
would offer the best option for SureTec and its
creates the ability to serve our customers better and
associates to grow and continue to build the value of
more efficiently than they could do themselves.
the firm.
2- SureTec and State National Acquisitions
During the course of 2017 we acquired SureTec and
State National. These two additions represent new
and substantial venues to continue our longstanding
strategy of specialization and diversification. SureTec
brings specialized knowledge of the surety market, a
unique and critical insurance function, which we
previously had not been able to offer to our clients in
a meaningful way. State National also brings new
skills and specialized insurance services with their
historical knowledge of certain insurance
management and program services, as well as
collateral protection products.
Both companies are experts and leaders in their
respective fields. By joining Markel, both companies
will be able to increase the amount of business they
write, add specialized knowledge to better serve our
clients, and help us continue on our path of
diversification. The diversification adds margins of
safety to our financial strength and performance,
which stands behind our promises to our clients.
John and his team did a wonderful job of launching
SureTec in 1998 and growing a successful surety
operation. SureTec’s largest markets are in their home
state of Texas, along with California. While they do
business in many other states as well, as part of
Markel, they will immediately be able to expand the
distribution and awareness of their surety products to
Markel’s existing nationwide client base.
We already do business with many of the agents,
contractors, and current and potential customers of
SureTec, and our ability to help them grow through
access to our distribution channels and customer base
creates a win-win situation for SureTec and Markel.
John and his SureTec team win by knowing that their
firm will be part of the permanent capital structure of
Markel. They can grow and provide long term
potential for their current and future associates with
the larger and long term base of Markel capital.
We at Markel win by adding surety to our array of
insurance products and services. Surety requires
specialized expertise and we can serve our customers
6
Markel Corporation
more fulsomely by adding the surety skills that are
combine to offer new and unique insurance products
now part of Markel.
that are fully and appropriately regulated, and
reviewed by government and rating agency personnel.
State National also stands as a strategically valuable
and important addition to Markel. The Ledbetter
As part of the larger Markel organization, State
family built State National over two generations. They
National can continue to expand the size and scale of
provided two primary lines of business. In one line,
their offerings and we can learn about the ways in
State National served as a “fronting” company for
which technology continues to change the
other property and casualty insurance companies. In
fundamental nature of insurance pricing, marketing,
the other line, they offered collateral protection
and distribution. This acquisition adds additional sets
insurance that works to protect credit unions and their
of specialized skills to Markel and further diversifies
customers.
the set of products we can offer our customers.
In the fronting business, State National often works
with insurers experiencing some vulnerability, or risks,
to their ratings and marketplace acceptance. State
National would stand in the shoes of their insurance
company clients, and provide services and assurance
to regulators and rating agencies, that the client
insurance companies could, and would, maintain
appropriate levels of service and financial stability.
In developing the skills to provide these important
services, State National also developed the skills to
assist the growing “Fintech” and venture capital
funded entrants in the insurance industry. These new
participants often have unique marketing skills, risk
pricing abilities, and product packaging and design
approaches. At the same time, they often do not have
the array of licenses required to offer insurance
products or financial strength ratings to provide
comfort to potential buyers.
3- Costa Farms
Costa Farms is the largest grower of houseplants in
the world. You can find their plants on the shelves of
the leading home improvement and general
merchandise retailers as well as online. The company
is in its third generation of Costa family leadership and
generation four is in the building.
The Costa family demonstrates everything that can be
wonderful about a family business. In their words they
talk about the foundation of “customers, culture, and
growth.” With that focus, starting from scratch, three
generations built a wonderful business. They work
each day to make themselves indispensable to their
customers, and they keep a long term focus. All of
these activities stem from, and go hand in hand with,
building a business that you expect to continue into
future generations. Short cuts, and short term time
horizons, have no place when this mentality pervades
State National can work with those firms to solve their
your business.
challenges of regulatory and financial rating agency
requirements. By partnering, State National and the
newer entrants into the insurance business can
7
Just as is the case at Markel, this mindset goes beyond
substantial increase in our size and scale, and we were
people with the same last name or blood lines. Family
able to pay for these purchases without additional
becomes a matter of choice as associates join a firm
equity financing.
and choose to live with the same long term values.
At the same time as we funded these acquisitions, we
To be an associate of Markel is to be a member of the
began making record levels of claims payments to our
“Markel Family” in a figurative sense. We all share
policyholders from the CAT losses and normal
the same basic values and commitment to long term
insurance operations. We believe this combination of
success. We were pleased that the Costa family saw
activities and events stands as strong evidence of our
this culture at Markel and sought us out as partners
financial strength, investment excellence, and
to help them to continue to build their business in
conservative financial practices. We were in a financial
the future.
position to pay record claim losses and execute three
substantial acquisitions all in the space of the same
Costa stands as the largest acquisition to date for
year. Additionally, our financial position enables us to
Markel Ventures. They have the specialized
fully seek and accept property insurance risks in the
knowledge and skills to grow more than 100 million
post CAT environment of higher pricing and
plants per year in varied locations, and get those
prospectively better financial returns.
living, breathing products onto store shelves, or
delivered to your home and office, all around the
We work every day to build and protect our financial
country. They are the leading firm in their industry,
strength. Those daily activities over many years paid
and we expect that they will continue to grow
off in 2017 as demonstrated by our ability to take
organically (please pardon the pun) and inorganically.
advantage of these opportunities to grow.
We provide capital, and a time horizon, that matches
the generational views of the Costa family.
Separately, we raised $300 million of 30 year fixed
rate financing at 4.30% in the fourth quarter. We
The Costa acquisition represents a new level of size
believe that the ability to lock in such a long term,
and scope for Markel Ventures. We are excited to
fixed rate debt makes prudent financial sense and is
continue to add specialized knowledge and skills to
consistent with the conservative way in which we
Markel and to provide additional margin of safety to
manage our financial affairs.
our customers, associates, and shareholders.
4- Acquisition Financing
5- Operational Developments
Amidst the headlines about the new things that
I’m pleased to report to you that we paid for the
happened at Markel this year it can be easy to forget
acquisitions of SureTec, Costa, and State National
about the thousands of operational details and
with cash. We issued no dilutive equity to fund these
improvements that took place in all of our global
purchases. These deals increase the size and revenue
operations.
8
footprint of Markel by about a quarter. This is a
Markel Corporation
In each and every aspect of our insurance and
There are no activities within the Markel organization
industrial businesses we worked diligently to improve
that are not being actively worked on to be made
the efficiency by which we serve our clients. We have
better. As it says in the Markel Style we look for “a
and continue to focus on using all of the tools in the
better way to do things.” The most important aspect
toolbox labeled “technology”, to build and maintain
of that statement is the mindset of continuous
our competitive position in the world.
improvement that infuses the people of Markel. The
tools and technology we use to make that journey
In 2017 our expense ratio stood at 37% compared to
change over time but the path is one we’ve been on
39% in the prior year. This progress shows results
for decades. We commit to remaining on that path to
from our ongoing efforts to increase our internal
improvement in every facet of your company.
efficiency and offer our customers the best possible
value for their insurance needs.
There are no businesses on planet earth that do not
face the same challenge. Any degree of complacency
Our overall combined ratio of 105% reflects the
or satisfaction with current processes or ways of doing
record amount of CAT losses. CATs in total added
business has no place in today’s world. There are no
13 points to our combined ratio and the change in
elements of any aspect of Markel, in any business, in
UK government mandated discount rate applied to
any country, that are not constantly being refined,
our run-off UK auto business added two points to
reviewed, analyzed, changed and adapted to remain
the total.
relevant in 2018 and beyond.
We remain fully committed to the discipline of
underwriting profits. Our long term record of
consistency with this goal stands as evidence that we
mean it and we fully expect to produce underwriting
profits in 2018.
Throughout the organization we continued to increase
the tools created by technological developments. We
changed the way we offered renewals to existing
policyholders, we streamlined internal accounting
and financial processes, we adapted our claims
process to reflect more granular understanding of
policyholder losses, we increased the efficiency and
effectiveness of our marketing efforts, and so on and
so on and so on.
6- Investment Results
We earned excellent returns in 2017. We earned 26%
on our publicly traded equity portfolio and 3% on our
fixed income holdings. The total portfolio earned
10%. In dollar terms, we earned more than $1 billion
of unrealized gains, realized gains and dividends from
our public equity holdings and this represents a new
record.
The double barreled win is that we also achieved this
performance at a cost lower than passive index funds.
We manage the vast majority of our investments
internally. The total cost of our in house management
stands at a single number of basis points.
9
We believe that we manage our investment
That approach and formula has not changed since our
operations with a triple play advantage of, ultra-low
initial public offering in 1986 and despite the swirling
costs, tax efficiency, and rigorous and continuous
pace of change in so many aspects of life, we believe
intellectual engagement and management of our
the philosophy remains completely relevant and
portfolio holdings. Two of those three aspects are
durable. We continue to find productive ways to invest
currently popular in the investment world. Specifically,
our capital. In the short run, anything can and will
indexing and passive investing are relatively low cost
happen and results will be volatile. In the long run,
and tax efficient. With our internal management, we
we’ve earned spectacular returns with this
keep our costs lower than passive indexers, we
time-tested approach and we’re confident in our
operate with tax efficiency, AND, we obsess about
ability to continue to do so.
what we own and why we own it. We do so in order to
attempt to adapt and change as the world changes.
In our fixed income operations we maintain the
Our multi-decade record of outperformance in our
We match the duration and currencies of our holdings
investment results speaks to the effectiveness of
to our expectations of our insurance liabilities. This
highest possible credit quality holdings we can find.
our approach.
has been our longstanding and consistent practice and
it has served us well. We also believe the approach is
As we’ve written every year since 1999 we maintain a
low cost and durable in the future.
four step approach to selecting and managing our
equity investments.
In total, our net unrealized gains from this
1- We look for profitable businesses with excellent
end. With the change in the tax law that occurred
long term returns on capital and modest leverage
during the fourth quarter of 2017, we reduced the
longstanding approach stood at $3.7 billion at year
2- We look for management teams with equal
increased shareholders equity by $402 million due
measures of talent and integrity
to the reduction in the U.S. corporate tax rate from
deferred taxes associated with these gains and
3- We look for companies that can reinvest their
earnings at high rates of return and/or demonstrate
skill in acquisitions or other capital management
activities
4- We look for these investments at reasonable prices
which should produce acceptable returns over time
35% to 21%.
Next
The spectacular news about Markel is that there is
always a chapter that starts with the headline NEXT.
From the very beginning of our firm, with Sam
Markel’s creative solution to a customer need, the
entire history of this company has been figuring out
what to do next.
10
Markel Corporation
We’ve done so by following the precepts of the Markel
We followed our process of using our financial
Style. As the Style says, we’ve worked hard. We’ve
resources to support organic growth in our
pursued excellence, we’ve kept our sense of humor,
existing businesses, acquiring new companies,
and we’ve adhered to a creed of honesty and fairness
adding to our investment portfolio of publicly
in all our dealings. We’ve done so on a daily basis for
traded securities and repurchasing our own
years and we will do it the next day as well.
stock. We will follow those same four steps
next year and the year after that.
We tested our design and fundamental strategy of
specialization and diversification in 2017. While a
2017 indeed stands as a transformational
record amount of catastrophic losses took place
year in our longstanding goal to build one
worldwide, our insurance operations were able to
of “The World’s Great Companies.” There have
absorb those losses. At the same time, our investment
been transformational and watershed years
and industrial operations produced excellent financial
in our past and we aspire to more in the years
results, and we maintained overall comprehensive
to come.
profitability for the company. We look forward to the
next results from our varied operations as we expect
Next.
them to reveal the same story of long term progress.
Respectfully submitted,
Alan I. Kirshner, Executive Chairman
Thomas S. Gayner, Co-Chief Executive Officer
Anthony F. Markel, Vice Chairman
Richard R. Whitt, III, Co-Chief Executive Officer
Steven A. Markel, Vice Chairman
11
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
We are a diverse financial holding company serving a variety of niche markets. Our principal business markets and underwrites
specialty insurance products. We believe that our specialty product focus and niche market strategy enable us to develop
expertise and specialized market knowledge. We seek to differentiate ourselves from competitors by our expertise, service,
continuity and other value-based considerations. We also own interests in various businesses that operate outside of the
specialty insurance marketplace. Our financial goals are to earn consistent underwriting and operating profits and superior
investment returns to build shareholder value.
Our business is comprised of the following types of operations:
• Underwriting - our underwriting operations are comprised of our risk-bearing insurance operations, which include the run-off
of underwriting operations that were discontinued in conjunction with acquisitions
• Investing - our investing activities are primarily related to our underwriting operations
• Program Services - our program services business serves as a fronting platform that provides other insurance companies
access to the U.S. property and casualty insurance market
• Markel CATCo - our Markel CATCo operations include an investment fund manager that offers insurance-linked securities
to investors
• Markel Ventures - our Markel Ventures operations include our controlling interests in a diverse portfolio of businesses that
operate outside of the specialty insurance marketplace
U n d e r w r i t i n g
Specialty Insurance and Reinsurance
The specialty insurance market differs significantly from the standard market. In the standard market, insurance rates and
forms are highly regulated, products and coverages are largely uniform with relatively predictable exposures and companies tend
to compete for customers on the basis of price. In contrast, the specialty market provides coverage for hard-to-place risks that
generally do not fit the underwriting criteria of standard carriers.
Competition in the specialty insurance market tends to focus less on price than in the standard insurance market and more on
other value-based considerations, such as availability, service and expertise. While specialty market exposures may have higher
perceived insurance risks than their standard market counterparts, we seek to manage these risks to achieve higher financial
returns. To reach our financial and operational goals, we must have extensive knowledge and expertise in our chosen markets.
Many of our accounts are considered on an individual basis where customized forms and tailored solutions are employed.
By focusing on the distinctive risk characteristics of our insureds, we have been able to identify a variety of niche markets
where we can add value with our specialty product offerings. Examples of niche insurance markets that we have targeted
include wind and earthquake-exposed commercial properties, liability coverage for highly specialized professionals,
equine-related risks, workers’ compensation insurance for small businesses, classic cars and marine, energy and
environmental-related activities. Our market strategy in each of these areas of specialization is tailored to the unique nature of
the loss exposure, coverage and services required by insureds. In each of our niche markets, we assign teams of experienced
underwriters and claims specialists who provide a full range of insurance services.
We also participate in the reinsurance market in certain classes of reinsurance product offerings. In the reinsurance market, our
clients are other insurance companies, or cedents. We typically write our reinsurance products in the form of treaty reinsurance
contracts, which are contractual arrangements that provide for automatic reinsuring of a type or category of risk underwritten
by cedents. Generally, we participate on reinsurance treaties with a number of other reinsurers, each with an allocated portion
of the treaty, with the terms and conditions of the treaty being substantially the same for each participating reinsurer. With
treaty reinsurance contracts, we do not separately evaluate each of the individual risks assumed under the contracts and are
largely dependent on the individual underwriting decisions made by the cedent. Accordingly, we review and analyze the
cedent’s risk management and underwriting practices in deciding whether to provide treaty reinsurance and in pricing of treaty
reinsurance contracts.
12
Our reinsurance products are written on both a quota share and excess of loss basis. Quota share contracts require us to share
the losses and expenses in an agreed proportion with the cedent. Excess of loss contracts require us to indemnify the cedent
against all or a specified portion of losses and expenses in excess of a specified dollar or percentage amount. In both types of
contracts, we may provide a ceding commission to the cedent.
We distinguish ourselves in the reinsurance market by the expertise of our underwriting teams, our access to global reinsurance
markets, our ability to offer large lines and our ability to customize reinsurance solutions to fit our client’s needs. Our specialty
reinsurance product offerings include coverage for general casualty, professional liability, property, workers’ compensation and
credit and surety risks.
Markets
In the United States, we write business in the excess and surplus lines (E&S) and specialty admitted insurance and reinsurance
markets. In 2016, the E&S market represented $42 billion, or 7%, of the $613 billion United States property and casualty
industry.(1) In 2016, we were the sixth largest E&S writer in the United States as measured by direct premium writings.(1)
Our E&S insurance operations are conducted through Evanston Insurance Company (Evanston), domiciled in Illinois. The
majority of our specialty admitted insurance operations are conducted through Markel Insurance Company (MIC), domiciled
in Illinois; Markel American Insurance Company (MAIC), domiciled in Virginia; FirstComp Insurance Company (FCIC),
domiciled in Nebraska and Essentia Insurance Company (Essentia), domiciled in Missouri. Beginning in 2017, our specialty
admitted operations also include Suretec Insurance Company (SIC), Suretec Indemnity Company (SINC), State National
Insurance Company, Inc. (SNIC) and National Specialty Insurance Company (NSIC), all of which are domiciled in Texas.
Our United States reinsurance operations are conducted through Markel Global Reinsurance Company (Markel Global Re),
a Delaware-domiciled reinsurance company.
In Europe, we participate in the London insurance market primarily through Markel Capital Limited (Markel Capital) and
Markel International Insurance Company Limited (MIICL). Markel Capital is the corporate capital provider for Markel
Syndicate 3000, through which our Lloyd’s of London (Lloyd’s) operations are conducted. Markel Syndicate 3000 is managed by
Markel Syndicate Management Limited (MSM). Markel Capital and MIICL are headquartered in London, England and have
offices across the United Kingdom, Europe, Canada, Latin America, Asia Pacific and the Middle East through which we are able
to offer insurance and reinsurance. The London insurance market produced approximately $62 billion of gross written premium
in 2016.(2) In 2016, the United Kingdom non-life insurance market was the second largest in Europe and fifth largest in the
world.(3) In 2016, gross premium written through Lloyd’s syndicates generated roughly 65% of the London market’s
international insurance business,(2) making Lloyd’s the world’s largest commercial surplus lines insurer(1) and sixth largest
reinsurer.(4) Corporate capital providers often provide a majority of a syndicate’s capacity and also generally own or control the
syndicate’s managing agent. This structure permits the capital provider to exert greater influence on, and demand greater
accountability for, underwriting results. In 2016, corporate capital providers accounted for approximately 90% of total
underwriting capacity in Lloyd’s.(5)
In Latin America, we provide reinsurance through MIICL, using our representative office in Bogota, Colombia, and our service
company in Buenos Aires, Argentina; through Markel Resseguradora do Brasil S.A. (Markel Brazil Re), our reinsurance company
in Rio de Janeiro, Brazil; and through Markel Syndicate 3000, using Lloyd’s admitted status in Rio de Janeiro. Additionally,
MIICL and Markel Syndicate 3000 are able to offer reinsurance in a number of Latin American countries through offices outside
of Latin America. Beginning in 2017, we provide insurance through Markel Seguradora do Brasil S.A. (Markel Brazil), our
insurance company in Rio de Janeiro, Brazil.
(1) U.S. Surplus Lines Segment Review Special Report, A.M. Best (September 1, 2017).
(2) London Company Market Statistics Report, International Underwriting Association (October 2017).
(3) Swiss Re Sigma (March 2017).
(4) Global Reinsurance Segment Review Special Report, A.M. Best (September 5, 2017).
(5) Lloyd’s Annual Report 2016.
13
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
In Bermuda, we write business in the worldwide insurance and reinsurance markets. The Bermuda property and casualty
insurance and reinsurance market produced $64 billion of gross written premium in 2015.(2) We conduct our Bermuda operations
through Markel Bermuda Limited (Markel Bermuda), which is registered as a Class 4 insurer and Class C long-term insurer
under the insurance laws of Bermuda.
Our reinsurance operations, which include our operations based in the United States, the United Kingdom, Latin America
and Bermuda, as described above, made us the 37th largest reinsurer in 2016, as measured by worldwide gross reinsurance
premium writings.(1)
In 2017, 21% of gross premium writings from our underwriting segments related to foreign risks (i.e., coverage for risks or
cedents located outside of the United States), of which 34% were from the United Kingdom and 12% were from Canada.
In 2016, 23% of our premium writings related to foreign risks, of which 32% were from the United Kingdom and 11% were
from Canada. In 2015, 24% of our premium writings related to foreign risks, of which 37% were from the United Kingdom
and 10% were from Canada. In each of these years, there was no other individual foreign country from which premium
writings were material. Premium writings are attributed to individual countries based upon location of risk or cedent.
Most of our business is placed through insurance and reinsurance brokers. Some of our insurance business is also placed
through managing general agents. We seek to develop and capitalize on relationships with insurance and reinsurance brokers,
insurance and reinsurance companies, large global corporations and financial intermediaries to develop and underwrite
business. A significant volume of premium for the property and casualty insurance and reinsurance industry is produced
through a small number of large insurance and reinsurance brokers. During the years ended December 31, 2017, 2016 and
2015, the top three independent brokers accounted for 27%, 28% and 27%, respectively, of gross premiums written in our
underwriting segments.
Competition
We compete with numerous domestic and international insurance companies and reinsurers, Lloyd’s syndicates, risk retention
groups, insurance buying groups, risk securitization programs, alternative capital sources and alternative self-insurance
mechanisms. We also compete with new companies that continue to be formed to enter the insurance and reinsurance
markets, particularly companies with new or “disruptive” technologies or business models. Competition may take the form of
lower prices, broader coverages, greater product flexibility, higher coverage limits, higher quality services or higher ratings by
independent rating agencies. In all of our markets, we compete by developing specialty products to satisfy well-defined market
needs and by maintaining relationships with agents, brokers and insureds who rely on our expertise. This expertise is our
principal means of competing. We offer a diverse portfolio of products, each with its own distinct competitive environment,
which enables us to be responsive to changes in market conditions for individual product lines. With each of our products,
we seek to compete with innovative ideas, appropriate pricing, expense control and quality service to policyholders, agents
and brokers.
Few barriers exist to prevent insurers and reinsurers from entering our markets of the property and casualty industry. Market
conditions and capital capacity influence the degree of competition at any point in time. Periods of intense competition, which
typically include broader coverage terms, lower prices and excess underwriting capacity, are referred to as a “soft market.” A
favorable insurance market is commonly referred to as a “hard market” and is characterized by stricter coverage terms, higher
prices and lower underwriting capacity. During soft markets, unfavorable conditions exist due in part to what many perceive as
excessive amounts of capital in the industry. In an attempt to use their capital, many insurance companies seek to write
additional premiums without appropriate regard for ultimate profitability, and standard insurance companies are more willing
to write specialty coverages. The opposite is typically true during hard markets. Historically, the performance of the property
and casualty reinsurance and insurance industries has tended to fluctuate in cyclical periods of price competition and excess
(1) Global Reinsurance Segment Review Special Report, A.M. Best (September 5, 2017).
(2) Bermuda Monetary Authority 2016 Annual Report.
14
underwriting capacity, followed by periods of high premium rates and shortages of underwriting capacity. This cyclical market
pattern can be more pronounced in the specialty insurance and reinsurance markets in which we compete than the standard
insurance market.
We experienced soft insurance market conditions, including price deterioration in virtually all of our product lines, starting in
the mid-2000s. Beginning in 2012, prices stabilized and we generally saw low to mid-single digit favorable rate changes in many
of our product lines in the following years as market conditions improved and revenues, gross receipts and payrolls of our
insureds were favorably impacted by improving economic conditions. However, beginning in 2013 and continuing through the
end of 2017, we experienced softening prices across most of our property product lines, as well as on our marine and energy
lines. Our large account business has also been subject to more pricing pressure and competition remains strong in the
reinsurance market. Following the high level of natural catastrophes that occurred in the third and fourth quarters of 2017,
beginning in first quarter of 2018, we saw more favorable rates, particularly on our catastrophe exposed product lines. We are
also seeing more stabilized pricing on our other product lines and continue to see pricing margins in most reinsurance lines of
business. Despite stabilization of prices on certain product lines during the last several years, we still consider the overall
property and casualty insurance market to be soft. We routinely review the pricing of our major product lines and will continue
to pursue price increases in 2018, when possible. However, when we believe the prevailing market price will not support our
underwriting profit targets, the business is not written. As a result of our underwriting discipline, gross premium volume may
vary when we alter our product offerings to maintain or improve underwriting profitability.
Underwriting Philosophy
By focusing on market niches where we have underwriting expertise, we seek to earn consistent underwriting profits, which are
a key component of our strategy. The property and casualty insurance industry commonly defines underwriting profit or loss as
earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. We believe
that the ability to achieve consistent underwriting profits demonstrates knowledge and expertise, commitment to superior
customer service and the ability to manage insurance risk. We use underwriting profit or loss as a basis for evaluating our
underwriting performance. To facilitate this strategy, we have a product line leadership group that has primary responsibility for
both developing and maintaining underwriting and pricing guidelines on our existing products and new product development.
The product line leadership group is under the direction of our Chief Underwriting Officer.
The combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss
adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums. A combined ratio less than
100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. In 2017, our
combined ratio was 105%. See Management’s Discussion & Analysis of Financial Condition and Results of Operations for
further discussion of our underwriting results.
The following graph compares our combined ratio to the property and casualty industry’s combined ratio for the past five years.
C O M B I N E D R AT I O S
110%
110%
100%
100%
90%
90%
80%
80%
Markel Corporation
M
M
Industry Average*
101%
97% 96%
97%
107%
102%
95% 97%
102%
98%
97%
89%
101%
97% 96%
92%
105%
95%
105%
97%
2017
2013 2014 2015 2016 2017
2010 2011 2012 2013 2014
2013
2014
2015
2016
*
*
* Source: A.M. Best Company. Industry Average is estimated for 2017.
15
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
Underwriting Segments
Through December 31, 2017, we monitored and reported our ongoing underwriting operations in the following three
segments: U.S. Insurance, International Insurance and Reinsurance. In determining how to aggregate and monitor our
underwriting results, management considered many factors, including the geographic location and regulatory environment
of the insurance entity underwriting the risk, the nature of the insurance product sold, the type of account written and the
type of customer served.
The U.S. Insurance segment includes all direct business and facultative placements written by our insurance subsidiaries
domiciled in the United States. The International Insurance segment includes all direct business and facultative placements
written by our insurance subsidiaries domiciled outside of the United States, including our syndicate at Lloyd’s. The
Reinsurance segment includes all treaty reinsurance written across the Company. Results for lines of business discontinued
prior to, or in conjunction with, acquisitions are reported in the Other Insurance (Discontinued Lines) segment. The lines
were discontinued because we believed some aspect of the product, such as risk profile or competitive environment, would not
allow us to earn consistent underwriting profits. Results attributable to the run-off of life and annuity reinsurance business are
included in our Other Insurance (Discontinued Lines) segment.
With the continued growth and diversification of our business, beginning in 2018, we no longer consider the geographic location
of the insurance entity underwriting the risk when monitoring our underwriting operations and will monitor and report our
ongoing underwriting operations on a global basis in the following two segments: Insurance and Reinsurance. The Insurance
segment will include all direct business and facultative placements written across the Company, which currently are reported
in our U.S. Insurance and International Insurance segments. The Reinsurance segment will remain unchanged.
See note 20 of the notes to consolidated financial statements for additional segment reporting disclosures.
M A R K E L C O R P O R AT I O N
2017 G R O S S P R E M I U M V O L U M E ($5.3 B I L L I O N)
55%
U.S. Insurance
24%
International
Insurance
Reinsurance
21%
16
U . S . I n s u r a n c e S e g m e n t
Our U.S. Insurance segment includes both hard-to-place risks written outside of the standard market on an excess and surplus
lines basis and unique and hard-to-place risks that must be written on an admitted basis due to marketing and regulatory
reasons. Business in this segment is written primarily through our Wholesale, Specialty and Global Insurance divisions. As a
result of the acquisition of State National Companies, Inc. (State National), effective November 17, 2017, we created the State
National division. The State National division’s collateral protection underwriting business is included in the U.S. Insurance
segment and the remainder is included in our program services business. Effective January 1, 2018, our Wholesale and Global
Insurance divisions were combined to form the Markel Assurance division.
42%
Specialty
Wholesale
46%
Global
Insurance
11%
1% - State National
Wholesale Division
The Wholesale division writes commercial risks, primarily on an excess and surplus lines basis. The E&S market focuses on
hard-to-place risks and loss exposures that generally cannot be written in the standard market. United States insurance
regulations generally require an E&S account to be declined by admitted carriers before an E&S company may write the
business. E&S eligibility allows our insurance subsidiaries to underwrite unique loss exposures with more flexible policy forms
and unregulated premium rates. This typically results in coverages that are more restrictive and more expensive than coverages
in the standard market.
Our E&S business is written through two distribution channels: professional surplus lines general agents who have limited
quoting and binding authority and wholesale brokers. Our E&S business produced by this segment is written on a surplus lines
basis through Evanston, which is authorized to write business in all 50 states and the District of Columbia, Guam, Puerto Rico
and the U.S. Virgin Islands.
Specialty Division
The Specialty division writes program insurance and other specialty coverages for well-defined niche markets, primarily on an
admitted basis. Our business written in the admitted market focuses on risks that, although unique and hard-to-place in the
standard market, must remain with an admitted insurance company for marketing and regulatory reasons. Hard-to-place risks
written in the admitted market cover insureds engaged in similar, but highly specialized, activities that require a total insurance
program not otherwise available from standard insurers or insurance products that are overlooked by large admitted carriers.
The 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.
The majority of our business written in the Specialty division is written by retail insurance agents who have very limited or no
underwriting authority although we also utilize managing general agents, who have broader underwriting authority, for certain
of our product lines. Agents are carefully selected and agency business is controlled through regular audits and pre-approvals.
Certain products and programs are marketed directly to consumers or distributed through wholesale producers. Personal lines
coverages included in this segment are marketed directly to the consumer using direct mail, internet and telephone promotions,
as well as relationships with various motorcycle and boat manufacturers, dealers and associations.
17
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
The majority of the business produced by this division is written either through MIC, MAIC, FCIC, Essentia, SIC, and SINC.
MIC, MAIC and Essentia are licensed to write property and casualty insurance in all 50 states and the District of Columbia.
MAIC is also licensed to write property and casualty insurance in Puerto Rico. Essentia specializes in coverage for classic cars
and boats. FCIC is currently licensed in 28 states and specializes in workers’ compensation coverage. SIC and SINC specialize in
surety coverages. SIC is currently licensed in all 50 states and the District of Columbia. SINC is currently licensed in California
and Texas.
Global Insurance Division
The Global Insurance division writes risks outside of the standard market on both an admitted and non-admitted basis. The
portion of Global Insurance division business written by our U.S. insurance subsidiaries is included in this segment, and the
remainder is included in the International Insurance segment. U.S. business produced by this division is primarily written on
Evanston and MAIC.
State National Division
The State National division writes collateral protection insurance (CPI), which insures personal automobiles and other vehicles
held as collateral for loans made by credit unions, banks and specialty finance companies through its lender services product
line on both an admitted and non-admitted basis. This business is primarily written on SNIC and NSIC, which are licensed to
write property and casualty insurance in all 50 states and the District of Columbia.
Our U.S. Insurance segment reported gross premium volume of $2.9 billion, earned premiums of $2.4 billion and an
underwriting profit of $119.9 million in 2017.
U.S. I N S U R A N C E S E G M E N T
2017 G R O S S P R E M I U M V O L U M E ($2.9 B I L L I O N)
14%
Property
Workers’
Compensation
11%
15%
Professional
Liability
16%
Personal
Lines
Specialty
Programs
11%
General Liability
27%
6%
Other
Product offerings within the U.S. Insurance segment fall within the following major product groupings:
• General Liability
• Professional Liability
• Property
• Personal Lines
• Specialty Programs
• Workers’ Compensation
• Other Product Lines
18
General Liability product offerings include a variety of primary and excess liability coverages targeting apartments and office
buildings, retail stores and contractors, as well as business in the life sciences, energy, medical, recreational and hospitality
industries. Specific products include the following:
• excess and umbrella products, which provide coverage over approved underlying insurance carriers on either an occurrence
or claims-made basis;
• products liability products, which provide coverage on either an occurrence or claims-made basis to manufacturers,
distributors, importers and re-packagers of manufactured products;
• environmental products, which provide coverage on either an occurrence or claims-made basis and include environmental
consultants’ professional liability, contractors’ pollution liability and site-specific environmental impairment liability
coverages; and
• casualty facultative reinsurance written for individual casualty risks focusing on general liability, products liability,
automobile liability and certain classes of miscellaneous professional liability and targeting classes which include low
frequency, high severity general liability risks.
Professional liability coverages include unique solutions for highly specialized professions, including architects and engineers,
lawyers, agents and brokers, service technicians and computer consultants. We offer claims-made medical malpractice coverage
for doctors and dentists; claims-made professional liability coverage to individual healthcare providers such as therapists,
pharmacists, physician assistants and nurse anesthetists; and coverages for medical facilities and other allied healthcare risks
such as clinics, laboratories, medical spas, home health agencies, small hospitals, pharmacies and senior living facilities. Other
professional liability coverages include errors and omissions, union liability, executive liability for financial institutions and
Fortune 1000 companies and management liability. Our management liability coverages, which can be bundled with other
coverages or written on a standalone basis, include employment practices liability, directors’ and officers’ liability and fiduciary
liability coverages. Additionally, we offer cyber liability products, which provide coverage primarily for data breach and privacy
liability, data breach loss to insureds and electronic media coverage.
Property coverages consist principally of fire, allied lines (including windstorm, hail and water damage) and other specialized
property coverages, including catastrophe-exposed property risks such as earthquake and wind on both a primary and excess
basis. Catastrophe-exposed property risks are typically larger and are lower frequency and higher severity in nature than more
standard property risks. Our property risks range from small, single-location accounts to large, multi-state, multi-location
accounts. Other types of property products include:
• inland marine products, which provide a number of specialty coverages for risks such as motor truck cargo coverage for
damage to third party cargo while in transit, warehouseman’s legal liability coverage for damage to third party goods in
storage, contractor’s equipment coverage for first party property damage and builder’s risk coverage; and
• railroad-related products, which provide first party coverages for short-line and regional railroads, scenic and tourist railroads,
commuter and light rail trains and railroad equipment.
Personal lines products provide first and third party coverages for classic cars, motorcycles and a variety of personal watercraft,
including vintage boats, high performance boats and yachts and recreational vehicles, such as motorcycles, snowmobiles and
ATVs. Based on the seasonal nature of much of our personal lines business, we generally will experience higher claims activity
during the second and third quarters of the year. Additionally, property coverages are offered for mobile homes, dwellings and
homeowners that do not qualify for standard homeowner’s coverage. Other products offered include special event protection,
performance bicycle coverage, pet health coverage, supplemental natural disaster coverage, renters’ protection coverage and
excess flood coverage.
19
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
Specialty programs business included in this segment is offered on a standalone or package basis and generally targets
specialized commercial markets and customer groups. Targeted groups include youth and recreation oriented organizations
and camps, child care operators, schools, social service organizations, museums and historic homes, performing arts
organizations, senior living facilities and wineries. Other specialty programs business written in this segment includes:
• general agent programs that use managing general agents to offer single source admitted and non-admitted programs for a
specific class or line of business;
• first and third party coverages for medical transport, small fishing ventures, charters, utility boats and boat rentals; and
• property and liability coverages for farms and animal boarding, breeding and training facilities.
Workers’ compensation products provide wage replacement and medical benefits to employees injured in the course of
employment and target main-street, service and artisan contractor businesses, retail stores and restaurants.
Other product lines within the U.S. Insurance segment include:
• ocean marine products, which provide general liability, professional liability, property and cargo coverages for marine artisan
contractors, boat dealers and marina owners including hull physical damage, protection and indemnity and third party
property coverages for ocean cargo;
• surety products, which consist primarily of contract, commercial and court bonds;
• CPI, which provides coverage on automobiles or other vehicles held as collateral for loans made by credit unions, banks and
specialty finance companies; and
• coverages for equine-related risks, such as horse mortality, theft, infertility, transit and specified perils.
I n t e r n a t i o n a l I n s u r a n c e S e g m e n t
Our International Insurance segment writes risks that are characterized by either the unique nature of the exposure or the high
limits of insurance coverage required by the insured. Business included in this segment is produced through our Markel
International and Global Insurance divisions.
78%
Markel
International
Global
Insurance
22%
Markel International Division
The Markel International division writes business worldwide from our London-based platform and branch offices around the
world. This platform includes Markel Syndicate 3000, through which our Lloyd’s operations are conducted, and MIICL. The
London insurance market is known for its ability to provide innovative, tailored coverage and capacity for unique and
hard-to-place risks. Hard-to-place risks in the London market are generally distinguishable from standard risks due to the
complexity or significant size of the risk. It is primarily a broker market, which means that insurance brokers bring most of the
business to the market. Risks written in the Markel International division are written on either a direct basis or a subscription
basis, the latter of which means that loss exposures brought into the market are typically insured by more than one insurance
company or Lloyd’s syndicate, often due to the high limits of insurance coverage required. When we write business in the
subscription market, we prefer to participate as lead underwriter in order to control underwriting terms, policy conditions and
claims handling.
20
Global Insurance Division
Global Insurance division business written by our non-U.S. insurance subsidiaries, which primarily targets Fortune 1000
accounts, is included in the International Insurance segment. The Global Insurance division is comprised of business written
through Markel Bermuda and MIICL.
In 2017, 63% of gross premium written in the International Insurance segment related to foreign risks, of which 36% was from
the United Kingdom and 15% was from Canada. In 2016, 64% of gross premium written in the International Insurance segment
related to foreign risks, of which 36% was from the United Kingdom and 16% was from Canada. In 2015, 66% of gross
premium written in the International Insurance segment related to foreign risks, of which 40% was from the United Kingdom
and 13% was from Canada. In each of these years, there was no other individual foreign country from which premium writings
were material.
Our International Insurance segment reported gross premium volume of $1.3 billion, earned premiums of $949.9 million and an
underwriting loss of $33.6 million in 2017.
I N T E R N AT I O N A L I N S U R A N C E S E G M E N T
2017 G R O S S P R E M I U M V O L U M E ($1.3 B I L L I O N)
29%
Marine and
Energy
14%
General
Liability
Professional
Liability
31%
Property
11%
Other
15%
Product offerings within the International segment fall within the following major product groupings:
• Professional Liability
• Marine and Energy
• General Liability
• Property
• Other Product Lines
Professional liability products are written on a worldwide basis and include professional indemnity, directors’ and officers’
liability, errors and omissions, employment practices liability, intellectual property and cyber liability. Our target industries
include U.S. and international public companies, as well as large professional firms, including lawyers, financial institutions,
accountants, consultants, and architects and engineers.
Marine and energy products include a portfolio of coverages for cargo, energy, hull, liability, war and terrorism risks. The cargo
account is an international transit-based book covering many types of cargo. Energy coverage includes all aspects of oil and gas
activities. The hull account covers physical damage to ocean-going tonnage, yachts and mortgagees’ interests. Liability coverage
provides for a broad range of energy liabilities, as well as traditional marine exposures including charterers, terminal operators
and ship repairers. The war account covers the hulls of ships and aircraft, and other related interests, against war and associated
perils. Terrorism coverage provides for property damage and business interruption related to political violence including war and
civil war.
21
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
General liability products are written on a worldwide basis and include general and products liability coverages targeting
consultants, construction professionals, financial service professionals, professional practices, social welfare organizations and
medical products. We also write excess liability coverage, which includes excess product liability, excess medical malpractice
and excess product recall insurance in the following industries: healthcare, pharmaceutical, medical products, life sciences,
transportation, heavy industrial and energy.
Property products target a wide range of insureds, providing coverage ranging from specie risks and fire to catastrophe perils
such as earthquake and windstorm. Business is written primarily on an open market basis for direct and facultative risks
targeting Fortune 1000 and large, multi-national companies on a worldwide basis. We also provide property coverage for small
to medium-sized commercial risks on both a stand-alone and package basis. The specie account includes coverage for fine art on
exhibition and in private collections, securities, bullion, precious metals, cash in transit and jewelry.
Other product lines within the International Insurance segment include:
• crime coverage primarily targeting financial institutions and providing protection for bankers’ blanket bond, computer crime
and commercial fidelity;
• contingency coverage including event cancellation, non-appearance and prize indemnity;
• accident and health coverage targeting affinity groups and schemes, high value and high risks accounts and sports groups;
• coverage for equine-related risks such as horse mortality, theft, infertility, transit and specified perils;
• coverage for legal expenses including before the event products that protect commercial clients in the event of legal actions
and after the event products covering a wide range of litigation;
• specialty coverages include mortality risks for farms, zoos, animal theme parks and safari parks; and
• short-term trade credit coverage for commercial risks, including insolvency and protracted default as well as political risks
coverage in conjunction with commercial risks for currency inconvertibility, government action, import and export license
cancellation, public buyer default and war.
R e i n s u r a n c e S e g m e n t
Our Reinsurance segment includes property and casualty treaty reinsurance products offered to other insurance and reinsurance
companies globally through the broker market. Our treaty reinsurance offerings include both quota share and excess of loss
reinsurance and are typically written on a participation basis, which means each reinsurer shares proportionally in the business
ceded under the reinsurance treaty written. Our reinsurance products may include features such as contractual provisions that
require our cedent to share in a portion of losses resulting from ceded risks, may require payment of additional premium
amounts if we incur greater losses than those projected at the time of the execution of the contract, may require reinstatement
premium to restore the coverage after there has been a loss occurrence or may provide for experience refunds if the losses we
incur are less than those projected at the time the contract is executed. Our reinsurance product offerings are underwritten by
our Global Reinsurance division and our Markel International division. The Global Reinsurance division operates from
platforms in the United States and Bermuda. Business written in the Global Reinsurance division is produced through Markel
Global Re and Markel Bermuda. Markel Global Re is licensed or accredited to provide reinsurance in all 50 states and the
District of Columbia. Markel Bermuda conducts its reinsurance operations from Bermuda. The Markel International division
conducts its reinsurance operations from its London-based platform, as described above, and from its platform in Latin America,
which includes Markel Brazil.
22
In 2017, 27% of gross premium written in the Reinsurance segment related to foreign risks, of which 31% was from the United
Kingdom. In 2016, 37% of gross premium written in the Reinsurance segment related to foreign risks, of which 25% was from
the United Kingdom. In 2015, 36% of gross premium written in the Reinsurance segment related to foreign risks, of which 32%
was from the United Kingdom. In each of these years, there was no other individual foreign country from which premium
writings were material.
80%
Global
Reinsurance
Markel
International
20%
Our Reinsurance segment reported gross premium volume of $1.1 billion, earned premiums of $934.1 million and an
underwriting loss of $299.2 million in 2017.
R E I N S U R A N C E S E G M E N T
2017 G R O S S P R E M I U M V O L U M E ($1.1 B I L L I O N)
39%
31%
Property
Casualty
Specialty
30%
Product offerings within the Reinsurance segment fall within the following major product groupings:
• Property
• Casualty
• Specialty
Property treaty products are offered on an excess of loss and quota share basis for catastrophe, per risk and retrocessional
exposures worldwide. Our catastrophe exposures are generally written on an excess of loss basis and target both personal and
commercial lines of business providing coverage for losses from natural disasters, including hurricanes, wind storms and
earthquakes. We also reinsure individual property risks such as buildings, structures, equipment and contents and provide
coverage for both personal lines and commercial property exposures. Our retrocessional products provide coverage for all types
of underlying exposures and geographic zones. A significant portion of the property treaty business covers United States
exposures, with the remainder coming from international property exposures.
23
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
Our casualty treaty reinsurance programs are written on a quota share and excess of loss basis and include general liability,
professional liability, workers’ compensation, medical malpractice, environmental impairment liability and auto liability.
General liability reinsurance includes umbrella and excess casualty products that are written worldwide. Our professional
liability reinsurance programs are offered worldwide and consist of directors and officers liability, including publicly traded,
private, and non-profit companies in both commercial and financial institution arenas; lawyers errors and omissions for small,
medium and large-sized law firms; accountants errors and omissions for small and medium-sized firms; technology errors and
omissions and cyber liability focusing on network security and privacy exposures. Auto reinsurance treaty products include
commercial and non standard personal auto exposures predominantly in the United States. Our workers’ compensation
business includes catastrophe-exposed workers’ compensation business. Medical malpractice reinsurance products are offered
in the United States and include quota share, excess of loss and stop loss coverage for physician, surgeon, hospital and long term
care medical malpractice writers. Environmental treaty reinsurance provides coverage for pollution legal liability, contractors
pollution and professional liability exposures on both a nationwide and regional basis within the United States.
Specialty treaty reinsurance products offered in the Reinsurance segment include structured and whole turnover credit, political
risk, mortgage and contract and commercial surety reinsurance programs covering worldwide exposures, public entity
reinsurance products, aviation, whole account, accident and health catastrophe coverage, marine and agriculture reinsurance
products. Our public entity reinsurance products offer customized programs for government risk solutions, including counties,
municipalities, schools, public housing authorities and special districts (e.g. water, sewer, parks) located in the United States.
Types of coverage for public entities include general liability, environmental impairment liability, workers’ compensation and
errors and omissions. Our aviation business includes commercial airline hull and liability coverage as well as general aviation
for risks worldwide. Our accident and health catastrophe products cover personal accident, life, medical and workers’
compensation coverage. Marine reinsurance products include offshore and onshore marine and energy risks on a worldwide
basis, including hull, cargo and liability. Agriculture reinsurance covers Multi-Peril Crop Insurance, hail and related exposures,
for risks located in the United States and Canada.
Ceded Reinsurance
Within our underwriting operations, we purchase reinsurance and retrocessional reinsurance to manage our net retention on
individual risks and overall exposure to losses, while providing us with the ability to offer policies with sufficient limits to meet
policyholder needs. In reinsurance and retrocession transactions, an insurance or reinsurance company transfers, or cedes, all or
part of its exposure in return for a portion of the premium. We purchase catastrophe reinsurance coverage for our
catastrophe-exposed policies to ensure that our net retained catastrophe risk is within our corporate tolerances. Net retention of
gross premium volume in our underwriting segments was 84% in 2017 and 83% in 2016. We do not purchase or sell finite
reinsurance products or use other structures that would have the effect of discounting loss reserves.
Our ceded reinsurance and retrocessional contracts do not legally discharge us from our primary liability for the full amount of
the policies, and we will be required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the
reinsurance agreement. We attempt to minimize credit exposure to reinsurers through adherence to internal ceded reinsurance
guidelines. We manage our exposures so that no exposure to any one reinsurer is material to our ongoing business. To
participate in our reinsurance program, prospective companies generally must: (i) maintain an A.M. Best Company (Best) or
Standard & Poor’s (S&P) rating of “A” (excellent) or better; (ii) maintain minimum capital and surplus of $500 million and (iii)
provide collateral for recoverables in excess of an individually established amount. In addition, certain foreign reinsurers for our
United States insurance operations must provide collateral equal to 100% of recoverables, with the exception of reinsurers who
have been granted certified or authorized status by an insurance company’s state of domicile. Our credit exposure to Lloyd’s
syndicates is managed through individual and aggregate exposure thresholds.
When appropriate, we pursue reinsurance commutations that involve the termination of ceded reinsurance and retrocessional
contracts. Our commutation strategy related to ceded reinsurance and retrocessional contracts is to reduce credit exposure and
eliminate administrative expenses associated with the run-off of ceded reinsurance placed with certain reinsurers.
24
The following table displays balances recoverable from our ten largest reinsurers by group from our underwriting operations at
December 31, 2017. The contractual obligations under reinsurance and retrocessional contracts are typically with individual
subsidiaries of the group or syndicates at Lloyd’s and are not typically guaranteed by other group members or syndicates at
Lloyd’s. These ten reinsurance groups represent approximately 61% of our $2.6 billion reinsurance recoverable balance
attributed to our underwriting operations, before considering allowances for bad debts.
Reinsurance Group
A.M. Best Rating
Reinsurance Recoverable
Fairfax Financial Group
Munich Re Group
AXIS Capital Holdings Limited
Lloyd’s of London
Alleghany Corporation
RenaissanceRe Holdings Ltd
EXOR S.p.A
Liberty Mutual Holding Company
Swiss Re Group
Everest Re Group
Reinsurance recoverable on paid and unpaid losses for ten largest reinsurers
Total reinsurance recoverable on paid and unpaid losses
A
A+
A+
A
A+
A
A
A
A+
A+
(dollars in thousands)
$ 262,806
214,441
184,662
163,317
151,033
136,753
125,599
123,068
110,377
94,306
1,566,362
$ 2,585,823
Reinsurance recoverable balances in the preceding table are shown before consideration of balances owed to reinsurers and any
potential rights of offset, any collateral held by us and allowances for bad debts.
Reinsurance and retrocessional treaties are generally purchased on an annual or biennial basis and are subject to renegotiations
at renewal. In most circumstances, the reinsurer remains responsible for all business produced before termination. Treaties
typically contain provisions concerning ceding commissions, required reports to reinsurers, responsibility for taxes, arbitration
in the event of a dispute and provisions that allow us to demand that a reinsurer post letters of credit or assets as security if a
reinsurer becomes an unauthorized reinsurer under applicable regulations or if its rating falls below an acceptable level.
See note 15 of the notes to consolidated financial statements and Management’s Discussion & Analysis of Financial Condition
and Results of Operations for additional information about our ceded reinsurance programs and exposures.
I n v e s t m e n t s
Our business strategy recognizes the importance of both consistent underwriting and operating profits and superior investment
returns to build shareholder value. We rely on sound underwriting practices to produce investable funds while minimizing
underwriting risk. The majority of our investable assets come from premiums paid by policyholders. Policyholder funds are
invested predominantly in high-quality corporate, government and municipal bonds that generally match the duration of our
loss reserves. 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 maturity investments. When purchasing equity securities, we seek to invest
in profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline,
at reasonable prices. We intend to hold these investments over the long term. Substantially all of our investment portfolio is
managed by company employees.
25
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
We evaluate our investment performance by analyzing net investment income and net realized gains (losses) as well as our
taxable equivalent total investment return, which is a non-GAAP financial measure. Taxable equivalent total investment
return includes items that impact net income, such as coupon interest on fixed maturities, dividends on equity securities and
realized investment gains or losses, as well as changes in unrealized gains or losses, which do not impact net income. Certain
items that are included in net investment income have been excluded from the calculation of taxable equivalent total
investment return, such as amortization and accretion of premiums and discounts on our fixed maturity portfolio, to provide a
comparable basis for measuring our investment return against industry investment returns. The calculation of taxable
equivalent total investment return also includes the current tax benefit associated with income on certain investments that is
either taxed at a lower rate than the statutory income tax rate or is not fully included in federal taxable income. We believe the
taxable equivalent total investment return is a better reflection of the economics of our decision to invest in certain asset
classes. We do not lower the quality of our investment portfolio in order to enhance or maintain yields. We focus on long-term
total investment return, understanding that the level of realized and unrealized investment gains or losses may vary from one
period to the next.
The following table summarizes our investment performance.
(dollars in thousands)
2017
2016
2015
2014
2013
Years Ended December 31,
Net investment income
Net realized investment gains (losses)
Increase (decrease) in net unrealized
gains on investments
Investment yield (1)
$ 405,709%)
(5,303)%
$
$ 373,230% $ 353,213%)
$ 65,147% $ 106,480%)
$ 363,230% $ 317,373%
$ 46,000% $ 63,152%
$ 1,125,440%)
2.6%)
$ 342,111% $ (457,584)% $ 981,035% $ 261,995%
2.6%
2.3%)
2.4%
2.4%
(1) Investment yield reflects net investment income as a percentage of monthly average invested assets at amortized cost.
We believe our investment performance is best analyzed from the review of taxable equivalent total investment return over
several years. The following table presents taxable equivalent total investment return before and after the effects of foreign
currency movements.
A N N U A L TA X A B L E E Q U I VA L E N T T O TA L I N V E S T M E N T R E T U R N S
Years Ended December 31,
2017
2016
2015
2014
2013
Five-Year Ten-Year
Annual Annual
Return
Return
Equities
Fixed maturities (1)
Total portfolio, before foreign currency effect
Total portfolio
25.5%
3.4%
9.2%
10.2%
13.5%
2.4%
5.0%
4.4%
(2.5)%
1.6%
0.5%
(0.7)%
18.6%
6.5%
8.9%
7.4%
33.3%
—%
6.9%
6.8%
17.0% 10.6%
4.1%
2.7%
5.7%
6.1%
5.3%
5.5%
Invested assets, end of year (in millions)
$20,570
$19,059
$18,181
$18,638
$17,612
(1) Includes short-term investments, cash and cash equivalents and restricted cash and cash equivalents.
26
The following table reconciles investment yield to taxable equivalent total investment return.
Investment yield (1)
Adjustment of investment yield from
amortized cost to fair value
Net amortization of net premium on fixed
maturities
Net realized investment gains and change in
net unrealized gains on investments
Taxable equivalent effect for interest and dividends (2)
Other (3)
Taxable equivalent total investment return
Years Ended December 31,
2017
2.6%
2016
2.4%
2015
2014
2013
2.3%
2.4%
2.6%
(0.5)%
(0.4)%
(0.4)%
(0.4)%
(0.3)%
0.4%
5.9%
0.4%
1.4%
10.2%
0.4%
0.5%
0.6%
0.7%
2.3%
0.4%
(0.7)%
4.4%
(2.0)%
0.4%
(1.5)%
(0.7)%
5.9%
0.4%
(1.5)%
7.4%
2.3%
0.4%
1.1%
6.8%
(1) Investment yield reflects net investment income as a percentage of monthly average invested assets at amortized cost.
(2) Adjustment to tax-exempt interest and dividend income to reflect a taxable equivalent basis.
(3) Adjustment to reflect the impact of changes in foreign currency exchange rates and time-weighting the inputs to the calculation of taxable
equivalent total investment return.
We monitor our investment portfolio to ensure that credit risk does not exceed prudent levels. S&P and Moody’s provide
corporate and municipal debt ratings based on their assessments 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 predominantly 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.
Our fixed maturity portfolio has an average rating of “AA,” with 98% rated “A” or better by at least one nationally recognized
rating organization. Our policy is to invest in investment grade securities and to minimize investments in fixed maturities that
are unrated or rated below investment grade. At December 31, 2017, less than 1% of our fixed maturity portfolio was unrated or
rated below investment grade. Our fixed maturity portfolio includes securities issued with financial guaranty insurance. We
purchase fixed maturities based on our assessment of the credit quality of the underlying assets without regard to insurance.
The following chart presents our fixed maturity portfolio, at estimated fair value, by rating category at December 31, 2017.
2017 C R E D I T Q UA L I T Y O F F I X E D M AT U R I T Y P O RT F O L I O ($9.9 B I L L I O N)
92%
AAA/AA
A
6%
BBB
1%
1%
Other
See “Market Risk Disclosures” in Management’s Discussion & Analysis of Financial Condition and Results of Operations for
additional information about investments.
27
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
P r o g r a m S e r v i c e s
In November 2017, we completed the acquisition of State National. Following the acquisition, our other operations expanded to
include program services business, which is provided through our newly formed State National division. Our program services
business generates fee income, in the form of ceding (program service) fees, by offering issuing carrier capacity to both specialty
general agents and other producers (GAs), who sell, control, and administer books of insurance business that are supported by
third parties that assume reinsurance risk. These reinsurers are domestic and foreign insurers and institutional risk investors
(capacity providers) that want to access specific lines of U.S. property and casualty insurance business. Issuing carrier (fronting)
arrangements refer to our business in which we write insurance on behalf of a capacity provider and then reinsure the risk under
these policies with the capacity provider in exchange for program services fees.
Through our program services business, we write a wide variety of insurance products, principally including general liability
insurance, commercial liability insurance, commercial multi-peril insurance, property insurance and workers compensation
insurance. Program services business written through our State National division is separately managed from our underwriting
divisions, which write similar products, in order to protect our customers and eliminate internal competition for this business.
Our program services business is written through SNIC, NSIC and City National Insurance Company (CNIC), all of which are
domiciled in Texas, and United Specialty Insurance Company (USIC), which is domiciled in Delaware. SNIC, NSIC and CNIC
are licensed to write property and casualty insurance in all 50 states and the District of Columbia. USIC is eligible to write
business in all 50 states, the District of Columbia and the U.S. Virgin Islands. Many of our programs are arranged with the
assistance of brokers that are seeking to provide customized insurance solutions for specialty insurance business that requires
an A.M Best “A” rated carrier. Our specialized business model relies on our GAs or capacity providers to provide the
infrastructure associated with providing policy administration, claims handling, cash handling, underwriting, or other
traditional insurance company services. We believe there are relatively few active competitors in the fronting business. We
compete primarily on the basis of price, customer service, geographic coverage, financial strength ratings, licenses, reputation,
business model and experience.
Total revenues attributed to our program services business from the acquisition date to December 31, 2017 were $15.3 million.
Our program services business generated $253.9 million of gross written premium volume from the acquisition date to
December 31, 2017.
In our program services business, we generally enter into a 100% quota share reinsurance agreement whereby we cede to the
capacity provider (reinsurer) substantially all of our gross liability under all policies issued by and on behalf of us by the GA. The
capacity provider is generally entitled to 100% of the net premiums received on policies reinsured, less the ceding fee to us, the
commission paid to the GA and premium taxes on the policies. In connection with writing this business, we also enter into
agency agreements with both the producer (typically GAs) and the capacity provider whereby the producer and capacity
provider are generally required to deal directly with each other to develop business structures and terms to implement and
maintain the ongoing contractual relationship. In a number of cases, the producer and capacity provider for a program are part of
the same organization or are otherwise affiliated. As a result of our contract design, substantially all of the underwriting risk and
business risk inherent in the arrangement is borne by the capacity provider. The capacity provider assumes and is liable for
substantially all losses incurred in connection with the risks under the reinsurance agreement, including judgments and
settlements. Our contracts with capacity providers do not legally discharge us from our primary liability for the full amount of
the policies, and we will be required to pay the loss and bear collection risk if the capacity provider fails to meet its obligations
under the reinsurance agreement. As a result, we remain exposed to the credit risk of capacity providers, or the risk that one of
our capacity providers becomes insolvent or otherwise unable or unwilling to pay policyholder claims. We mitigate this credit
risk generally by either selecting well capitalized, highly rated authorized capacity providers or requiring that the capacity
provider post substantial collateral to secure the reinsured risks.
28
The following table displays balances recoverable from our ten largest reinsurers by group for our program services business,
based on gross reinsurance recoverable balances at December 31, 2017. The contractual obligations under reinsurance and
retrocessional contracts are typically with individual subsidiaries of the group or syndicates at Lloyd’s and are not typically
guaranteed by other group members or syndicates at Lloyd’s. Reinsurance recoverable balances are shown before consideration
of balances owed to reinsurers and any potential rights of offset, and allowances for bad debts. These ten reinsurance groups
represent 79% of our $2.2 billion reinsurance recoverable balance attributed to our program services business, before considering
allowances for bad debts.
Reinsurance Group
Fosun International Holdings Ltd.
Knight Insurance Company Ltd.
Lloyd’s of London
James River Group Holdings, Ltd.
Tokio Marine Holdings
Enstar Group Limited
State Automobile Mutual Insurance Company
Greenlight Capital Re, Ltd.
SOMPO Holdings, Inc.
Allianz SE
A.M. Best
Rating
Gross
Reinsurance
Recoverable
Collateral
Applied(1)
Net
Reinsurance
Recoverable
(dollars in thousands)
B++
B++
A
A
A++
A-
A-
A-
A+
A+
$ 538,227
397,070
297,494
139,507
102,284
75,289
50,886
48,833
42,535
42,534
$ 537,659
397,070
—
139,507
1,172
39,349
50,886
48,833
—
—
$ 568
—
297,494
—
101,112
35,940
—
—
42,535
42,534
Reinsurance recoverable on paid and unpaid losses for ten largest gross reinsurers
1,734,659
1,214,476
520,183
Total reinsurance recoverable on paid and unpaid losses
$ 2,193,542
$ 1,510,671
$ 682,871
(1) Collateral is applied to each reinsurer, up to the amount of the gross recoverable, to determine the net recoverable for each reinsurer
presented in this table. As of December 31, 2017, we were the beneficiary of total letters of credit, trust accounts and funds withheld in the
amount of $1.5 billion collateralizing reinsurance recoverable balances from our top 10 reinsurers and $1.9 billion for our total reinsurance
recoverable balance.
M a r k e l C A T C o I n v e s t m e n t M a n a g e m e n t
Our other operations also include our Markel CATCo operations, which are conducted through Markel CATCO Investment
Management Ltd. (MCIM). MCIM is a leading insurance-linked securities investment fund manager and reinsurance manager
headquartered in Bermuda focused on building and managing highly diversified, collateralized retrocession and reinsurance
portfolios covering global property catastrophe risks. MCIM receives management fees for its investment and insurance
management services, as well as performance fees based on the annual performance of the investment funds that it manages.
Total revenues attributed to MCIM for the year ended December 31, 2017 were $28.7 million. As of December 31, 2017,
MCIM’s total investment and insurance assets under management were $6.2 billion, which includes $6.0 billion for
unconsolidated variable interest entities.
29
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
M a r k e l V e n t u r e s
Through our wholly owned subsidiary Markel Ventures, Inc. (Markel Ventures), we own interests in various businesses that
operate outside of the specialty insurance marketplace. These businesses are viewed by management as separate and distinct
from our insurance operations. Local management teams oversee the day-to-day operations of these companies, while strategic
decisions are made in conjunction with members of our executive management team.
Our strategy in making these investments is similar to our strategy for purchasing equity securities. We seek to invest in
profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline, at
reasonable prices. We intend to own the businesses acquired for a long period of time.
Our Markel Ventures operations are comprised of a diverse portfolio of businesses. While each of the businesses is operated
independently from one another, we aggregate their financial results into two industry groups: manufacturing and
non-manufacturing. Our manufacturing operations are comprised of manufacturers of transportation and other industrial
equipment. Our non-manufacturing operations are comprised of businesses from several industry groups, including consumer
goods and services (including healthcare) and business services.
We historically monitored and assessed the performance of each of our Markel Ventures businesses separately with no single
business being individually significant to the operations of the Company as a whole. Following the continued growth in our
Markel Ventures operations and its aggregate significance to our financial results, beginning in 2018, we will monitor and report
our Markel Ventures operations as a single operating segment, consistent with the way our chief operating decision maker now
reviews and assesses Markel Ventures’ performance.
In 2017, our Markel Ventures operations reported revenues of $1.3 billion, net income to shareholders of $103.6 million and
earnings before interest, income taxes, depreciation and amortization (EBITDA) of $177.6 million. We use Markel Ventures
EBITDA as an operating performance measure in conjunction with revenues and net income. See “Markel Ventures
Operations” in Management’s Discussion & Analysis of Financial Condition and Results of Operations for more information
on EBITDA.
See note 21 of the notes to consolidated financial statements and Management’s Discussion & Analysis of Financial Condition
and Results of Operations for additional information about our Markel Ventures operations.
S h a r e h o l d e r V a l u e
Our financial goals are to earn consistent underwriting and operating profits and superior investment returns to build
shareholder value. More specifically, we measure financial success by our ability to grow book value per share at a high rate of
return over a long period of time. To mitigate the effects of short-term volatility, we generally use five-year time periods to
measure ourselves. Growth in book value per share is an important measure of our success because it includes all underwriting,
operating and investing results. For the year ended December 31, 2017, book value per share increased 13% primarily due to a
$763.0 million increase in net unrealized gains on investments, net of taxes, and net income to shareholders of $395.3 million.
For the year ended December 31, 2016, book value per share increased 8% primarily due to net income to shareholders of
$455.7 million and a $242.2 million increase in net unrealized gains on investments, net of taxes. Over the past five years, we
have grown book value per share at a compound annual rate of 11% to $683.55 per share. As we continue to expand our
operations beyond underwriting and investing, we recognize that book value per share does not capture all of the economic
value in our business, as a growing portion of our operations are not recorded at fair value or otherwise captured in book value.
As a result, beginning in 2018, we will also measure our financial success through the growth in the market price of a share of
our stock, or total shareholder return, over a long period of time. For the year ended December 31, 2017, our share price
increased 26%. Over the past five years, our share price increased at a compound annual rate of 21%.
30
The following graph presents book value per share and share price for the past five years as of December 31.
1,139.13
Book Value Per Share
Share Price
904.50
883.35
$1,200
$1,000
$800
$600
$400
682.84
580.35
543.96
561.23
683.55
606.30
477.16
$200
$0
2013 2014 2015 2016 2017
R e g u l a t o r y E n v i r o n m e n t
Our insurance subsidiaries are subject to regulation and supervision by the insurance regulatory authorities of the various
jurisdictions in which they conduct business. This regulation is intended for the benefit of policyholders rather than
shareholders or holders of debt securities. The jurisdictions of our principal insurance subsidiaries are the United States (U.S.),
the United Kingdom (U.K.) and Bermuda. Our Markel Ventures, Markel CATCo and other businesses also are subject to
regulation and supervision by regulatory authorities of the various jurisdictions in which they conduct business.
United States Insurance Regulation
Overview. Our U.S. insurance subsidiaries are subject to varying degrees of regulation and supervision in the jurisdictions in
which they do business. Each state has its own regulatory authority for insurance that is generally responsible for the direct
regulation of the business of insurance conducted in that state. In addition, the National Association of Insurance
Commissioners (NAIC), comprised of the insurance commissioners of each U.S. jurisdiction, develops or amends model
statutes and regulations that in turn most states adopt. While the U.S. federal government and its regulatory agencies generally
do not directly regulate the business of insurance, there have been recent federal initiatives that impact the business of
insurance.
State Insurance Regulation. In the United States, authority for the regulation, supervision and administration of the business of
insurance in each state is generally delegated to a state commissioner heading a regulatory body responsible for the business of
insurance. Through this authority, state 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 insurers; and the establishment of loss reserves. Our U.S. insurance subsidiaries that operate on an admitted basis
are typically subject to regulatory rate and form review, while our U.S. excess and surplus lines insurance subsidiaries generally
operate free of rate and form regulation.
Holding Company Statutes. In addition to regulatory supervision of our domestic insurance subsidiaries, we are subject to state
statutes governing insurance holding company systems. Typically, such statutes require that we periodically file information
with the appropriate state insurance commissioner, including information concerning our capital structure, ownership,
financial condition, material transactions with affiliates and general business operations. In addition, these statutes also require
approval of changes in control of an insurer or an insurance holding company. Generally, control for these purposes is defined as
ownership or voting power of 10% or more of a company’s voting shares. Additional requirements include group-level reporting,
submission of an annual enterprise risk report by a regulated insurance company’s ultimate controlling person and information
regarding an insurer’s non-insurer affiliates.
31
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
Risk Based Capital Requirements. The NAIC uses a risk based capital formula that is designed to measure the capital of an
insurer taking into account the company’s investments and products. These requirements provide a formula which, for property
and casualty insurance companies, establishes capital thresholds for four categories of risk: asset risk, insurance risk, interest
rate risk and business risk. At December 31, 2017, the capital and surplus of each of our United States insurance subsidiaries
was above the minimum regulatory thresholds.
Own Risk and Solvency Assessment. We must submit annually to the Illinois Department of Insurance, our lead state
insurance regulator, an Own Risk and Solvency Assessment Summary Report (ORSA). The ORSA is a confidential internal
assessment of the material and relevant risks associated with an insurer’s current business plan and the sufficiency of capital
resources to support those risks.
Excess and Surplus Lines. The regulation of our U.S. insurance subsidiaries’ excess and surplus lines insurance business differs
significantly from the regulation of our admitted business. Our surplus lines subsidiaries are subject to the surplus lines
regulation and reporting requirements of the jurisdictions in which they are eligible to write surplus lines insurance. Although
the surplus lines business is generally less regulated than admitted business, regulations apply to surplus lines placements under
the laws of every state.
Dividends. The laws of the domicile states of our U.S. insurance subsidiaries govern the amount of dividends that may be paid
to our holding company, Markel Corporation. Generally, statutes in the domicile states of our insurance subsidiaries require
prior approval for payment of extraordinary, as opposed to ordinary, dividends. At December 31, 2017, our United States
insurance subsidiaries could pay up to $436.4 million during the following 12 months under the ordinary dividend regulations.
Trade Practices. State insurance laws and regulations include numerous provisions governing trade practices and the
marketplace activities of insurers, including provisions governing marketing and sales practices, data security, policyholder
services, claims management, anti-fraud controls and complaint handling. State regulatory authorities generally enforce these
provisions through periodic market conduct examinations.
Investment Regulation. Investments by our domestic insurance companies must comply with applicable laws and regulations
that prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments in
federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate
and certain other investments, subject to specified limits and certain other qualifications.
The Terrorism Risk Insurance Act. The Terrorism Risk Insurance Act of 2002, as amended (TRIA), has established a federal
program that provides for a system of shared public and private compensation for certain insured losses resulting from acts of
terrorism. In early 2015 the program was extended for another six years, and is now scheduled to expire in 2020. In addition, the
most recent extension of TRIA (1) raised the threshold for the program to go into effect (the triggering event) from $100 million
in losses to $200 million, in $20 million increments starting in January 2016 and (2) increased the amount that insurers must
cover as a whole through co-payments and deductibles, which is known in the industry as the aggregate retention. Starting in
2016, the aggregate retention amount rises by $2 billion a year to $37.5 billion from $27.5 billion. TRIA is applicable to almost
all commercial lines of property and casualty insurance but excludes commercial auto, burglary and theft, surety, professional
liability and farm owners’ multi-peril insurance. Insurers with direct commercial property and casualty insurance exposure in
the United States are required to participate in the program and make available coverage for certified acts of terrorism. Federal
participation will be triggered under TRIA when the Secretary of Treasury certifies an act of terrorism.
Cybersecurity. The New York Department of Financial Services (NYDFS) has issued Cybersecurity Requirements for Financial
Services Companies that require certain of our insurance operations to, among other things, establish and maintain a
cybersecurity policy designed to protect consumers and ensure the safety and soundness of New York State’s financial services
industry. The regulation went into effect on March 1, 2017 and has transition periods ranging from 180 days to two years. In
addition, the NAIC recently adopted the Insurance Data Security Model Law in October 2017. The purpose of the model law is
to establish standards for data security and for the investigation and notification of insurance commissioners of cybersecurity
events involving unauthorized access to, or the misuse of, certain nonpublic information. It is not clear whether state
legislatures will begin adopting the model law, or in what form or when they will do so.
32
Federal Regulation. The federal government and its regulatory agencies generally do not directly regulate the business of
insurance. However, two federal government bodies, the Federal Insurance Office (FIO) and the Financial Stability Oversight
Council (FSOC), each created under The Dodd Frank Wall Street Reform and Consumer Protection Act enacted in 2010,
may impact the regulation of insurance. Although the FIO is prohibited from directly regulating the business of insurance,
it has authority to represent the United States in international insurance matters and has limited powers to preempt certain
types of state insurance laws. The FIO also can recommend to the FSOC that it designate an insurer as an entity posing
risks to the United States financial stability in the event of the insurer’s material financial distress or failure. We have not
been so designated.
United Kingdom Insurance Regulation
Under the Financial Services and Markets Act 2000 (FSMA), it is unlawful to carry on insurance business in the United
Kingdom without permission to do so from the relevant regulators, currently the Prudential Regulation Authority (PRA) and
the Financial Conduct Authority (FCA). An independent Financial Policy Committee at the Bank of England supervises the
financial services sector at a macro level, responding to sectoral issues that could threaten economic and financial stability.
MIICL, MSM, our Lloyd’s managing agent, and E.C. Insurance Company Limited (ECIC), which we acquired in November
2017, are authorized by the PRA and regulated by both the PRA and the FCA. In addition, our United Kingdom insurance
operations include FCA-authorized insurance intermediaries that produce insurance for MIICL, Syndicate 3000 and third
party insurance carriers.
The PRA is a subsidiary of the Bank of England and is responsible for the prudential regulation and supervision of banks,
building societies, credit unions, major investment firms and insurers, including the Society of Lloyd’s and managing agents
that participate in the Lloyd’s market. The two primary statutory objectives of the PRA are to promote the safety and
soundness of the firms it regulates and, specific to insurers, to contribute to securing an appropriate degree of protection for
those who are, or may become, policyholders. A secondary objective of the PRA is to facilitate effective competition.
The FCA, which is separate from the Bank of England, is accountable to HM Treasury and ultimately the United Kingdom
Parliament. The FCA supervises the day-to-day conduct of insurance firms and other authorized firms operating in the
United Kingdom, including those participating in the Lloyd’s market and U.K. insurance intermediaries. The overarching
strategic objective of the FCA is to ensure that the relevant markets function well. The FCA also has three operational
objectives: securing an appropriate degree of protection for consumers, protecting and enhancing the integrity of the U.K.
financial system, and promoting effective competition in the interests of consumers.
The PRA assesses the insurance firms it regulates on a continuous cycle, requiring firms to submit sufficient data of
appropriate quality to support their judgments about key risks, through meetings of directors, officers and other employees
with PRA supervisors. The PRA also oversees compliance with minimum solvency and capital requirements under the
Solvency II Directive (Solvency II) and imposes dividend restrictions. Both the PRA and the FCA oversee compliance with
risk assessment reviews, restrictions governing the appointment of key officers, restrictions governing controlling ownership
interests and various other requirements. In addition, both the PRA and FCA have arrangements with Lloyd’s for cooperation
on supervision and enforcement of the Lloyd’s market.
MIICL and ECIC must provide advance notice to the PRA for any dividends and any transaction or proposed transaction with
a connected or related person. MSM is required to satisfy the solvency requirements of Lloyd’s. In addition, our United
Kingdom subsidiaries must comply with the United Kingdom Companies Act of 2006, which provides that dividends may
only be paid out of profits available for that purpose.
33
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
In addition, under Solvency II, the regulatory framework for the European insurance industry in place effective January 1,
2016, MIICL must give the PRA advance notice of any material intra-group transaction which Markel International Limited
(the indirect parent of MIICL) or any of its subsidiaries intends to enter into with a group entity outside the European
Economic Area and any material payment, including the payment of a dividend, other distribution or capital extraction
which Markel International Limited or any of its subsidiaries intends to make to a group entity outside the European
Economic Area.
MIICL, MSM and ECIC each submit, at least annually, an ORSA to the PRA and Lloyd’s, respectively. The ORSA is a
confidential internal assessment of the material risks associated with the current business plans for MIICL, MSM and ECIC
and the sufficiency of capital resources in place to support those risks.
On June 23, 2016, the United Kingdom voted to exit the European Union (E.U.) (Brexit). For discussion regarding Brexit, see
“Brexit Developments” under Management’s Discussion & Analysis of Financial Condition and Results of Operations and
the Risk Factor titled “The United Kingdom’s vote to leave, and the eventual exit of the United Kingdom from, the European
Union could adversely affect us.”
Bermuda Insurance Regulation
The insurance and reinsurance industry in Bermuda is regulated by the Bermuda Monetary Authority (BMA). Markel
Bermuda is regulated by the BMA as a Class 4 general business and Class C long-term business insurer under the Insurance
Act 1978 of Bermuda and its related regulations (Bermuda Insurance Act). The Bermuda Insurance Act imposes on Markel
Bermuda solvency and liquidity standards, restrictions on the reduction of statutory capital and auditing and reporting
requirements. The Bermuda Insurance Act grants to the BMA powers to cancel insurance licenses, supervise, investigate and
intervene in the affairs of Bermuda insurance and reinsurance companies and, in certain circumstances, share information
with foreign regulators. Bermuda’s prudential framework for the supervision of insurance and reinsurance companies and
groups is deemed to be fully equivalent to the regulatory standards applied to European insurance and reinsurance
companies and groups under Solvency II. As a result, Bermuda is considered by European member states as applying an
equivalent statutory insurance regime in accordance with the requirements of Solvency II with respect to reinsurance, group
solvency calculations and group supervision. The equivalence recognition applies to Bermuda’s commercial Class 3A, 3B, 4,
Class C, Class D and Class E insurers and reinsurers and groups.
Markel Bermuda is subject to enhanced capital requirements in addition to minimum solvency and liquidity requirements.
The enhanced capital requirement is determined by reference to a risk-based capital model that determines a control
threshold for statutory capital and surplus by taking into account the risk characteristics of different aspects of the insurer’s
business. At December 31, 2017, Markel Bermuda satisfied both the enhanced capital requirements and the minimum
solvency and liquidity requirements.
Markel Bermuda also must submit annually to the BMA a Commercial Insurer Solvency Self-Assessment (CISSA) and a
Financial Condition Report (FCR). The CISSA is a confidential internal assessment of the material and relevant risks
associated with an insurer’s current business plan and the sufficiency of capital resources to support those risks. The FCR is
an assessment of the insurer’s business and performance, governance structure, risk profile, solvency valuation and capital
management, and is available to the public upon written request.
Under the Bermuda Insurance Act, Markel Bermuda is prohibited from paying or declaring dividends during a fiscal year if it
is in breach of its enhanced capital requirement, solvency margin or minimum liquidity ratio or if the declaration or
payment of the dividend would cause a breach of those requirements. If an insurer fails to meet its solvency margin or
minimum liquidity ratio on the last day of any financial year, it is prohibited from declaring or paying any dividends during
the next financial year without the approval of the BMA. Further, Markel Bermuda is prohibited from declaring or paying in
any financial year dividends of more than 25% of its total statutory capital and surplus as set forth in its previous year’s
34
statutory balance sheet unless at least seven days before payment of those dividends it files with the BMA an affidavit stating that it
will continue to meet its solvency margin and minimum liquidity ratio. Markel Bermuda must obtain the BMA’s prior approval for a
reduction by 15% or more of the total statutory capital as set forth in its previous year’s financial statements. In addition, as a Class
C long-term insurer, Markel Bermuda may not declare or pay a dividend to any person other than a policyholder unless the value of
the assets in its long-term business fund, as certified by Markel Bermuda’s approved actuary, exceeds the liabilities of its long-term
business. The amount of the dividend cannot exceed the aggregate of that excess and any other funds legally available for the
payment of the dividend. At December 31, 2017, Markel Bermuda could pay up to $443.5 million in dividends during the following
12 months without making any additional filings with the BMA.
Markel CATCo Re Ltd (Markel CATCo Re) is licensed as a Bermuda Class 3 reinsurance company and is subject to regulation and
supervision of the BMA. See “Regulation of Markel CATCo” under “Other Regulation” below for more information about the
regulation of Markel CATCo Re.
Other Insurance Jurisdictions
The European Union implemented Solvency II effective January 1, 2016. Solvency II replaces existing insurance directives and
creates a pan-European, risk based solvency regime which affects all insurers and reinsurers throughout the E.U. The Solvency II
regime is based on three pillars: financial requirements; governance and risk management requirements; and disclosure
requirements. The European Commission has developed detailed rules that complement the high-level principles of Solvency II.
At present the United States is not recognized as Solvency II “equivalent.” Therefore, MIICL has agreed on “other methods” with
the PRA which includes the provision to the PRA of certain specified information regarding Markel Corporation and its insurance
companies.
In addition, as a global provider of specialty insurance and reinsurance, our insurance subsidiaries must comply with various
regulatory requirements in jurisdictions where they conduct business in addition to the jurisdictions in which they are domiciled.
For example, MIICL and our Lloyd’s operations must comply with applicable Latin America regulatory requirements in connection
with our Latin American reinsurance operations. In addition to the regulatory requirements imposed by the jurisdictions in which an
insurer or reinsurer is licensed, a reinsurer’s business operations are affected by regulatory requirements governing credit for
reinsurance in other jurisdictions in which its ceding companies are located. In general, a ceding company that obtains reinsurance
from a reinsurer that is licensed, accredited or approved by the jurisdiction in which the ceding company files statutory financial
statements is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the liability for
unearned premiums and loss reserves and loss expense reserves ceded to the reinsurer. Many jurisdictions also permit ceding
companies to take credit on their statutory financial statements for reinsurance obtained from unlicensed or non-admitted reinsurers
if certain prescribed security arrangements are made. As an example, Markel Bermuda currently is not licensed, accredited or
approved in every jurisdiction where its reinsurance customers are domiciled. As a result, Markel Bermuda may be required to
provide a letter of credit or other security arrangement for its reinsurance customers domiciled in those jurisdictions. In most U.S.
states Markel Bermuda has obtained approval of a trust arrangement that satisfies the credit for reinsurance requirements for Markel
Bermuda’s customers domiciled in those states.
The insurance and reinsurance industry in Brazil is regulated by the Conselho Nacional de Seguros Privados (CNSP) and supervised
by the Superintendência de Seguros Privados (SUSEP) on behalf of the Ministry of Finance. Markel Seguradora do Brasil S.A. (Markel
Brazil) and Markel Resseguradora do Brasil S.A. (Markel Brazil Re) are each authorized by SUSEP as a local Brazilian insurance
company and reinsurance company, respectively. Markel Brazil and Markel Brazil Re are required to submit monthly returns,
audited annual returns and annual financial statements to SUSEP.
On June 23, 2016, the United Kingdom voted to exit the European Union (Brexit). For discussion regarding Brexit, see “Brexit
Developments” under Management’s Discussion & Analysis of Financial Condition and Results of Operations and the Risk Factor
titled “The United Kingdom’s vote to leave, and the eventual exit of the United Kingdom from, the European Union could adversely
affect us.”
35
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
Global Supervisory College; Global Common Framework
The global insurance regulatory framework now also includes supervisory colleges. A supervisory college is a forum of the
regulators having jurisdictional authority over an insurance holding company’s worldwide insurance subsidiaries. The
supervisory college meets with executive management to evaluate the insurance group on both a group-wide and legal-entity
basis, particularly with respect to its financial data, business strategies, enterprise risk management and corporate
governance. The Illinois Department of Insurance, our lead insurance regulator, and several other regulators conducted an
initial supervisory college with management in December 2016. A regulator only meeting of our supervisory college was
conducted in July 2017. The next supervisory college with management is scheduled for August 2018.
The NAIC and state insurance regulators, as well as regulators in countries where we have operations, are currently working
with the International Association of Insurance Supervisors (IAIS) to develop a global common framework (ComFrame) for
the supervision of internationally active insurance groups (IAIGs). If adopted, ComFrame would require the designation of a
group-wide supervisor (regulator) for each IAIG and would impose a group capital requirement that would be applied to an
IAIG in addition to the current legal entity capital requirements imposed by state insurance regulators. In response to
ComFrame, the NAIC revised the model Insurance Holding Company System Regulatory Act to allow state insurance
regulators in the U.S. to be designated as group-wide supervisors for U.S. based IAIGs. Additionally, the NAIC is developing a
group capital standard that would be applied to U.S. based insurance groups.
Other Regulation
Markel Ventures. Our Markel Ventures businesses are subject to a wide variety of U.S. federal, state, and local laws and
regulations, as well as foreign laws and regulations applicable to their non-U.S. operations, including:
• For our Markel Ventures manufacturing operations, and certain consumer operations, laws and regulations in the areas of
safety, health, employment and environmental pollution controls, as well as U.S. and international trade and
anti-corruption laws and regulations; and
• For our Markel Ventures non-manufacturing operations, laws and regulations in the areas of data privacy and security,
health care, government contracting and employment.
Solicitors Regulation Authority. LHS Solicitors LLP (LHS), a wholly owned subsidiary, is a full service commercial law firm
with offices in Manchester and Croydon, England. LHS employs approximately 65 lawyers who provide legal services to
small and medium-sized enterprises in the United Kingdom. LHS is authorized and regulated by the Solicitors Regulation
Authority (SRA). The SRA is an independent regulatory body of the Law Society of England and Wales which regulates the
conduct of solicitors and law firms to protect consumers and to support the rule of law and the administration of justice. The
SRA works within a statutory framework for regulation provided by the Solicitors Act 1974, the Administration of Justice
Act 1985 and, primarily, by the Legal Services Act 2007.
Regulation of Markel CATCo. We conduct our Markel CATCo operations through three Bermuda companies: MCIM,
Markel CATCo Reinsurance Fund Ltd. (Markel CATCo Fund) and Markel CATCo Re.
MCIM is a Bermuda exempted company with limited liability. MCIM holds investment business and insurance
management licenses, issued by the BMA under the Investment Business Act 2003 and the Insurance Act 1978, respectively,
and is regulated by the BMA. MCIM is not registered as an investment company under the U.S. Investment Company Act of
1940, an investment adviser under the U.S. Investment Advisers Act of 1940 or as a “commodity pool operator” or
“commodity trading advisor” with the U.S. Commodity Futures Trading Commission.
Markel CATCo Fund is a mutual fund company with limited liability under the Companies Act 1981 of Bermuda and is
registered as a segregated accounts company under the Bermuda Segregated Accounts Companies Act 2000.
36
Markel CATCo Re is also registered as a segregated accounts company under the Bermuda Segregated Accounts Companies Act
2000 and is licensed as a Bermuda Class 3 reinsurance company subject to regulation and supervision of the BMA. Under the
Bermuda Insurance Act, and related regulations and policies of the BMA, Markel CATCo Re is subject to, among other things,
capital, surplus and liquidity requirements, solvency standards, restrictions on dividends and distributions and certain periodic
examinations of the company and its financial condition. In addition, Markel CATCo Re must obtain prior approval of ownership
and transfer of shares and maintain a principal office and appoint and maintain a principal representative in Bermuda. The BMA also
requires that Markel CATCo Re contract for local services, such as corporate secretary, insurance manager and registered
representative, at market rates.
R a t i n g s
Financial stability and strength are important purchase considerations of policyholders, cedents 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 independent rating agencies provide information and assign ratings to assist buyers in
their search for financially sound insurers. Rating agencies periodically re-evaluate assigned ratings based upon changes in the
insurer’s operating results, financial condition or other significant factors influencing the insurer’s business. Changes in assigned
ratings could have an adverse impact on an insurer’s ability to write new business.
Best assigns financial strength ratings (FSRs) to property and casualty 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
ceded 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 FSRs range from “A++” (superior) to “F” (in liquidation).
Seventeen of our nineteen insurance subsidiaries are rated by Best. All seventeen of our insurance subsidiaries rated by Best have
been assigned an FSR of “A” or “A-” (excellent). Our Lloyd’s syndicate is part of a group rating for the Lloyd’s overall market, which
has been assigned an FSR of “A” (excellent) by Best.
Nine of our nineteen insurance subsidiaries are rated by S&P. All nine of our insurance subsidiaries rated by S&P have been assigned
an FSR of “A” (strong). Our Lloyd’s syndicate is part of a group rating for the Lloyd’s overall market, which has been assigned an FSR
of “A+” (strong) by S&P.
Eight of our nineteen insurance subsidiaries are rated by Fitch Ratings (Fitch). All eight of our insurance subsidiaries rated by Fitch
have been assigned an FSR of “A+” (strong). Our Lloyd’s syndicate is part of a group rating for the Lloyd’s overall market, which has
been assigned an FSR of “AA-” (very strong) by Fitch.
Five of our nineteen insurance subsidiaries are rated by Moody’s Corporation (Moody’s). All five insurance subsidiaries rated by
Moody’s have been assigned an FSR of “A2” (good).
The various rating agencies typically charge companies fees for the rating and other services they provide. During 2017, we paid
rating agencies, including Best, S&P, Fitch and Moody’s, $2.0 million for their services.
37
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
R i s k F a c t o r s
A wide range of factors could materially affect our future prospects and performance. The matters addressed under “Safe
Harbor and Cautionary Statement,” “Critical Accounting Estimates” and “Market Risk Disclosures” in Management’s
Discussion and Analysis of Financial Condition and Results of Operations and other information included or incorporated in
this report describe many of the significant risks that could affect our operations and financial results. We are also subject to
the following risks.
We may experience losses or disruptions from catastrophes. As a company with significant property and casualty insurance
underwriting operations, we may experience losses from man-made or natural catastrophes. Catastrophes include, but are
not limited to, windstorms, hurricanes, earthquakes, tornadoes, hail, severe winter weather and fires and may include events
related to terrorism and political unrest. While we employ catastrophe modeling tools in our underwriting process, we
cannot predict how severe a particular catastrophe will be before it occurs. The extent of losses from catastrophes is a
function of the total amount of losses incurred, the number of insureds affected, the frequency and severity of the events, the
effectiveness of our catastrophe risk management program and the adequacy of our reinsurance coverage. Most catastrophes
occur over a small geographic area; however, some catastrophes may produce significant damage in large, heavily populated
areas. In addition, catastrophes may have a material adverse effect on the investment management and performance fees
earned by our insurance-linked securities (ILS) investment fund management business and returns on our investments in
ILS funds. Catastrophes also may result in significant disruptions in our insurance and other operations, as well as loss of
income and assets. If, as many forecast, climate change results in an increase in the frequency and severity of weather-related
catastrophes, we may experience additional catastrophe-related losses or disruptions, which may be material.
Our results may be affected because actual insured or reinsured losses differ from our loss reserves. Significant periods of
time often elapse between the occurrence of an insured or reinsured loss, the reporting of the loss to us and our payment of
that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities representing estimates of
amounts needed to pay reported and unreported losses and the related loss adjustment expenses. The process of estimating
loss reserves is a difficult and complex exercise involving many variables and subjective judgments. This process may
become more difficult if we experience a period of rising inflation. As part of the reserving process, we review historical data
and consider the impact of such factors as:
• trends in claim frequency and severity,
• changes in operations,
• emerging economic and social trends,
• trends in insurance rates,
• inflation or deflation, and
• changes in the regulatory and litigation environments.
This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an
appropriate basis for predicting future events. There is no precise method, however, for evaluating the impact of any specific
factor on the adequacy of reserves, and actual results will differ from original estimates. As part of the reserving process, we
regularly review our loss reserves and make adjustments as necessary. Future increases in loss reserves will result in
additional charges to earnings, which may be material.
In addition, reinsurance reserves are subject to greater uncertainty than insurance reserves primarily because a reinsurer
relies on (i) the original underwriting decisions made by ceding companies and (ii) information and data from ceding
companies. As a result, we are subject to the risk that our ceding companies may not have adequately evaluated the
risks reinsured by us and the premiums ceded may not adequately compensate us for the risks we assume. In addition,
reinsurance reserves may be less reliable than insurance reserves because there is generally a longer lapse of time from
the occurrence of the event to the reporting of the loss or benefit to the reinsurer and ultimate resolution or settlement of
the loss.
38
Changes in the assumptions and estimates used in establishing reserves for our life and annuity reinsurance book could result in
material increases in our estimated loss reserves for such business. Our run-off life and annuity reinsurance book exposes us to
mortality risk, which is the risk that the level of death claims may differ from that which we assumed in establishing the reserves
for our life and annuity reinsurance contracts. Some of our life and annuity reinsurance contracts expose us to longevity risk, which
is the risk that an insured person will live longer than expected when the reserves were established, or morbidity risk, which is the
risk that an insured person will become critically ill or disabled. Our reserving process for the life and annuity reinsurance book is
designed with the objective of establishing appropriate reserves for the risks we assumed. Among other things, these processes rely
heavily on analysis of mortality, longevity and morbidity trends, lapse rates, interest rates and expenses. As of December 31, 2017,
our reserves for life and annuity benefits totaled $1.1 billion.
We expect mortality, morbidity, longevity, and lapse experience to fluctuate somewhat from period to period, but believe they should
remain reasonably predictable over a period of many years. Mortality, longevity, morbidity or lapse experience that is less favorable
than the mortality, longevity, morbidity or lapse rates that we used in establishing the reserves for a reinsurance agreement will
negatively affect our net income because the reserves we originally set for the risks we assumed may not be sufficient to cover the
future claims and expense payments. Furthermore, even if the total benefits paid over the life of the contract do not exceed the
expected amount, unexpected increases in the incidence of deaths or illness can cause us to pay more benefits in a given reporting
period than expected, adversely affecting our net income in any particular reporting period. Fluctuations in interest rates will impact
the performance of our investments. If there are changes to any of the above factors to the point where a reserve deficiency exists, a
charge to earnings will be recorded, which may have a material adverse impact on our results of operations and financial condition.
We are subject to regulation by insurance regulatory authorities that may affect our ability to implement and achieve our business
objectives. Our insurance subsidiaries are subject to supervision and regulation by the insurance regulatory authorities in the various
jurisdictions in which they conduct business. This regulation is intended for the benefit of policyholders rather than shareholders or
holders of debt securities. Insurance regulatory authorities have broad regulatory, supervisory and administrative powers relating to
data protection and data privacy, solvency standards, licensing, coverage requirements, policy rates and forms and the form and
content of financial reports. Regulatory and legislative authorities continue to implement enhanced or new regulatory requirements
intended to prevent future financial crises or otherwise assure the stability of financial institutions. Regulatory authorities also may
seek to exercise their supervisory or enforcement authority in new or more aggressive ways, such as imposing increased capital
requirements. Any such actions, if they occur, could affect the competitive market and the way we conduct our business and
manage our capital and could result in lower revenues and higher costs. As a result, such actions could materially affect our results
of operations, financial condition and liquidity.
Our ability to make payments on debt or other obligations depends on the receipt of funds from our subsidiaries. We are a holding
company, and substantially all of our insurance operations are conducted through our regulated insurance subsidiaries. As a result,
our cash flow and our ability to service our debt are dependent upon the earnings of our subsidiaries and on the distribution of
earnings, loans or other payments by our subsidiaries to us. In addition, payment of dividends by our insurance subsidiaries may
require prior regulatory notice or approval.
Our investment results may be impacted by changes in interest rates, U.S. and international monetary and fiscal policies as well as
broader economic conditions. We receive premiums from customers for insuring their risks. We invest these funds until they are
needed to pay policyholder claims or until they are recognized as profits. Fluctuations in the value of our investment portfolio can
occur as a result of changes in interest rates and U.S. and international monetary and fiscal policies as well as broader economic
conditions (including, for example, equity market conditions and significant inflation or deflation). Our investment results may be
materially impacted by one or more of these factors.
Competition in the insurance and reinsurance markets could reduce our underwriting profits. Insurance and reinsurance markets are
highly competitive. We compete on an international and regional basis with major U.S., Bermuda, European, and other international
insurers and reinsurers and with underwriting syndicates, some of which have greater financial, marketing, and management
resources than we do. Recent industry consolidation, including business combinations among insurance and other financial services
companies, has resulted in larger competitors with even greater financial resources. We also compete with new companies that
continue to be formed to enter the insurance and reinsurance markets, particularly companies with new or “disruptive”
technologies or business models. In addition, capital market participants have created alternative products that are intended to
39
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
compete with reinsurance products. Increased competition could result in fewer submissions, lower premium rates, and less
favorable policy terms and conditions, which could reduce our underwriting profits and have a material adverse effect on our
results of operations and financial condition.
The historical cyclicality in the property and casualty insurance industry could adversely affect our ability to improve or
maintain underwriting profits or to grow or maintain premium volume. The insurance and reinsurance markets have
historically been cyclical, characterized by periods of intense price competition due to excessive underwriting capacity as
well as periods when shortages of capacity permitted more favorable rate levels. Among our competitive strengths have been
our specialty product focus and our niche market strategy. These strengths also make us vulnerable in periods of intense
competition to actions by other insurance companies who seek to write additional premiums without appropriate regard for
underwriting profitability. During soft markets, it is very difficult for us to grow or maintain premium volume levels
without sacrificing underwriting profits. If we are not successful in maintaining rates or achieving rate increases, it may be
difficult for us to improve or maintain underwriting profits or to grow or maintain premium volume levels.
We invest a significant portion of our invested assets in equity securities, which may result in significant variability in our
investment results and net income and may adversely impact shareholders’ equity. Additionally, our equity investment
portfolio is concentrated, and declines in the value of these significant investments could adversely affect our financial results.
Equity securities were 63% and 56% of our shareholders’ equity at December 31, 2017 and 2016, respectively. Equity
securities have historically produced higher returns than fixed maturities; however, investing in equity securities may result
in significant variability in investment returns from one period to the next. In volatile financial markets, we could experience
significant declines in the fair value of our equity investment portfolio, which would result in a material decrease in
shareholders’ equity. Our equity portfolio is concentrated in particular issuers and industries and, as a result, a decline in the
fair value of these concentrated investments also could result in a material decrease in shareholders’ equity. A material
decrease in shareholders’ equity may adversely impact our ability to carry out our business plans. Beginning in the first quarter
of 2018, changes in the fair value of our equity securities will be presented in net income rather than in other comprehensive
income. As a result, variability in our investment returns could also have a material adverse effect on net income.
General economic, market or industry conditions could lead to investment losses, adverse effects on our businesses and
limit our access to the capital markets. General economic and market conditions and industry specific conditions, including
extended economic recessions or expansions; prolonged periods of slow economic growth; inflation or deflation; fluctuations
in foreign currency exchange rates, commodity and energy prices and interest rates; volatility in the credit and capital
markets; and other factors, could lead to substantial realized and unrealized investment losses in future periods, declines in
demand for or increased claims made under our insurance products or limited or no access to the capital markets, any of
which could have a material adverse effect on our results of operations, financial condition, debt and financial strength
ratings or our insurance subsidiaries’ capital.
We rely on the purchase of reinsurance and bear collection risk if the reinsurer fails to meet its obligations under the
reinsurance agreement. Our underwriting operations purchase reinsurance and retrocessional reinsurance to manage our net
retention on individual risks and overall exposure to losses, while providing us with the ability to offer policies with
sufficient limits to meet policyholder needs. Our program services business reinsures substantially all of its underwriting
and operating risks in connection with its fronting arrangements.
The ceding of insurance does not legally discharge us from our primary liability for the full amount of the policies. Reliance
on reinsurance may create credit risk as a result of the reinsurer’s inability or unwillingness to pay reinsurance claims when
due. We generally select well capitalized and highly rated reinsurers and in certain instances we require reinsurers to post
substantial collateral to secure the reinsured risks. Deterioration in the credit quality of existing reinsurers or disputes over
the terms of reinsurance could result in charges to earnings, which may have a material adverse impact on our results of
operations and financial condition. In addition, collateral may not be sufficient to cover our liability, and we may not be able
to cause the reinsurer to deliver additional collateral.
40
As of December 31, 2017, we were the beneficiary of letters of credit, trust accounts and funds withheld in the aggregate amount of
$2.7 billion, collateralizing $4.7 billion in reinsurance recoverables. The remaining unsecured reinsurance recoverables are ceded to
highly-rated, well capitalized reinsurers. Our reinsurance recoverables are based on estimates, and our actual liabilities may exceed
the amount we are able to recover from our reinsurers or any collateral securing the liabilities. The failure of a reinsurer to meet its
obligations to us, whether due to insolvency, dispute or other unwillingness or inability to pay, or due to our inability to access
sufficient collateral to cover our liabilities, could have a material adverse effect on our results of operations and financial condition.
The availability and cost of reinsurance are determined by market conditions beyond our control. There is no guarantee that our
desired amounts of reinsurance or retrocessional reinsurance will be available in the marketplace in the future.
Our information technology systems could fail or suffer a security breach, which could adversely affect our business, reputation,
results of operations or financial condition or result in the loss of sensitive information. Our businesses are dependent upon the
operational effectiveness and security of our enterprise systems and those maintained by third parties. Among other things, we rely
on these systems to interact with producers, insureds, customers, clients, and other third parties, to perform actuarial and other
modeling functions, to underwrite business, to prepare policies and process premiums, to process claims and make claims payments,
to prepare internal and external financial statements and information, as well as to engage in a wide variety of other business
activities. A significant failure of our enterprise systems, or those of third parties upon which we may rely, whether because of a
natural disaster, network outage or a cyber-attack on our systems, could compromise our personal, confidential and proprietary
information as well as that of our customers and business partners, impede or interrupt our business operations and could result in
other negative consequences, including remediation costs, loss of revenue, additional regulatory scrutiny and fines, litigation and
monetary and reputational damages. Although we have implemented controls and take protective actions to reduce the risk of an
enterprise failure and protect against a security breach, such measures may be insufficient to prevent, or mitigate the effects of, a
natural disaster, network outage or a cyber-attack on our systems that could result in liability to us, cause our data to be corrupted or
stolen and cause us to commit resources, management time and money to prevent or correct those failures.
In addition, we are subject to numerous data privacy laws and regulations enacted in the jurisdictions in which we do business. A
misuse or mishandling of confidential or proprietary information being sent to or received from a client, employee or third party
could damage our businesses or our reputation or result in significant monetary damages, regulatory enforcement actions, fines and
criminal prosecution in one or more jurisdictions. For example, under the European General Data Protection Regulation there are
significant new punishments for non-compliance which could result in a penalty of up to 4% of a firm’s global annual revenue. In
addition, a violation of data privacy laws and regulations could result in defaults under our outstanding indebtedness or credit
facilities. Those monetary damages, penalties, regulatory or legal actions or defaults, or the damage to our businesses or reputation,
could have a material adverse effect on our results of operations and financial condition. Third parties to whom we outsource certain
functions are also subject to these risks, and their failure to adhere to these laws and regulations also could damage our businesses or
reputation, could have a material adverse effect on our results of operations and financial condition.
Further, we routinely transmit, receive and store personal, confidential and proprietary information by email and other electronic
means. Although we attempt to protect this confidential and proprietary information, we may be unable to do so in all cases,
especially with customers, business partners and other third parties who may not have or use appropriate controls to protect
confidential information.
While we maintain cyber risk insurance providing first party and third party coverages, such insurance may not cover all costs
associated with the consequences of personal and confidential and proprietary information being compromised. A material cyber
security breach could have a material adverse effect on our results of operations and financial condition.
We may not find suitable acquisition candidates or new ventures. As part of our growth strategy, we continue to evaluate possible
acquisition transactions on an ongoing basis, and at any given time we may be engaged in discussions with respect to possible
acquisitions and new ventures. We may not be able to identify suitable acquisition targets or ventures, any such transactions may
not be financed or completed on acceptable terms and our future acquisitions or ventures may not be successful.
41
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
The integration of acquired companies may not be as successful as we anticipate. We have recently engaged in a number of
acquisitions in an effort to achieve profitable growth in our underwriting operations and to create additional value on a
diversified basis in our other operations. Acquisitions present operational, strategic and financial risks, as well as risks
associated with liabilities arising from the previous operations of the acquired companies. All of these risks are magnified in
the case of a large acquisition. Assimilation of the operations and personnel of acquired companies may prove more difficult
than anticipated, which may result in failure to achieve financial objectives associated with the acquisition or diversion of
management attention. In addition, integration of formerly privately-held companies into the management and internal
control and financial reporting systems of a publicly-held company presents additional risks.
Impairment in the value of our goodwill or other intangible assets could have a material adverse effect on our operating
results and financial condition. As of December 31, 2017, goodwill and intangible assets totaled $3.1 billion and represented
33.0% of shareholders’ equity. We record goodwill and intangible assets at fair value upon the acquisition of a business.
Goodwill represents the excess of amounts paid for acquiring businesses over the fair value of the net assets acquired.
Goodwill and indefinite-lived intangible assets are evaluated for impairment annually, or more frequently if conditions
warrant, by comparing the carrying value of a reporting unit to its estimated fair value. Intangible assets with definite lives
are reviewed for impairment when events or circumstances indicate that their carrying value may not be recoverable.
Declines in operating results, divestitures, sustained market declines and other factors that impact the fair value of a
reporting unit could result in an impairment of goodwill or intangible assets and, in turn, a charge to net income. Such a
charge could have a material adverse effect on our results of operations or financial condition.
For example, in 2017 we recorded $1.3 billion in goodwill and intangible assets in connection with the acquisitions of
SureTec, Costa Farms and State National. Developments that adversely affect the future cash flows or earnings of the
acquired businesses may cause the goodwill or intangible assets recorded for the acquired businesses to be impaired.
The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial condition
or on our results of operations. We seek to limit our loss exposure in a variety of ways, including adhering to maximum
limitations on policies written in defined geographical zones, limiting program size for each client, establishing per risk and
per occurrence limitations for each event, employing coverage restrictions and following prudent underwriting guidelines for
each program written. We also seek to limit our loss exposure through geographic diversification. Underwriting is a matter of
judgment, involving assumptions about matters that are inherently unpredictable and beyond our control, and for which
historical experience and probability analysis may not provide sufficient guidance. One or more future events could result in
claims that substantially exceed our expectations, which could have a material adverse effect on our financial condition and
our results of operations, possibly to the extent of eroding away our shareholders’ equity. In addition, we seek to limit loss
exposures by policy terms, exclusion from coverage and choice of legal forum. Disputes relating to coverage and choice of
legal forum also arise. As a result, various provisions of our policies, such as choice of forum, limitations or exclusions from
coverage may not be enforceable in the manner we intend and some or all of our loss limitation methods may prove
ineffective.
The effects of emerging claim and coverage issues on our business are uncertain. As industry practices and legal, judicial,
social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may
emerge. These issues may adversely affect our business by either broadening coverage beyond our underwriting intent or by
increasing the number or size of claims. In some instances, these changes may not become apparent until after we have
issued insurance or reinsurance contracts that are affected by the changes. As a result, the full extent of liability under our
insurance or reinsurance contracts may not be known for many years after a contract is issued.
We could be adversely affected by the loss of one or more key executives or by an inability to attract and retain qualified
personnel. Our success depends on our ability to retain the services of our existing key executives and to attract and retain
additional qualified personnel in the future. The loss of the services of any of our key executives or the inability to hire and
retain other highly qualified personnel in the future could adversely affect our ability to conduct or grow our business.
42
We have substantial international operations and investments, which expose us to increased political, operational and economic
risks. A substantial portion of our revenues and income is derived from our operations and investments outside the U.S., including
from the United Kingdom, Bermuda, Europe, Asia, South America and the Middle East. Our international operations and
investments expose us to increased political, operational and economic risks. These risks include foreign currency and credit risk.
Changes in the value of the U.S. dollar relative to other currencies could have an adverse effect on our results of operations and
financial condition. Our investments in non-U.S. dollar-denominated securities are subject to fluctuations in non-U.S. securities and
currency markets, and those markets can be volatile.
Deterioration or volatility in foreign and international financial markets or general economic and political conditions could
adversely affect our operating results, financial condition and liquidity. Concerns about the economic conditions, capital markets,
political and economic stability and solvency of certain countries have contributed to global market volatility. Political changes in
the jurisdictions where we operate and elsewhere, some of which may be disruptive, can also interfere with our customers and our
activities in a particular location. Our international operations also may be subject to a number of additional risks, particularly in
emerging economies, including restrictions such as price controls, capital controls, currency exchange limits, ownership limits and
other restrictive or anti-competitive governmental actions or requirements, which could have an adverse effect on our businesses.
The impact of the Tax Cuts and Jobs Act could be materially different from our current estimates and expectations. On December 22,
2017, the U.S. enacted the Tax Cuts and Jobs Act (TCJA), which made significant modifications to U.S. federal income tax law, most
of which are effective January 1, 2018. As a result, we recorded a one-time tax benefit of $339.9 million in the fourth quarter of 2017,
a portion of which is considered provisional. We expect that overall the TCJA will have a favorable impact on our future after-tax
earnings, primarily due to the reduction of the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. The overall impact
of the TCJA, including the final amount of the one-time tax benefit recorded in the fourth quarter of 2017 and the TCJA’s impact on
our effective tax rate, is uncertain due to ambiguities in the application of certain provisions of the TCJA, the impact of future
regulatory and administrative guidance, interpretations or rules issued by government agencies in applying the TCJA, statutory
technical corrections that are subsequently enacted, and potential court decisions interpreting the legislation. Changes in the
application or interpretation of the TCJA could have an adverse impact on our results of operation and financial condition.
We are rated by Best, S&P, Fitch and Moody’s, and a downgrade or potential downgrade in one or more of these ratings could
adversely affect our businesses, financial condition, results of operations, liquidity and access to capital markets. Financial strength
ratings are an important factor in establishing the competitive position of insurance and reinsurance companies. Our senior debt
ratings also affect the availability and cost of capital. Certain of our insurance and reinsurance company subsidiaries are rated by
Best, S&P, Fitch or Moody’s, and our senior debt securities, and those of certain of our subsidiaries, also are rated by Best, S&P, Fitch
or Moody’s. Our financial strength and debt ratings are subject to periodic review, and are subject to revision or withdrawal at any
time. The financial strength ratings of our insurance subsidiaries are significantly influenced by their statutory surplus amounts and
leverage and capital adequacy ratios. Rating agencies may implement changes to their internal models that have the effect of
increasing or decreasing the amount of capital our insurance subsidiaries must hold in order to maintain their current ratings. For
certain of our insurance subsidiaries, rating agencies may take into account in their leverage calculations the collateral provided to
us by reinsurers. A change in this practice could adversely impact our ratings. In addition, rating agencies may downgrade the
investments held in our portfolio, which could result in a reduction of our capital and surplus. We cannot be sure that we will be
able to retain our current or any future ratings. If our ratings are reduced from their current levels by one or more rating agencies, our
competitive position in our target markets within the insurance industry could suffer and it would be more difficult for us to market
our products. A significant downgrade could:
• result in a substantial loss of business as policyholders and ceding company clients move to other companies with higher
claims-paying and financial strength ratings; and
• trigger contract provisions that allow cedents to terminate their reinsurance contracts on terms disadvantageous to us or require
us to collateralize our obligations through trusts or letters of credit.
A ratings downgrade could also adversely affect our liquidity, including the availability of our letter of credit facilities, and limit our
access to capital markets, increase our cost of borrowing or issuing debt and require us to post collateral.
43
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
We depend on a few brokers for a large portion of our revenues and the loss of business provided by any one of them could
adversely affect us. We market our insurance and reinsurance worldwide through insurance and reinsurance brokers. For the
year ended December 31, 2017, our top three independent brokers represented 27% of the gross premiums written by our
underwriting operations. Loss of all or a substantial portion of the business provided by one or more of these brokers could
have a material adverse effect on our business.
Employee error and misconduct may be difficult to detect and prevent and may result in significant losses. There have been
a number of cases involving misconduct by employees in a broad range of industries in recent years, and we run the risk
that employee misconduct could occur. Instances of fraud, illegal acts, errors, failure to document transactions properly or
to obtain proper internal authorization, or failure to comply with regulatory requirements or our internal policies may result
in losses. It is not always possible to deter or prevent employee errors or misconduct, and the controls that we have in place
to prevent and detect this activity may not be effective in all cases.
We are subject to applicable laws and regulations relating to economic and trade sanctions and bribery and corruption, the
violation of which could have a material adverse effect on us. We are required to comply with the economic and trade
sanctions and embargo programs administered by the United States Department of the Treasury’s Office of Foreign Assets
Control and similar multi-national bodies and governmental agencies worldwide, as well as applicable anti-corruption laws
and regulations of the United States and other jurisdictions where we operate. A violation of a sanction, embargo program, or
anti-corruption law, could subject us, and individual employees, to a regulatory enforcement action as well as significant
civil and criminal penalties. In addition, a violation could result in defaults under our outstanding indebtedness or credit
facilities or damage our businesses or our reputation. Those penalties or defaults, or damage to our businesses or reputation,
could have a material adverse effect on our results of operations and financial condition. In some cases the requirements
and limitations applicable to the global operations of U.S. companies and their affiliates are more restrictive than those
applicable to non-U.S. companies and their affiliates, which also could have a material adverse effect on our results of
operations and financial condition.
The legal and regulatory requirements applicable to our businesses are extensive. Failure to comply could have a material
adverse effect on us. Our businesses are highly dependent on our ability to engage on a daily basis in a large number of
financial and operational activities, including among others insurance underwriting, claim processing, investment activities
and the management of third party capital, many of which are highly complex. These activities are subject to internal
guidelines and policies, as well as legal and regulatory standards, including, among others, those related to privacy,
anti-corruption, anti-bribery and global finance and insurance matters. Our continued expansion into new businesses and
markets has brought about additional requirements. While we believe that we have adopted appropriate risk management
and compliance programs, compliance risks will continue to exist, particularly as we become subject to new rules and
regulations. Failure to comply with, or to obtain, appropriate authorizations and/or exemptions under any applicable laws
and regulations could result in restrictions on our ability to do business or undertake activities that are regulated in one or
more of the jurisdictions in which we conduct business and could subject us to fines, penalties, equitable relief and changes
to our business practices. In addition, a failure to comply could result in defaults under our outstanding indebtedness or
credit facilities or damage our businesses or our reputation. Compliance with applicable laws and regulations is time
consuming and personnel-intensive, and changes in these laws and regulations could materially increase our direct and
indirect compliance and other expenses of doing business, and have a material adverse effect on our results of operations
and financial condition.
Regulators may challenge our use of fronting arrangements in states in which our capacity providers are not licensed.
Our program services business enters into fronting arrangements with general agents and domestic and foreign insurers
that want to access specific U.S. property and casualty insurance business in states in which the capacity providers are not
licensed or are not authorized to write particular lines of insurance. Some state insurance regulators may object to these
fronting arrangements. In certain states, an insurance commissioner has the authority to prohibit an authorized insurer from
acting as an issuing carrier for an unauthorized insurer. In addition, insurance departments in states in which there is no
such statutory or regulatory prohibition, could deem the assuming insurer to be transacting insurance business without a
license and the issuing carrier to be aiding and abetting the unauthorized sale of insurance.
44
If regulators in any of the states where we conduct our fronting business were to prohibit or limit those arrangements, we would be
prevented or limited from conducting that business for which a capacity provider is not authorized in those states, unless and until
the capacity provider is able to obtain the necessary licenses. This could have a material adverse effect on our results of operations
and financial condition.
We may be exposed to risk in connection with our management of third party capital. Some of our operating subsidiaries may owe
certain legal duties and obligations to third party investors. A failure to fulfill any such duties or obligations could result in
significant liabilities, penalties or other losses, and harm our businesses and results of operations. In addition, third party investors
may decide not to renew their interests in the funds we manage, which could materially impact the financial condition of those
funds, and could, in turn, have an adverse impact on our results of operations and financial condition. Moreover, we may not be able
to raise additional third party capital for the funds we manage or for potential new funds and therefore we may forego existing or
potential fee income and other income generating opportunities.
The United Kingdom’s vote to leave, and the eventual exit of the United Kingdom from, the European Union could adversely affect
us. On June 23, 2016, the U.K. voted to exit the E.U. (Brexit), and on March 29, 2017, the U.K. government delivered formal notice to
the other E.U. member countries that it is leaving the E.U. A two-year period has now commenced during which the U.K. and the
E.U. will negotiate the future terms of the U.K.’s relationship with the E.U., including the terms of trade between the U.K. and the
E.U. Unless this period is extended, the U.K. will automatically exit the E.U., with or without an agreement in place, after two years.
During this period the U.K. will remain a part of the E.U. After Brexit terms are agreed, Brexit could be implemented in stages over a
multi-year period.
The effects of Brexit will depend in part on any agreements the U.K. makes to retain access to E.U. markets either during a
transitional period or more permanently. Brexit could impair or end the ability of both MIICL and our Lloyd’s syndicate to transact
business in E.U. countries from our U.K. offices and MIICL’s ability to maintain its current branches in E.U. member countries and
in Switzerland. We have started the process to obtain regulatory approval to establish an insurance company in Germany in order to
continue transacting E.U. business if U.K. access to E.U. markets ceases or is materially impaired. The Society of Lloyd’s has
announced that it will be setting up a new European insurance company in Brussels in order to maintain access to E.U. business for
Lloyd’s syndicates. Access to E.U. markets through a solution devised by the Society of Lloyd’s may supplement, or serve as an
alternative to, a new E.U.-based insurance carrier for business we transact in the E.U.
The eventual exit of the U.K. from the E.U., and negotiations leading up to that exit, could continue to contribute to instability in
global financial markets, including foreign currency markets, and adversely affect European and worldwide economic or market
conditions. In addition, no member country has previously left the E.U., and the rules for exit (contained in Article 50 of the Treaty
on European Union) are brief. Accordingly, there are significant uncertainties related to the political, monetary and economic
impacts of Brexit, including related tax, accounting and financial reporting implications. Brexit could also lead to legal uncertainty
and potentially a large number of new and divergent national laws and regulations, including new tax rules, as the U.K. determines
which E.U. laws to replace or replicate. Any of these effects of Brexit, and others we cannot anticipate, could adversely affect our
business, business opportunities, results of operations, financial condition and cash flows.
A s s o c i a t e s
At December 31, 2017, we had approximately 15,600 employees, of whom approximately 11,400 were employed within our Markel
Ventures operations.
45
Markel Corporation & Subsidiaries
S E L E C T E D F I N A N C I A L D A T A (dollars in millions, except per share data) (1)
R E S U LT S O F O P E R AT I O N S
Earned premiums
Net investment income
Total operating revenues
Net income (loss) to shareholders
Comprehensive income (loss) to shareholders
Diluted net income (loss) per share
F I N A N C I A L P O S I T I O N
Total investments, cash and cash equivalents and restricted cash
and cash equivalents (invested assets)
Total assets
Unpaid losses and loss adjustment expenses
Senior long-term debt and other debt
Shareholders’ equity
Common shares outstanding (at year end, in thousands)
O P E R A T I N G P E R F O R M A N C E M E A S U R E S (1,2)
O P E R AT I N G D ATA
Book value per common share outstanding
Growth (decline) in book value per share
5-Year CAGR in book value per share (3)
Closing stock price
R AT I O A N A LY S I S
U.S. GAAP combined ratio(4)
Investment yield(5)
Taxable equivalent total investment return(6)
Investment leverage(7)
Debt to capital
2017
2016
2015
$ 4,248%
406%
6,062%
395%
1,175%
$ 25.81%
$ 20,570%
32,805%
13,584%
3,099%
9,504%
13,904%
$ 3,866%
373%
5,612%
456%
667%
$ 31.27%
$ 19,059%
25,875%
10,116%
2,575%
8,461%
13,955%
$ 3,824%
353%
5,370%
583%
233%
$ 41.74%
$ 18,181%
24,939%
10,252%
2,239%
7,834%
13,959%
$ 683.55%
13%
11%
$ 1,139.13%
$ 606.30%
8%
11%
$ 904.50%
$ 561.23%
3%
11%
$ 883.35%
105%
3%
10%
2.2%
25%
92%
2%
4%
2.3%
23%
89%
2%
(1)%
2.3%
22%
(1) Reflects the acquisition of Alterra Capital Holdings Limited effective May 1, 2013, which included the issuance of equity
totaling $2.3 billion.
(2) Operating Performance Measures provide a basis for management to evaluate our performance. The method we use to
compute these measures may differ from the methods used by other companies. See further discussion of management’s
evaluation of these measures in Management’s Discussion & Analysis of Financial Condition and Results of Operations.
(3) CAGR— compound annual growth rate.
46
2014
2013
2012
2011
2010
2009
2008
5-Year
CAGR(3)
10-Year
CAGR(3)
$ 3,841% $ 3,232%
317%
4,323%
281%
459%
$ 22.27% $ 22.48%
363%
5,134%
321%
936%
$ 2,147%
282%
3,000%
253%
504%
$ 25.89%
$ 1,979%
264%
2,630%
142%
252%
$ 14.60%
$ 1,731% $ 1,816%
260%
2,069%
202%
591%
$ 27.27% $ 20.52%
273%
2,225%
267%
431%
$ 2,022)%
282)%
1,977)%
(59)%
(403)%
$ (5.95)%
$ 18,638% $ 17,612%
23,956%
10,262%
2,256%
6,674%
13,986%
25,198%
10,404%
2,251%
7,595%
13,962%
$ 9,333%
12,557%
5,371%
1,493%
3,889%
9,629%
$ 8,728%
11,532%
5,399%
1,294%
3,388%
9,621%
$ 8,224% $ 7,849%
10,242 %
5,427 %
964 %
2,774 %
9,819 %
10,826%
5,398%
1,016%
3,172%
9,718%
$ 6,893)%
9,512)%
5,492)%
694)%
2,181)%
9,814)%
15%
8%
15%
—
—
—
17%
21%
20%
—
20%
—
7%
3%
9%
—
—
—
10%
12%
9%
—
14%
—
$ 543.96% $ 477.16%
18%
17%
$ 682.84% $ 580.35%
14%
14%
$ 403.85%
15%
9%
$ 433.42%
$ 352.10%
8%
9%
$ 326.36% $ 282.55%
27%
11%
$ 414.67% $ 378.13% $ 340.00%
16%
13%
$ 222.20)%
(16)%)
10%)
$ 299.00)%
11%
—
—
—
10%
—
—
—
95%
2%
7%
2.5%
23%
97%
3%
7%
2.6%
25%
97%
4%
9%
2.4
28%
102%
4%
7%
2.6
28%
97%
4%
8%
2.6%
24%
95%
4%
13%
2.8%
26%
99%
4%
(10)%
3.2%
24%
—
—
—
—
—
—
—
—
—
—
(4) The U.S. GAAP combined ratio measures the relationship of incurred losses, loss adjustment expenses and underwriting,
acquisition and insurance expenses to earned premiums.
(5) Investment yield reflects net investment income as a percentage of monthly average invested assets at amortized cost.
(6) See “Investing Results” in Management’s Discussion & Analysis of Financial Condition and Results of Operations for detail
regarding the calculation of taxable equivalent total investment return.
(7) Investment leverage represents total invested assets divided by shareholders’ equity.
47
Markel Corporation & Subsidiaries
M A N A G E M E N T ’ S R E P O R T O N I N T E R N A L C O N T R O L O V E R F I N A N C I A L R E P O R T I N G
®
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles.
Management does not expect that its internal control over financial reporting will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. Internal control over financial reporting is a process that involves human diligence and compliance
and is subject to lapses in judgment and breakdowns resulting from human failures. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any,
have been detected. The design of any system of internal control over financial reporting also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions.
Under the supervision and with the participation of management, including the Principal Executive Officer and the Principal
Financial Officer, we evaluated the effectiveness of our internal control over financial reporting as of December 31, 2017, based
on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on our evaluation, we have concluded that we maintained effective internal control over
financial reporting as of December 31, 2017.
In conducting our evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017,
we excluded internal controls over financial reporting associated with Costa Farms and State National Companies, Inc., which
were acquired in August 2017 and November 2017, respectively. These operations represent 15% of our consolidated assets as
of December 31, 2017 and 2% of our consolidated operating revenues for the year then ended.
KPMG LLP, our independent registered public accounting firm, has issued an attestation report on the effectiveness of the
Company's internal control over financial reporting as of December 31, 2017, which is included herein.
Alan I. Kirshner
Executive Chairman
(Principal Executive Officer)
February 23, 2018
Anne G. Waleski
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
48
R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M
To the Shareholders and Board of Directors
Markel Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Markel Corporation’s and subsidiaries’ (the Company) internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, and the
related consolidated statements of income and comprehensive income, changes in equity, and cash flows for each of
the years in the three-year period ended December 31, 2017, and related notes, and our report dated February 23,
2018 expressed an unqualified opinion on those consolidated financial statements.
Management excluded from its assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2017, Costa Farms and State National Companies (State National), which were
acquired in August 2017 and November 2017, respectively. These operations represent 15 percent of assets and 2
percent of operating revenues included in the consolidated financial statements of the Company as of and for the year
ended December 31, 2017. Our audit of internal control over financial reporting of the Company also excluded an
evaluation of the internal control over financial reporting of Costa Farms and State National.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Richmond, Virginia
February 23, 2018
49
Markel Corporation & Subsidiaries
R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M
To the Shareholders and Board of Directors
Markel Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Markel Corporation and subsidiaries (the
Company) as of December 31, 2017 and 2016, the related consolidated statements of income and comprehensive
income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2017,
and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017
and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on
criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated February 23, 2018 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
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 are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free
of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the
risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for
our opinion.
We have served as the Company’s auditor since 1980.
Richmond, Virginia
February 23, 2018
50
C O N S O L I D A T E D B A L A N C E S H E E T S
A S S E T S
Investments, available-for-sale, at estimated fair value:
Fixed maturities (amortized cost of $9,551,153 in 2017 and
$9,591,734 in 2016)
Equity securities (cost of $2,667,661 in 2017 and $2,481,448 in 2016)
Short-term investments (estimated fair value approximates cost)
Total Investments
Cash and cash equivalents
Restricted cash and cash equivalents
Receivables
Reinsurance recoverable on unpaid losses
Reinsurance recoverable on paid losses
Deferred policy acquisition costs
Prepaid reinsurance premiums
Goodwill
Intangible assets
Other assets
December 31,
2017
2016
(dollars in thousands)
$ 9,940,670
5,967,847
2,160,974
18,069,491
2,198,459
302,387
1,567,453
4,619,336
126,054
465,569
1,099,757
1,777,464
1,355,681
1,223,365
$ 9,891,510
4,745,841
2,336,151
16,973,502
1,738,747
346,417
1,282,997
2,006,945
64,892
392,410
299,923
1,142,248
722,542
904,676
TOTAL ASSETS
$ 32,805,016
$ 25,875,299
L I A B I L I T I E S A N D E Q U I T Y
Unpaid losses and loss adjustment expenses
Life and annuity benefits
Unearned premiums
Payables to insurance and reinsurance companies
Senior long-term debt and other debt (estimated fair value of
$3,351,000 in 2017 and $2,721,000 in 2016)
Other liabilities
Total Liabilities
Redeemable noncontrolling interests
Commitments and contingencies
Shareholders’ equity:
Common stock
Retained earnings
Accumulated other comprehensive income
Total Shareholders’ Equity
Noncontrolling interests
Total Equity
TOTAL LIABILITIES AND EQUITY
See accompanying notes to consolidated financial statements.
$ 13,584,281
1,072,112
3,308,779
324,304
3,099,230
1,748,460
23,137,166
166,269
3,381,834
3,776,743
2,345,571
9,504,148
(2,567)
9,501,581
$ 10,115,662
1,049,654
2,263,838
231,327
2,574,529
1,099,200
17,334,210
73,678
3,368,666
3,526,395
1,565,866
8,460,927
6,484
8,467,411
$ 32,805,016
$ 25,875,299
51
Markel Corporation & Subsidiaries
C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E A N D C O M P R E H E N S I V E I N C O M E
O P E R AT I N G R E V E N U E S
Earned premiums
Net investment income
Net realized investment gains (losses):
Other-than-temporary impairment losses
Net realized investment gains, excluding
other-than-temporary impairment losses
Net realized investment gains (losses)
Other revenues
Total Operating Revenues
O P E R AT I N G E X P E N S E S
Losses and loss adjustment expenses
Underwriting, acquisition and insurance expenses
Amortization of intangible assets
Other expenses
Total Operating Expenses
Operating Income
Interest expense
Loss on early extinguishment of debt
Income Before Income Taxes
Income tax expense (benefit)
Net Income
Net income attributable to noncontrolling interests
Years Ended December 31,
2017
2016
2015
(dollars in thousands, except per share data)
$ 4,247,978
405,709
$ 3,865,870
373,230
$ 3,823,532
353,213
(7,589)
(18,355)
(44,481)
2,286
(5,303)
1,413,275
83,502
65,147
1,307,779
150,961
106,480
1,086,758
6,061,659
5,612,026
5,369,983
2,865,761
1,587,414
80,758
1,307,980
2,050,744
1,498,590
68,533
1,190,243
1,938,745
1,455,080
68,947
1,046,805
5,841,913
4,808,110
4,509,577
219,746
132,451
—
87,295
(313,463)
803,916
129,896
44,100
629,920
169,477
860,406
118,301
—
742,105
152,963
$ 400,758
5,489
$ 460,443
4,754
$ 589,142
6,370
N E T I N C O M E T O S H A R E H O L D E R S
$ 395,269
$ 455,689
$ 582,772
O T H E R C O M P R E H E N S I V E I N C O M E (L O S S)
Change in net unrealized gains on investments, net of taxes:
Net holding gains (losses) arising during the period
Change in unrealized other-than-temporary impairment
losses on fixed maturities arising during the period
Reclassification adjustments for net gains
included in net income
Change in net unrealized gains on investments, net of taxes
Change in foreign currency translation adjustments, net of taxes
Change in net actuarial pension loss, net of taxes
Total Other Comprehensive Income (Loss)
Comprehensive Income
Comprehensive income attributable to noncontrolling interests
$ 787,339
$ 275,661
$ (240,170)
—
35
160
(24,296)
763,043
10,449
6,259
779,751
(33,528)
242,168
(11,704)
(19,100)
211,364
(80,482)
(320,492)
(29,278)
(352)
(350,122)
$ 1,180,509
5,535
$ 671,807
4,760
$ 239,020
6,297
C O M P R E H E N S I V E I N C O M E T O S H A R E H O L D E R S
$ 1,174,974
$ 667,047
$ 232,723
N E T I N C O M E P E R S H A R E
Basic
Diluted
See accompanying notes to consolidated financial statements.
$
$
25.89
25.81
$
$
31.41
31.27
$
$
41.99
41.74
52
C O N S O L I D A T E D S T A T E M E N T S O F C H A N G E S I N E Q U I T Y
(in thousands)
Common
Shares
Common
Stock
Retained
Earnings
Accumulated
Other
Total
Comprehensive Shareholders’ Noncontrolling
Equity
Interests
Income
Total
Equity
Redeemable
Noncontrolling
Interests
December 31, 2014
Net income (loss)
Other comprehensive income (loss)
Comprehensive Income (Loss)
Issuance of common stock
Repurchase of common stock
Restricted stock awards expensed
Acquisition of CapTech
Adjustment of redeemable
noncontrolling interests
Purchase of noncontrolling
interest
Other
13,962 $3,308,395 $2,581,866 $1,704,557 $7,594,818
582,772
(350,049)
––
(350,049)
582,772
––
34
(37)
––
––
––
––
––
4,752
––
24,129
––
––
(31,491)
––
––
––
4,144
(1,447)
6,528
––
(6)
232,723
4,752
(31,491)
24,129
––
4,144
(1,447)
6,522
––
––
––
––
––
––
––
December 31, 2015
13,959
3,342,357
3,137,285
455,689
––
1,354,508
––
211,358
7,834,150
455,689
211,358
Net income
Other comprehensive income
Comprehensive Income
Issuance of common stock
Repurchase of common stock
Restricted stock awards expensed
Adjustment of redeemable
noncontrolling interests
Purchase of noncontrolling
interest
Other
54
(58)
––
––
––
––
4,623
––
21,336
––
(51,142)
––
––
(15,472)
350
––
––
35
––
––
––
––
––
––
December 31, 2016
Net income (loss)
Other comprehensive income
13,955
3,368,666
3,526,395
395,269
––
1,565,866
––
779,705
Comprehensive Income (Loss)
Issuance of common stock
Repurchase of common stock
Restricted stock awards expensed
Acquisition of Costa Farms
Adjustment of redeemable
noncontrolling interests
Purchase of noncontrolling
interest
Other
58
(109)
––
––
––
––
––
552
––
15,881
––
––
(110,838)
––
––
––
(33,738)
(2,955)
(310)
––
(345)
––
––
––
––
––
––
––
667,047
4,623
(51,142)
21,336
(15,472)
350
35
8,460,927
395,269
779,705
1,174,974
552
(110,838)
15,881
––
$ 7,184
(988)
––
$7,602,002 $ 61,048
7,358
(73)
581,784
(350,049)
(988)
––
––
––
––
––
––
263
6,459
99
––
99
––
––
––
––
––
(74)
6,484
(895)
––
(895)
––
––
––
––
231,735
4,752
(31,491)
24,129
––
7,285
––
––
––
13,817
4,144
(4,144)
(1,447)
6,785
(8,224)
(6,824)
7,840,609
455,788
211,358
667,146
4,623
(51,142)
21,336
62,958
4,655
6
4,661
––
––
––
(15,472)
15,472
350
(39)
(3,517)
(5,896)
8,467,411
394,374
779,705
1,174,079
552
(110,838)
15,881
––
73,678
6,384
46
6,430
––
––
––
66,600
(33,738)
––
(33,738)
33,738
(2,955)
(655)
(8,330)
174
(11,285)
(481)
(6,179)
(7,998)
DECEMBER 31, 2017
13,904 $3,381,834 $3,776,743 $2,345,571 $9,504,148
$ (2,567) $9,501,581 $166,269
See accompanying notes to consolidated financial statements.
53
Markel Corporation & Subsidiaries
C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S
O P E R AT I N G A C T I V I T I E S
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Years Ended December 31,
2017
2016
2015
(dollars in thousands)
$ 400,758
$ 460,443
$ 589,142
Deferred income tax expense (benefit)
Depreciation and amortization
Net realized investment (gains) losses
Loss on early extinguishment of debt
Decrease (increase) in receivables
Increase in deferred policy acquisition costs
Increase (decrease) in unpaid losses and loss adjustment expenses, net
Decrease in life and annuity benefits
Increase (decrease) in unearned premiums, net
Increase (decrease) in payables to insurance and reinsurance companies
Increase (decrease) in income taxes payable
Increase (decrease) in accrued expenses
Increase (decrease) in other liabilities
Other
(324,090)
203,871
5,303
—
(38,259)
(67,923)
619,305
(55,647)
197,706
(40,761)
(35,968)
(71,669)
45,051
20,852
63,358
194,147
(65,147)
44,100
(163,123)
(41,619)
(9,429)
(54,580)
134,593
11,582
(16,484)
67,994
(90,571)
(641)
(9,678)
200,987
(106,480)
—
5,604
(7,360)
(91,960)
(85,257)
(4,522)
(31,829)
27,817
97,273
(5,793)
73,207
Net Cash Provided By Operating Activities
858,529
534,623
651,151
I N V E S T I N G A C T I V I T I E S
Proceeds from sales of fixed maturities and equity securities
Proceeds from maturities, calls and prepayments of fixed maturities
Cost of fixed maturities and equity securities purchased
Net change in short-term investments
Proceeds from sales of equity method investments
Cost of equity method investments
Additions to property and equipment
Acquisitions, net of cash acquired
Other
577,650
1,129,895
(1,176,281)
234,743
3,353
(13,023)
(74,652)
(1,431,712)
5,570
365,822
963,165
(2,205,939)
(689,194)
8,790
(8,576)
(63,674)
(7,527)
(1,348)
538,978
1,503,616
(1,576,254)
(62,124)
23,155
(21,849)
(79,755)
(261,521)
(797)
Net Cash Provided (Used) By Investing Activities
(744,457)
(1,638,481)
63,449
F I N A N C I N G A C T I V I T I E S
Additions to senior long-term debt and other debt
Repayment of senior long-term debt and other debt
Premiums and fees related to early extinguishment of debt
Repurchases of common stock
Issuance of common stock
Payment of contingent consideration
Purchase of noncontrolling interests
Distributions to noncontrolling interests
Other
664,657
(259,972)
—
(110,838)
552
(5,018)
(18,334)
(7,899)
(6,833)
559,300
(278,363)
(43,691)
(51,142)
4,623
(14,219)
(3,167)
(5,949)
(15,373)
Net Cash Provided (Used) By Financing Activities
256,315
152,019
69,797
(88,020)
—
(31,491)
4,752
(9,263)
(12,474)
(6,287)
(1,225)
(74,211)
Effect of foreign currency rate changes on cash, cash equivalents,
restricted cash and restricted cash equivalents
Increase (decrease) in cash, cash equivalents, restricted cash and
restricted cash equivalents
Cash, cash equivalents, restricted cash and restricted cash
equivalents at beginning of year
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND
RESTRICTED CASH EQUIVALENTS AT END OF YEAR
See accompanying notes to consolidated financial statements.
54
45,295
(33,138)
(52,642)
415,682
(984,977)
587,747
2,085,164
3,070,141
2,482,394
$ 2,500,846
$ 2,085,164
$ 3,070,141
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
1. Summary of Significant Accounting Policies
Markel Corporation is a diverse financial holding company serving a variety of niche markets. Markel Corporation’s principal
business markets and underwrites specialty insurance products. Through its wholly owned subsidiary, Markel Ventures, Inc.
(Markel Ventures), Markel Corporation also owns interests in various businesses that operate outside of the specialty insurance
marketplace.
a) Basis of Presentation. The accompanying consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles (U.S. GAAP) and include the accounts of Markel Corporation and its consolidated
subsidiaries, as well as any variable interest entities (VIEs) that meet the requirements for consolidation (the Company). All
significant intercompany balances and transactions have been eliminated in consolidation. The Company consolidates the
results of its Markel Ventures subsidiaries on a one-month lag. Certain prior year amounts have been reclassified to conform to
the current presentation.
b) Use of Estimates. The preparation of financial statements in accordance with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities. Management periodically reviews its estimates and assumptions. Quarterly reviews include
evaluating the adequacy of reserves for unpaid losses and loss adjustment expenses, life and annuity reinsurance benefit
reserves, litigation contingencies, the reinsurance allowance for doubtful accounts and income tax liabilities, as well as
analyzing the recoverability of deferred tax assets, estimating reinsurance premiums written and earned and evaluating the
investment portfolio for other-than-temporary declines in estimated fair value. Estimates and assumptions for goodwill and
intangible assets are reviewed in conjunction with an acquisition, and goodwill and indefinite-lived intangible assets are
reassessed at least annually for impairment. Actual results may differ materially from the estimates and assumptions used in
preparing the consolidated financial statements.
c) Investments. Available-for-sale investments are recorded at estimated fair value. Unrealized gains and losses on investments,
net of income taxes, are included in accumulated other comprehensive income in shareholders’ equity. The Company
completes a detailed analysis each quarter to assess whether the decline in the fair value of any investment below its cost basis
is deemed other-than-temporary.
Premiums and discounts are amortized or accreted over the lives of the related fixed maturities as an adjustment to the yield
using the effective interest method. Dividend and interest income are recognized when earned. Realized investment gains or
losses are included in earnings. Realized gains or losses from sales of investments are derived using the first-in, first-out method.
The Company also has certain investments in equity securities that are recorded at estimated fair value with changes in
unrealized gains and losses recorded in net income. These investments totaled $168.8 million as of December 31, 2017 and are
included in equity securities in the consolidated balance sheets.
Investments accounted for under the equity method of accounting are recorded at cost within other assets on the consolidated
balance sheets and subsequently increased or decreased by the Company’s proportionate share of the net income or loss of the
investee. The Company records its proportionate share of net income or loss of the investee in net investment income (loss).
The Company records its proportionate share of other comprehensive income or loss of the investee as a component of other
comprehensive income (loss). Dividends or other equity distributions in excess of the Company’s cumulative equity in earnings
of the investee are recorded as as a reduction of the investment. The Company reviews equity method investments for
impairment when events or circumstances indicate that a decline in the fair value of the investment below its carrying value is
other-than-temporary.
d) Cash and Cash Equivalents. The Company considers all investments with original maturities of 90 days or less to be cash
equivalents. The carrying value of the Company’s cash and cash equivalents and restricted cash and cash equivalents
approximates fair value.
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e) Restricted Cash and Cash Equivalents. Cash and cash equivalents that are restricted as to withdrawal or use are recorded as
restricted cash and cash equivalents. The carrying value of the Company’s restricted cash and cash equivalents approximates
fair value.
f) Receivables. Receivables include amounts receivable from agents, brokers and insureds, which represent premiums that are
both currently due and amounts not yet due on insurance and reinsurance policies. Premiums for insurance policies are
generally due at inception. Premiums for reinsurance policies generally become due over the period of coverage based on the
policy terms. The Company monitors the credit risk associated with premiums receivable, taking into consideration the fact
that in certain instances credit risk may be reduced by the Company’s right to offset loss obligations or unearned premiums
against premiums receivable. Amounts deemed uncollectible are charged to net income in the period they are determined.
Changes in the estimate of reinsurance premiums written will result in an adjustment to premiums receivable in the period
they are determined.
g) Reinsurance Recoverables. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsured business. Allowances are established for amounts deemed uncollectible and reinsurance
recoverables are recorded net of these allowances. The Company evaluates the financial condition of its reinsurers and monitors
concentration risk to minimize its exposure to significant losses from individual reinsurers.
h) Deferred Policy Acquisition Costs. Costs directly related to the acquisition of insurance premiums are deferred and
amortized over the related policy period, generally one year. The Company only defers acquisition costs incurred that are related
directly to the successful acquisition of new or renewal insurance contracts, including commissions to agents and brokers and
premium taxes. Commissions received related to reinsurance premiums ceded are netted against broker commissions in
determining acquisition costs eligible for deferral. To the extent that future policy revenues on existing policies are not adequate
to cover related costs and expenses, deferred policy acquisition costs are charged to earnings. The Company does not consider
anticipated investment income in determining whether a premium deficiency exists.
i) Goodwill and Intangible Assets. Goodwill and intangible assets are recorded as a result of business acquisitions. Goodwill
represents the excess of the amount paid to acquire a business over the net fair value of assets acquired and liabilities assumed at
the date of acquisition. Indefinite-lived and other intangible assets are recorded at fair value as of the acquisition date. The
determination of the fair value of certain assets acquired and liabilities assumed involves significant judgment and the use of
valuation models and other estimates, which require assumptions that are inherently subjective. Goodwill and indefinite-lived
intangible assets are tested for impairment at least annually. The Company completes an annual test during the fourth quarter
of each year based upon the results of operations through September 30. Intangible assets with definite lives are amortized using
the straight-line method over their estimated useful lives, generally five to 20 years, and are reviewed for impairment when
events or circumstances indicate that their carrying value may not be recoverable.
j) Property and Equipment. Property and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization of property and equipment are calculated using the straight-line method over the estimated
useful lives (generally, the lower of the life of the lease or the estimated useful life for leasehold improvements, ten to 40 years
for buildings, seven to 40 years for land improvements, three to ten years for furniture and equipment and three to 25 years for
other property and equipment).
k) Redeemable Noncontrolling Interests. The Company owns controlling interests in various companies through its Markel
Ventures operations. In some cases, the Company has the option to acquire the remaining equity interests, and the remaining
equity interests have the option to sell their interests to the Company, in the future. The redemption value of the remaining
equity interests is generally based on the respective company’s earnings in specified periods preceding the redemption date. The
redeemable noncontrolling interests generally become redeemable through 2022.
The Company recognizes changes in the redemption value that exceed the carrying value of redeemable noncontrolling
interests to retained earnings as if the balance sheet date were also the redemption date. Changes in the redemption value also
result in an adjustment to net income to shareholders in the calculation of basic and diluted net income per share. The change
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in the redemption value of redeemable noncontrolling interests in 2017, 2016 and 2015 resulted in an adjustment to retained
earnings of a decrease of $33.7 million, a decrease of $15.5 million, and an increase of $4.1 million, respectively.
l) Income Taxes. The Company records deferred income taxes to reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are
expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when management believes it is
more likely than not that some, or all, of the deferred tax assets will not be realized. The Company recognizes the tax benefit
from an uncertain tax position taken or expected to be taken in income tax returns only if it is more likely than not that the tax
position will be sustained upon examination by tax authorities, based on the technical merits of the position. Tax positions that
meet the more likely than not threshold are then measured using a probability weighted approach, whereby the largest amount
of tax benefit that is greater than 50% likely of being realized upon ultimate settlement is recognized. The Company recognizes
interest and penalties related to uncertain tax positions in income tax expense.
m) Unpaid Losses and Loss Adjustment Expenses. Unpaid losses and loss adjustment expenses on the Company’s property and
casualty insurance business 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 incurred but not reported are based on reserve
development studies, among other things. Recorded reserves are estimates, and the ultimate liability may be greater or less than
the estimates.
n) Life and Annuity Benefits. The Company previously acquired a block of long duration reinsurance contracts for life and
annuity benefits which subject the Company to mortality, longevity and morbidity risks. The assumptions used to determine
policy benefit reserves are generally locked-in for the life of the contract unless an unlocking event occurs. To the extent
existing policy reserves, together with the present value of future gross premiums and expected investment income earned
thereon, are not adequate to cover the present value of future benefits, settlement and maintenance costs, the locked-in
assumptions are revised to current best estimate assumptions and a charge to earnings for life and annuity benefits is recognized
at that time. Because of the assumptions and estimates used in establishing reserves for life and annuity benefit obligations and
the long-term nature of these reinsurance contracts, the ultimate liability may be greater or less than the estimates.
Results attributable to the run-off of life and annuity reinsurance business are included in other revenues and other expenses in
the Company’s consolidated statements of income and comprehensive income and as part of the Company’s Other Insurance
(Discontinued Lines) segment.
o) Revenue Recognition.
Property and Casualty Premiums
Insurance premiums are generally earned on a pro rata basis over the policy period, typically one year. The cost of reinsurance
ceded is initially recorded as prepaid reinsurance premiums and is amortized over the reinsurance contract period in proportion
to the amount of insurance protection provided. Premiums ceded are netted against premiums written.
Assumed reinsurance premiums are recorded at the inception of each contract based upon contract terms and information
received from cedents and brokers and are earned on a pro rata basis over the coverage period, or for multi-year contracts, in
proportion with the underlying risk exposure to the extent there is variability in the exposure through the coverage period.
Changes in reinsurance premium estimates are expected and may result in significant adjustments in any period. These
estimates change over time as additional information regarding changes in underlying exposures is obtained. Any subsequent
differences arising on such estimates are recorded as premiums written in the period they are determined and are earned on a
pro rata basis over the coverage period. The Company uses the periodic method to account for assumed reinsurance from
foreign reinsurers. The Company’s foreign reinsurers provide sufficient information to record foreign assumed business in the
same manner as the Company records assumed business from United States reinsurers.
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Certain contracts that the Company writes provide for reinstatement of coverage. Reinstatement premiums are the premiums
for the restoration of the insurance or reinsurance limit of a contract to its full amount after a loss occurrence by the insured or
reinsured. The Company accrues for reinstatement premiums resulting from losses recorded. Such accruals are based upon
contractual terms and management judgment is involved with respect to the amount of losses recorded. Changes in estimates
of losses recorded on contracts with reinstatement premium features will result in changes in reinstatement premiums based on
contractual terms. Reinstatement premiums are recognized at the time losses are recorded and are earned on a pro rata basis
over the coverage period.
Other Revenues
Other revenues primarily relate to the Company’s Markel Ventures operations and consist of revenues from the sale of
manufactured products and service revenues. Revenues from manufactured products are generally recognized at the time title
transfers to the customer, which typically occurs at the point of shipment or delivery to the customer, depending on the terms
of the sales arrangement. Revenues from services are generally recognized as the services are performed. Services provided
pursuant to a contract are recognized either over the contract period or upon completion of the elements specified in the
contract, depending on the terms of the contract.
Investment management fee income is recognized over the period in which investment management services are provided and
is calculated and billed monthly based on the net asset value of the accounts managed. Performance fee arrangements entitle
the Company to participate, on a fixed-percentage basis, in any net income generated in excess of an agreed-upon threshold as
established by the underlying investment management agreements. In general, net income is calculated at the end of each
calendar year and performance fees are payable annually. Following the preferred method identified in the Accounting Standards
Codification (ASC) Topic 605, Revenue Recognition, such performance fee income is recorded at the conclusion of the
contractual performance period, when all contingencies are resolved.
Program services fees received in exchange for providing access to the U.S. property and casualty insurance market are based
on the gross premiums written on behalf of general agent and capacity provider clients. Program services fees are earned in a
manner consistent with the recognition of the gross premiums earned on the underlying insurance policies, generally on a
pro rata basis over the terms of the underlying policies reinsured.
p) Program Services. In connection with the program services business, the Company enters into contractual agreements with
both the producing general agents and the reinsurers, whereby the general agents and reinsurers are typically obligated to each
other for payment of insurance amounts, including premiums, commissions and losses. To the extent these funds are not the
obligation of the Company and are settled directly between the general agent and the reinsurer, no receivables or payables are
recorded for these amounts. All obligations of the Company’s insurance subsidiaries owed to or on behalf of their policyholders
are recorded by the Company and, to the extent appropriate, offsetting reinsurance recoverables are recorded.
q) Stock-based Compensation. Stock-based compensation expense is generally recognized as part of underwriting, acquisition
and insurance expenses over the requisite service period. Stock-based compensation expense, net of taxes, was $11.9 million in
2017, $14.3 million in 2016 and $16.3 million in 2015. See note 12.
r) Foreign Currency Translation. The functional currencies of the Company’s foreign operations are the currencies in which the
majority of their business is transacted. Assets and liabilities of foreign operations are translated into the United States Dollar
using the exchange rates in effect at the balance sheet date. Revenues and expenses of foreign operations are translated using the
average exchange rate for the period. Gains or losses from translating the financial statements of foreign operations denominated
in a functional currency are included, net of taxes, in shareholders’ equity as a component of accumulated other comprehensive
income. Gains and losses arising from transactions denominated in a foreign currency other than a functional currency are
included in net income.
The Company manages its exposure to foreign currency risk primarily by matching assets, other than goodwill and intangible
assets, and liabilities denominated in the same currency. To the extent that assets and liabilities in foreign currencies are not
matched, the Company is exposed to foreign currency risk. For functional currencies, the related exchange rate fluctuations are
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reflected in other comprehensive income. The cumulative foreign currency translation adjustment, net of taxes, was a loss of
$74.0 million and $84.4 million at December 31, 2017 and 2016, respectively.
s) Derivative Financial Instruments. Derivative instruments, including derivative instruments resulting from hedging
activities, are measured at fair value and recognized as either assets or liabilities on the consolidated balance sheets. The
changes in fair value of derivatives are recognized in earnings unless the derivative is designated as a hedge and qualifies for
hedge accounting.
The Company’s foreign currency forward contracts are generally designated and qualify as hedges of a net investment in a
foreign operation. The effective portion of the change in fair value resulting from these hedges is reported in currency translation
adjustments as part of other comprehensive income. The ineffective portion of the change in fair value is recognized in earnings.
t) Comprehensive Income. Comprehensive income represents all changes in equity that result from recognized transactions
and other economic events during the period. Other comprehensive income refers to revenues, expenses, gains and losses that
under U.S. GAAP are included in comprehensive income but excluded from net income, such as unrealized gains or losses on
investments, foreign currency translation adjustments and changes in net actuarial pension loss.
u) Net Income Per Share. Basic net income per share is computed by dividing adjusted net income to shareholders by the
weighted average number of common shares outstanding during the year. Diluted net income per share is computed by dividing
adjusted net income to shareholders by the weighted average number of common shares and dilutive potential common shares
outstanding during the year. See note 12(b).
v) Variable Interest Entities. The Company determines whether it has relationships with entities defined as VIEs in accordance
with ASC Topic 810, Consolidation. Under this guidance, a VIE is consolidated by the variable interest holder that is
determined to be the primary beneficiary.
An entity in which the Company holds a variable interest is a VIE if any of the following conditions exist: (a) the total equity
investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial
support, (b) as a group, the holders of equity investment at risk lack either the direct or indirect ability through voting rights or
similar rights to make decisions about an entity’s activities that most significantly impact the entity’s economic performance or
the obligation to absorb the expected losses or right to receive the expected residual returns, or (c) the voting rights of some
investors are disproportionate to their obligation to absorb the expected losses of the entity, their rights to receive the expected
residual returns of the entity, or both and substantially all of the entity’s activities either involve or are conducted on behalf of
an investor with disproportionately few voting rights.
The primary beneficiary is defined as the variable interest holder that is determined to have the controlling financial interest
as a result of having both (a) the power to direct the activities of a VIE that most significantly impact the economic performance
of the VIE and (b) the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant
to the VIE.
The Company determines whether an entity is a VIE at the inception of its variable interest in the entity and upon the
occurrence of certain reconsideration events. The Company continually reassesses whether it is the primary beneficiary of
VIEs in which it holds a variable interest.
w) Recent Accounting Pronouncements.
Effective January 1, 2017, the Company early adopted Accounting Standards Update (ASU) No. 2016-15, Statement of Cash
Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in
practice in how certain transactions are classified in the statement of cash flows. Some of the topics covered by the ASU include
the classification of debt prepayment and extinguishment costs, contingent consideration payments made after a business
combination and distributions from equity method investees. Upon adoption of this ASU, the Company made an accounting
policy election to use the cumulative earnings approach for presenting distributions received from equity method investees,
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which is consistent with its existing approach. Under this approach, distributions up to the amount of cumulative equity in
earnings recognized will be treated as returns on investment and presented in operating activities and those in excess of that
amount will be treated as returns of investment and presented in financing activities. The provisions of ASU No. 2016-15 were
adopted on a retrospective basis and did not impact the Company’s financial position, results of operations or cash flows.
Effective January 1, 2017, the Company early adopted ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash.
The ASU requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and
cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash
flows. The Company previously presented changes in restricted cash and restricted cash equivalents on the statements of cash
flows as an investing activity. The Company generally describes amounts held in trust or on deposit to support underwriting
activities as well as amounts pledged as security for letters of credit as restricted cash or restricted cash equivalents. The
provisions of ASU No. 2016-18 were adopted on a retrospective basis and did not impact the Company’s financial position,
results of operations or total comprehensive income. As a result of adoption of this ASU, investing cash inflows of $93.4 million
in 2016 and $62.3 million in 2015 were attributed to the change in restricted cash and were reclassified out of investing
activities. The Company’s statements of cash flows now include restricted cash and restricted cash equivalents in the
beginning-of-period and end-of-period total amounts for cash, cash equivalents, restricted cash and restricted cash equivalents.
Effective January 1, 2017, the Company early adopted ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment. The ASU eliminates Step 2 of the goodwill impairment test, which is performed
by estimating the fair value of individual assets and liabilities of the reporting unit to calculate the implied fair value of
goodwill. Instead, an entity will record a goodwill impairment charge based on the excess of a reporting unit’s carrying value
over its estimated fair value, not to exceed the carrying amount of goodwill. The provisions of ASU No. 2017-04 were adopted
on a prospective basis and did not have an impact on the Company’s financial position, results of operations or cash flows.
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with
Customers (Topic 606), which creates a new comprehensive revenue recognition standard that will serve as a single source of
revenue guidance for all companies in all industries. The guidance applies to all companies that either enter into contracts with
customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets, unless those contracts are
within the scope of other standards, such as insurance contracts. ASU No. 2014-09’s core principle is that a company will
recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to
which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more
judgment and make more estimates than under the current guidance. These may include identifying performance obligations in
the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction
price to each separate performance obligation. Several ASUs have also been issued as amendments to ASU No. 2014-09 and will
be evaluated and adopted in conjunction with ASU No. 2014-09. ASU No. 2014-09 becomes effective for the Company during
the first quarter of 2018 and will be applied using the modified retrospective method, whereby the cumulative effect of adoption
for ongoing contracts will be recognized as an adjustment to retained earnings at the date of initial application. The adjustment
to retained earnings at January 1, 2018 will not be material. The adoption of this ASU will not impact the Company’s insurance
premium revenues or revenues from its investment portfolio, which totaled 77% of consolidated revenues for the year ended
December 31, 2017, but will impact certain of the Company’s other revenues, which are comprised of a diverse portfolio of
contracts across various industries. Based on the Company’s evaluation of the impacted revenue streams, which was completed
in 2017, the timing of the recognition of revenue and related costs will change with respect to certain contracts with customers,
none of which will have a material effect on the consolidated financial statements. For instance, revenues and costs for certain
contracts will be recognized over time rather than when the product or service is delivered, as is the current practice. The
Company also will provide additional disclosures in the notes to consolidated financial statements as required under the new
guidance.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of
Financial Assets and Financial Liabilities. The ASU significantly changes the income statement impact of equity investments
and the recognition of changes in fair value of financial liabilities attributable to an entity’s own credit risk when the fair value
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option is elected. The ASU requires equity instruments that do not result in consolidation and are not accounted for under the
equity method to be measured at fair value and to recognize any changes in fair value in net income rather than other
comprehensive income. ASU No. 2016-01 becomes effective for the Company during the first quarter of 2018 and will be
applied using a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. As of
December 31, 2017, accumulated other comprehensive income included $3.3 billion of net unrealized gains on equity securities,
which will be reclassified to retained earnings on January 1, 2018. As of December 31, 2017, accumulated other comprehensive
income was net of deferred income taxes on net unrealized gains on equity securities of $1.1 billion. The Company is still
assessing the impact of ASU No. 2018-02, as discussed below, on deferred taxes included in accumulated other comprehensive
income and has not determined the amount of deferred income taxes on net unrealized gains on equity securities that will be
reclassified to retained earnings on January 1, 2018. The provisions related to equity investments without a readily determinable
fair value will be applied prospectively to equity investments as of the adoption date. Adoption of this ASU is not expected have
a material impact on the Company’s financial position, cash flows, or total comprehensive income, but will have a material
impact on the Company’s results of operations as changes in fair value of equity instruments will be presented in net income
rather than other comprehensive income. See note 3(f) for details regarding the change in net unrealized gains on equity
securities included in other comprehensive income for the years ended December 31, 2017, 2016 and 2015.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires lessees to record most leases on their
balance sheets as a lease liability with a corresponding right-of-use asset, but continue to recognize the related leasing expense
within net income. ASU No. 2016-02 becomes effective for the Company during the first quarter of 2019 and will be applied
using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative
period in the financial statements. See note 16 for details regarding the Company’s minimum annual rental commitments
payable directly by the Company for noncancelable operating leases at December 31, 2017, which will be subject to this new
guidance. The calculation of the lease liability and right-of-use asset requires further analysis of the underlying leases to
determine which portions of the underlying lease payments are required to be included in the calculation. Adoption of this
standard will impact the Company’s consolidated balance sheets but is not expected to have a material impact on the
Company’s results of operations or cash flows. The Company is currently evaluating ASU No. 2016-02 to determine the
magnitude of the impact that adopting this standard will have on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments. The ASU replaces the current incurred loss model used to measure impairment losses with an
expected loss model for trade, reinsurance, and other receivables as well as financial instruments measured at amortized cost.
For available-for-sale debt securities, which are measured at fair value, the ASU requires entities to record impairments as an
allowance, rather than a reduction of the amortized cost, as is currently required under the other-than-temporary impairment
model. ASU No. 2016-13 becomes effective for the Company during the first quarter of 2020 and will be applied using a
modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first
reporting period in which the guidance is effective. The Company is currently evaluating ASU No. 2016-13 to determine the
potential impact that adopting this standard will have on its consolidated financial statements. Application of the new expected
loss model for measuring impairment losses will not impact the Company’s investment portfolio, all of which is considered
available-for-sale, but will impact the Company’s other financial assets, including its reinsurance recoverables. Upon adoption of
this ASU, any impairment losses on the Company’s available-for-sale debt securities will be recorded as an allowance, subject to
reversal, rather than as a reduction in amortized cost.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU provides an option to
reclassify tax effects that are stranded in accumulated other comprehensive income as a result of enactment of the Tax Cuts and
Jobs Act (TCJA) in December 2017, to retained earnings. U.S. GAAP currently requires the effects of changes in tax rates and
laws on deferred tax balances to be recorded as a component of income tax expense in the period of enactment, even if the assets
and liabilities relate to items of accumulated other comprehensive income. See note 8 for further discussion of the impact of the
TCJA recorded in the fourth quarter of 2017. ASU No. 2018-02 becomes effective for the Company during the first quarter of
2019 and can be applied in the period of adoption or retrospectively to each period in which the effect of the TCJA was
recognized. Early adoption is permitted. The Company is currently evaluating ASU No. 2018-02 to determine the potential
impact that adopting this standard will have on its consolidated financial statements.
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The following ASU’s relate to topics relevant to the Company’s operations and were adopted effective January 1, 2017. These
ASU’s did not have a material impact on the Company’s financial position, results of operations or cash flows:
• ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory
• ASU No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity
Method of Accounting
• ASU No. 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control
• ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business
The following ASU’s relate to topics relevant to the Company’s operations and are not yet effective. These ASU’s are not
expected to have a material impact on the Company’s financial position, results of operations or cash flows:
• ASU No. 2016-16, Income Taxes (Topic 740): Intra-entity Transfers of Assets Other Than Inventory
• ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension
Cost and Net Periodic Postretirement Benefit Cost
• ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on
Purchased Callable Debt Securities
• ASU No. 2017-09, Stock Compensation (Topic 718): Scope of Modification Accounting
2. Acquisitions
SureTec Acquisition
In April 2017, the Company completed the acquisition of SureTec Financial Corp. (SureTec), a Texas-based privately held surety
company primarily offering contract, commercial and court bonds. Results attributable to this acquisition are included in the
U.S. Insurance segment.
Total consideration for this acquisition was $246.9 million, which included cash consideration of $225.6 million. Total
consideration also includes the estimated fair value of contingent consideration the Company expects to pay based on SureTec’s
earnings, as defined in the merger agreement, for the years 2017 through 2020. The purchase price was allocated to the acquired
assets and liabilities of SureTec based on estimated fair values on the acquisition date. The Company recognized goodwill of
$70.4 million, which is primarily attributable to synergies that are expected to result upon integration of SureTec into the
Company’s insurance operations. None of the goodwill recognized is expected to be deductible for income tax purposes. The
Company also recognized other intangible assets of $103.0 million, which includes $92.0 million of agent relationships to be
amortized over a weighted average period of 15 years.
State National Acquisition
In November 2017, the Company completed its acquisition of 100% of the issued and outstanding common stock of State
National Companies, Inc. (State National), a Texas-based leading specialty provider of property and casualty insurance that
includes both fronting services and collateral protection insurance coverage. Results attributable to State National’s collateral
protection insurance coverages are included in the U.S. Insurance segment. Results attributable to State National’s program
services (fronting) business are reported with the Company’s other operations, which are not included in a reportable segment.
Pursuant to the terms of the merger agreement, State National stockholders received $21.00 cash for each outstanding share of
State National common stock (other than certain performance-based restricted shares that did not vest in connection with the
transaction). Total consideration for this acquisition was $918.8 million, all of which was cash consideration.
62
The purchase price was allocated to the acquired assets and liabilities of State National based on estimated fair values at the
acquisition date. The Company preliminarily recognized goodwill of $370.4 million, none of which is expected to be deductible
for income tax purposes. The goodwill is attributable to the Company’s ability to achieve future revenue growth from new
customers and the continued enhancement of State National’s existing technology. Goodwill is also attributable to State
National’s assembled workforce and synergies that are expected to result upon integration of State National into the Company’s
insurance operations and investing activities.
The Company has not completed the process of determining the fair value of the assets acquired and liabilities assumed. These
valuations will be completed within the measurement period, which cannot exceed 12 months from the acquisition date. As a
result, the fair value recorded for these items is a provisional estimate and may be subject to adjustment. Once completed, any
adjustments resulting from the valuations may impact the individual amounts recorded for assets acquired and liabilities
assumed, as well as the residual goodwill.
The following table summarizes the provisional fair values of the assets acquired and liabilities assumed at the acquisition date.
(dollars in thousands)
ASSETS
Investments
Cash and cash equivalents
Restricted cash and cash equivalents
Receivables
Prepaid reinsurance premiums
Reinsurance recoverable on paid and unpaid losses
Other assets
LIABILITIES
Unpaid losses and loss adjustment expenses
Unearned premiums
Payables to insurance and reinsurance companies
Senior long-term debt and other debt
Other liabilities
Net assets
Goodwill
Intangible assets
Acquisition date fair value
$ 395,940
77,302
25,545
147,256
808,331
2,075,734
83,721
2,086,621
825,529
122,203
44,500
370,551
164,425
370,375
384,000
$ 918,800
Other liabilities includes a provisional increase of $64.5 million to reflect the risk premium for program services business,
which is attributed to the net capital charges arising from the gross and ceded unpaid losses and loss adjustment expenses and
unearned premium balances at the acquisition date. This adjustment will be amortized to other expenses over a weighted
average period of three years, based on the estimated payout pattern of net unpaid losses and loss adjustment expenses as of the
acquisition date. The amount of the unamortized fair value adjustment included in other liabilities as of December 31, 2017
was $57.7 million. Other liabilities also includes a provisional decrease of $28.3 million to adjust the carrying value of State
National’s historical deferred program services fees to fair value as of the acquisition date. The fair value of deferred program
services fees is based on the cost of fulfilling the obligation plus a normal profit margin. The adjustment will be amortized to
other expense over the life of the underlying business, which is a weighted average period of one year. The amount of the
unamortized fair value adjustment included in other liabilities as of December 31, 2017 was $19.3 million.
63
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
The following table summarizes the provisional intangible assets recorded in connection with the acquisition, and as of
December 31, 2017.
(dollars in thousands)
Customer relationships
Trade names
Technology
Insurance licenses
Intangible assets, before amortization, as of the Acquisition Date
Amortization (from the Acquisition Date through December 31, 2017)
Net intangible assets as of December 31, 2017
Economic
Useful Life
13 years
13 years
Nine years
Indefinite
Amount
$ 302,000
23,000
27,000
32,000
384,000
4,797
$ 379,203
Customer relationships represent lender relationships, fronting relationships and other relationships through which State
National conducted its operations. The fair value of customer relationships was estimated using the income approach. Critical
inputs into the valuation model for customer relationships include estimates of expected premium and attrition rates, and
discounting at a weighted average cost of capital. Technology represents intangible assets related to State National’s proprietary
insurance systems and was valued using the income approach.
Markel Ventures Acquisitions
In August 2017, the Company acquired 81% of Costa Farms, a Florida-based privately held grower of house and garden plants.
Under the terms of the acquisition agreement, the Company has the option to acquire the remaining equity interests and the
remaining equity interests have the option to sell their interests to the Company in the future. The redemption value of the
remaining equity interests is generally based on Costa Farm’s earnings in specified periods preceding the redemption date. Total
consideration for the purchase was $417.2 million, which included cash consideration of $387.9 million. Total consideration
also includes the estimated fair value of contingent consideration the Company expects to pay based on Costa Farms’ earnings,
as defined in the purchase agreement, annually through 2021. The purchase price was allocated to the acquired assets and
liabilities of Costa Farms based on estimated fair values at the acquisition date. The Company recognized goodwill of $186.2
million, which is primarily attributable to expected future earnings and cash flow potential of Costa Farms. The majority of the
goodwill recognized is expected to be deductible for income tax purposes. The Company also recognized other intangible assets
of $192.0 million, which includes $161.0 million of customer relationships and $31.0 million of trade names, which are
expected to be amortized over a weighted average period of 17 years and nine years, respectively. The Company also recognized
redeemable non-controlling interests of $66.6 million. Results attributable to this acquisition are included with the Company’s
other operations, which are not included in a reportable segment.
In December 2015, the Company acquired 80% of the outstanding shares of CapTech Ventures, Inc. (CapTech), a privately held
company headquartered in Richmond, Virginia. CapTech is a management and IT consulting firm, providing services and
solutions to a wide array of customers. Under the terms of the acquisition agreement for CapTech, the Company has the option
to acquire the remaining equity interests and the remaining equity interests have the option to sell their interests to the
Company in the future. The redemption value of the remaining equity interests is generally based on CapTech’s earnings in
specified periods preceding the redemption date.
Total consideration for the CapTech acquisition was $60.6 million. Total consideration included the estimated fair value of
contingent consideration we expected to pay based on CapTech’s earnings, as defined in the stock purchase agreement, through
2018. The purchase price was preliminarily allocated to the acquired assets and liabilities based on the estimated fair values at
the acquisition date. During 2016, the Company completed the process of determining the fair value of the assets and liabilities
acquired with CapTech. There were no material adjustments to the provisional estimates recorded as of December 31, 2015.
The Company recognized goodwill of $50.6 million related to this acquisition, none of which is expected to be deductible for
64
income tax purposes. The Company also recognized other intangible assets of $49.2 million, primarily related to customer
relationships, and redeemable noncontrolling interests of $13.8 million. These intangible assets are expected to be amortized
over a weighted average period of 14 years. Results attributable to this acquisition are included with the Company’s other
operations, which are not included in a reportable segment.
CATCo Investment Management Acquisition
In December 2015, the Company completed the acquisition of substantially all of the assets of CATCo Investment Management
Ltd. (CATCo IM) and CATCo-Re Ltd. CATCo IM was a leading insurance-linked securities investment fund manager and
reinsurance manager headquartered in Bermuda focused on building and managing highly diversified, collateralized retrocession
and reinsurance portfolios covering global property catastrophe risks. Results attributable to Markel CATCo Investment
Management Ltd. (MCIM), the wholly owned subsidiary formed in conjunction with this transaction, are included with the
Company’s other operations, which are not included in a reportable segment.
Total consideration for the acquisition was $205.7 million, all of which was cash. The purchase price was allocated to the
acquired assets and liabilities based on estimated fair values at the acquisition date. The Company recognized goodwill of
$91.9 million, all of which is expected to be deductible for income tax purposes. The goodwill is primarily attributable to the
Company’s ability to achieve continued capital growth in excess of that which can be expected for the investment funds
previously managed by CATCo IM. The Company also recognized other intangible assets of $113.0 million, primarily related
to its investment management agreements. These intangible assets are expected to be amortized over a weighted average
period of 14 years.
In connection with the acquisition, the Company instituted performance incentive and retention arrangements for former
CATCo employees, whom are now employed by MCIM. Pursuant to these agreements, the Company committed to the
payment of performance bonuses derived from the results of the business in 2016 through 2018 and retention bonuses that
will be paid annually over the three year period following the acquisition. The total amount expected to be paid is currently
estimated to be $122 million, of which $38.1 million and $33.2 million was recognized as compensation expense for the years
ended December 31, 2017 and 2016, respectively. The balance will be recognized in the consolidated financial statements as
post-acquisition compensation expense over the remaining performance period and as services are provided.
65
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
3. Investments
a) The following tables summarize the Company’s available-for-sale investments. Commercial and residential mortgage-backed
securities include securities issued by U.S. government-sponsored enterprises and U.S. government agencies.
(dollars in thousands)
Fixed maturities:
U.S. Treasury securities
U.S. government-sponsored enterprises
Obligations of states, municipalities and
political subdivisions
Foreign governments
Commercial mortgage-backed securities
Residential mortgage-backed securities
Asset-backed securities
Corporate bonds
Total fixed maturities
Equity securities:
Insurance, banks and other
financial institutions
Industrial, consumer and all other
Total equity securities
Short-term investments
December 31, 2017
Amortized
Cost
Gross
Unrealized
Holding
Gains
Gross
Unrealized Unrealized Other-
Than-Temporary
Impairment Losses
Holding
Losses
Estimated
Fair
Value
$
162,378
352,455
$ 54
11,883
$ (1,819)
(818)
$ ––
––
$
160,613
363,520
4,381,358
1,341,628
1,244,777
846,916
34,942
1,186,699
9,551,153
899,324
1,768,337
2,667,661
2,161,017
193,120
150,010
6,108
14,115
8
51,563
426,861
1,209,162
2,110,959
3,320,121
26
(7,916)
(2,410)
(16,559)
(4,863)
(222)
(2,737)
(37,344)
(5,453)
(14,482)
(19,935)
(69)
––
––
––
––
––
––
––
––
––
––
––
4,566,562
1,489,228
1,234,326
856,168
34,728
1,235,525
9,940,670
2,103,033
3,864,814
5,967,847
2,160,974
INVESTMENTS, AVAILABLE-FOR-SALE
$ 14,379,831
$ 3,747,008
$ (57,348)
$ ––
$ 18,069,491
(dollars in thousands)
Fixed maturities:
U.S. Treasury securities
U.S. government-sponsored enterprises
Obligations of states, municipalities and
political subdivisions
Foreign governments
Commercial mortgage-backed securities
Residential mortgage-backed securities
Asset-backed securities
Corporate bonds
Total fixed maturities
Equity securities:
Insurance, banks and other
financial institutions
Industrial, consumer and all other
Total equity securities
Short-term investments
December 31, 2016
Amortized
Cost
Gross
Unrealized
Holding
Gains
Gross
Unrealized Unrealized Other-
Than-Temporary
Impairment Losses
Holding
Losses
Estimated
Fair
Value
$
259,379
418,457
$ 99
9,083
$
(894)
(4,328)
$ ––
––
$
258,584
423,212
4,324,332
1,306,324
1,055,947
779,503
27,494
1,420,298
9,591,734
846,343
1,635,105
2,481,448
2,336,100
145,678
159,291
3,953
18,749
2
49,146
386,001
857,063
1,421,080
2,278,143
57
(41,805)
(2,153)
(19,544)
(5,048)
(158)
(9,364)
(83,294)
(5,596)
(8,154)
(13,750)
(6)
––
––
––
(2,258)
––
(673)
(2,931)
––
––
––
––
4,428,205
1,463,462
1,040,356
790,946
27,338
1,459,407
9,891,510
1,697,810
3,048,031
4,745,841
2,336,151
66
INVESTMENTS, AVAILABLE-FOR-SALE
$ 14,409,282
$ 2,664,201
$ (97,050)
$ (2,931)
$ 16,973,502
b) The following tables summarize gross unrealized investment losses by the length of time that securities have continuously
been in an unrealized loss position.
December 31, 2017
Less than 12 months
12 months or longer
Total
Gross Unrealized
Holding and Other-
Than-Temporary
Impairment
Losses
Estimated
Fair
Value
Gross Unrealized
Holding and Other-
Than-Temporary
Impairment
Losses
Estimated
Fair
Value
Gross Unrealized
Holding and Other-
Than-Temporary
Impairment
Losses
Estimated
Fair
Value
$
78,756
$
(659) $
78,298
$ (1,160)
$ 157,054
$ (1,819)
(dollars in thousands)
Fixed maturities:
U.S. Treasury securities
U.S. government-sponsored
enterprises
11,593
(79)
89,194
(739)
100,787
(818)
Obligations of states, municipalities
and political subdivisions
Foreign governments
Commercial mortgage-backed
80,654
31,752
(789)
(452)
404,814
63,406
(7,127)
(1,958)
485,468
95,158
(7,916)
(2,410)
securities
253,936
(1,980)
481,216
(14,579)
735,152
(16,559)
Residential mortgage-backed
securities
Asset-backed securities
Corporate bonds
157,508
14,263
149,345
(1,345)
(123)
(863)
148,960
15,165
187,754
(3,518)
(99)
(1,874)
306,468
29,428
337,099
(4,863)
(222)
(2,737)
Total fixed maturities
777,807
(6,290)
1,468,807
(31,054)
2,246,614
(37,344)
Equity securities:
Insurance, banks and other
financial institutions
Industrial, consumer and all other
Total equity securities
Short-term investments
60,848
78,552
139,400
369,104
(4,843)
(11,798)
(16,641)
(69)
1,291
11,243
12,534
––
(610)
(2,684)
(3,294)
––
62,139
89,795
151,934
369,104
(5,453)
(14,482)
(19,935)
(69)
TOTAL
$ 1,286,311
$ (23,000)
$ 1,481,341
$ (34,348)
$ 2,767,652
$ (57,348)
At December 31, 2017, the Company held 739 securities with a total estimated fair value of $2.8 billion and gross unrealized
losses of $57.3 million. Of these 739 securities, 272 securities had been in a continuous unrealized loss position for one year or
longer and had a total estimated fair value of $1.5 billion and gross unrealized losses of $34.3 million. Of these securities, 258
securities were fixed maturities and 14 were equity securities. The Company does not intend to sell or believe it will be required
to sell these fixed maturities before recovery of their amortized cost. The Company has the ability and intent to hold these
equity securities for a period of time sufficient to allow for the anticipated recovery of their fair value.
67
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
December 31, 2016
Less than 12 months
12 months or longer
Total
Gross Unrealized
Holding and Other-
Than-Temporary
Impairment
Losses
Estimated
Fair
Value
Gross Unrealized
Holding and Other-
Than-Temporary
Impairment
Losses
Estimated
Fair
Value
Gross Unrealized
Holding and Other-
Than-Temporary
Impairment
Losses
Estimated
Fair
Value
$ 122,950
$
(894)
$ ––
$ ––
$ 122,950
$
(894)
(dollars in thousands)
Fixed maturities:
U.S. Treasury securities
U.S. government-sponsored
enterprises
220,333
(4,324)
7,618
(4)
227,951
(4,328)
Obligations of states, municipalities
and political subdivisions
Foreign governments
Commercial mortgage-backed
1,004,947
68,887
(37,685)
(2,145)
31,723
5,005
(4,120)
(8)
1,036,670
73,892
(41,805)
(2,153)
securities
749,889
(19,091)
29,988
(453)
779,877
(19,544)
Residential mortgage-backed
securities
Asset-backed securities
Corporate bonds
181,557
14,501
494,573
(4,987)
(106)
(8,357)
79,936
5,869
93,790
(2,319)
(52)
(1,680)
261,493
20,370
588,363
(7,306)
(158)
(10,037)
Total fixed maturities
2,857,637
(77,589)
253,929
(8,636)
3,111,566
(86,225)
Equity securities:
Insurance, banks and other
financial institutions
Industrial, consumer and all other
Total equity securities
Short-term investments
8,808
98,406
107,214
504,211
(410)
(4,772)
(5,182)
(6)
37,973
29,650
67,623
––
(5,186)
(3,382)
(8,568)
––
46,781
128,056
174,837
504,211
(5,596)
(8,154)
(13,750)
(6)
TOTAL
$ 3,469,062
$ (82,777)
$ 321,552
$ (17,204)
$ 3,790,614
$ (99,981)
At December 31, 2016, the Company held 654 securities with a total estimated fair value of $3.8 billion and gross unrealized
losses of $100.0 million. Of these 654 securities, 109 securities had been in a continuous unrealized loss position for one year
or longer and had a total estimated fair value of $321.6 million and gross unrealized losses of $17.2 million. Of these securities,
93 securities were fixed maturities and 16 were equity securities.
The Company completes a detailed analysis each quarter to assess whether the decline in the fair value of any investment
below its cost basis is deemed other-than-temporary. All securities with unrealized losses are reviewed. The Company considers
many factors in completing its quarterly review of securities with unrealized losses for other-than-temporary impairment,
including the length of time and the extent to which fair value has been below cost and the financial condition and near-term
prospects of the issuer. For equity securities, the ability and intent to hold the security for a period of time sufficient to allow for
anticipated recovery is considered. For fixed maturities, the Company considers whether it intends to sell the security or if it is
more likely than not that it will be required to sell the security before recovery, the implied yield-to-maturity, the credit quality
of the issuer and the ability to recover all amounts outstanding when contractually due.
For equity securities, a decline in fair value that is considered to be other-than-temporary is recognized in net income based on
the fair value of the security at the time of assessment, resulting in a new cost basis for the security. For fixed maturities where
the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security
before recovery of its amortized cost, a decline in fair value is considered to be other-than-temporary and is recognized in net
income based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security. If the
decline in fair value of a fixed maturity below its amortized cost is considered to be other-than-temporary based upon other
considerations, the Company compares the estimated present value of the cash flows expected to be collected to the amortized
68
cost of the security. The extent to which the estimated present value of the cash flows expected to be collected is less than the
amortized cost of the security represents the credit-related portion of the other-than-temporary impairment, which is recognized
in net income, resulting in a new cost basis for the security. Any remaining decline in fair value represents the non-credit
portion of the other-than-temporary impairment, which is recognized in other comprehensive income (loss). The discount rate
used to calculate the estimated present value of the cash flows expected to be collected is the effective interest rate implicit for
the security at the date of purchase.
When assessing whether it intends to sell a fixed maturity or if it is likely to be required to sell a fixed maturity before recovery
of its amortized cost, the Company evaluates facts and circumstances including decisions to reposition the investment
portfolio, potential sales of investments to meet cash flow needs and, ultimately, current market prices.
c) The amortized cost and estimated fair value of fixed maturities at December 31, 2017 are shown below by contractual
maturity.
(dollars in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Commercial mortgage-backed securities
Residential mortgage-backed securities
Asset-backed securities
TOTAL FIXED MATURITIES
Amortized
Cost
Estimated
Fair Value
$ 288,292
1,297,635
1,671,171
4,167,420
7,424,518
1,244,777
846,916
34,942
$ 289,171
1,334,823
1,744,280
4,447,174
7,815,448
1,234,326
856,168
34,728
$ 9,551,153
$ 9,940,670
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 fixed maturities at December 31, 2017 was 6.5 years.
d) The following table presents the components of net investment income.
(dollars in thousands)
Interest:
Municipal bonds (tax-exempt)
Municipal bonds (taxable)
Other taxable bonds
Short-term investments, including
overnight deposits
Dividends on equity securities
Income (loss) from equity method investments
Other
Investment expenses
NET INVESTMENT INCOME
Years Ended December 31,
2017
2016
2015
$ 87,768
70,771
145,085
$ 88,654
65,749
144,752
$ 93,580
57,550
138,763
26,772
82,096
11,076
(828)
422,740
(17,031)
11,177
70,577
6,852
2,676
390,437
(17,207)
5,223
74,705
(262)
651
370,210
(16,997)
$ 405,709
$ 373,230
$ 353,213
69
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
e) Cumulative credit losses recognized in net income on fixed maturities where other-than-temporary impairment was
identified and a portion of the other-than-temporary impairment was included in other comprehensive income (loss) were
$10.7 million at December 31, 2015 and 2016. There were no such losses included at December 31, 2017.
f) The following table presents net realized investment gains (losses) and the change in net unrealized gains on investments.
(dollars in thousands)
Realized gains:
Sales of fixed maturities
Sales of equity securities
Other
Total realized gains
Realized losses:
Sales of fixed maturities
Sales of equity securities
Other-than-temporary impairments
Other
Total realized losses
Years Ended December 31,
2017
2016
2015
$
5,525
40,113
6,644
52,282
(1,983)
(1,830)
(7,589)
(1,295)
(12,697)
$ 5,160
70,177
1,415
$ 3,073
156,987
8,103
76,752
168,163
(704)
(6,988)
(18,355)
(2,349)
(28,396)
16,791
(4,598)
(1,232)
(44,481)
(486)
(50,797)
(10,886)
Gains (losses) on securities measured at fair value through net income
(44,888)
NET REALIZED INVESTMENT GAINS (LOSSES)
$ (5,303)
$ 65,147
$ 106,480
Change in net unrealized gains on investments included in
other comprehensive income (loss):
Fixed maturities
Equity securities
Short-term investments
NET INCREASE (DECREASE)
$ 89,741
1,035,793
(94)
$ (56,534)
398,752
(107)
$ (137,435)
(320,277)
128
$ 1,125,440
$ 342,111
$ (457,584)
g) The following table presents other-than-temporary impairment losses recognized in net income and included in net realized
investment gains (losses) by investment type.
(dollars in thousands)
Fixed maturities:
Corporate bonds
Total fixed maturities
Equity securities:
Insurance, banks and other financial institutions
Industrial, consumer and all other
Total equity securities
TOTAL
Years Ended December 31,
2017
2016
2015
$ (328)
$ —
$ —
(328)
(604)
(6,657)
(7,261)
—
—
(7,586)
(10,769)
(18,355)
(9,835)
(34,646)
(44,481)
$ (7,589)
$ (18,355)
$ (44,481)
70
h) The following table presents the components of restricted assets.
(dollars in thousands)
Restricted assets held in trust or on deposit to support underwriting activities
Investments and cash and cash equivalents pledged as security for letters of credit
TOTAL
Total restricted assets are included on the Company’s consolidated balance sheets as follows.
(dollars in thousands)
Investments, available-for-sale
Restricted cash and cash equivalents
TOTAL
December 31,
2017
2016
$ 4,624,998
349,462
$ 4,059,336
355,616
$ 4,974,460
$ 4,414,952
December 31,
2017
2016
$ 4,672,073
302,387
$ 4,068,535
346,417
$ 4,974,460
$ 4,414,952
i) At December 31, 2017 and 2016, investments in securities issued by the U.S. Treasury, U.S. government agencies and U.S.
government-sponsored enterprises were the only investments in any one issuer that exceeded 10% of shareholders’ equity.
At December 31, 2017, the Company’s ten largest equity holdings represented $2.5 billion, or 41%, of the equity portfolio.
Investments in the property and casualty insurance industry represented $1.1 billion, or 19%, of the equity portfolio at
December 31, 2017. Investments in the property and casualty insurance industry included a $623.8 million investment in
the common stock of Berkshire Hathaway Inc.
4. Receivables
The following table presents the components of receivables.
(dollars in thousands)
Amounts receivable from agents, brokers and insureds
Trade accounts receivable
Insurance proceeds receivable
Program services fees receivable
Employee stock loans receivable (see note 12(c))
Investment management and performance fees receivable
Other
Allowance for doubtful receivables
RECEIVABLES
December 31,
2017
2016
$ 1,281,366
181,666
39,196
22,767
18,499
5,796
31,938
$ 1,102,538
123,341
––
––
20,171
38,735
10,122
1,581,228
(13,775)
1,294,907
(11,910)
$ 1,567,453
$ 1,282,997
71
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
5. Deferred Policy Acquisition Costs
The following table presents the amounts of policy acquisition costs deferred and amortized.
(dollars in thousands)
Balance, beginning of year
Policy acquisition costs deferred
Amortization of policy acquisition costs
Foreign currency movements
Years Ended December 31,
2017
$ 392,410
964,755
(894,353)
2,757
2016
2015
$ 352,756
823,840
(782,221)
(1,965)
$ 353,410
752,324
(744,964)
(8,014)
DEFERRED POLICY ACQUISITION COSTS
$ 465,569
$ 392,410
$ 352,756
The following table presents the components of underwriting, acquisition and insurance expenses.
(dollars in thousands)
Amortization of policy acquisition costs
Other operating expenses
Years Ended December 31,
2017
2016
2015
$ 894,353
693,061
$ 782,221
716,369
$ 744,964
710,116
UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES
$ 1,587,414
$ 1,498,590
$ 1,455,080
6. Property and Equipment
The following table presents the components of property and equipment, which are included in other assets on the consolidated
balance sheets.
(dollars in thousands)
Land
Buildings
Leasehold improvements
Land improvements
Furniture and equipment
Other
Accumulated depreciation and amortization
PROPERTY AND EQUIPMENT
December 31,
2017
2016
$ 66,885
119,729
98,246
89,444
341,450
196,465
912,219
(410,602)
$ 56,783
76,159
95,898
74,040
301,146
162,385
766,411
(354,009)
$ 501,617
$ 412,402
Depreciation and amortization expense of property and equipment was $71.6 million, $64.8 million and $64.2 million for the
years ended December 31, 2017, 2016 and 2015, respectively.
72
The Company does not own any individually material properties. The Company leases substantially all of the facilities used by
its insurance operations and certain furniture and equipment under operating leases. The Company leases offices for the U.S.
Insurance segment in Glen Allen, Virginia and in 34 other locations; the Company leases offices for the International Insurance
segment in London, England and in 30 other locations; and the Company leases offices for the Reinsurance segment primarily
in Summit, New Jersey and Hamilton, Bermuda. The Company’s Markel Ventures operations own certain of their office, clinic,
manufacturing, warehouse and distribution facilities and lease others. The Company believes these facilities are suitable and
adequate for the Company’s operations.
7. Goodwill and Intangible Assets
The following table presents the components of goodwill by reportable segment.
(dollars in thousands)
U.S. Insurance
January 1, 2016
Impairment loss
Foreign currency movements
and other adjustments
December 31, 2016(2)
Acquisitions (see note 2)
Foreign currency movements
and other adjustments
International
Insurance
$ 397,993
––
Reinsurance
Other (1)
Total
$ 122,745
––
$ 366,527
(18,723)
$ 1,167,844
(18,723)
$ 280,579
––
––
(5,809)
––
(1,064)
(6,873)
$ 280,579
93,123
$ 392,184
––
$ 122,745
––
$ 346,740
533,612
$ 1,142,248
626,735
––
5,935
––
2,546
8,481
DECEMBER 31, 2017(2)
$ 373,702
$ 398,119
$ 122,745
$ 882,898
$ 1,777,464
(1) Amounts included in Other above are related to the Company’s other operations, which are not included in a reportable segment.
(2) Goodwill is net of accumulated impairment losses of $47.3 million as of December 31, 2017 and 2016, included in Other.
Goodwill and indefinite-lived intangible assets are tested for impairment at least annually. The Company completes an annual
test during the fourth quarter of each year based upon the results of operations through September 30. There were no
impairment losses recognized during 2017.
During the fourth quarter of 2016, the Company recorded a goodwill impairment charge of $18.7 million to other expenses for
one of the Markel Ventures industrial manufacturing reporting units, to reduce the carrying value of its goodwill to its implied
fair value. Unfavorable market conditions, specifically declining oil prices from late 2014 through 2016 resulted in lower than
expected earnings over a similar time period. The reporting unit’s earnings are generally tied to infrastructure spending across
global markets, a significant portion of which are influenced by the price of oil. To determine the value of the impairment loss,
the Company estimated the fair value of the reporting unit primarily using an income approach based on a discounted cash flow
model. While these cash flow projections yield positive cash flows and earnings in the long-term, they were insufficient to
support the current carrying value of the reporting unit due to the unfavorable impact of current market conditions and recent
trends on the Company’s shorter-term projections. Following the impairment charge in 2016, the carrying value of the reporting
unit’s goodwill is zero.
73
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
The following table presents the components of intangible assets with a net carrying amount.
(dollars in thousands)
Customer relationships
Broker relationships
Trade names
Investment management agreements
Agent relationships
Technology
Insurance licenses
Lloyd’s syndicate capacity
Other
December 31,
2017
2016
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
$ 938,536
183,514
163,736
98,000
92,000
84,242
70,185
12,000
42,959
$ (156,725)
(68,273)
(39,057)
(14,000)
(4,042)
(35,106)
––
––
(12,288)
$ 460,327
183,092
100,966
98,000
––
54,408
30,185
12,000
34,172
$ (119,376)
(56,888)
(29,745)
(7,000)
––
(28,220)
––
––
(9,379)
TOTAL
$ 1,685,172
$ (329,491)
$ 973,150
$ (250,608)
Amortization of intangible assets was $80.8 million, $68.5 million and $68.9 million for the years ended December 31, 2017,
2016 and 2015, respectively. Amortization of intangible assets is estimated to be $117.6 million for 2018, $110.9 million for
2019, $103.1 million for 2020, $101.4 million for 2021 and $98.2 million for 2022. Indefinite-lived intangible assets were $88.2
million at December 31, 2017 and $48.2 million at December 31, 2016.
In 2017, the Company acquired $703.8 million of intangible assets, of which $663.8 million is amortizable. The definite-lived
intangible assets acquired are expected to be amortized over a weighted average period of 14 years. The definite-lived intangible
assets acquired during 2017 include customer relationships, trade names, agent relationships, technology and other, which are
expected to be amortized over a weighted average period of 14, 11, 15, nine and nine years, respectively.
74
8. Income Taxes
Income before income taxes includes the following components.
(dollars in thousands)
Domestic operations
Foreign operations
Years Ended December 31,
2017
2016
2015
$ 337,704
(250,409)
$ 288,905
341,015
$ 323,954
418,151
INCOME BEFORE INCOME TAXES
$ 87,295
$ 629,920
$ 742,105
Income tax expense (benefit) includes the following components.
(dollars in thousands)
Current:
Domestic
Foreign
Years Ended December 31,
2017
2016
2015
$ (19,255)
29,882
$ 57,916
48,203
$ 44,406
118,235
Total current tax expense
10,627
106,119
162,641
Deferred:
Domestic
Foreign
Total deferred tax expense (benefit)
INCOME TAX EXPENSE (BENEFIT)
(222,427)
(101,663)
(324,090)
19,991
43,367
63,358
9,415
(19,093)
(9,678)
$ (313,463)
$ 169,477
$ 152,963
Foreign income tax expense includes U.S. income tax expense on foreign operations, which includes U.S. income tax on the
Company’s Bermuda-based operations, certain of which have elected to be taxed as domestic corporations for U.S. tax purposes.
State income tax expense is not material to the consolidated financial statements.
The Company made income tax payments of $70.2 million, $142.2 million and $132.5 million in 2017, 2016 and 2015,
respectively. Income taxes payable were $51.3 million and $46.4 million at December 31, 2017 and 2016, respectively, and were
included in other liabilities on the consolidated balance sheets. Income taxes receivable were $64.3 million and $5.4 million at
December 31, 2017 and 2016, respectively, and were included in other assets on the consolidated balance sheets.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (TCJA), which made significant modifications to U.S. federal
income tax law, most of which are effective January 1, 2018. The TCJA, among other changes, (1) reduces the U.S. corporate tax
rate from 35% to 21%, (2) imposes a one-time deemed repatriation tax on unremitted foreign earnings which were not
previously subject to U.S. income tax, (3) moves the U.S. from a worldwide tax system towards a territorial tax system and
(4) modifies the manner in which property and casualty insurance loss reserves are computed for federal income tax purposes.
U.S. GAAP requires companies to recognize the effect of tax law changes in the period of enactment. As a result, the Company
recorded a one-time tax benefit of $339.9 million in the fourth quarter of 2017, a portion of which is considered provisional.
75
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
This one-time tax benefit from the TCJA is attributable to the remeasurement of the Company’s U.S. deferred tax assets and
liabilities on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
their tax bases at the lower enacted U.S. corporate tax rate, as well as the tax on the deemed repatriation of foreign earnings,
as follows:
(dollars in thousands)
Tax rate change on net unrealized gains on investments
Tax rate change on other temporary differences - Markel Ventures (provisional)
Tax rate change on other temporary differences - Other operations (provisional)
Tax on deemed repatriation of foreign earnings (provisional)
TOTAL
Year Ended
December 31, 2017
$ (401,538)
(37,129)
69,268
29,500
$ (339,899)
The impact of the tax rate change applied to temporary differences other than those related to net unrealized gains on
investments is considered provisional because all the data necessary to calculate the underlying tax basis of certain temporary
differences under the new tax law is not yet available and additional analysis is required. The largest provisional deferred tax
component on other temporary differences is related to the Company’s unpaid losses and loss adjustment expenses. Other
provisional deferred tax components are not significant. The tax on the deemed repatriation of foreign earnings is also
considered provisional because a number of inputs to the calculation are incomplete, principally the earnings and profits of
certain foreign subsidiaries which were not previously subject to U.S. income tax. There is also potential that authoritative
clarification of technical issues associated with application of the TCJA, which are presently unclear, will be issued. The
additional analysis required for provisional deferred tax components will be completed within the measurement period, which
cannot exceed 12 months from the date of enactment, during preparation of the Company’s 2017 tax return. Once completed,
any adjustments to these provisional deferred tax components will be reflected in income tax expense.
The following table presents a reconciliation of income taxes computed using the U.S. corporate tax rate to the Company’s
income tax expense (benefit).
Years Ended December 31,
(dollars in thousands)
2017
2016
2015
Income taxes at U.S. corporate tax rate
Increase (decrease) resulting from:
TCJA
Tax-exempt investment income
Tax credits
Stock based compensation
Foreign operations
Other
$ 30,553
35%
$ 220,472
35%
$ 259,737
35%
(339,899)
(41,565)
(10,236)
(9,001)
54,920
1,765
(389)
(48)
(12)
(10)
63
2
—
(39,710)
(13,294)
(5,411)
4,672
2,748
—
(6)
(2)
(1)
1
—
—
(40,483)
(56,409)
—
(10,766)
884
—
(5)
(8)
—
(1)
—
INCOME TAX EXPENSE (BENEFIT)
$ (313,463)
(359)%
$ 169,477
27%
$ 152,963
21%
76
The following table presents the components of domestic and foreign deferred tax assets and liabilities.
(dollars in thousands)
Assets:
Unpaid losses and loss adjustment expenses
Life and annuity benefits
Unearned premiums recognized for income tax purposes
Tax credit carryforwards
Net operating loss carryforwards
Accrued incentive compensation
Other differences between financial reporting and tax bases
Total gross deferred tax assets
Less valuation allowance
Total gross deferred tax assets, net of allowance
Liabilities:
Investments
Amortization of goodwill and other intangible assets
Deferred policy acquisition costs
Other differences between financial reporting and tax bases
Total gross deferred tax liabilities
NET DEFERRED TAX LIABILITY
December 31,
2017
2016
$ 144,761
77,945
74,282
48,938
29,252
23,167
60,995
459,340
(25,225)
434,115
603,523
171,681
90,826
73,664
939,694
$ 181,303
135,075
121,852
23,037
26,743
67,719
64,177
619,906
(18,781)
601,125
664,950
102,631
128,302
35,727
931,610
$ 505,579
$ 330,485
The net deferred tax liability at December 31, 2017 and 2016 was included in other liabilities on the consolidated balance
sheets.
At December 31, 2017, the Company had tax credit carryforwards of $48.9 million. The earliest any of these credits will expire
is 2024.
At December 31, 2017, the Company also had net operating losses of $15.1 million that can be used to offset other future
taxable income in the U.S. The Company’s ability to use these losses expires between the years 2028 and 2030. At December
31, 2017, certain branch operations in Europe and a wholly owned subsidiary in Brazil had net operating losses of $105.2 million
that can be used to offset future income in their local jurisdictions. The Company’s ability to use $26.9 million of these losses
expires between the years 2020 and 2026. The remaining losses are not subject to expiration. As discussed below, the deferred
tax assets related to losses at the Company’s European branches and Brazilian subsidiary are offset by valuation allowances.
The Company believes that it is more likely than not that it will realize $434.1 million of gross deferred tax assets, including net
operating losses at December 31, 2017, through generating taxable income or the reversal of existing temporary differences
attributable to the gross deferred tax liabilities. As a result of cumulative net operating losses in certain jurisdictions, the
Company has a valuation allowance of $25.2 million at December 31, 2017 that offsets the deferred tax assets primarily related
to losses incurred at European branches of one of the Company’s wholly owned United Kingdom subsidiaries and at one of the
Company’s Brazilian subsidiaries.
At December 31, 2017, the Company did not have any material unrecognized tax benefits. The Company does not currently
anticipate any changes in unrecognized tax benefits during 2018 that would have a material impact on the Company’s income
tax provision.
77
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
The Company is subject to income tax in the U.S. and in foreign jurisdictions. With few exceptions, the Company is no longer
subject to income tax examination by tax authorities for years ended before January 1, 2014.
Following the enactment of the TCJA and as a result of the tax on the deemed repatriation of foreign earnings, the Company’s
net foreign earnings have now been subjected to tax in the U.S. However, the Company continues to be indefinitely reinvested
in its foreign subsidiaries, with the exception of certain Bermuda-based subsidiaries, and no provision for deferred U.S. income
taxes has been recorded on the basis differences attributable to those subsidiaries. The Company’s largest basis difference is
attributable to net unrealized gains on investments held by the Company’s foreign insurance operations, which totaled $630.0
million at December 31, 2017. This amount has not been subjected to the 21% U.S. corporate tax rate.
While the Company’s tax expense for the year ended December 31, 2017 is based upon an assertion that it is indefinitely
reinvested in its foreign subsidiaries, the Company’s plans for its foreign operations may change upon completion of an
assessment of the impact of the TCJA on capital in the Company’s foreign subsidiaries. A change in the Company’s indefinite
reinvestment assertion for some or all of its foreign subsidiaries could result in recognition of additional income tax expense.
9. Unpaid Losses and Loss Adjustment Expenses
a) The following table presents a reconciliation of consolidated beginning and ending reserves for losses and loss adjustment
expenses.
(dollars in thousands)
Net reserves for losses and loss adjustment
expenses, beginning of year
Foreign currency movements
Adjusted net reserves for losses and loss
adjustment expenses, beginning of year
Incurred losses and loss adjustment expenses:
Current accident year
Prior accident years
Years Ended December 31,
2017
2016
2015
$ 8,108,717
110,079
$ 8,235,288
(129,692)
$ 8,535,483
(134,173)
8,218,796
8,105,596
8,401,310
3,367,223
(497,627)
2,555,902
(493,495)
2,566,545
(627,800)
Total incurred losses and loss adjustment expenses
2,869,596
2,062,407
1,938,745
Payments:
Current accident year
Prior accident years
Total payments
Effect of foreign currency rate changes
Net reserves for losses and loss adjustment
expenses of acquired insurance companies
Reinsurance recoverable on retroactive reinsurance transactions
Net reserves for losses and loss adjustment expenses, end of year
Reinsurance recoverable on unpaid losses
671,112
1,513,580
2,184,692
3,752
57,493
––
8,964,945
4,619,336
532,140
1,529,206
486,551
1,423,286
2,061,346
1,909,837
2,060
(17,281)
––
––
––
(177,649)
8,108,717
8,235,288
2,006,945
2,016,665
GROSS RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES, END OF YEAR
$ 13,584,281
$ 10,115,662
$ 10,251,953
78
In March 2015, the Company completed a retroactive reinsurance transaction to cede a portfolio of policies primarily comprised
of liabilities arising from asbestos and environmental (A&E) exposures that originated before 1992 in exchange for payments
totaling $89.0 million, which included cash paid at closing of $69.9 million. Effective March 31, 2017, the related reserves,
which totaled $69.1 million, were formally transferred to the third party by way of a Part VII transfer pursuant to the Financial
Services and Markets Act 2000 of the United Kingdom. The Part VII transfer eliminates the uncertainty regarding the potential
for adverse development of estimated ultimate liabilities on the underlying policies. Upon completion of the transfer in the first
quarter of 2017, the Company recognized a previously deferred gain of $3.9 million, which is included in losses and loss
adjustment expenses on the consolidated statement of income (loss) and comprehensive income (loss) in 2017. This amount is
excluded from the prior years’ incurred losses and loss adjustment expenses for 2017 in the above table as the deferred gain was
included in other liabilities on the consolidated balance sheet as of December 31, 2016, rather than unpaid losses and loss
adjustment expenses.
In October 2015, the Company completed a second retroactive reinsurance transaction to cede a portfolio of policies primarily
comprised of liabilities arising from A&E exposures that originated before 1987 in exchange for cash payments totaling $86.5
million. The transaction provides up to $300 million of coverage for losses in excess of a $97.0 million retention on the ceded
policies and 50% coverage on an additional $100 million of losses. The transaction was effective as of January 1, 2015, at which
time reserves for unpaid losses and loss adjustment expenses on the policies ceded totaled $173.4 million. After considering the
Company’s retention on the ceded policies, ceded reserves for unpaid losses and loss adjustment expenses totaled $76.4 million,
resulting in an underwriting loss of $10.1 million on the transaction.
In 2016, incurred losses and loss adjustment expenses in the above table exclude $11.7 million of favorable development on
prior years loss reserves included in losses and loss adjustment expenses on the consolidated statement of income and other
comprehensive income (loss) related to the commutation of a property and casualty deposit contract, for which the underlying
deposit liability was included in other liabilities on the consolidated balance sheet as of December 31, 2015, rather than unpaid
losses and loss adjustment expenses.
In 2017, the Company recorded net reserves for losses and loss adjustment expenses of $57.5 million as a result of acquisitions
completed during the year. All acquired net reserves were recorded at fair value as part of the Company’s purchase accounting.
See note 2 for a discussion of the Company’s acquisitions.
In 2017, underwriting results included $565.3 million of underwriting loss from Hurricanes Harvey, Irma, Maria and Nate as
well as the earthquakes in Mexico and wildfires in California (2017 Catastrophes). The underwriting loss on the 2017
Catastrophes was comprised of $585.4 million of estimated net losses and loss adjustment expenses and $20.1 million of net
assumed reinstatement premiums. The estimated net losses and loss adjustment expenses on the 2017 Catastrophes for the
current year were net of estimated reinsurance recoverables of $490.3 million.
In 2017, incurred losses and loss adjustment expenses included $497.6 million of favorable development on prior years’ loss
reserves, which included $414.1 million of favorable development on the Company’s general liability, professional liability, and
workers’ compensation product lines as well as personal lines business within the U.S. Insurance segment, professional liability,
general liability and marine and energy product lines within the International Insurance segment, and property product lines
within the Reinsurance segment. Favorable development in 2017 was partially offset by $85.0 million of adverse development
resulting from a decrease in the discount rate, known as the Ogden Rate, used to calculate lump sum awards in United
Kingdom (U.K.) bodily injury cases. Effective March 20, 2017, the Ogden Rate decreased from plus 2.5% to minus 0.75%, which
represents the first rate change since 2001. The effect of the rate change is most impactful to the Company’s U.K. auto casualty
exposures through reinsurance contracts written in the Reinsurance segment. In late 2014, the Company ceased writing auto
reinsurance in the U.K. The reduction in the Ogden Rate increased the expected claims payments on these exposures, and
management increased loss reserves accordingly. The Company’s estimate of the ultimate cost of settling these claims is based
on many factors, and is subject to increase or decrease as the effect of changes in these factors becomes known over time.
In 2016, incurred losses and loss adjustment expenses included $493.5 million of favorable development on prior years’ loss
reserves, which was due in part to $418.0 million of favorable development on the Company’s long-tail casualty lines within the
U.S. Insurance and International Insurance segments, marine and energy product lines within the International Insurance
segment, and property product lines in the U.S. Insurance and Reinsurance segments, as actual claims reporting and
79
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
development patterns on prior accident years have been more favorable than the Company’s actuarial analyses initially
anticipated. Favorable development in 2016 was partially offset by $71.2 million of adverse development on the Company’s
specified medical and medical malpractice product lines within the U.S. Insurance segment.
In 2015, incurred losses and loss adjustment expenses included $627.8 million of favorable development on prior years’ loss
reserves, which was due in part to $375.8 million of favorable development on the Company’s general liability, workers’
compensation, inland marine and brokerage property product lines within the U.S. Insurance segment and on general liability,
professional liability and marine and energy product lines within the International Insurance segment, as actual claims
reporting patterns on prior accident years have been more favorable than the Company’s actuarial analyses initially anticipated.
In 2015, incurred losses and loss adjustment expenses also included $82.7 million of favorable development on prior years’ loss
reserves attributable to a decrease in the estimated volatility of the Company’s consolidated net reserves for unpaid losses and
loss adjustment expenses as a result of ceding a significant portion of the Company’s A&E exposures to a third party during
2015, as described above. As a result of this decrease in estimated volatility, the level of confidence in the Company’s net
reserves for unpaid losses and loss adjustment expenses increased. Therefore, management reduced prior years’ loss reserves by
$82.7 million in order to maintain a consolidated confidence level in a range consistent with the Company’s historic levels.
This reduction in prior years’ loss reserves occurred across all three of the Company’s ongoing underwriting segments.
The favorable development on prior years’ loss reserves in 2015 was partially offset by $25.4 million of adverse development on
prior years’ loss reserves for A&E exposures, of which $7.1 million is attributable to the underwriting loss on the retroactive
reinsurance transaction described above. Following the October 2015 retroactive reinsurance transaction, the Company’s
actuaries increased their estimate of the ultimate losses on the remaining A&E claims and management increased prior years’
loss reserves by $15.0 million. Without the diversification of a larger portfolio of loss reserves, there is greater uncertainty
around the potential outcomes of the remaining claims, and management strengthened reserves accordingly.
The Company uses a variety of techniques to establish the liabilities for unpaid losses and loss adjustment expenses based upon
estimates of the ultimate amounts payable. The Company maintains reserves for specific claims incurred and reported (case
reserves) and reserves for claims incurred but not reported (IBNR reserves), which include expected development on reported
claims. The Company does not discount its reserves for losses and loss adjustment expenses to reflect estimated present value,
except for reserves assumed in connection with an acquisition, which are recorded at fair value at the acquisition date, and
reserves held for a runoff book of U.K. motor business. The fair value adjustment includes an adjustment to reflect the acquired
reserves for losses and loss adjustment expenses at present value plus a risk premium, the net of which is amortized to losses
and loss adjustment expenses within the consolidated statements of income.
As of any balance sheet date, all claims have not yet been reported, and some claims may not be reported for many years.
As a result, the liability for unpaid losses and loss adjustment expenses includes significant estimates for incurred but not
reported claims.
There is normally a time lag between when a loss event occurs and when it is actually reported to the Company. The actuarial
methods that the Company uses to estimate losses have been designed to address the lag in loss reporting as well as the delay in
obtaining information that would allow the Company to more accurately estimate future payments. There is also a time lag
between cedents establishing case reserves and re-estimating their reserves, and notifying the Company of the new or revised
case reserves. As a result, the reporting lag is more pronounced in reinsurance contracts than in the insurance contracts due to
the reliance on ceding companies to report their claims. On reinsurance transactions, the reporting lag will generally be 60 to 90
days after the end of a reporting period, but can be longer in some cases. Based on the experience of the Company’s actuaries and
management, loss development factors and trending techniques are selected to mitigate the difficulties caused by reporting lags.
The loss development and trending factor selections are evaluated at least annually and updated using cedent specific and
industry data.
IBNR reserves are 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.
IBNR reserves, which include expected development on reported claims, are generally calculated by subtracting paid losses and
loss adjustment expenses and case reserves from estimated ultimate losses and loss adjustment expenses. IBNR reserves were
64% of total unpaid losses and loss adjustment expenses at December 31, 2017 compared to 67% at December 31, 2016.
80
In establishing liabilities for unpaid losses and loss adjustment expenses, the Company’s actuaries estimate an ultimate loss
ratio, by accident year or policy year, for each product line with input from underwriting and claims associates. For product lines
in which loss reserves are established on a policy year basis, the Company has developed a methodology to convert from policy
year to accident year for financial reporting purposes. In estimating an ultimate loss ratio for a particular line of business, the
actuaries may use one or more actuarial reserving methods and select from these a single point estimate. To varying degrees,
these methods include detailed statistical analysis of past claim reporting, settlement activity, claim frequency and severity,
policyholder loss experience, industry loss experience and changes in market conditions, policy forms and exposures. Greater
judgment may be required when new product lines are introduced or when there have been changes in claims handling
practices, as the statistical data available may be insufficient. These estimates also reflect implicit and explicit assumptions
regarding the potential effects of external factors, including economic and social inflation, judicial decisions, changes in law,
general economic conditions and recent trends in these factors. Management believes the process of evaluating past experience,
adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events.
Loss reserves are established at management’s best estimate, which is generally higher than the corresponding actuarially
calculated point estimate. The actuarial point estimate represents the actuaries’ estimate of the most likely amount that will
ultimately be paid to settle the loss reserves that are recorded at a particular point in time; however, there is inherent
uncertainty in the point estimate as it is the expected value in a range of possible reserve estimates. In some cases, actuarial
analyses, which are based on statistical analysis, cannot fully incorporate all of the subjective factors that affect development of
losses. In other cases, management’s perspective of these more subjective factors may differ from the actuarial perspective.
Subjective factors where management’s perspective may differ from that of the actuaries include: the credibility and timeliness
of claims information received from third parties, economic and social inflation, judicial decisions, changes in law, changes in
underwriting or claims handling practices, general economic conditions, the risk of moral hazard and other current and
developing trends within the insurance and reinsurance markets, including the effects of competition. As a result, the
actuarially calculated point estimates for each of line of business represents starting points for management’s quarterly review
of loss reserves.
Inherent in the Company’s reserving practices is the desire to establish loss reserves that are more likely redundant than
deficient. As such, the Company seeks to establish loss reserves that will ultimately prove to be adequate. As part of the
Company’s acquisition of insurance operations, to the extent the reserving philosophy of the acquired business differs from the
Company’s reserving philosophy, the post-acquisition loss reserves will be strengthened until total loss reserves are consistent
with the Company’s target level of confidence. Furthermore, the Company’s philosophy is to price its insurance products to
make an underwriting profit. Management continually attempts to improve its loss estimation process by refining its ability to
analyze loss development patterns, claim payments and other information, but uncertainty remains regarding the potential for
adverse development of estimated ultimate liabilities.
Management currently believes the Company’s gross and net reserves are adequate. However, there is no precise method for
evaluating the impact of any significant factor on the adequacy of reserves, and actual results will differ from original estimates.
b) The following tables present loss development information, by accident year, for the Company’s U.S. Insurance,
International Insurance and Reinsurance segments, including cumulative incurred and paid losses and allocated loss adjustment
expenses, net of reinsurance, as well as the corresponding amount of IBNR reserves as of December 31, 2017. This level of
disaggregation is consistent with how the Company analyzes loss reserves for both internal and external reporting purposes.
The loss development information for the years ended December 31, 2012 through 2016 is presented as supplementary
information. For the Company’s U.S. Insurance segment, the years presented in the tables comprise the majority of the period
for which incurred losses typically remain outstanding. Incurred losses in the Company’s International Insurance and
Reinsurance segments, which generally include a larger proportion of long-tail business than the U.S. Insurance segment,
generally remain outstanding more than six years; however, data prior to 2012 is not practically available by segment as a result
of a change in the Company’s reportable segments in 2014, which was most impactful on these two segments. Additionally,
reserves for the Company’s international operations within these two segments are determined on a policy year basis and
historical data prior to 2012 does not exist by accident year. All amounts included in the tables below related to transactions
denominated in a foreign currency have been translated into United States Dollars using the exchange rates in effect at
December 31, 2017.
81
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
The tables below also include claim frequency information, by accident year, for each of the segments presented. The Company
defines a claim as a single claim incident, per policy, which may include multiple claimants and multiple coverages on a single
policy. Claim counts include claims closed without a payment as well as claims where the Company is monitoring to
determine if an exposure exists, even if a reserve has not been established.
In 2013, the Company completed the acquisition of Alterra, the results of which are included in each of the Company’s
reportable segments. Ultimate incurred losses and loss adjustment expenses, net of reinsurance for the year ended December 31,
2013 include outstanding liabilities for losses and loss adjustment expenses of Alterra as of the acquisition date, by accident year
and not in any prior periods. Pre-acquisition data is not available by segment and accident year as a result of changes to the
historical Alterra product line reporting structure that impacted each of the Company’s reportable segments and the impact of
significant intercompany reinsurance contracts. Additionally, Alterra reserves were historically determined on a policy year
basis and pre-acquisition data does not exist in a format that can be used to determine accident year and segment. Following the
acquisition, ongoing business attributable to Alterra was integrated with the Company’s other insurance operations and is not
separately tracked.
U.S. Insurance Segment
Ultimate Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Unaudited
(in thousands)
Years Ended December 31,
Total of
Incurred-but-
Not-Reported
Liabilities, Net of
Reinsurance
Cumulative
Number of
Reported Claims
Year Ended
December 31,
Accident Year
2012
2013
2014
2015
2016
2017
December 31, 2017
2012
2013
2014
2015
2016
2017
Total
$ 949,141
$ 985,721 $ 924,138 $ 924,621
1,042,100
1,105,927
1,130,681
1,140,685
1,278,116
1,285,411
$ 909,237
1,009,438
1,116,093
1,211,389
1,319,731
$ 891,641
996,204
1,088,667
1,136,033
1,224,207
1,572,585
$ 6,909,337
$ 88,973
124,412
193,049
305,158
476,971
911,675
107
66
57
57
59
67
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Unaudited
Years Ended December 31,
Year Ended
December 31,
Accident Year
2012
2013
2014
2015
2016
2017
$ 193,708
2012
2013
2014
2015
2016
2017
Total
222,890
$ 401,773 $ 546,635 $ 644,658
594,558
487,068
260,121
443,392
264,697
$ 728,802
725,782
650,118
514,497
278,650
All outstanding liabilities for unpaid losses and loss adjustment expenses
before 2012, net of reinsurance
Total liabilities for unpaid losses and loss adjustment expenses, net of
reinsurance
82
$ 763,455
799,385
770,490
660,699
523,226
336,553
$ 3,853,808
289,191
$ 3,344,720
Ultimate incurred losses and allocated loss adjustment expenses and cumulative paid losses and allocated loss adjustment
expenses for the year ended December 31, 2017 for the U.S. Insurance segment include amounts attributable to acquisitions
completed in 2017 which are not material to the segment. Ultimate incurred losses and allocated loss adjustment expenses for
the year ended December 31, 2013 for the U.S. Insurance segment include $97.4 million and $149.9 million of losses and loss
adjustment expenses on the 2012 and 2013 accident years, respectively, attributable to Alterra. Cumulative paid losses and
allocated loss adjustment expenses for the year ended December 31, 2013 include $22.6 million and $23.2 million of paid losses
and allocated loss adjustment expenses on the 2012 and 2013 accident years, respectively, attributable to the acquired Alterra
reserves and post-acquisition Alterra business. Cumulative paid losses and allocated loss adjustment expenses and cumulative
reported claims for the 2012 and 2013 accident years exclude any claims paid or closed prior to the acquisition.
Cumulative reported claims for the 2012, 2013 and 2017 accident years include 66 thousand, 17 thousand and 10 thousand,
respectively, of claim counts associated with a personal lines product with high claim frequency and low claim severity. The
Company did not write this business from 2014 to 2016. The related net incurred losses and allocated loss adjustment expenses
are not material to the U.S. Insurance segment.
International Insurance Segment
Ultimate Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Unaudited
(in thousands)
Years Ended December 31,
Total of
Incurred-but-
Not-Reported
Liabilities, Net of
Reinsurance
Cumulative
Number of
Reported Claims
Year Ended
December 31,
Accident Year
2012
2013
2014
2015
2016
2017
December 31, 2017
$ 428,711
2012
2013
2014
2015
2016
2017
Total
614,829
$ 633,511 $ 573,945 $ 511,144
492,290
566,049
508,159
598,638
594,055
$ 493,563
460,978
522,778
510,035
562,190
$ 477,855
439,992
491,882
460,851
573,593
765,959
$ 3,210,132
$ 58,151
128,109
117,588
119,232
142,890
427,823
19
18
18
22
22
21
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Unaudited
Years Ended December 31,
Year Ended
December 31,
Accident Year
2012
2013
2014
2015
2016
2017
$ 40,545
2012
2013
2014
2015
2016
2017
Total
49,426
$ 168,322 $ 237,084 $ 297,752
187,671
174,294
63,564
130,088
68,464
$ 329,766
227,922
249,408
153,418
94,926
All outstanding liabilities for unpaid losses and loss adjustment expenses
before 2012, net of reinsurance
Total liabilities for unpaid losses and loss adjustment expenses, net of
reinsurance
$ 360,164
243,043
297,887
219,574
232,921
103,780
$ 1,457,369
482,546
$ 2,235,309
83
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
Ultimate incurred losses and allocated loss adjustment expenses for the year ended December 31, 2013 for the International
Insurance segment include $159.9 million and $163.9 million of losses and loss adjustment expenses on the 2012 and 2013
accident years, respectively, attributable to Alterra. Cumulative paid losses and allocated loss adjustment expenses for the year
ended December 31, 2013 include $14.2 million and $6.3 million of paid losses and allocated loss adjustment expenses on the
2012 and 2013 accident years, respectively, attributable to the acquired Alterra reserves and post-acquisition Alterra business.
Cumulative paid losses and allocated loss adjustment expenses and cumulative reported claims for the 2012 and 2013 accident
years exclude any claims paid or closed prior to the acquisition.
Business contained within the Company’s International Insurance segment includes business managed by other managing
agents, coverholders and third party administrators, for which the Company is unable to obtain access to the underlying claim
counts. As such, the claim count information for this business has been excluded from the total claim counts reported above.
This business represents 5% of the cumulative incurred losses and allocated loss adjustment expenses, net of reinsurance, on
the 2012 through 2017 accident years detailed above.
Reinsurance Segment
Ultimate Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Unaudited
(in thousands)
Years Ended December 31,
Total of
Incurred-but-
Not-Reported
Liabilities, Net of
Reinsurance
Year Ended
December 31,
Accident Year
2012
2013
2014
2015
2016
2017
December 31, 2017
$ 73,177
2012
2013
2014
2015
2016
2017
Total
591,730
$ 553,865 $ 511,264 $ 489,767
553,046
571,056
530,245
583,775
580,964
$ 460,002
538,223
541,967
516,568
531,083
$ 458,643
549,500
587,525
535,936
541,645
910,948
$ 3,584,197
$ 82,453
129,940
159,911
247,838
285,157
563,757
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Unaudited
Years Ended December 31,
Year Ended
December 31,
Accident Year
2012
2013
2014
2015
2016
2017
$ 4,127
71,983
$ 64,982 $ 129,633 $ 185,315
212,106
156,903
159,221
98,241
64,130
$ 233,284
271,598
229,572
135,132
80,026
2012
2013
2014
2015
2016
2017
Total
All outstanding liabilities for unpaid losses and loss adjustment expenses
before 2012, net of reinsurance
Total liabilities for unpaid losses and loss adjustment expenses, net of
reinsurance
$ 265,833
304,797
278,786
210,289
171,547
158,420
$ 1,389,672
757,569
$ 2,952,094
84
Ultimate incurred losses and allocated loss adjustment expenses for the year ended December 31, 2013 for the Reinsurance
segment include $478.3 million and $540.9 million of losses and loss adjustment expenses on the 2012 and 2013 accident years,
respectively, attributable to Alterra. Cumulative paid losses and allocated loss adjustment expenses for the year ended
December 31, 2013 include $53.1 million and $69.3 million of paid losses and allocated loss adjustment expenses on the 2012
and 2013 accident years, respectively, attributable to the acquired Alterra reserves and post-acquisition Alterra business.
Cumulative paid losses and allocated loss adjustment expenses for the 2012 and 2013 accident years exclude any claims paid
prior to the acquisition.
All of the business contained within the Company’s Reinsurance segment represents treaty business that is assumed from other
insurance or reinsurance companies, for which the Company does not have access to the underlying claim counts. Further, this
business includes both quota share and excess of loss treaty reinsurance, through which only a portion of each reported claim
results in losses to the Company. As such, the Company has excluded claim count information from the Reinsurance segment
disclosures.
The following table presents supplementary information about average historical claims duration as of December 31, 2017
based on the cumulative incurred and paid losses and allocated loss adjustment expenses presented above.
Average Annual Percentage Payout of Incurred Losses by Age (in Years), Net of Reinsurance
Unaudited
U.S. Insurance
International Insurance
Reinsurance
1
22.6%
12.9%
12.5%
2
21.7%
22.2%
13.8%
3
14.8%
14.3%
12.5%
4
11.7%
10.6%
10.4%
5
8.4%
5.1%
8.3%
6
3.9%
6.4%
7.1%
The following table reconciles the net incurred and paid loss development tables, by segment, to the liability for losses and loss
adjustment expenses in the consolidated balance sheet.
(dollars in thousands)
Net outstanding liabilities
U.S. Insurance
International Insurance
Reinsurance
Other Insurance (Discontinued Lines)
Program Services
Liabilities for unpaid losses and loss adjustment expenses, net of reinsurance
Reinsurance recoverable on unpaid losses
U.S. Insurance
International Insurance
Reinsurance
Other Insurance (Discontinued Lines)
Program Services
Total reinsurance recoverable on unpaid losses
Unallocated loss adjustment expenses
Unamortized fair value adjustments
December 31, 2017
$ 3,344,720
2,235,309
2,952,094
246,365
2,441
8,780,929
827,113
1,091,785
341,168
166,281
2,192,989
4,619,336
230,016
(46,000)
184,016
TOTAL GROSS LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
$ 13,584,281
85
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
c) The Company’s exposure to A&E claims results from policies written by acquired insurance operations before their
acquisition by the Company. The Company’s exposure to A&E claims originated from umbrella, excess and commercial general
liability (CGL) insurance policies and assumed reinsurance contracts that were written on an occurrence basis from the 1970s
to mid-1980s. Exposure also originated from claims-made policies that were designed to cover environmental risks provided
that all other terms and conditions of the policy were met.
A&E claims include property damage and clean-up costs related to pollution, as well as personal injury allegedly arising from
exposure to hazardous materials. After 1986, the Company began underwriting CGL coverage with pollution exclusions, and in
some lines of business the Company began using a claims-made form. These changes significantly reduced the Company’s
exposure to future A&E claims on post-1986 business.
The following table provides a reconciliation of beginning and ending A&E reserves for losses and loss adjustment expenses,
which are a component of consolidated unpaid losses and loss adjustment expenses. Amounts included in the following table
are presented before consideration of reinsurance allowances.
(dollars in thousands)
Net reserves for A&E losses and loss adjustment expenses,
beginning of year
Commutations and other
Adjusted net reserves for A&E losses and loss adjustment expenses,
beginning of year
Incurred losses and loss adjustment expenses
Payments
Reinsurance recoverable on retroactive reinsurance transactions
Net reserves for A&E losses and loss adjustment expenses,
end of year
Reinsurance recoverable on unpaid losses
GROSS RESERVES FOR A&E LOSSES AND LOSS ADJUSTMENT EXPENSES,
Years Ended December 31,
2017
2016
2015
$ 111,604
6,827
$ 132,869
––
$ 287,723
––
118,431
659
(14,429)
––
104,661
169,866
132,869
(5,277)
(15,988)
––
111,604
212,300
287,723
25,415
(20,628)
(159,641)
132,869
253,756
END OF YEAR
$ 274,527
$ 323,904
$ 386,625
At December 31, 2017, asbestos-related reserves were $210.7 million and $84.4 million on a gross and net basis, respectively.
Net reserves for reported claims for A&E exposures were $92.0 million at December 31, 2017. Net incurred but not reported
reserves for A&E exposures were $12.7 million at December 31, 2017. Inception-to-date net paid losses and loss adjustment
expenses for A&E related exposures totaled $626.4 million at December 31, 2017, which includes $159.6 million of payments
for two retroactive reinsurance transactions completed in 2015 and $96.2 million of litigation-related expense. As previously
described, during 2015, the Company completed two retroactive reinsurance transactions to cede two portfolios of policies
primarily comprised of liabilities arising from A&E exposures. At the time of the transactions, the reinsurance recoverable for
the retroactive reinsurance coverages totaled $177.6 million, of which $159.6 million was attributable to A&E exposures.
The Company’s reserves for losses and loss adjustment expenses related to A&E exposures represent management’s best
estimate of ultimate settlement values. A&E reserves are monitored by management, and the Company’s statistical analysis
of these reserves is reviewed by the Company’s independent actuaries. A&E exposures are subject to significant uncertainty
due to potential loss severity and frequency resulting from the uncertain and unfavorable legal climate. A&E reserves could be
subject to increases in the future; however, management believes the Company’s gross and net A&E reserves at December 31,
2017 are adequate.
86
10. Life and Annuity Benefits
The following table presents life and annuity benefits.
(dollars in thousands)
Life
Annuities
Accident and health
TOTAL
December 31,
2017
$ 127,208
885,984
58,920
$ 1,072,112
2016
$ 131,768
849,226
68,660
$ 1,049,654
Life and annuity benefits are compiled on a reinsurance contract-by-contract basis and are discounted using standard actuarial
techniques and cash flow models. Since the development of the life and annuity reinsurance reserves is based upon cash flow
projection models, the Company must make estimates and assumptions based on cedent experience, industry mortality tables,
and expense and investment experience, including a provision for adverse deviation. The assumptions used to determine policy
benefit reserves are generally locked-in for the life of the contract unless an unlocking event occurs. Loss recognition testing is
performed to determine if existing policy benefit reserves, together with the present value of future gross premiums and
expected investment income earned thereon, are adequate to cover the present value of future benefits, settlement and
maintenance costs. If the existing policy benefit reserves are not sufficient, the locked-in assumptions are revised to current best
estimate assumptions and a charge to earnings for life and annuity benefits is recognized at that time.
Because of the assumptions and estimates used in establishing the Company’s reserves for life and annuity benefit obligations
and the long-term nature of these reinsurance contracts, the ultimate liability may be greater or less than the estimates. The
average discount rate for the life and annuity benefit reserves was 2.3% as of December 31, 2017.
As of December 31, 2017, the largest life and annuity benefits reserve for a single contract was 33.8% of the total.
No annuities included in life and annuity benefits in the consolidated balance sheet are subject to discretionary withdrawal.
87
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
11. Senior Long-Term Debt and Other Debt
The following table summarizes the Company’s senior long-term debt and other debt.
(dollars in thousands)
December 31,
2017
2016
7.20% unsecured senior notes, due April 14, 2017, interest payable semi-annually,
net of unamortized premium of $0 in 2017 and $417 in 2016
$
––
$ 91,046
7.125% unsecured senior notes, due September 30, 2019, interest payable semi-annually,
net of unamortized discount of $332 in 2017 and $522 in 2016
234,411
234,183
6.25% unsecured senior notes, due September 30, 2020, interest payable semi-annually,
net of unamortized premium of $26,618 in 2017 and $35,717 in 2016
376,616
385,714
5.35% unsecured senior notes, due June 1, 2021, interest payable semi-annually,
net of unamortized discount of $706 in 2017 and $912 in 2016
249,176
248,957
4.90% unsecured senior notes, due July 1, 2022, interest payable semi-annually,
net of unamortized discount of $1,257 in 2017 and $1,536 in 2016
348,540
348,215
3.625% unsecured senior notes, due March 30, 2023, interest payable semi-annually,
net of unamortized discount of $1,056 in 2017 and $1,257 in 2016
248,749
248,508
3.50% unsecured senior notes, due November 1, 2027, interest payable semi-annually,
net of unamortized discount of $2,558 in 2017
296,728
––
7.35% unsecured senior notes, due August 15, 2034, interest payable semi-annually,
net of unamortized discount of $1,143 in 2017 and $1,212 in 2016
128,642
128,570
5.0% unsecured senior notes, due March 30, 2043, interest payable semi-annually,
net of unamortized discount of $5,655 in 2017 and $5,879 in 2016
244,033
243,796
5.0% unsecured senior notes, due April 5, 2046, interest payable semi-annually,
net of unamortized discount of $6,909 in 2017 and $7,154 in 2016
492,219
491,943
4.30% unsecured senior notes, due November 1, 2047, interest payable semi-annually,
net of unamortized discount of $4,451 in 2017
Other debt, at various interest rates ranging from 1.7% to 6.1%
SENIOR LONG-TERM DEBT AND OTHER DEBT
294,834
185,282
––
153,597
$ 3,099,230
$ 2,574,529
The Company’s 6.25% unsecured senior notes and the 7.20% unsecured senior notes were issued by Alterra Finance LLC and
Alterra USA Holdings Limited, respectively, which are wholly owned indirect subsidiaries of the Company, and are guaranteed
by Markel Corporation. All of the Company’s other unsecured senior notes were issued by Markel Corporation. In April 2017,
the Company repaid its 7.20% unsecured senior notes due April 14, 2017 ($90.6 million principal outstanding at December 31,
2016). Also in 2017, the Company repaid $84.3 million of debt assumed in connection with acquisitions.
In November 2017, the Company issued $300 million of 3.50% unsecured notes due November 1, 2027 and $300 million of
4.30% unsecured notes due November 1, 2047. Net proceeds to the Company were $297.4 million and $295.5 million,
respectively, to be used for general corporate purposes.
In the second quarter of 2016, the Company issued $500 million of 5.0% unsecured senior notes due April 5, 2046. Net
proceeds to the Company were $493.1 million. The Company used a portion of these proceeds to purchase $70.2 million of
principal on its 7.35% unsecured senior notes due 2034 and $108.8 million of principal on its 7.125% unsecured senior notes
due 2019 through a tender offer at a total purchase price of $95.0 million and $126.4 million, respectively. In connection
with the purchase, the Company recognized a loss on early extinguishment of debt of $44.1 million during the year ended
December 31, 2016.
88
The Company’s 7.35% unsecured senior notes due August 15, 2034 are not redeemable. The Company’s other unsecured senior
notes are redeemable by the Company at any time, subject to payment of a make-whole premium to the noteholders. None of
the Company’s senior long-term debt is subject to any sinking fund requirements.
The Company’s other debt is primarily associated with its subsidiaries and includes $78.3 million associated with its Markel
Ventures subsidiaries. The Markel Ventures debt is non-recourse to the holding company and generally is secured by the assets
of those subsidiaries. ParkLand, a subsidiary of the Company, has formed subsidiaries for the purpose of acquiring and financing
real estate (the real estate subsidiaries). The assets of certain real estate subsidiaries, which are not material to the Company, are
consolidated in accordance with U.S. GAAP but are not available to satisfy the debt and other obligations of the Company or
any affiliates other than those real estate subsidiaries. Other debt also includes a $62.5 million note payable delivered as part of
the consideration provided for the investment held by the Markel Diversified Fund, as discussed in note 17. In January 2018, the
Company repaid $37.5 million of the outstanding note payable.
The estimated fair value of the Company’s senior long-term debt and other debt was $3.4 billion and $2.7 billion at December
31, 2017 and 2016, respectively.
The following table summarizes the future principal payments due at maturity on senior long-term debt and other debt as of
December 31, 2017.
Years Ending December 31,
(dollars in thousands)
2018
2019
2020
2021
2022
2023 and thereafter
Total principal payments
Net unamortized premium
Net unamortized debt issuance costs
SENIOR LONG-TERM DEBT AND OTHER DEBT
$ 86,312
239,765
355,074
277,072
357,245
1,785,340
$ 3,100,808
2,552
(4,130)
$ 3,099,230
The Company maintains a revolving credit facility which provides $300 million of capacity for future acquisitions, investments,
repurchases of capital stock of the Company and for general corporate purposes. At the Company’s discretion, $200 million of
the total capacity may be used for secured letters of credit. The Company may increase the capacity of the facility to $500
million subject to certain terms and conditions. The Company pays interest on balances outstanding under the facility and a
utilization fee for letters of credit issued under the facility. The Company also pays a commitment fee (0.25% at December 31,
2017) on the unused portion of the facility based on the Company’s debt to equity leverage ratio as calculated under the credit
agreement. Markel Corporation, along with Alterra Finance LLC and Alterra USA Holdings Limited, guaranteed the Company’s
obligations under the facility. As a result, the Company’s revolving credit facility ranks equally with the 6.25% unsecured senior
notes. At December 31, 2017 and 2016, the Company had no borrowings outstanding under this revolving credit facility. This
facility expires in August 2019.
At December 31, 2017, the Company was in compliance with all covenants contained in its revolving credit facility. To the
extent that the Company is not in compliance with its covenants, the Company’s access to the revolving credit facility could
be restricted.
The Company paid $141.3 million, $135.4 million and $127.0 million in interest on its senior long-term debt and other debt
during the years ended December 31, 2017, 2016 and 2015, respectively.
89
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
12. Shareholders’ Equity
a) The Company had 50,000,000 shares of no par value common stock authorized of which 13,903,526 shares and 13,954,931
shares were issued and outstanding at December 31, 2017 and 2016, respectively. The Company also has 10,000,000 shares of
no par value preferred stock authorized, none of which was issued or outstanding at December 31, 2017 or 2016.
The Company’s Board of Directors has approved the repurchase of up to $300 million of common stock under a share
repurchase program (the Program). Under the Program, the Company may repurchase outstanding shares of common stock
from time to time, primarily through open-market transactions. The Program has no expiration date but may be terminated by
the Board of Directors at any time. As of December 31, 2017, the Company had repurchased 183,735 shares of common stock at
a cost of $158.0 million under the Program.
b) Net income per share was determined by dividing adjusted net income to shareholders by the applicable weighted average
shares outstanding. Basic shares outstanding include restricted stock units that are no longer subject to any contingencies for
issuance, but for which the corresponding shares have not been issued. Diluted net income per share is computed by dividing
adjusted net income to shareholders by the weighted average number of common shares and dilutive potential common shares
outstanding during the year. Average closing common stock market prices are used to calculate the dilutive effect attributable
to restricted stock.
(in thousands, except per share amounts)
Net income to shareholders
Adjustment of redeemable noncontrolling interests
Adjusted net income to shareholders
Basic common shares outstanding
Dilutive potential common shares from conversion of options
Dilutive potential common shares from conversion of restricted stock
Diluted shares outstanding
Basic net income per share
Diluted net income per share
Years Ended December 31,
2017
$ 395,269
(33,738)
$ 361,531
13,964
1
41
14,006
$ 25.89
$ 25.81
2016
2015
$ 455,689
(15,472)
$ 582,772
4,144
$ 440,217
$ 586,916
14,013
4
61
14,078
13,978
9
74
14,061
$ 31.41
$ 41.99
$ 31.27
$ 41.74
c) The Company’s Employee Stock Purchase and Bonus Plan provides a method for employees and directors to purchase shares
of the Company’s common stock on the open market. The plan encourages share ownership by providing for the award of bonus
shares to participants equal to 10% of the net increase in the number of shares owned under the plan in a given year, excluding
shares acquired through the plan’s loan program component. Under the loan program, the Company offers subsidized unsecured
loans so participants may purchase shares and awards bonus shares equal to 5% of the shares purchased with a loan. In May
2016, the Company adopted the Markel Corporation 2016 Employee Stock Purchase and Bonus Plan which replaced the
Company’s prior Employee Stock Purchase and Bonus Plan. No shares have been issued under the prior Employee Stock
Purchase and Bonus Plan since the effective date of the 2016 Employee Stock Purchase and Bonus Plan. The Company
authorized 125,000 shares for purchase under the 2016 Employee Stock Purchase and Bonus Plan, of which 113,690 and 118,692
shares were available for purchase as of December 31, 2017 and 2016, respectively. At December 31, 2017 and 2016, loans
outstanding under the plans, which are included in receivables on the consolidated balance sheets, totaled $18.5 million and
$20.2 million, respectively.
90
d) In May 2016, the Company adopted the 2016 Equity Incentive Compensation Plan (2016 Compensation Plan), which
replaced the 2012 Equity Incentive Compensation Plan (2012 Compensation Plan). The 2016 Compensation Plan provides for
grants and awards of restricted stock, restricted stock units, performance grants, and other stock based awards to employees and
non-employee directors and is administered by the Compensation Committee of the Company’s Board of Directors
(Compensation Committee). No share-based awards have been issued under the 2012 Compensation Plan after the effective
date of the 2016 Compensation Plan. At December 31, 2017, there were 235,137 shares available for future awards under the
2016 Compensation Plan.
Restricted stock units are awarded to certain associates and executive officers based upon meeting performance conditions
determined by the Compensation Committee. These awards generally vest at the end of the third year following the year
for which the Compensation Committee determines performance conditions have been met. At the end of the vesting period,
recipients are entitled to receive one share of the Company’s common stock for each vested restricted stock unit. During
2017, the Company awarded 11,339 restricted stock units to associates and executive officers based on performance conditions
being met.
Restricted stock units also are awarded to associates to assist the Company in securing or retaining the services of key
employees. During 2017, the Company awarded 499 restricted stock units to associates as a hiring or retention incentive.
The restricted stock units had a grant-date fair value of $0.5 million. These awards generally vest over a three-year period
and entitle the recipient to receive one share of the Company’s common stock for each vested restricted stock unit.
During 2017, the Company awarded 1,050 shares of restricted stock to its non-employee directors. The shares awarded to
non-employee directors will vest in 2018, except for 105 shares that vested in 2017.
The following table summarizes nonvested share-based awards.
Nonvested awards at January 1, 2017
Granted
Vested
Nonvested awards at December 31, 2017
Number
of Awards
65,618
12,888
(46,988)
31,518
Weighted Average
Grant-Date
Fair Value
$ 634.71
979.23
612.54
$ 808.63
The fair value of the Company’s share-based awards granted under the 2012 Compensation Plan and 2016 Compensation Plan
was determined based on the closing price of the Company’s common shares on the grant date. The fair value of the Company’s
share-based awards issued under the Markel Corporation Omnibus Incentive Plan, which preceded the 2012 Compensation
Plan, was determined based on the average price of the Company’s common shares on the grant date. The weighted average
grant-date fair value of the Company’s share-based awards granted in 2017, 2016 and 2015 was $979.23, $878.03 and $740.80,
respectively. As of December 31, 2017, unrecognized compensation cost related to nonvested share-based awards was $7.8
million, which is expected to be recognized over a weighted average period of 1.5 years. The fair value of the Company’s
share-based awards that vested during 2017, 2016 and 2015 was $28.8 million, $29.8 million and $15.8 million, respectively.
91
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
13. Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes net holding gains (losses) arising during the period, changes in unrealized
other-than-temporary impairment losses on fixed maturities arising during the period and reclassification adjustments for
net gains included in net income. Other comprehensive income (loss) also includes changes in foreign currency translation
adjustments and changes in net actuarial pension loss.
The following table presents the change in accumulated other comprehensive income by component, net of taxes and
noncontrolling interests.
(dollars in thousands)
December 31, 2014
Other comprehensive loss
before reclassifications
Amounts reclassified from accumulated other
comprehensive income
Total other comprehensive loss
December 31, 2015
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from accumulated other
comprehensive income
Total other comprehensive income (loss)
December 31, 2016
Other comprehensive income
before reclassifications
Amounts reclassified from accumulated other
comprehensive income
Total other comprehensive income
Unrealized
Holding Gains
on Available-for-
Sale Securities
Foreign
Currency
Net Actuarial
Pension Loss
Total
$ 1,793,254
$ (43,491)
$ (45,206)
$ 1,704,557
(240,010)
(29,205)
(2,482)
(271,697)
(80,482)
(320,492)
—
(29,205)
2,130
(352)
(78,352)
(350,049)
$ 1,472,762
$ (72,696)
$ (45,558)
$ 1,354,508
275,696
(11,710)
(20,700)
243,286
(33,528)
242,168
—
1,600
(11,710)
(19,100)
(31,928)
211,358
$ 1,714,930
$ (84,406)
$ (64,658)
$ 1,565,866
787,339
10,403
(24,296)
763,043
—
10,403
3,092
3,167
6,259
800,834
(21,129)
779,705
December 31, 2017
$ 2,477,973
$ (74,003)
$ (58,399)
$ 2,345,571
The following table summarizes the tax expense (benefit) associated with each component of other comprehensive
income (loss).
Years Ended December 31,
(dollars in thousands)
2017
2016
2015
Change in net unrealized gains on investments:
Net holding gains (losses) arising during the period
Change in unrealized other-than-temporary impairment losses
on fixed maturities arising during the period
Reclassification adjustments for net gains
included in net income
Change in net unrealized gains (losses) on investments
Change in foreign currency translation adjustments
Change in net actuarial pension loss
92
TOTAL
$ 372,469
$ 112,399
$ (107,860)
––
6
35
(10,072)
362,397
28
1,284
(12,462)
99,943
1,037
(4,192)
(29,267)
(137,092)
408
(88)
$ 363,709
$ 96,788
$ (136,772)
The following table presents the details of amounts reclassified from accumulated other comprehensive income into income,
by component.
(dollars in thousands)
Unrealized holding gains on available-for-sale securities:
Other-than-temporary impairment losses
Net realized investment gains, excluding other-than-temporary
impairment losses
Total before taxes
Income taxes
Years Ended December 31,
2017
2016
2015
$ (7,589)
$ (18,355)
$ (44,481)
41,957
34,368
(10,072)
64,345
45,990
(12,462)
154,230
109,749
(29,267)
Reclassification of unrealized holding gains, net of taxes
$ 24,296
$ 33,528
$ 80,482
Net actuarial pension loss:
Underwriting, acquisition and insurance expenses
Income taxes
$ (3,815)
648
$ (1,951)
351
$ (2,662)
532
Reclassification of net actuarial pension loss, net of taxes
$ (3,167)
$ (1,600)
$ (2,130)
14. Fair Value Measurements
FASB ASC 820-10, Fair Value Measurements and Disclosures, establishes a three-level hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active
markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to
measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input
that is significant to the fair value measurement of the asset or liability.
Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded
and the reliability and transparency of the assumptions used to determine fair value. The hierarchy requires the use of
observable market data when available. The levels of the hierarchy are defined as follows:
Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active
markets.
Level 2 - Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted
prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are
observable for the asset or liability and market-corroborated inputs.
Level 3 - Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value
measurement.
In accordance with FASB ASC 820, the Company determines fair value based on the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair
value, the Company uses various methods, including the market, income and cost approaches. The Company uses valuation
techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The following section
describes the valuation methodologies used by the Company to measure assets and liabilities at fair value, including an
indication of the level within the fair value hierarchy in which each asset or liability is generally classified.
93
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
Investments available-for-sale. Investments available-for-sale are recorded at fair value on a recurring basis and include fixed
maturities, equity securities and short-term investments. Short-term investments include certificates of deposit, commercial
paper, discount notes and treasury bills with original maturities of one year or less. Fair value for investments available-for-sale
is determined by the Company after considering various sources of information, including information provided by a third party
pricing service. The pricing service provides prices for substantially all of the Company’s fixed maturities and equity securities.
In determining fair value, the Company generally does not adjust the prices obtained from the pricing service. The Company
obtains an understanding of the pricing service’s valuation methodologies and related inputs, which include, but are not limited
to, reported trades, benchmark yields, issuer spreads, bids, offers, duration, credit ratings, estimated cash flows and prepayment
speeds. The Company validates prices provided by the pricing service by reviewing prices from other pricing sources and
analyzing pricing data in certain instances.
The Company has evaluated the various types of securities in its investment portfolio to determine an appropriate fair value
hierarchy level based upon trading activity and the observability of market inputs. Level 1 investments include those traded on
an active exchange, such as the New York Stock Exchange. Level 2 investments include U.S. Treasury securities, U.S.
government-sponsored enterprises, municipal bonds, foreign government bonds, commercial mortgage-backed securities,
residential mortgage-backed securities, asset-backed securities and corporate debt securities. Level 3 investments include the
Company’s investments in insurance-linked securities funds (the ILS Funds), as further described in note 17, that are not traded
on an active exchange and are valued using unobservable inputs.
Fair value for investments available-for-sale is measured based upon quoted prices in active markets, if available. Due to
variations in trading volumes and the lack of quoted market prices, fixed maturities are classified as Level 2 investments. The
fair value of fixed maturities is normally derived through recent reported trades for identical or similar securities, making
adjustments through the reporting date based upon available market observable data described above. If there are no recent
reported trades, the fair value of fixed maturities may be derived through the use of matrix pricing or model processes, where
future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate.
Significant inputs used to determine the fair value of obligations of states, municipalities and political subdivisions, corporate
bonds and obligations of foreign governments include reported trades, benchmark yields, issuer spreads, bids, offers, credit
information and estimated cash flows. Significant inputs used to determine the fair value of commercial mortgage-backed
securities, residential mortgage-backed securities and asset-backed securities include the type of underlying assets, benchmark
yields, prepayment speeds, collateral information, tranche type and volatility, estimated cash flows, credit information, default
rates, recovery rates, issuer spreads and the year of issue.
Due to the significance of unobservable inputs required in measuring the fair value of the Company’s investments in the ILS
Funds, these investments are classified as Level 3 within the fair value hierarchy. Changes in fair value of the ILS Funds are
included in net realized gains (losses) in net income. The fair value of the securities are derived using their reported net asset
value (NAV) as the primary input, as well as other observable and unobservable inputs as deemed necessary by management.
Management has obtained an understanding of the inputs, assumptions, process, and controls used to determine NAV, which is
calculated by an independent third party. Unobservable inputs to the NAV calculations include assumptions around premium
earnings patterns and loss reserve estimates for the underlying securitized reinsurance contracts in which the ILS Funds invest.
Significant unobservable inputs used in the valuation of these investments include an adjustment to include the fair value of
the equity that was issued by one of the ILS Funds in exchange for notes receivable, rather than cash, which is excluded from
NAV. The Company’s investments in the ILS Funds are redeemable annually as of January 1st of each calendar year.
The Company’s valuation policies and procedures for Level 3 investments are determined by management. Fair value
measurements are analyzed quarterly to ensure the change in fair value from prior periods is reasonable relative to
management’s understanding of the underlying investments, recent market trends and external market data, which includes
the price of a comparable security and an insurance-linked security index.
Senior long-term debt and other debt. Senior long-term debt and other debt is carried at amortized cost with the estimated fair
value disclosed on the consolidated balance sheets. Senior long-term debt and other debt is classified as Level 2 within the fair
value hierarchy due to variations in trading volumes and the lack of quoted market prices. Fair value for senior long-term debt
and other debt is generally derived through recent reported trades for identical securities, making adjustments through the
94
reporting date, if necessary, based upon available market observable data including U.S. Treasury securities and implied credit
spreads. Significant inputs used to determine the fair value of senior long-term debt and other debt include reported trades,
benchmark yields, issuer spreads, bids and offers.
The following tables present the balances of assets measured at fair value on a recurring basis by level within the fair value
hierarchy.
(dollars in thousands)
Assets:
Investments available-for-sale:
Fixed maturities:
U.S. Treasury securities
U.S. government-sponsored enterprises
Obligations of states, municipalities
and political subdivisions
Foreign governments
Commercial mortgage-backed securities
Residential mortgage-backed securities
Asset-backed securities
Corporate bonds
Total fixed maturities
Equity securities:
Insurance, banks and other financial institutions
Industrial, consumer and all other
Total equity securities
Short-term investments
December 31, 2017
Level 1
Level 2
Level 3
Total
$ —
—
$ 160,613
363,520
$ — $ 160,613
363,520
—
—
—
—
—
—
—
—
1,934,224
3,864,814
5,799,038
2,065,749
4,566,562
1,489,228
1,234,326
856,168
34,728
1,235,525
9,940,670
—
—
—
95,225
—
—
—
—
—
—
—
168,809
—
168,809
—
4,566,562
1,489,228
1,234,326
856,168
34,728
1,235,525
9,940,670
2,103,033
3,864,814
5,967,847
2,160,974
Total investments available-for-sale
$ 7,864,787
$ 10,035,895
$ 168,809
$ 18,069,491
(dollars in thousands)
Assets:
Investments available-for-sale:
Fixed maturities:
U.S. Treasury securities
U.S. government-sponsored enterprises
Obligations of states, municipalities
and political subdivisions
Foreign governments
Commercial mortgage-backed securities
Residential mortgage-backed securities
Asset-backed securities
Corporate bonds
Total fixed maturities
Equity securities:
Insurance, banks and other financial institutions
Industrial, consumer and all other
Total equity securities
Short-term investments
December 31, 2016
Level 1
Level 2
Level 3
Total
$ —
—
$ 258,584
423,212
$ — $ 258,584
423,212
—
—
—
—
—
—
—
—
1,506,607
3,048,031
4,554,638
2,255,898
4,428,205
1,463,462
1,040,356
790,946
27,338
1,459,407
9,891,510
—
—
—
80,253
—
—
—
—
—
—
—
191,203
—
191,203
—
4,428,205
1,463,462
1,040,356
790,946
27,338
1,459,407
9,891,510
1,697,810
3,048,031
4,745,841
2,336,151
Total investments available-for-sale
$ 6,810,536
$ 9,971,763
$ 191,203
$ 16,973,502
95
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
The following table summarizes changes in Level 3 investments at fair value on a recurring basis.
(dollars in thousands)
Equity securities, beginning of period
Purchases
Sales
Total gains (losses) included in:
Net income (loss)
Other comprehensive income
Transfers into Level 3
Transfers out of Level 3
Equity securities, end of period
2017
$ 191,203
56,250
(26,674)
(51,970)
—
—
—
2016
$ —
195,250
(25,000)
20,953
—
—
—
$ 168,809
$ 191,203
Net unrealized gains (losses) included in net income relating to
assets held at December 31, 2017 and 2016(1)
$ (51,970)
$ 20,953
(1) Included in net realized investment gains (losses) in the consolidated statements of income and comprehensive income.
Net realized investment losses for the year ended December 31, 2017 included losses of $52.0 million on the Company’s
investment in the ILS Funds as a result of a decrease in the NAV of the ILS Funds.
There were no transfers into or out of Level 1 and Level 2 during 2017 or 2016.
Except as disclosed in note 2, the Company did not have any assets or liabilities measured at fair value on a non-recurring basis
during the years ended December 31, 2017 and 2016.
15. Reinsurance
In reinsurance and retrocession transactions, an insurance or reinsurance company transfers, or cedes, all or part of its exposure
in return for a portion of the premium. The ceding of insurance does not legally discharge the Company from its primary
liability for the full amount of the policies, and the Company will be required to pay the loss and bear collection risk if the
reinsurer fails to meet its obligations under the reinsurance or retrocessional agreement. A credit risk exists with ceded
reinsurance to the extent that any reinsurer is unable to meet the obligations assumed under the reinsurance or retrocessional
contracts. Allowances are established for amounts deemed uncollectible.
Within its underwriting operations, the Company uses reinsurance and retrocessional reinsurance to manage its net retention
on individual risks and overall exposure to losses while providing it with the ability to offer policies with sufficient limits to
meet policyholder needs. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit
risk arising from its exposure to individual reinsurers. To further reduce credit exposure to reinsurance recoverable balances, the
Company has received collateral, including letters of credit and trust accounts, from certain reinsurers. Collateral related to
these reinsurance agreements is available, without restriction, when the Company pays losses covered by the reinsurance
agreements.
Within the Company’s underwriting operations, at December 31, 2017 and 2016, balances recoverable from the ten largest
reinsurers, by group, represented 61% and 67%, respectively, of the reinsurance recoverable on paid and unpaid losses, before
considering reinsurance allowances and collateral. At December 31, 2017, the largest reinsurance balance was due from Fairfax
Financial Group and represented 10% of the reinsurance recoverable on paid and unpaid losses, before considering reinsurance
allowances and collateral.
96
Within the Company’s program services business, acquired as a part of the State National acquisition in November 2017, the
Company generally enters into 100% quota share reinsurance agreements whereby the Company cedes to the capacity provider
(reinsurer) substantially all of its gross liability under all policies issued by and on behalf of the Company by the GA. The
Company remains exposed to the credit risk of the reinsurer, or the risk that one of its reinsurers becomes insolvent or
otherwise unable or unwilling to pay policyholder claims. This credit risk is generally mitigated by either selecting well
capitalized, highly rated authorized capacity providers or requiring that the capacity provider post substantial collateral to secure
the reinsured risks.
Within the Company’s program services business, at December 31, 2017, balances recoverable from the ten largest reinsurers, by
group, represented 79% of the reinsurance recoverable on paid and unpaid losses, before considering reinsurance allowances and
collateral. At December 31, 2017, the largest reinsurance balance was due from Fosun International Holdings, Ltd and
represented 25% of the reinsurance recoverable on paid and unpaid losses, before considering reinsurance allowances and
collateral.
The following table summarizes the Company’s reinsurance allowance for doubtful accounts, all of which is attributable to the
Company’s underwriting operations.
(dollars in thousands)
Reinsurance allowance, beginning of year
Additions
Deductions
Reinsurance allowance, end of year
Years Ended December 31,
2017
$ 36,770
2,669
(5,464)
$ 33,975
2016
2015
$ 59,350
980
(23,560)
$ 59,813
5,897
(6,360)
$ 36,770
$ 59,350
Management believes the Company’s reinsurance allowance for doubtful accounts is adequate at December 31, 2017; however,
the deterioration in the credit quality of existing reinsurers or disputes over reinsurance and retrocessional contracts could result
in additional charges.
The following table summarizes the effect of reinsurance and retrocessional reinsurance on consolidated premiums written
and earned.
Years Ended December 31,
(dollars in thousands)
2017
2016
2015
Direct(1)
Assumed(1)
Ceded(1)
Written
$ 4,172,467
1,334,493
(1,089,173)
Earned
$ 4,068,622
1,287,395
(1,108,039)
Written
$ 3,560,635
1,236,010
(795,625)
Earned
$ 3,506,687
1,176,205
(817,022)
Written
$ 3,474,510
1,158,402
(813,619)
Earned
$ 3,480,297
1,194,772
(851,537)
NET PREMIUMS
$ 4,417,787
$ 4,247,978
$ 4,001,020
$ 3,865,870
$ 3,819,293
$ 3,823,532
(1) Written premium includes $252.9 million, $1.0 million and $253.9 million of direct, assumed and ceded premium, respectively, in the
Company’s program services business in 2017. Earned premium includes $291.3 million, $1.4 million and $292.7 million of direct, assumed
and ceded premium, respectively, in the Company’s program services business in 2017.
All of the premium written and earned in the Company’s program services business for the year-ended December 31, 2017 was
ceded to third parties. The percentage of ceded earned premiums to gross earned premiums was 21%, 17% and 18% for the years
ended December 31, 2017, 2016 and 2015, respectively. The percentage of assumed earned premiums to net earned premiums
was 30%, 30% and 31% for the years ended December 31, 2017, 2016 and 2015, respectively.
97
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
All of the incurred losses and loss adjustment expenses in the Company’s program services business, which totaled $286.1 million
were ceded to third parties. Incurred losses and loss adjustment expenses for the Company’s underwriting operations were net
of ceded incurred losses and loss adjustment expenses of $856.8 million, $362.0 million and $330.7 million for the years ended
December 31, 2017, 2016 and 2015, respectively. Ceded incurred losses and loss adjustment expenses in 2017 included ceded losses
on the 2017 Catastrophes of $490.3 million.
See note 9 for information regarding two retroactive reinsurance transactions completed during 2015 to cede portfolios of policies
primarily comprised of liabilities arising from A&E exposures.
16. Commitments and Contingencies
a) The Company leases substantially all of its facilities and certain furniture and equipment under noncancelable operating
leases with remaining terms up to 17 years.
The following table summarizes the Company’s minimum annual rental commitments, excluding taxes, insurance and other
operating costs payable directly by the Company, for noncancelable operating leases at December 31, 2017.
Years Ending December 31,
(dollars in thousands)
2018
2019
2020
2021
2022
2023 and thereafter
TOTAL
$ 53,398
44,820
37,166
33,567
30,356
112,415
$ 311,722
Rental expense was $44.6 million, $40.2 million and $44.3 million for the years ended December 31, 2017, 2016 and 2015,
respectively.
b) In October 2010, the Company completed its acquisition of Aspen Holdings, Inc. (Aspen). As part of the consideration for
that acquisition, Aspen shareholders received contingent value rights (CVRs), which are currently expected to result in the
payment of additional cash consideration to CVR holders. Absent the litigation described below, the final amount to be paid to
CVR holders would be determined after December 31, 2017, the CVR maturity date, based on, among other things, adjustments
for the development of pre-acquisition loss reserves and loss sensitive profit commissions.
The CVR holder representative, Thomas Yeransian, has disputed the Company’s estimation of the value of the CVRs. On
September 15, 2016, Mr. Yeransian filed a suit alleging, among other things, that the Company is in default under the CVR
agreement. The holder representative seeks: $47.3 million in damages, which represents the unadjusted value of the CVRs;
plus interest ($11.6 million through December 31, 2017) and default interest (up to an additional $10.1 million through
December 31, 2017, depending on the date any default occurred); and an unspecified amount of punitive damages, costs,
and attorneys’ fees.
At the initial hearing held February 21, 2017, the court stayed the proceedings and ordered the parties to discuss resolving the
dispute pursuant to the independent CVR valuation procedure under the CVR agreement. The parties met on April 5, 2017, but
were unsuccessful in reaching agreement on a process for resolving the dispute. The Company subsequently filed a motion to
stay the litigation and compel arbitration, and, on July 31, 2017, the court issued an order granting that motion. Mr. Yeransian
has filed a motion requesting that the court reconsider that order.
98
Management believes the holder representative’s suit to be without merit and will vigorously defend against it. Further,
management believes that any material loss resulting from the holder representative’s suit to be remote and that the contractual
contingent consideration payments related to the CVRs will not have a material impact on the Company’s liquidity.
In addition, contingencies arise in the normal course of the Company’s operations and are not expected to have a material
impact on the Company’s financial condition or results of operations.
17. Variable Interest Entities
In December 2015, the Company formed MCIM, a wholly owned consolidated subsidiary. MCIM is an insurance-linked
securities investment fund manager and insurance manager headquartered in Bermuda. Results attributable to MCIM are
included with the Company’s other operations, which are not included in a reportable segment.
In December 2015, the Company also formed a mutual fund company and reinsurance company, both of which were organized
under Bermuda law and are managed by MCIM. The mutual fund company issues multiple classes of nonvoting, redeemable
preference shares to investors through its funds (the Funds) and the Funds are primarily invested in nonvoting shares of the
reinsurance company. The underwriting results of the reinsurance company are attributed to the Funds through the issuance of
nonvoting preference shares.
The Funds and the reinsurance company are considered VIEs, as their preference shareholders have no voting rights. MCIM has
the power to direct the activities that most significantly impact the economic performance of these entities, but does not have a
variable interest in any of the entities. Except as described below, the Company is not the primary beneficiary of the Funds or
the reinsurance company, as the Company’s involvement is generally limited to that of an investment or insurance manager,
receiving fees that are at market and commensurate with the level of effort required. Investment management fees earned by
the Company from unconsolidated Funds were $28.7 million and $56.5 million for the years ended December 31, 2017 and
2016, respectively. The Company is the sole investor in one of the Funds, the Markel Diversified Fund, and consolidates that
fund as its primary beneficiary.
As of December 31, 2017, total assets of the Markel Diversified Fund were $170.3 million and total liabilities were $62.7
million. As of December 31, 2016, total assets of the Markel Diversified Fund were $166.8 million and total liabilities were
$64.6 million. The assets of the Markel Diversified Fund are available for use only by the Markel Diversified Fund, and are not
available for use by the Company. Total assets of the Markel Diversified Fund include an investment in one of the
unconsolidated Funds totaling $168.2 million as of December 31, 2017 and $165.1 million as of December 31, 2016, which
represents 7% of the outstanding preference shares of that fund as of December 31, 2017 and 6% as of December 31, 2016. This
investment is included in equity securities (available-for-sale) on the Company’s consolidated balance sheet. Total liabilities of
the Markel Diversified Fund for both periods includes a $62.5 million note payable delivered as part of the consideration
provided for its investment. This note payable is included in senior long-term debt and other debt on the Company’s
consolidated balance sheet. Other than the note payable, any liabilities held by the Markel Diversified Fund have no recourse to
the Company’s general credit.
The Company also holds an investment in CATCo Reinsurance Opportunities Fund Ltd. (CROF), a limited liability closed-end
fund listed on the London and Bermuda Stock Exchanges, which is not a VIE. This investment is included in equity securities
(available-for-sale) on the Company’s consolidated balance sheet. CROF is managed by MCIM and invests substantially all of its
assets in one of the unconsolidated Funds. At December 31, 2017 and 2016, the fair value of the Company’s investment in
CROF was $20.5 million and $26.3 million, respectively.
The Company’s exposure to risk from the unconsolidated Funds and reinsurance company is generally limited to its investment
and any earned but uncollected fees. The Company has not issued any investment performance guarantees to these VIEs or
their investors. As of December 31, 2017, total investment and insurance assets under management of MCIM for
unconsolidated VIEs were $6.0 billion, which includes funds held that will be used to settle claims for incurred losses.
99
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
18. Related Party Transactions
The Company engages in certain related party transactions in the normal course of business. These transactions are at arm’s
length and are not material to the Company’s consolidated financial statements. See note 17 for a discussion of the Company’s
related party transactions with unconsolidated VIEs.
19. Statutory Financial Information
a) Statutory capital and surplus and statutory net income (loss) for the Company’s insurance subsidiaries as of December 31,
2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015, respectively, is summarized below.
(dollars in thousands)
United States
United Kingdom
Bermuda
Other
Statutory Capital and Surplus
2017
$ 3,334,303
$ 642,418
$ 1,774,012
24,544
$
2016
$ 2,761,454
$ 670,030
$ 2,189,649
$ 24,726
As of December 31, 2017, the amount of statutory capital and surplus necessary to satisfy regulatory requirements is not
significant in relation to actual statutory capital and surplus.
(dollars in thousands)
United States
United Kingdom
Bermuda
Other
Statutory Net Income (Loss)
Years Ended December 31,
2017
$ 312,828
$ (25,785)
$ (83,445)
$ 127
2016
2015
$ 249,176
$ 78,033
$ 132,442
$ (965)
$ 291,783
$ 74,330
$ 185,289
$ (3,181)
The Solvency II Directive that governs the calculation of statutory capital and surplus for the Company’s United Kingdom
insurance subsidiary does not provide requirements for the calculation of net income. Amounts presented in the table above
have been calculated in accordance with United Kingdom GAAP.
United States
The laws of the domicile states of the Company’s U.S. insurance subsidiaries govern the amount of dividends that may be paid
to the Company. Generally, statutes in the domicile states of the Company’s U.S. insurance subsidiaries require prior approval
for payment of extraordinary, as opposed to ordinary, dividends. At December 31, 2017, the Company’s U.S. insurance
subsidiaries could pay up to $436.4 million to the Company during the following 12 months under the ordinary dividend
regulations.
In converting from U.S. statutory accounting principles to U.S. GAAP, typical adjustments include deferral of policy acquisition
costs, differences in the calculation of deferred income taxes and the inclusion of net unrealized gains or losses relating to fixed
maturities in shareholders’ equity. The Company does not use any permitted statutory accounting practices that are different
from prescribed statutory accounting practices which impact statutory capital and surplus.
100
United Kingdom
The Company’s United Kingdom insurance subsidiary, Markel International Insurance Company Limited (MIICL), and its
Lloyd’s managing agent, Markel Syndicate Management Limited (MSM), are authorized by the Prudential Regulation Authority
(PRA) and regulated by both the PRA and the Financial Conduct Authority (FCA). The PRA oversees compliance with
established periodic auditing and reporting requirements, minimum solvency margins and individual capital assessment
requirements under the Solvency II Directive and imposes dividend restrictions, while both the PRA and the FCA oversee
compliance with risk assessment reviews and various other requirements. MIICL is required to give advance notice to the PRA
for any dividends from MIICL and any transaction or proposed transaction with a connected or related person. MSM is required
to satisfy the solvency requirements of Lloyd’s. In addition, the Company’s United Kingdom subsidiaries must comply with the
United Kingdom Companies Act of 2006, which provides that dividends may only be paid out of profits available for that
purpose. As of December 31, 2017, earnings of the Company’s United Kingdom subsidiaries, to the extent not previously taxed
in the United States, are considered reinvested indefinitely for U.S. income tax purposes and will not be made available for
distributions to the holding company. See note 8 for further discussion of the effect of U.S. income tax regulations on the
Company’s foreign subsidiaries.
Bermuda
The Company’s Bermuda insurance subsidiary, Markel Bermuda Limited (Markel Bermuda), is subject to enhanced capital
requirements in addition to minimum solvency and liquidity requirements. The enhanced capital requirement is determined by
reference to a risk-based capital model that determines a control threshold for statutory capital and surplus by taking into
account the risk characteristics of different aspects of the insurer’s business. At December 31, 2017, Markel Bermuda satisfied
both the enhanced capital requirements and the minimum solvency and liquidity requirements.
Under the Bermuda Insurance Act, Markel Bermuda is prohibited from paying or declaring dividends during a fiscal year if it is
in breach of its enhanced capital requirement, solvency margin or minimum liquidity ratio or if the declaration or payment of
the dividend would cause a breach of those requirements. If an insurer fails to meet its solvency margin or minimum liquidity
ratio on the last day of any financial year, it is prohibited from declaring or paying any dividends during the next financial year
without the approval of the Bermuda Monetary Authority (BMA). Further, Markel Bermuda is prohibited from declaring or
paying, in any financial year, dividends of more than 25% of its total statutory capital and surplus as set forth in its previous
year’s statutory balance sheet unless at least seven days before payment of those dividends it files with the BMA an affidavit
stating that it will continue to meet its solvency margin and minimum liquidity ratio. Markel Bermuda must obtain the BMA’s
prior approval for a reduction by 15% or more of the total statutory capital as set forth in its previous year’s financial
statements. In addition, as a long-term insurer, Markel Bermuda may not declare or pay a dividend to any person other than a
policyholder unless the value of the assets in its long-term business fund, as certified by Markel Bermuda’s approved actuary,
exceeds the liabilities of its long-term business. The amount of the dividend cannot exceed the aggregate of that excess and any
other funds legally available for the payment of the dividend. As of December 31, 2017, Markel Bermuda could pay up to $443.5
million during the following 12 months without making any additional filings with the BMA.
Other Jurisdictions
The Company’s other foreign subsidiaries are subject to capital and solvency requirements in their respective jurisdictions of
domicile that govern their ability to declare and pay dividends. As of December 31, 2017, earnings of the Company’s foreign
subsidiaries, to the extent not previously taxed in the United States, are considered reinvested indefinitely for U.S. income tax
purposes and will not be made available for distributions to the holding company.
b) Lloyd’s sets the corporate members’ required capital annually based on each syndicates’ business plans, rating environment,
reserving environment and input arising from Lloyd’s discussions with, inter alia, regulatory and rating agencies. Such required
capital is referred to as Funds at Lloyd’s (FAL), and comprises cash and investments. The amount of cash and investments held
as FAL as of December 31, 2017 was $868.0 million. The amount which the Company provides as FAL is not available for
distribution to the holding company. The Company’s corporate members may also be required to maintain funds under the
control of Lloyd’s in excess of their capital requirements and such funds also may not be available for distribution to the
holding company.
101
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
20. Segment Reporting Disclosures
The Company monitors and reports its ongoing underwriting operations in the following three segments: U.S. Insurance,
International Insurance and Reinsurance. In determining how to aggregate and monitor its underwriting results, the Company
considers many factors, including the geographic location and regulatory environment of the insurance entity underwriting the
risk, the nature of the insurance product sold, the type of account written and the type of customer served. The U.S. Insurance
segment includes all direct business and facultative reinsurance placements written by the Company’s insurance subsidiaries
domiciled in the United States. The International Insurance segment includes all direct business and facultative reinsurance
placements written by the Company’s insurance subsidiaries domiciled outside of the United States, including the Company’s
syndicate at Lloyd’s of London. The Reinsurance segment includes all treaty reinsurance written across the Company. Results
for lines of business discontinued prior to, or in conjunction with, acquisitions, including results attributable to the run-off of
life and annuity reinsurance business, are reported in the Other Insurance (Discontinued Lines) segment. All investing activities
related to the Company’s insurance operations are included in the Investing segment.
In addition to it’s underwriting operations, the Company also has various other insurance-related and non-insurance operations.
These other operations include the Company’s Markel Ventures operations, which primarily consist of controlling interests in
various businesses that operate outside of the specialty insurance marketplace. The Company’s other operations also include
the results of the Company’s legal and professional consulting services, and, effective December 8, 2015, the results of the
Company’s investment management services attributable to MCIM. Effective November 17, 2017, the Company’s other
operations also include the results of the program services business acquired as part of the State National transaction. For
purposes of segment reporting, while presented separately in the Company’s segment disclosures, none of these other operations
are considered a reportable segment.
The following table summarizes the Company’s gross written premiums by country. Gross written premiums are attributed to
individual countries based upon location of risk or cedent.
(dollars in thousands)
United States
United Kingdom
Canada
Other countries
Total Underwriting
United States - Program Services
TOTAL
% of
Total
79%
7
3
11
100%
2017
$ 4,163,753
374,941
132,018
582,395
5,253,107
253,853
$ 5,506,960
Years Ended December 31,
% of
Total
77%
7
3
13
100%
2016
$ 3,691,840
358,348
125,444
621,013
4,796,645
—
$ 4,796,645
% of
Total
76%
9
2
13
100%
2015
$ 3,519,487
414,941
115,191
583,293
4,632,912
—
$ 4,632,912
Most of the Company’s gross written premiums are placed through insurance and reinsurance brokers. During the years ended
December 31, 2017, 2016 and 2015, the top three independent brokers accounted for 27%, 28% and 27% of gross premiums
written in the Company’s underwriting segments. During the years ended December 31, 2017, 2016 and 2015, the top three
independent brokers accounted for 35%, 40% and 42%, respectively, of gross premiums written in the International Insurance
segment and 78%, 75% and 68%, respectively, of gross premiums written in the Reinsurance segment.
Segment profit for the Investing segment is measured by net investment income and net realized investment gains or losses.
Segment profit or loss for each of the Company’s underwriting segments is measured by underwriting profit or loss. The
property and casualty insurance industry commonly defines underwriting profit or loss as earned premiums net of losses and
loss adjustment expenses and underwriting, acquisition and insurance expenses. Underwriting profit or loss does not replace
operating income or net income computed in accordance with U.S. GAAP as a measure of profitability. Underwriting profit or
loss provides a basis for management to evaluate the Company’s underwriting performance. Segment profit or loss for the
102
Company’s underwriting segments also includes other revenues and other expenses, primarily related to the run-off of managing
general agent operations that were discontinued in conjunction with acquisitions. Other revenues and other expenses in the
Other Insurance (Discontinued Lines) segment are comprised of the results attributable to the run-off of life and annuity
reinsurance business.
For management reporting purposes, the Company allocates assets to its underwriting, investing and other operations.
Underwriting assets are all assets not specifically allocated to the Investing segment or to the Company’s other operations.
Underwriting and investing assets are not allocated to the U.S. Insurance, International Insurance, Reinsurance or Other
Insurance (Discontinued Lines) segments since the Company does not manage its assets by underwriting segment. The
Company does not allocate capital expenditures for long-lived assets to any of its underwriting segments for management
reporting purposes.
a) The following tables summarize the Company’s segment disclosures.
Year Ended December 31, 2017
U.S. Insurance
International
Insurance
Reinsurance
Other
Insurance
(Discontinued
Lines)
Investing
Other
Consolidated
$ 2,885,279
2,432,477
$ 1,255,922
1,007,319
$ 1,112,101
978,160
$
2,364,121
949,912
934,114
$ — $ 253,853
(dollars in thousands)
Gross premium volume
Net written premiums
Earned premiums
Losses and loss adjustment expenses:
Current accident year
Prior accident years
Amortization of policy
acquisition costs
Other operating expenses
(1,648,427)
301,939
(793,917)
198,688
(924,879)
(7,803)
(502,217)
(395,472)
(173,253)
(215,028)
(218,883)
(81,766)
Underwriting profit (loss)
119,944
(33,598)
(299,217)
7,495
(195)
(169)
(169)
—
8,459
—
(795)
—
—
—
—
—
—
—
$ 5,506,960
— 4,417,787
— 4,247,978
— (3,367,223)
501,462
179
—
—
(894,353)
(693,061)
179
(205,197)
Net investment income
Net realized investment losses
Other revenues
Other expenses
—
—
3,419
(1,093)
—
—
5,886
(7,388)
—
—
417
—
—
—
2,022
(28,218)
405,709
(5,303)
—
—
— 1,401,531
— (1,271,281)
405,709
(5,303)
1,413,275
(1,307,980)
Total profit (loss)
$ 122,270
$ (35,100) $ (298,800)
$ (18,701)
$ 400,406
$ 130,429
$ 300,504
Amortization of intangible assets
Interest expense
INCOME BEFORE INCOME TAXES
(80,758)
(132,451)
$
87,295
U.S. GAAP COMBINED RATIO (1)
95%
104%
132%
NM(2)
NM(2)
105%
(1) The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment
expenses and underwriting, acquisition and insurance expenses to earned premiums.
(2) NM — Ratio is not meaningful.
103
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
Year Ended December 31, 2016
(dollars in thousands)
Gross premium volume
Net written premiums
Earned premiums
Losses and loss adjustment expenses:
Current accident year
Prior accident years
Amortization of policy
acquisition costs
Other operating expenses
U.S. Insurance
International
Insurance
Reinsurance
Other
Insurance
(Discontinued
Lines)
$ 2,635,266
2,237,163
$ 1,119,815
864,494
$ 1,041,055
898,728
$
2,175,332
853,512
836,264
509
635
762
(1,403,589)
204,881
(605,837)
164,713
(546,476)
125,514
—
10,050
(446,649)
(377,230)
(146,117)
(219,066)
(189,455)
(119,012)
Underwriting profit
152,745
47,205
106,835
Net investment income
Net realized investment gains
Other revenues
Other expenses
—
—
7,143
(15,407)
—
—
5,560
(5,712)
—
—
—
—
Investing
Other
Consolidated
$
— $
—
—
—
—
—
—
—
— $ 4,796,645
— 4,001,020
— 3,865,870
— (2,555,902)
505,158
—
—
—
—
(782,221)
(716,369)
316,536
373,230
65,147
—
—
— 1,293,185
— (1,142,620)
373,230
65,147
1,307,779
(1,190,243)
—
(1,061)
9,751
—
—
1,891
(26,504)
Total profit (loss)
$ 144,481
$ 47,053
$ 106,835
$ (14,862)
$ 438,377 $ 150,565
$ 872,449
Amortization of intangible assets
Interest expense
Loss on early extinguishment of debt
INCOME BEFORE INCOME TAXES
U.S. GAAP COMBINED RATIO (1)
93%
94%
87%
NM(2)
(68,533)
(129,896)
(44,100)
$ 629,920
92%
(1) The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment
expenses and underwriting, acquisition and insurance expenses to earned premiums.
(2) NM — Ratio is not meaningful.
104
(dollars in thousands)
Gross premium volume
Net written premiums
Year Ended December 31, 2015
U.S. Insurance
International
Insurance
Reinsurance
Other
Insurance
(Discontinued
Lines)
Investing
Other
Consolidated
$ 2,504,096
2,106,490
$ 1,164,866
888,214
$ 965,374
824,324
$
(1,424)
265
$
— $
—
Earned premiums
Losses and loss adjustment expenses:
2,105,212
879,426
838,543
351
Current accident year
Prior accident years
Amortization of policy
acquisition costs
Other operating expenses
(1,367,159)
298,967
(638,144)
248,834
(561,242)
97,860
—
(17,861)
(420,289)
(378,563)
(142,657)
(221,758)
(182,018)
(106,863)
—
(2,932)
Underwriting profit (loss)
238,168
125,701
86,280
(20,442)
—
—
—
—
—
—
— $ 4,632,912
— 3,819,293
— 3,823,532
— (2,566,545)
627,800
—
—
—
—
(744,964)
(710,116)
429,707
Net investment income
Net realized investment gains
Other revenues
Other expenses
—
—
3,331
(3,902)
—
—
7,790
(5,717)
—
—
593
(1,419)
—
—
617
(29,057)
353,213
106,480
—
—
— 1,074,427
— (1,006,710)
353,213
106,480
1,086,758
(1,046,805)
Total profit (loss)
$ 237,597
$ 127,774
$ 85,454
$ (48,882)
$ 459,693 $ 67,717
$ 929,353
Amortization of intangible assets
Interest expense
INCOME BEFORE INCOME TAXES
U.S. GAAP COMBINED RATIO (1)
89%
86%
90%
NM(2)
(68,947)
(118,301)
$ 742,105
89%
(1) The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment
expenses and underwriting, acquisition and insurance expenses to earned premiums.
(2) NM — Ratio is not meaningful.
105
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
b) The following table summarizes deferred policy acquisition costs, unearned premiums and unpaid losses and loss adjustment
expenses by segment.
(dollars in thousands)
December 31, 2017
U.S. Insurance
International Insurance
Reinsurance
Other Insurance (Discontinued Lines)
Total Underwriting
Program Services
TOTAL
December 31, 2016
U.S. Insurance
International Insurance
Reinsurance
Other Insurance (Discontinued Lines)
TOTAL
Deferred Policy
Acquisition Costs
Unearned
Premiums
Unpaid Losses and
Loss Adjustment Expenses
$ 212,102
74,678
178,789
—
465,569
—
$ 1,324,591
530,740
690,565
—
2,545,896
762,883
$ 4,331,541
3,379,969
3,248,070
429,270
11,388,850
2,195,431
$ 465,569
$ 3,308,779
$ 13,584,281
$ 176,348
51,948
164,114
—
$ 392,410
$ 1,166,914
445,183
651,741
—
$ 2,263,838
$ 3,849,541
3,062,725
2,661,209
542,187
$ 10,115,662
c) The following table summarizes earned premiums by major product grouping.
(dollars in thousands)
U.S. Insurance:
General liability
Professional liability
Property
Personal lines
Programs
Workers compensation
Other
Total U.S. Insurance
International Insurance:
General liability
Professional liability
Property
Marine and energy
Other
Total International Insurance
Reinsurance:
Property
Casualty
Auto
Other
Total Reinsurance
Other Insurance (Discontinued Lines)
TOTAL EARNED PREMIUMS
106
Years Ended December 31,
2017
2016
2015
$ 642,283
333,758
273,735
367,073
273,954
319,679
153,639
$ 563,908
328,597
270,026
364,843
263,783
301,126
83,049
$ 522,358
324,230
264,232
325,811
277,829
281,954
108,798
2,364,121
2,175,332
2,105,212
122,673
295,120
91,778
276,134
164,207
949,912
321,178
351,457
28,700
232,779
934,114
(169)
111,291
272,010
87,294
242,070
140,847
853,512
288,771
327,383
65,363
154,747
836,264
762
124,198
268,637
85,152
262,307
139,132
879,426
265,373
315,027
102,227
155,916
838,543
351
$ 4,247,978
$ 3,865,870
$ 3,823,532
The Company does not manage products at this level of aggregation. The Company offers a diverse portfolio of products and
manages these products in logical groupings within each operating segment.
d) The following table reconciles segment assets to the Company’s consolidated balance sheets.
(dollars in thousands)
Segment assets:
Investing
Underwriting
Total segment assets
Other operations
TOTAL ASSETS
December 31,
2017
2016
2015
$ 20,317,160
6,828,048
$ 19,029,584
5,397,696
$ 18,056,947
5,385,126
27,145,208
24,427,280
23,442,073
5,659,808
1,448,019
1,497,042
$ 32,805,016
$ 25,875,299
$ 24,939,115
e) Beginning in 2018, the Company will monitor and report its operations in the following four segments: Insurance,
Reinsurance, Investing and Markel Ventures. The Insurance segment will include all direct business and facultative placements
written on a global basis across the Company, which currently are included in the U.S. Insurance and International Insurance
segments. The Reinsurance segment will remain unchanged. Results for lines of business discontinued prior to, or in
conjunction with, acquisitions will continue to be excluded from these segments but will no longer be considered a reportable
segment. All investing activities related to the Company’s insurance operations will continue to be included in the Investing
segment. The Markel Ventures segment will include results attributable to the Company’s Markel Ventures operations, which
previously were not considered a reportable segment. Historically, the Company’s chief operating decision maker monitored and
assessed the performance of each Markel Ventures business separately with no single business being individually significant.
Following the continued growth in the Company’s Markel Ventures operations, effective in the first quarter of 2018, the chief
operating decision maker reviews and assesses Markel Ventures’ performance in the aggregate. The Company’s other operations,
which include legal and professional consulting services, investment management services, program services business and the
run-off underwriting operations discontinued prior to, or in conjunction with, acquisitions will be monitored and reported
separately from the Company’s four reportable segments.
21. Other Revenues and Other Expenses
The following table summarizes the components of other revenues and other expenses.
(dollars in thousands)
Markel Ventures:
Manufacturing
Markel Ventures:
Non-Manufacturing
Investment management
Program services
Managing general agent operations
Life and annuity
Other
Years Ended December 31,
2017
2016
2015
Other
Revenues
Other
Expenses
Other
Revenues
Other
Expenses
Other
Revenues
Other
Expenses
$ 742,591
$ 650,491
$ 784,745
$ 675,620
$ 755,802
$ 677,054
590,689
28,740
15,328
8,821
2,022
25,084
535,352
52,636
6,508
5,803
28,218
28,972
429,704
56,455
—
12,703
1,891
22,281
396,323
46,190
—
21,119
26,504
24,487
291,714
—
—
10,202
617
28,423
301,004
—
—
9,619
29,057
30,071
TOTAL
1,413,275
1,307,980
1,307,779
1,190,243
1,086,758
1,046,805
107
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
The Company’s Markel Ventures operations primarily consist of controlling interests in various businesses that operate outside
of the specialty insurance marketplace and are viewed by management as separate and distinct from the Company’s insurance
operations. While each of the businesses is operated independently from one another, management aggregates financial results
into two industry groups: manufacturing and non-manufacturing.
22. Employee Benefit Plans
a) The Company maintains defined contribution plans for employees of its United States insurance operations in accordance
with Section 401(k) of the U.S. Internal Revenue Code of 1986. Employees of the Company’s Markel Ventures subsidiaries are
provided post-retirement benefits under separate plans. The Company also provides various defined contribution plans for
employees of its international insurance and other operations, which are in line with local market terms and conditions of
employment. Expenses relating to the Company’s defined contribution plans, including the defined contribution plans of State
National effective November 17, 2017, were $36.7 million, $30.1 million and $27.7 million in 2017, 2016 and 2015, respectively.
b) The Terra Nova Pension Plan is a defined benefit plan which covers certain employees in the Company’s international
insurance operations who meet the eligibility conditions set out in the plan. The plan has been closed to new participants since
2001. The cost of providing pensions for employees is charged to earnings over the average working life of employees according
to actuarial recommendations. Final benefits are based on the employee’s years of credited service and the higher of pensionable
compensation received in the calendar year preceding retirement or the best average pensionable compensation received in any
three consecutive years in the ten years preceding retirement. Effective April 1, 2012, employees are no longer accruing benefits
for future service in the Terra Nova Pension Plan. The Company uses December 31 as the measurement date for the Terra Nova
Pension Plan.
The following table summarizes the funded status of the Terra Nova Pension Plan and the amounts recognized on the
accompanying consolidated balance sheets of the Company.
(dollars in thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of period
Interest cost
Benefits paid
Actuarial loss
Effect of foreign currency rate changes
Years Ended December 31,
2017
2016
$ 178,618
5,016
(5,644)
4,985
16,142
$ 170,005
6,113
(3,322)
38,485
(32,663)
Projected benefit obligation at end of year
$ 199,117
$ 178,618
Change in plan assets:
Fair value of plan assets at beginning of period
Actual gain on plan assets
Employer contributions
Benefits paid
Effect of foreign currency rate changes
Fair value of plan assets at end of year
Funded status of the plan
Net actuarial pension loss
TOTAL
108
$ 175,644
16,902
3,393
(5,644)
16,275
$ 186,727
22,367
3,577
(3,322)
(33,705)
$ 206,570
$ 175,644
$
7,453
$ (2,974)
77,567
85,110
$ 85,020
$ 82,136
Net actuarial pension loss is recognized as a component of accumulated other comprehensive income, net of taxes. The asset or
liability for pension benefits, also referred to as the funded status of the plan, at December 31, 2017 and 2016 was included in
other assets on the consolidated balance sheets.
The following table presents the changes in plan assets and projected benefit obligation recognized in accumulated other
comprehensive income.
(dollars in thousands)
Net actuarial gain (loss)
Settlement loss recognized
Amortization of:
Net actuarial loss
Tax benefit (expense)
Years Ended December 31,
2017
$ 3,728
—
3,815
(1,284)
2016
$ (25,243)
—
1,951
4,192
2015
$ (3,102)
343
2,319
88
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
$ 6,259
$ (19,100)
$ (352)
The following table summarizes the components of net periodic benefit income (loss) and the weighted average assumptions for
the Terra Nova Pension Plan.
(dollars in thousands)
Components of net periodic benefit income (loss):
Interest cost
Expected return on plan assets
Amortization of net actuarial pension loss
Settlement loss recognized
Years Ended December 31,
2017
2016
2015
$ 5,016
(8,189)
3,815
—
$ 6,113
(9,124)
1,951
—
$ 6,645
(11,496)
2,319
343
NET PERIODIC BENEFIT INCOME (LOSS)
$ 642
$ (1,060)
$ (2,189)
Weighted average assumptions as of December 31:
Discount rate
Expected return on plan assets
Rate of compensation increase
2.6%
4.5%
3.0%
2.7%
4.5%
3.0%
4.0%
5.4%
2.9%
The projected benefit obligation and the net periodic benefit income (loss) are determined by independent actuaries using
assumptions provided by the Company. In determining the discount rate, the Company uses the current yield on high-quality,
fixed maturity investments that have maturities corresponding to the anticipated timing of estimated defined benefit payments.
The decrease in the weighted average discount rate from 2015 to 2016 is due to a decrease in the yields on securities used to
determine the discount rate during 2016. The expected return on plan assets is estimated based upon the anticipated average
yield on plan assets using asset return assumptions for each asset class, and the cross-correlations between the asset classes, over
a specified projection horizon. The decrease in the weighted average expected return on plan assets from 2015 to 2016 is due to
changes in market conditions during 2016 that impacted projected returns. The rate of compensation increase is based upon
historical experience and management’s expectation of future compensation.
Management’s discount rate and rate of compensation increase assumptions at December 31, 2017 were used to calculate the
Company’s projected benefit obligation. Management’s discount rate, expected return on plan assets and rate of compensation
increase assumptions at December 31, 2016 were used to calculate the net periodic benefit income for 2017. The Company
estimates that net periodic benefit cost in 2018 will include an expense of $3.1 million resulting from the amortization of the net
actuarial pension loss included as a component of accumulated other comprehensive income at December 31, 2017.
109
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
The fair values of each of the plan’s assets are measured using quoted prices in active markets for identical assets, which
represent Level 1 inputs within the fair value hierarchy established in FASB ASC 820-10. The following table summarizes the
fair value of plan assets as of December 31, 2017 and 2016.
(dollars in thousands)
Plan assets:
Fixed maturity index funds
Equity security index funds
Cash and cash equivalents
TOTAL
December 31,
2017
2016
$ 110,936
95,452
182
$ 103,218
72,419
7
$ 206,570
$ 175,644
The Company’s target asset allocation for the plan is 47% equity securities and 53% fixed maturities. At December 31, 2017,
the actual allocation of assets in the plan was 46% equity securities and 54% fixed maturities. At December 31, 2016, the
actual allocation of assets in the plan was 41% equity securities and 59% fixed maturities.
Investments are managed by a third party investment manager. Equity securities are invested in an index fund where 30% is
indexed to United Kingdom equities and 70% is indexed to other markets. Assets are also invested in a mutual fund with a
diversified global portfolio of equities, investment grade debt, property and cash. The primary objective of investing in these
funds is to earn rates of return that are consistently in excess of inflation. Investing in equity securities, historically, has
provided rates of return that are higher than investments in fixed maturities. Fixed maturity investments are allocated between
five mutual funds; two index funds that include United Kingdom government securities, one index fund that includes securities
issued by other foreign governments, one mutual fund that includes investment grade corporate bonds from the United
Kingdom and foreign markets and one index fund that includes United Kingdom corporate securities. The assets in these funds
are invested to meet the Company’s obligations for current pensioners and those individuals nearing retirement. The plan does
not invest in the Company’s common shares.
At December 31, 2017 and 2016, the fair value of plan assets exceeded the plan’s accumulated benefit obligation of $195.1
million and $175.1 million, respectively. The Company expects to make plan contributions of $3.5 million in 2018.
The benefits expected to be paid in each year from 2018 to 2022 are $3.0 million, $3.1 million, $3.1 million, $3.2 million and
$3.3 million, respectively. The aggregate benefits expected to be paid in the five years from 2023 to 2027 are $17.6 million. The
expected benefits to be paid are based on the same assumptions used to measure the Company’s projected benefit obligation at
December 31, 2017.
110
23. Markel Corporation (Parent Company Only) Financial Information
The following parent company only condensed financial information reflects the financial position, results of operations and
cash flows of Markel Corporation.
C O N D E N S E D B A L A N C E S H E E T S
A S S E T S
Investments, available-for-sale, at estimated fair value:
December 31,
2017
2016
(dollars in thousands)
Fixed maturities (amortized cost of $533,183 in 2017 and $51,181 in 2016)
Equity securities (cost of $402,694 in 2017 and $203,708 in 2016)
Short-term investments (estimated fair value approximates cost)
$
$ 532,438
646,060
1,159,323
Total Investments
Cash and cash equivalents
Restricted cash and cash equivalents
Receivables
Investments in consolidated subsidiaries
Notes receivable from subsidiaries
Income taxes receivable
Other assets
TOTAL ASSETS
L I A B I L I T I E S A N D S H A R E H O L D E R S’ E Q U I T Y
Senior long-term debt
Notes payable to subsidiaries
Income taxes payable
Net deferred tax liability
Other liabilities
Total Liabilities
Total Shareholders’ Equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
52,234
367,156
1,729,400
2,148,790
369,641
1,013
20,477
8,107,450
60,110
—
97,364
2,337,821
349,347
1,419
18,684
9,510,215
140,110
5,704
121,233
$ 12,484,533
$ 10,804,845
$ 2,537,331
285,000
—
84,507
73,547
2,980,385
9,504,148
$ 1,944,171
285,000
25,240
25,902
63,605
2,343,918
8,460,927
$ 12,484,533
$ 10,804,845
111
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
C O N D E N S E D S T A T E M E N T S O F I N C O M E A N D C O M P R E H E N S I V E I N C O M E
Years Ended December 31,
R E V E N U E S
Net investment income
Dividends on common stock of consolidated subsidiaries
Net realized investment gains:
Other-than-temporary impairment losses
Net realized investment gains, excluding
other-than-temporary impairment losses
Net realized investment gains
TOTAL REVENUES
E X P E N S E S
Interest expense
Loss on early extinguishment of debt
Other expenses
TOTAL EXPENSES
Income Before Equity in Undistributed Earnings of
Consolidated Subsidiaries and Income Taxes
Equity in undistributed earnings of consolidated subsidiaries
Income tax benefit
2017
2016
2015
(dollars in thousands)
$ 21,076
895,920
$ 9,561
349,622
$ 2,565
187,496
—
3,383
3,383
(98)
(3,455)
1,166
1,068
75,000
71,545
920,379
360,251
261,606
122,151
—
11,708
133,859
786,520
(469,365)
(78,114)
116,013
44,100
13,076
173,189
187,062
196,615
(72,012)
95,620
—
11,287
106,907
154,699
407,489
(20,584)
N E T I N C O M E T O S H A R E H O L D E R S
$ 395,269
$ 455,689
$ 582,772
O T H E R C O M P R E H E N S I V E I N C O M E (L O S S) T O S H A R E H O L D E R S
Change in net unrealized gains on investments, net of taxes:
Net holding gains (losses) arising during the period
Consolidated subsidiaries’ net holding gains (losses) arising
during the period
Consolidated subsidiaries’ change in unrealized
other-than-temporary impairment losses on
fixed maturities arising during the period
Reclassification adjustments for net gains
included in net income to shareholders
Consolidated subsidiaries’ reclassification
adjustments for net gains included
in net income to shareholders
Change in net unrealized gains on investments, net of taxes
Change in foreign currency translation adjustments, net of taxes
Consolidated subsidiaries’ change in foreign currency
$ 52,277
$ 37,045
$ (41,861)
735,062
238,616
(198,309)
—
35
160
(1,513)
(558)
(45,273)
(22,783)
763,043
(2,260)
(32,970)
242,168
(1,326)
(35,209)
(320,492)
2,970
translation adjustments, net of taxes
12,663
(10,384)
(32,175)
Consolidated subsidiaries’ change in net actuarial pension loss,
net of taxes
Total Other Comprehensive Income (Loss) to Shareholders
6,259
779,705
(19,100)
211,358
(352)
(350,049)
C O M P R E H E N S I V E I N C O M E T O S H A R E H O L D E R S
$ 1,174,974
$ 667,047
$ 232,723
112
C O N D E N S E D S T A T E M E N T S O F C A S H F L O W S
O P E R AT I N G A C T I V I T I E S
Net income to shareholders
Adjustments to reconcile net income to shareholders
to net cash provided by operating activities
NET CASH PROVIDED BY OPERATING ACTIVITIES
I N V E S T I N G A C T I V I T I E S
Proceeds from sales of fixed maturities and equity securities
Proceeds from maturities, calls and prepayments
of fixed maturities
Cost of fixed maturities and equity securities purchased
Net change in short-term investments
Securities received from subsidiaries as dividends, repayment
Years Ended December 31,
2017
2016
2015
(dollars in thousands)
$ 395,269
$ 455,689
$ 582,772
(166,132)
229,137
(120,564)
(464,193)
335,125
118,579
20,562
1,831
100,633
64,705
(765,602)
579,261
11,960
(29,110)
(970,364)
24,945
(55,656)
9,956
of notes receivable and return of capital
862,554
238,975
—
Securities provided to subsidiaries for issuance of notes receivable
and capital contributions
Return of capital from subsidiaries
Decrease (increase) in notes receivable due from subsidiaries
Capital contributions to subsidiaries
Acquisitions, net of cash acquired
Cost of equity method investments
Additions to property and equipment
Other
(99,942)
45,225
(58)
(270,623)
(1,153,683)
(10,633)
—
6,972
—
21,021
92,530
—
—
(3,100)
(584)
(3,207)
NET CASH USED BY INVESTING ACTIVITIES
(721,262)
(640,048)
F I N A N C I N G A C T I V I T I E S
Additions to senior long-term debt
Increase in notes payable to subsidiaries
Repayment and retirement of senior long-term debt
Premiums and fees related to early extinguishment of debt
Repurchases of common stock
Issuance of common stock
Purchase of noncontrolling interests
Other
NET CASH PROVIDED BY FINANCING ACTIVITIES
Increase (decrease) in cash, cash equivalents, restricted cash
592,923
—
—
—
(110,838)
552
(8,970)
(1,430)
472,237
493,149
—
(183,343)
(43,691)
(51,142)
4,623
—
(4,960)
214,636
—
—
—
(228,578)
—
(13,164)
(305)
(376)
(162,545)
—
285,000
(2,000)
—
(31,491)
4,752
—
3,985
260,246
and restricted cash equivalents
(19,888)
(90,287)
216,280
Cash, cash equivalents, restricted cash and restricted cash
equivalents at beginning of year
370,654
460,941
244,661
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND
RESTRICTED CASH EQUIVALENTS AT END OF YEAR
$ 350,766
$ 370,654
$ 460,941
113
Markel Corporation & Subsidiaries
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (continued)
24. Quarterly Financial Information (unaudited)
The following table presents the unaudited quarterly results of consolidated operations for 2017, 2016 and 2015.
(dollars in thousands, except per share amounts)
Mar. 31
June 30
Sept. 30
Dec. 31
Quarters Ended
2017
2016
2015
Operating revenues
Net income (loss)
Net income (loss) to shareholders
Comprehensive income (loss) to shareholders
Net income (loss) per share:
Basic
Diluted
Common stock price ranges:
High
Low
Operating revenues
Net income
Net income to shareholders
Comprehensive income (loss) to shareholders
Net income per share:
Basic
Diluted
Common stock price ranges:
High
Low
Operating revenues
Net income
Net income to shareholders
Comprehensive income (loss) to shareholders
Net income per share:
Basic
Diluted
Common stock price ranges:
High
Low
$ 1,411,751
71,040
69,869
223,239
$
3.91
3.90
$
992.00
887.40
$ 1,376,182
163,646
160,370
396,994
$
11.21
11.15
$
895.03
805.03
$ 1,302,154
194,006
190,992
281,807
$
13.57
13.49
$
783.50
660.05
$ 1,481,493
151,427
149,660
342,357
$ 1,506,148
(261,035)
(259,141)
(19,869)
$ 1,662,267
439,326
434,881
629,247
$
$
10.34
10.31
$
(18.82)
(18.82)
$
30.48
30.39
996.38
936.95
$ 1,086.68
963.79
$ 1,157.30
1,054.20
$ 1,375,937
80,673
78,797
209,942
$ 1,431,282
83,421
83,796
89,161
$ 1,428,625
132,703
132,726
(29,050)
$
$
5.44
5.41
$
5.62
5.60
$
9.14
9.11
989.18
880.01
$
961.78
909.84
$
931.94
811.05
$ 1,304,605
92,453
91,369
(132,925)
$ 1,342,764
104,410
102,519
(51,143)
$ 1,420,460
198,273
197,892
134,984
$
$
6.76
6.72
821.00
736.96
$
$
7.43
7.39
$
14.23
14.14
898.08
775.00
$
937.91
791.97
114
M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
The accompanying consolidated financial statements and related notes have been prepared in accordance with U.S. generally
accepted accounting principles (U.S. GAAP) and include the accounts of Markel Corporation and its subsidiaries, as well as any
variable interest entities that meet the requirements for consolidation (the Company). For a discussion of our significant
accounting policies, see note 1 of the notes to consolidated financial statements.
The following discussion and analysis should be read in conjunction with Selected Financial Data, the consolidated financial
statements and related notes and the discussion under “Risk Factors” and “Safe Harbor and Cautionary Statement.”
Our Business
We are a diverse financial holding company serving a variety of niche markets. Our principal business markets and underwrites
specialty insurance products. We believe that our specialty product focus and niche market strategy enable us to develop
expertise and specialized market knowledge. We seek to differentiate ourselves from competitors by our expertise, service,
continuity and other value-based considerations. We also own interests in various businesses that operate outside of the
specialty insurance marketplace. Our financial goals are to earn consistent underwriting and operating profits and superior
investment returns to build shareholder value.
Our business is comprised of the following types of operations:
• Underwriting - our underwriting operations are comprised of our risk-bearing insurance operations, which include the run-off
of underwriting operations that were discontinued in conjunction with acquisitions
• Investing - our investing activities are primarily related to our underwriting operations
• Program Services - our program services business serves as a fronting platform that provides other insurance companies
access to the U.S. property and casualty insurance market
• Markel CATCo - our Markel CATCo operations include an investment fund manager that offers insurance-linked securities
to investors
• Markel Ventures - our Markel Ventures operations include our controlling interests in a diverse portfolio of businesses that
operate outside of the specialty insurance marketplace
Through December 31, 2017, we monitored and reported our ongoing underwriting operations in the following three
segments: U.S. Insurance, International Insurance and Reinsurance. In determining how to aggregate and monitor our
underwriting results, management considered many factors, including the geographic location and regulatory environment of
the insurance entity underwriting the risk, the nature of the insurance product sold, the type of account written and the type
of customer served.
With the continued growth and diversification of our business, beginning in 2018, we no longer consider the geographic location
of the insurance entity underwriting the risk when monitoring our underwriting operations and will monitor and report our
ongoing underwriting operations on a global basis in the following two segments: Insurance and Reinsurance. The Insurance
segment will include all direct business and facultative placements written across the Company, which currently are reported
in our U.S. Insurance and International Insurance segments. The Reinsurance segment will remain unchanged.
The U.S. Insurance segment includes all direct business and facultative reinsurance placements written by our insurance
subsidiaries domiciled in the United States. The International Insurance segment includes all direct business and facultative
reinsurance placements written by our insurance subsidiaries domiciled outside of the United States, including our syndicate at
Lloyd’s of London (Lloyd’s). The Reinsurance segment includes all treaty reinsurance written across the Company. Results for
lines of business discontinued prior to, or in conjunction with, acquisitions, are reported in the Other Insurance (Discontinued
Lines) segment. All investing activities related to our insurance operations are included in the Investing segment.
Our U.S. Insurance segment includes both hard-to-place risks written outside of the standard market on an excess and surplus
lines basis and unique and hard-to-place risks that must be written on an admitted basis due to marketing and regulatory
reasons. The following products are included in this segment: general liability, professional liability, catastrophe-exposed
property, personal property, workers’ compensation, specialty program insurance for well-defined niche markets, and liability
coverages and other coverages tailored for unique exposures. Business in this segment is written through our Specialty division
and our Wholesale and Global Insurance divisions, which were combined effective January 1, 2018 to form the Markel
115
Markel Corporation & Subsidiaries
M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
Assurance division. The Specialty division writes program insurance and other specialty coverages for well-defined niche
markets, primarily on an admitted basis. The Wholesale division writes commercial risks, primarily on an excess and surplus
lines basis, using a network of wholesale brokers managed on a regional basis. The Global Insurance division writes risks
outside of the standard market on both an admitted and non-admitted basis. Global Insurance division business written by our
U.S. insurance subsidiaries is included in this segment.
In November 2017, we completed the acquisition of State National Companies, Inc. (State National), a leading specialty
provider of property and casualty insurance. The acquisition of State National adds a premier fronting platform to our insurance
operations through which insurance products can be offered throughout the United States. State National also offers collateral
protection insurance (CPI) to credit unions and regional banks. Results attributable to CPI business are included in the U.S.
Insurance segment. Results attributable to the program services (fronting) operations are reported within our other operations,
which are not included in a reportable segment.
In April 2017, we completed the acquisition of SureTec Financial Corp. (SureTec), a Texas-based privately held surety
company primarily offering contract, commercial and court bonds. Results attributable to SureTec are included in the
U.S. Insurance segment.
Our International Insurance segment writes risks that are characterized by either the unique nature of the exposure or the high
limits of insurance coverage required by the insured. Risks written in the International Insurance segment are written on either
a direct basis or a subscription basis, the latter of which means that loss exposures brought into the market are typically insured
by more than one insurance company or Lloyd’s syndicate. When we write business in the subscription market, we prefer to
participate as lead underwriter in order to control underwriting terms, policy conditions and claims handling. Products offered
within our International Insurance segment include primary and excess of loss property, excess liability, professional liability,
marine and energy and liability coverages and other coverages tailored for unique exposures. Business included in this segment
is produced through our Markel International and Global Insurance divisions. The Markel International division writes business
worldwide from our London-based platform, which includes our syndicate at Lloyd’s. Global Insurance division business
written by our non-U.S. insurance subsidiaries, which primarily targets Fortune 1000 accounts, is included in this segment.
Our Reinsurance segment includes property, casualty and specialty treaty reinsurance products offered to other insurance and
reinsurance companies globally through the broker market. Our treaty reinsurance offerings include both quota share and excess
of loss reinsurance and are typically written on a participation basis, which means each reinsurer shares proportionally in the
business ceded under the reinsurance treaty written. Principal lines of business include: property (including catastrophe-exposed
property), professional liability, general casualty, credit, surety, auto and workers’ compensation. Our reinsurance product
offerings are underwritten by our Global Reinsurance division and our Markel International division.
For purposes of segment reporting, the Other Insurance (Discontinued Lines) segment includes lines of business that have been
discontinued prior to, or in conjunction with, acquisitions. The lines were discontinued because we believed some aspect of the
product, such as risk profile or competitive environment, would not allow us to earn consistent underwriting profits. The Other
Insurance (Discontinued Lines) segment also includes development on asbestos and environmental (A&E) loss reserves and the
results attributable to the run-off of our life and annuity reinsurance business.
In December 2015, we completed the acquisition of substantially all of the assets of CATCo Investment Management Ltd.
(CATCo IM) and CATCo-Re Ltd. CATCo IM was an insurance-linked securities investment fund manager and reinsurance
manager headquartered in Bermuda focused on building and managing highly diversified, collateralized retrocession and
reinsurance portfolios covering global property catastrophe risks. Following the acquisition, we are operating this business
through Markel CATCo Investment Management Ltd. (MCIM). MCIM receives management fees for its investment
management and insurance management services, as well as performance fees based on the annual performance of the
investment funds that it manages. Results attributable to MCIM are included with our other operations, which are not included
in a reportable segment. As of December 31, 2017, MCIM’s total investment and insurance assets under management were
$6.2 billion, which includes $6.0 billion for unconsolidated variable interest entities.
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Through our wholly owned subsidiary Markel Ventures, Inc. (Markel Ventures), we own interests in various businesses that
operate outside of the specialty insurance marketplace. These businesses are viewed by management as separate and distinct
from our insurance operations and are comprised of a diverse portfolio of businesses from various industries. Local management
teams oversee the day-to-day operations of these companies, while strategic decisions are made in conjunction with members of
our executive management team. While each of these businesses is operated independently, we aggregate their financial results
into two industry groups: manufacturing and non-manufacturing. Our manufacturing operations are comprised of
manufacturers of transportation and other industrial equipment. Our non-manufacturing operations are comprised of
businesses from several industry groups, including consumer goods and services (including healthcare) and business services.
Our strategy in making these investments is similar to our strategy for purchasing equity securities. We seek to invest in
profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline,
at reasonable prices. We intend to own the businesses acquired for a long period of time.
In August 2017, we acquired 81% of Costa Farms, a Florida-based privately held grower of house and garden plants. Results
attributable to Costa Farms are included with our Markel Ventures operations, which are not included in a reportable segment.
In December 2015, we acquired 80% of the outstanding shares of CapTech Ventures, Inc. (CapTech), a privately held company
headquartered in Richmond, Virginia. CapTech is a management and IT consulting firm, providing services and solutions to a
wide array of customers. Results attributable to CapTech are included with our Markel Ventures operations, which are not
included in a reportable segment.
We historically monitored and assessed the performance of each of our Markel Ventures businesses separately with no single
business being individually significant to the operations of the Company as a whole. Following the continued growth in our
Markel Ventures operations and its aggregate significance to our financial results, beginning in 2018, we will monitor and report
our Markel Ventures operations as a single operating segment, consistent with the way our chief operating decision maker now
reviews and assesses Markel Ventures’ performance.
For further discussion of our lines of business, principal products offered, distribution channels, competition, underwriting
philosophy and our Markel Ventures operations, see the discussion under Business Overview.
Critical Accounting Estimates
Critical accounting estimates are those estimates that both are important to the portrayal of our financial condition and results
of operations and require us to exercise significant judgment. The preparation of financial statements in accordance with U.S.
GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and
expenses and the disclosure of material contingent assets and liabilities, including litigation contingencies. These estimates,
by necessity, are based on assumptions about numerous factors.
We review the following critical accounting estimates and assumptions quarterly: evaluating the adequacy of reserves for
unpaid losses and loss adjustment expenses, life and annuity reinsurance benefit reserves, the reinsurance allowance for
doubtful accounts and income tax liabilities, as well as analyzing the recoverability of deferred tax assets, estimating
reinsurance premiums written and earned and evaluating the investment portfolio for other-than-temporary declines in
estimated fair value. Critical accounting estimates and assumptions for goodwill and intangible assets are reviewed in
conjunction with an acquisition and goodwill and indefinite-lived intangible assets are reassessed at least annually for
impairment. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated
financial statements.
Unpaid Losses and Loss Adjustment Expenses
Our consolidated balance sheet included estimated unpaid losses and loss adjustment expenses of $13.6 billion and reinsurance
recoverable on unpaid losses of $4.6 billion at December 31, 2017 compared to $10.1 billion and $2.0 billion, respectively, at
December 31, 2016. Included in the December 31, 2017 balances for both unpaid losses and loss adjustment expenses and
reinsurance recoverable on unpaid losses were $2.2 billion attributable to our program services business.
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O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
We accrue liabilities for unpaid losses and loss adjustment expenses based upon estimates of the ultimate amounts payable.
We maintain reserves for specific claims incurred and reported (case reserves) and reserves for claims incurred but not reported
(IBNR reserves).
Reported claims are in various stages of the settlement process, and the corresponding reserves for reported claims are based
upon all information available to us. Case reserves consider our 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. Claims are settled based upon their merits, and some
claims may take years to settle, especially if legal action is involved.
As of any balance sheet date, all claims have not yet been reported, and some claims may not be reported for many years. As
a result, the liability for unpaid losses and loss adjustment expenses includes significant estimates for incurred but not
reported claims.
There is normally a time lag between when a loss event occurs and when it is actually reported to us. The actuarial methods
that we use to estimate losses have been designed to address the lag in loss reporting as well as the delay in obtaining
information that would allow us to more accurately estimate future payments. There is also often a time lag between cedents
establishing case reserves and re-estimating their reserves, and notifying us of the new or revised case reserves. As a result, the
reporting lag is more pronounced in our reinsurance contracts than in our insurance contracts due to the reliance on ceding
companies to report their claims to us. On reinsurance transactions, the reporting lag will generally be 60 to 90 days after the
end of a reporting period, but can be longer in some cases. Based on the experience of our actuaries and management, we select
loss development factors and trending techniques to mitigate the difficulties caused by reporting lags. At least annually, we
evaluate and update our loss development and trending factor selections using cedent specific and industry data.
U.S. GAAP requires that IBNR reserves 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. IBNR reserves are generally calculated by subtracting paid losses and case reserves from
estimated ultimate losses. IBNR reserves were 64% of total unpaid losses and loss adjustment expenses at December 31, 2017
compared to 67% at December 31, 2016.
Each quarter, our actuaries prepare estimates of the ultimate liability for unpaid losses and loss adjustment expenses based on
established actuarial methods. Management reviews these estimates, supplements the actuarial analyses with information
provided by claims, underwriting and other operational personnel and determines its best estimate of loss reserves, which is
recorded in our consolidated financial statements. Our procedures for determining the adequacy of loss reserves at the end of the
year are substantially similar to the procedures applied at the end of each interim period.
Any adjustments to reserves resulting from our interim or year-end reviews, including changes in estimates, are recorded as a
component of losses and loss adjustment expenses in the period of the change. Reserve changes that increase previous estimates
of ultimate claims cost are referred to as unfavorable or adverse development, or reserve strengthening. Reserve changes that
decrease previous estimates of ultimate claims cost are referred to as favorable development.
Program Services
For our program services business, case reserves are generally established based on reports received from the general agents or
reinsurers with whom we do business. Our actuaries review the loss reserve data received for sufficiency, consistency with
historical data and for consistency with other programs we write that have similar characteristics. If the data is not credible, or
where no data is available, the loss reserves are calculated using our experience or industry experience for similar products or
lines of business. All of the premium written in our program services business is ceded and net reserves for unpaid losses and
loss adjustment expenses as of December 31, 2017 were $2.4 million.
Underwriting
For our insurance operations, we are generally notified of insured losses by our insureds or their brokers. Based on this
information, we establish case reserves by estimating the expected ultimate losses from the claim (including any administrative
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costs associated with settling the claim). Our claims personnel use their knowledge of the specific claim along with internal and
external experts, including underwriters, actuaries and legal counsel, to estimate the expected ultimate losses.
For our reinsurance operations, case reserves are generally established based on reports received from ceding companies or their
brokers. For excess of loss contracts, we are typically notified of insurance losses on specific contracts and record a case reserve
for the estimated expected ultimate losses from the claim. For quota share contracts, we typically receive aggregated claims
information and record a case reserve based on that information. As with insurance business, we evaluate this information and
estimate the expected ultimate losses.
Our liabilities for unpaid losses and loss adjustment expenses can generally be categorized into two distinct groups, short-tail
business and long-tail business. Short-tail business refers to lines of business, such as property, accident and health, automobile,
watercraft and marine hull exposures, for which losses are usually known and paid shortly after the loss actually occurs.
Long-tail business describes lines of business for which specific losses may not be known and reported for some period and
losses take much longer to emerge. Given the time frame over which long-tail exposures are ultimately settled, there is greater
uncertainty and volatility in these lines than in short-tail lines of business. Our long-tail coverages consist of most casualty
lines, including professional liability, directors’ and officers’ liability, products liability, general and excess liability and excess
and umbrella exposures, as well as workers’ compensation insurance. Some factors that contribute to the uncertainty and
volatility of long-tail casualty programs, and thus require a significant degree of judgment in the reserving process, include the
inherent uncertainty as to the length of reporting and payment development patterns, the possibility of judicial interpretations
or legislative changes, including changes in workers’ compensation benefit laws, that might impact future loss experience
relative to prior loss experience and the potential lack of comparability of the underlying data used in performing loss reserve
analyses. For example, we have exposure to auto casualty claims in the United Kingdom (U.K.) through reinsurance contracts
written on the 2014 and prior years of account. In the United Kingdom, the calculation of these outstanding claims is
informed by the discount rate used in determining lump sum awards in personal injury cases referenced in the Ogden tables.
Effective March 20, 2017, the Ogden Rate decreased from plus 2.5% to minus 0.75%, which represents the first rate change
since 2001. The reduction in the Ogden Rate increased the expected claims payments on these exposures, and we increased
loss reserves accordingly.
Our ultimate liability may be greater or less than current reserves. Changes in our estimated ultimate liability for loss reserves
generally occur as a result of the emergence of unanticipated loss activity, the completion of specific actuarial or claims studies
or changes in internal or external factors. We closely monitor new information on reported claims and use statistical analyses
prepared by our actuaries to evaluate the adequacy of our recorded reserves. We are required to exercise considerable judgment
when assessing the relative credibility of loss development trends. Our philosophy is to establish loss reserves that are more
likely redundant than deficient. This means that we seek to establish loss reserves that will ultimately prove to be adequate.
As a result, if new information or trends indicate an increase in frequency or severity of claims in excess of what we initially
anticipated, we generally respond quickly and increase loss reserves. If, however, frequency or severity trends are more favorable
than initially anticipated, we often wait to reduce our loss reserves until we can evaluate experience in additional periods to
confirm the credibility of the trend. In addition, for long-tail lines of business, trends develop over longer periods of time, and as
a result, we give credibility to these trends more slowly than for short-tail or less volatile lines of business. As part of our
acquisition of underwriting operations, to the extent the reserving philosophy of the acquired business is less conservative than
our reserving philosophy, the post-acquisition loss reserves will be strengthened until total loss reserves are consistent with our
target level of confidence.
In establishing our liabilities for unpaid losses and loss adjustment expenses, our actuaries estimate an ultimate loss ratio, by
accident year or policy year, for each of our product lines with input from our underwriting and claims associates. For product
lines in which loss reserves are established on a policy year basis, we have developed a methodology to convert from policy year
to accident year for financial reporting purposes. In estimating an ultimate loss ratio for a particular line of business, our
actuaries may use one or more actuarial reserving methods and select from these a single point estimate. To varying degrees,
these methods include detailed statistical analysis of past claim reporting, settlement activity, claim frequency and severity,
policyholder loss experience, industry loss experience and changes in market conditions, policy forms and exposures. The
actuarial methods we use include:
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O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
Initial Expected Loss Ratio Method – This method multiplies earned premiums by an expected loss ratio. The expected loss
ratio is selected utilizing industry data, our historical data, frequency-severity and rate level forecasts and professional judgment.
Paid Loss Development – This method uses historical loss payment patterns to estimate future loss payment patterns.
Our actuaries use the historical loss patterns to develop factors that are applied to current paid loss amounts to calculate
expected ultimate losses.
Incurred Loss Development – This method uses historical loss reporting patterns to estimate future loss reporting patterns.
Our actuaries use the historical loss patterns to develop factors that are applied to current reported losses to calculate expected
ultimate losses.
Bornhuetter-Ferguson Paid Loss Development – This method divides the projection of ultimate losses into the portion that
has already been paid and the portion that has yet to be paid. The portion that has yet to be paid is estimated as the product of
three amounts: the premium earned for the exposure period, the expected loss ratio and the percentage of ultimate losses that
are still unpaid. The expected loss ratio is selected by considering historical loss ratios, adjusted for any known changes in
pricing, loss trends, adequacy of case reserves, changes in administrative practices and other relevant factors.
Bornhuetter-Ferguson Incurred Loss Development – This method is identical to the Bornhuetter-Ferguson paid loss
development method, except that it uses the percentage of ultimate losses that are still unreported, instead of the percentage
of ultimate losses that are still unpaid.
Frequency/Severity – Under this method, expected ultimate losses are equal to the product of the expected ultimate number
of claims and the expected ultimate average cost per claim. Our actuaries use historical reporting patterns and severity patterns
to develop factors that are applied to the current reported amounts to calculate expected ultimate losses.
Outstanding to IBNR Ratio Method – Under this method, IBNR is based on a detailed review of remaining open claims.
This method assumes that the estimated future loss development is indicated by the current level of case reserves.
Each actuarial method has its own set of assumptions and its own strengths and limitations, with no one method being better
than the others in all situations. Our actuaries select the reserving methods that they believe will produce the most reliable
estimate for the class of business being evaluated. Greater judgment may be required when we introduce new product lines or
when there have been changes in claims handling practices, as the statistical data available may be insufficient. In these
instances, we may rely upon assumptions applied to similar lines of business, rely more heavily on industry experience, take
into account changes in underwriting guidelines and risk selection or review the impact of changes in claims reserving practices
with claims personnel.
For example, in January 2013, we acquired Essentia Insurance Company, a company that underwrites insurance exclusively for
Hagerty Insurance Agency and Hagerty Classic Marine Insurance Agency (collectively, Hagerty). Hagerty offers liability and
physical damage insurance for classic cars, vintage boats, motorcycles and related automotive collectibles. Because Markel
had limited exposure to such risks in the past, we supplemented our limited data and loss experience with third-party data.
Working with Hagerty, we were able to obtain loss development triangles for the business Hagerty had underwritten with their
previous carriers. Markel now aggregates that data with our own data for use in the pricing of and reserving for the Hagerty
portfolio of business.
A key assumption in most actuarial analyses is that past development patterns will repeat themselves in the future, absent a
significant change in internal or external factors that influence the ultimate cost of our unpaid losses and loss adjustment
expenses. Our estimates reflect implicit and explicit assumptions regarding the potential effects of external factors, including
economic and social inflation, judicial decisions, changes in law, general economic conditions and recent trends in these factors.
Our actuarial analyses are based on statistical analysis but also consist of reviewing internal factors that are difficult to analyze
statistically, including underwriting and claims handling changes. In some of our markets, and where we act as a reinsurer, the
timing and amount of information reported about underlying claims are in the control of third parties. This can also affect
estimates and require re-estimation as new information becomes available.
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As indicated above, we may use one or more actuarial reserving methods, which incorporate numerous underlying
judgments and assumptions, to establish our estimate of ultimate loss reserves. While we use our best judgment in
establishing our estimate for loss reserves, applying different assumptions and variables could lead to significantly different
loss reserve estimates.
Loss frequency and loss severity are two key measures of loss activity that often result in adjustments to actuarial assumptions
relative to ultimate loss reserve estimates. Loss frequency measures the number of claims per unit of insured exposure. When
the number of newly reported claims is higher than anticipated, generally speaking, loss reserves are increased. Conversely, loss
reserves are generally decreased when fewer claims are reported than expected. Loss severity measures the average size of a
claim. When the average severity of reported claims is higher than originally estimated, loss reserves are typically increased.
When the average claim size is lower than anticipated, loss reserves are typically decreased. For example, in each of the past
three years, we experienced favorable development on prior years’ loss reserves in our brokerage products liability product line
as a result of decreases in loss severity. During 2016, we experienced unfavorable development on prior years’ loss reserves
related to our specified medical and medical malpractice product lines as a result of increases in loss frequency.
Changes in prior years’ loss reserves, including the trends and factors that impacted loss reserve development, as well as the
likelihood that such trends and factors could result in future loss reserve development, are discussed in further detail under
“Results of Operations.”
Loss reserves are established at management’s best estimate, which is generally higher than the corresponding actuarially
calculated point estimate. The actuarial point estimate represents our actuaries’ estimate of the most likely amount that will
ultimately be paid to settle the loss reserves we have recorded at a particular point in time; however, there is inherent
uncertainty in the point estimate as it is the expected value in a range of possible reserve estimates. In some cases, actuarial
analyses, which are based on statistical analysis, cannot fully incorporate all of the subjective factors that affect development of
losses. In other cases, management’s perspective of these more subjective factors may differ from the actuarial perspective.
Subjective factors where management’s perspective may differ from that of the actuaries include: the credibility and timeliness
of claims information received from third parties, economic and social inflation, judicial decisions, changes in law, changes in
underwriting or claims handling practices, general economic conditions, the risk of moral hazard and other current and
developing trends within the insurance and reinsurance markets, including the effects of competition. As a result, the
actuarially calculated point estimates for each of our lines of business represent starting points for management’s quarterly
review of loss reserves.
In management’s opinion, the actuarially calculated point estimate generally underestimates both the ultimate favorable
impact of a hard insurance market and the ultimate adverse impact of a soft insurance market. Therefore, the percentage by
which management’s best estimate exceeds the actuarial point estimate will generally be higher during a soft market than
during a hard market. Additionally, following an acquisition of insurance operations, to the extent the reserving philosophy of
the acquired business is less conservative than our reserving philosophy, the percentage by which management’s best estimate
exceeds the actuarial point estimate will generally be lower until we build total loss reserves that are consistent with our
historic level of confidence. Management’s best estimate of net reserves for unpaid losses and loss adjustment expenses
exceeded the actuarially calculated point estimate by $576.9 million, or 6.9%, at December 31, 2017, compared to $537.4
million, or 7.2%, at December 31, 2016.
The difference between management’s best estimate and the actuarially calculated point estimate in both 2017 and 2016 is
primarily associated with our long-tail business. Actuarial estimates can underestimate the adverse effects of a soft insurance
market because the impact of changes in risk selection and terms and conditions can be difficult to quantify. In addition, the
frequency of claims may increase in a recessionary environment. Similarly, the risk an insured will intentionally cause or be
indifferent to loss may increase during an economic downturn, and the attention to loss prevention measures may decrease.
These subjective factors affect the development of losses and represent instances where management’s perspectives may differ
from those of our actuaries. As a result, management has attributed less credibility than our actuaries to favorable trends
experienced on our long-tail business during soft market periods and has not incorporated these favorable trends into its best
estimate to the same extent as the actuaries.
See note 9 of the notes to consolidated financial statements for further details regarding the historical development of reserves
for losses and loss adjustment expenses and changes in methodologies and assumptions used to calculate reserves for unpaid
losses and loss adjustment expenses.
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O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
Management also considers the range, or variability, of reasonably possible losses determined by our actuaries when establishing
its best estimate for loss reserves. The actuarial ranges represent our actuaries’ estimate of a likely lowest amount and likely
highest amount that will ultimately be paid to settle the loss reserves we have recorded at a particular point in time. The range
determinations are based on estimates and actuarial judgments and are intended to encompass reasonably likely changes in one
or more of the factors that were used to determine the point estimates. Using statistical models, our actuaries establish high and
low ends of a range of reasonable reserve estimates for each of our operating segments.
The following table summarizes our reserves for net unpaid losses and loss adjustment expenses and the actuarially
established high and low ends of a range of reasonable reserve estimates at December 31, 2017. As described in note 9 of the
notes to consolidated financial statements, unpaid losses and loss adjustment expenses attributable to acquisitions are
recorded at fair value as of the acquisition date, which generally consists of the present value of the expected net loss and loss
adjustment expense payments plus a risk premium. The net loss reserves presented in this table represent our estimated future
payments for losses and loss adjustment expenses, whereas the reserves for unpaid losses and loss adjustment expenses
included in the consolidated balance sheet include the unamortized portion of fair value adjustments recorded in conjunction
with an acquisition.
(dollars in millions)
U.S. Insurance
International Insurance
Reinsurance
Other Insurance (Discontinued Lines)
Net Loss
Reserves Held
$ 3,500.1
2,261.7
2,886.1
263.0
Low End of
Actuarial
Range(1)
High End of
Actuarial
Range(1)
$ 3,033.5
1,805.8
2,087.3
208.1
$ 3,786.3
2,520.5
3,240.7
426.8
(1) Due to the actuarial methods used to determine the separate ranges for each segment of our business, it is not appropriate to aggregate the
high or low ends of the separate ranges to determine the high and low ends of the actuarial range on a consolidated basis.
Undue reliance should not be placed on these ranges of estimates as they are only one of many points of reference used by
management to determine its best estimate of ultimate losses. Further, actuarial ranges may not be a true reflection of the
potential variability between loss reserves estimated at the balance sheet date and the ultimate cost of settling claims. Actuarial
ranges are developed based on known events as of the valuation date, while ultimate losses are subject to events and
circumstances that are unknown as of the valuation date.
We place less reliance on the range established for our Other Insurance (Discontinued Lines) segment than on the ranges
established for our other operating segments. The range established for our Other Insurance (Discontinued Lines) segment
includes exposures related to acquired lines of business, many of which are no longer being written, that were not subject to our
underwriting discipline and controls prior to our acquisition. Additionally, A&E exposures, which are subject to an uncertain
and unfavorable legal environment, account for 40% of the net loss reserves considered in the range established for our Other
Insurance (Discontinued Lines) segment.
Our exposure to A&E claims results from policies written by acquired insurance operations before their acquisitions. The
exposure to A&E claims originated from umbrella, excess and commercial general liability (CGL) insurance policies and
assumed reinsurance contracts that were written on an occurrence basis from the 1970s to mid-1980s. Exposure also originated
from claims-made policies that were designed to cover environmental risks provided that all other terms and conditions of the
policy were met. A&E claims include property damage and clean-up costs related to pollution, as well as personal injury
allegedly arising from exposure to hazardous materials. After 1986, we began underwriting CGL coverage with pollution
exclusions, and in some lines of business we began using a claims-made form. These changes significantly reduced our exposure
to future A&E claims on post-1986 business.
There is significant judgment required in estimating the amount of our potential exposure from A&E claims due to the limited
and variable historical data on A&E losses as compared to other types of claims, the potential significant reporting delays of
claims from insureds to insurance companies and the continuing evolution of laws and judicial interpretations of those laws
relative to A&E exposures. Due to these unique aspects of A&E exposures, the ultimate value of loss reserves for A&E claims
cannot be estimated using traditional methods and is subject to greater uncertainty than other types of claims. Other factors
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contributing to the significant uncertainty in estimating A&E reserves include: uncertainty as to the number and identity of
insureds with potential exposure; uncertainty as to the number of claims filed by exposed, but not ill, individuals; uncertainty
as to the settlement values to be paid; difficulty in properly allocating responsibility and liability for the loss, especially if the
claim involves multiple insurance providers or multiple policy periods; growth in the number and significance of bankruptcies
of asbestos defendants; uncertainty as to the financial status of companies that insured or reinsured all or part of A&E claims;
and inconsistent court decisions and interpretations with respect to underlying policy intent and coverage.
Due to these uncertainties, it is not possible to estimate our ultimate liability for A&E exposures with the same degree of
reliability as with other types of exposures. Future development will be affected by the factors mentioned above and could have
a material effect on our results of operations, cash flows and financial position. As of December 31, 2017 and 2016, our
consolidated balance sheets included estimated net reserves for A&E losses and loss adjustment expenses of $104.7 million
and $111.6 million, respectively.
In March 2015, we completed a retroactive reinsurance transaction to cede a portfolio of policies primarily comprised of
liabilities arising from A&E exposures that originated before 1992 to a third party. Effective March 31, 2017, the related reserves,
which totaled $69.1 million, were formally transferred to the third party by way of a Part VII transfer pursuant to the Financial
Services and Markets Act 2000 of the United Kingdom. The Part VII transfer eliminates the uncertainty regarding the potential
for adverse development of estimated ultimate liabilities on the underlying policies. In October 2015, we completed a second
retroactive reinsurance transaction to cede a portfolio of policies primarily comprised of liabilities arising from A&E exposures
that originated before 1987. The transaction provides up to $300 million of coverage for losses in excess of a $97.0 million
retention on the ceded policies and 50% coverage on an additional $100 million of losses. After considering our retention on the
ceded policies, ceded reserves for unpaid losses and loss adjustment expenses totaled $76.4 million. As of December 31, 2017,
our total reinsurance recoverable on unpaid losses for A&E exposures was 62% of our gross reserves for A&E exposures.
We seek to establish appropriate reserve levels for A&E exposures, including A&E exposures ceded to third parties under
retroactive reinsurance transactions; however, these reserves could increase in the future. Any future adverse development on
reserves subject to retroactive reinsurance contracts will result in increases in our gross reserves for unpaid losses and loss
adjustment expenses for A&E exposures and will be recognized in net income in the current period. Any corresponding benefit
for ceded losses, however, will be deferred and recognized as claims are settled. These reserves are not discounted to present
value and are forecasted to pay out over the next 40 to 50 years as claims are settled.
Life and Annuity Benefits
We previously acquired a block of life and annuity reinsurance contracts which subject us to mortality, longevity and morbidity
risks. The related reserves are compiled by our actuaries on a reinsurance contract-by-contract basis and are computed on a
discounted basis using standard actuarial techniques and cash flow models. Since the development of our life and annuity
reinsurance reserves is based upon cash flow projection models, we must make estimates and assumptions based on cedent
experience, industry mortality tables, and expense and investment experience, including a provision for adverse deviation. The
assumptions used to determine policy benefit reserves are generally locked-in for the life of the contract unless an unlocking
event occurs. To the extent existing policy reserves, together with the present value of future gross premiums and expected
investment income earned thereon, are not adequate to cover the present value of future benefits, settlement and maintenance
costs, the locked-in assumptions are revised to current best estimate assumptions and a charge to earnings for life and annuity
benefits is recognized at that time. Our consolidated balance sheets at December 31, 2017 and 2016 included reserves for life
and annuity benefits of $1.1 billion and $1.0 billion, respectively.
Because of the assumptions and estimates used in establishing reserves for life and annuity benefit obligations and the
long-term nature of these reinsurance contracts, the ultimate liability may be greater or less than the estimates. The average
discount rate for the life and annuity benefit reserves was 2.3% as of December 31, 2017.
Reinsurance Premiums
Our assumed reinsurance premiums are recorded at the inception of each contract based upon contract terms and information
received from cedents and brokers. For excess of loss contracts, the amount of minimum or deposit premium is usually
contractually documented at inception, and variances between this premium and final premium are generally small. An
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adjustment is made to the minimum or deposit premium, when notified, if there are changes in underlying exposures insured.
For quota share contracts, gross premiums written are normally estimated at inception based on information provided by
cedents or brokers. We generally record such premiums using the cedent’s initial estimates, and then adjust them as more
current information becomes available, with such adjustments recorded as premiums written in the period they are determined.
We believe that the cedent’s estimate of the volume of business they expect to cede to us usually represents the best estimate of
gross premium written at the beginning of the contract. As the contract progresses, we monitor actual premium received in
conjunction with correspondence from the cedent in order to refine our estimate. Variances from original premium estimates
are normally greater for quota share contracts than excess of loss contracts. Premiums are earned on a pro rata basis over the
coverage period, or for multi-year contracts, in proportion with the underlying risk exposure to the extent there is variability in
the exposure throughout the coverage period. The impact of premium adjustments to net income may be mitigated by related
acquisition costs and losses.
Certain contracts we write, particularly property catastrophe reinsurance contracts, provide for reinstatements of coverage.
Reinstatement premiums are the premiums for the restoration of the reinsurance limit of a contract to its full amount after a
loss occurrence by the reinsured. The purpose of optional and required reinstatements is to permit the reinsured to reinstate the
reinsurance coverage at a pre-determined price level once a loss event has penetrated the reinsurance layer. In addition, required
reinstatement premiums permit the reinsurer to obtain additional premiums to cover the additional loss limits provided.
We accrue for reinstatement premiums resulting from losses recorded. Such accruals are based upon contractual terms and the
only element of management judgment involved is with respect to the amount of losses recorded. Changes in estimates of
losses recorded on contracts with reinstatement premium features will result in changes in reinstatement premiums based on
contractual terms. Reinstatement premiums are recognized at the time we record losses and are earned on a pro rata basis over
the coverage period.
Ceded Reinsurance Allowance for Doubtful Accounts
We evaluate and adjust reserves for uncollectible ceded reinsurance based upon our collection experience, the financial
condition of our reinsurers, collateral held and the development of our gross loss reserves. Our consolidated balance sheets at
December 31, 2017 and 2016 included a reinsurance allowance for doubtful accounts of $34.0 million and $36.8 million,
respectively, all of which is attributable to our underwriting operations. Based on the significant amounts of collateral held on
our program services business and historical collection experience, we have not recorded a reinsurance allowance for doubtful
accounts on this business.
Reinsurance recoverables recorded on insurance losses ceded under reinsurance contracts are subject to judgments and
uncertainties similar to those involved in estimating gross loss reserves. In addition to these uncertainties, our reinsurance
recoverables may prove uncollectible if the reinsurers are unable or unwilling to perform under the reinsurance contracts. In
establishing our reinsurance allowance for amounts deemed uncollectible, we evaluate the financial condition of our reinsurers
and monitor concentration of credit risk arising from our exposure to individual reinsurers. To determine if an allowance is
necessary, we consider, among other factors, published financial information, reports from rating agencies, payment history,
collateral held and our legal right to offset balances recoverable against balances we may owe. Our ceded reinsurance allowance
for doubtful accounts is subject to uncertainty and volatility due to the time lag involved in collecting amounts recoverable
from reinsurers. Over the period of time that losses occur, reinsurers are billed and amounts are ultimately collected, economic
conditions, as well as the operational and financial performance of particular reinsurers, may change and these changes may
affect the reinsurers’ willingness and ability to meet their contractual obligation to us. It is also difficult to fully evaluate the
impact of major catastrophic events on the financial stability of reinsurers, as well as the access to capital that reinsurers may
have when such events occur. The ceding of insurance does not legally discharge us from our primary liability for the full
amount of the policies, and we will be required to pay the loss and bear collection risk if the reinsurers fail to meet their
obligations under the reinsurance contracts.
Income Taxes and Uncertain Tax Positions
The preparation of our consolidated income tax provision, including the evaluation of tax positions we have taken or expect to
take on our income tax returns, requires significant judgment. In evaluating our tax positions, we recognize the tax benefit from
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an uncertain tax position only if, based on the technical merits of the position, it is more likely than not that the tax position
will be sustained upon examination by the taxing authorities. Tax positions that meet the more likely than not threshold are
then measured using a probability weighted approach, whereby the largest amount of tax benefit that is greater than 50% likely
of being realized upon ultimate settlement is recognized. At December 31, 2017, we did not have any material unrecognized tax
benefits. The tax positions that we have taken or expect to take are based upon the application of tax laws and regulations,
which are subject to interpretation, judgment and uncertainty. As a result, our actual liability for income taxes may differ
significantly from our estimates.
We record deferred income taxes as assets or liabilities on our consolidated balance sheets to reflect the net tax effect of the
temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in
which those temporary differences are expected to be recovered or settled. At December 31, 2017 and 2016, our net deferred tax
liability was $505.6 million and $330.5 million, respectively. The increase in our net deferred tax liability in 2017 was primarily
driven by the increase in net unrealized gains on investments in 2017 and an increase in intangible assets attributable to
acquisitions, partially offset by the remeasurement of our net deferred tax liability at the lower enacted U.S. corporate tax rate
following the enactment of the Tax Cuts and Jobs Act (TCJA) in December 2017. See further discussion of the impact of the
TCJA in note 8 of the notes consolidated financial statements.
Deferred tax assets are reduced by a valuation allowance when management believes it is more likely than not that some, or all,
of the deferred tax assets will not be realized. As of December 31, 2017 and 2016, our deferred tax assets were net of a valuation
allowance of $25.2 million and $18.8 million, respectively. In evaluating our ability to realize our deferred tax assets and
assessing the need for a valuation allowance at December 31, 2017 and 2016, we made estimates regarding the future taxable
income of our subsidiaries and judgments about our ability to pursue prudent and feasible tax planning strategies. A change in
any of these estimates and judgments could result in the need to increase our valuation allowance through a charge to earnings.
See note 8 of the notes to consolidated financial statements for further discussion of our consolidated income tax provision,
uncertain tax positions and net operating losses.
Goodwill and Intangible Assets
Our consolidated balance sheet as of December 31, 2017 included goodwill and intangible assets of $3.1 billion. Goodwill and
intangible assets are recorded as a result of business acquisitions. Goodwill represents the excess of the amount paid to acquire a
business over the net fair value of assets acquired and liabilities assumed at the date of acquisition. Indefinite-lived and other
intangible assets are recorded at fair value as of the acquisition date. The determination of the fair value of certain assets
acquired and liabilities assumed involves significant judgment and the use of valuation models and other estimates, which
require assumptions that are inherently subjective. Goodwill and indefinite-lived intangible assets are tested for impairment at
least annually. Intangible assets with definite lives are reviewed for impairment when events or circumstances indicate that
their carrying value may not be recoverable. We completed our annual test for impairment during the fourth quarter of 2017
based upon results of operations through September 30, 2017.
For some reporting units, we assessed qualitative factors to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. This assessment serves as a basis for determining whether it is necessary to
perform the quantitative goodwill impairment test. For other reporting units, we elected to perform the quantitative goodwill
impairment test, which includes determining whether the carrying amount of a reporting unit, including goodwill, exceeds its
estimated fair value. If the carrying amount of the reporting unit exceeds the fair value, the excess of the recorded amount of
goodwill over the fair value is charged to net income as an impairment loss. The impairment loss is limited to the amount of
goodwill allocated to that reporting unit.
A significant amount of judgment is required in performing goodwill impairment tests. When using the qualitative approach,
we considered macroeconomic factors such as industry and market conditions. We also considered reporting unit-specific
events, actual financial performance versus expectations and management’s future business expectations. As part of our
qualitative evaluation of certain reporting units with material goodwill, we considered the fact that some of the businesses
had been recently acquired in orderly transactions between market participants, and our purchase price represented fair value at
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Markel Corporation & Subsidiaries
M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
acquisition. There were no events since acquisition which had a significant impact on the fair value of these reporting units.
For reporting units which we tested quantitatively, we estimated fair value primarily using an income approach based on a
discounted cash flow model. The cash flow projections used in the discounted cash flow model included management’s best
estimate of future growth and margins. The discount rates used to determine the fair value estimates were developed based
on the capital asset pricing model using market-based inputs as well as an assessment of the inherent risk in projected future
cash flows.
We believe the fair value of each of our reporting units exceeded its respective carrying amount as of October 1, 2017 and
December 31, 2017.
During the fourth quarter of 2016, we recorded a goodwill impairment charge of $18.7 million to other expenses for one of our
Markel Ventures industrial manufacturing reporting units, to reduce the carrying value of its goodwill to its implied fair value.
Unfavorable market conditions, specifically declining oil prices from late 2014 through 2016, resulted in lower than expected
earnings over a similar time period. The reporting unit’s earnings are generally tied to infrastructure spending across global
markets, a significant portion of which are influenced by the price of oil. To determine the value of the impairment loss, we
estimated the fair value of the reporting unit primarily using an income approach based on a discounted cash flow model that
incorporates management’s best estimate of future growth and margins. While these cash flow projections yield positive cash
flows and earnings in the long-term, they were insufficient to support the current carrying value of the reporting unit due to the
unfavorable impact of current market conditions and recent trends on our shorter-term projections. After recording this charge
in 2016, the reporting unit’s goodwill was reduced to zero.
During the fourth quarter of 2015, we recorded a goodwill impairment charge of $14.9 million to other expenses, for one of our
Markel Ventures healthcare reporting units, to reduce the carrying value of its goodwill to its implied fair value. The reporting
unit’s operations consist of the planning, development and operation of behavioral health services in partnership with
healthcare organizations. In 2015, we determined the goodwill for the reporting unit was impaired as a result of lower than
expected earnings and lower estimated future earnings. We believe the performance of this reporting unit has been impacted by
healthcare legislation, evolving general healthcare market conditions and the need to adapt more quickly to those changes.
Additionally, the reporting unit’s performance has been impacted by operational costs in excess of projections on new operating
facilities where construction began just prior to our acquisition. Although we anticipated a ramp-up period in the initial
operations of these facilities, costs have continued to exceed both our initial and revised expectations. To determine the value
of the impairment loss, we estimated the fair value of the reporting unit primarily using an income approach based on a
discounted cash flow model that incorporates management’s best estimate of future growth and margins. After recording this
charge in 2015, the reporting unit’s goodwill was reduced to zero.
Investments
We complete a detailed analysis each quarter to assess whether the decline in the fair value of any investment below its cost
basis is deemed other-than-temporary. All securities with unrealized losses are reviewed. For equity securities, a decline in fair
value that is considered to be other-than-temporary is recognized in net income based on the fair value of the security at the
time of assessment, resulting in a new cost basis for the security. For fixed maturities where we intend to sell the security or it is
more likely than not that we will be required to sell the security before recovery of its amortized cost, a decline in fair value is
considered to be other-than-temporary and is recognized in net income based on the fair value of the security at the time of
assessment, resulting in a new cost basis for the security. If the decline in fair value of a fixed maturity below its amortized cost
is considered to be other-than-temporary based upon other considerations, we compare the estimated present value of the cash
flows expected to be collected to the amortized cost of the security. The extent to which the estimated present value of the cash
flows expected to be collected is less than the amortized cost of the security represents the credit-related portion of the
other-than-temporary impairment, which is recognized in net income, resulting in a new cost basis for the security. Any
remaining decline in fair value represents the non-credit portion of the other-than-temporary impairment, which is recognized
in other comprehensive income (loss). The discount rate used to calculate the estimated present value of the cash flows
expected to be collected is the effective interest rate implicit for the security at the date of purchase.
We consider many factors in completing our quarterly review of securities with unrealized losses for other-than-temporary
impairment, including the length of time and the extent to which fair value has been below cost and the financial condition and
near-term prospects of the issuer. For equity securities, the ability and intent to hold the security for a period of time sufficient
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to allow for any anticipated recovery is considered. For fixed maturities, we consider whether we intend to sell the security or if
it is more likely than not that we will be required to sell the security before recovery, the implied yield-to-maturity, the credit
quality of the issuer and the ability to recover all amounts outstanding when contractually due. When assessing whether we
intend to sell a fixed maturity or if it is likely that we will be required to sell a fixed maturity before recovery of its amortized
cost, we evaluate facts and circumstances including, but not limited to, decisions to reposition the investment portfolio,
potential sales of investments to meet cash flow needs and potential sales of investments to capitalize on favorable pricing.
Risks and uncertainties are inherent in our other-than-temporary decline in fair value assessment methodology. The risks and
uncertainties include, but are not limited to, incorrect or overly optimistic assumptions about the financial condition, liquidity
or near-term prospects of an issuer, inadequacy of any underlying collateral, unfavorable changes in economic or social
conditions and unfavorable changes in interest rates or credit ratings. Changes in any of these assumptions could result in
charges to earnings in future periods.
Losses from write downs for other-than-temporary declines in the estimated fair value of investments, while potentially
significant to net income, do not have an impact on our financial position. Since our investment securities are considered
available-for-sale and are recorded at estimated fair value, unrealized losses on investments are already included in accumulated
other comprehensive income. See note 3(b) of the notes to consolidated financial statements for further discussion of our
assessment methodology for other-than-temporary declines in the estimated fair value of investments.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued several accounting standards updates (ASUs) that become effective
January 1, 2018. These standards were evaluated and we have identified the impacts, if any, to our consolidated financial
position, results of operations and cash flows.
Adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), will not have a material impact on our
consolidated financial position, results of operations or cash flows.
Upon adoption of ASU No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets
and Financial Liabilities, changes in the fair value of equity securities will be recognized in net income rather than other
comprehensive income. As of December 31, 2017, accumulated other comprehensive income included $3.3 billion of net
unrealized gains on equity securities, which will be reclassified to retained earnings on January 1, 2018. As of December 31,
2017, accumulated other comprehensive income was net of deferred income taxes on net unrealized gains on equity securities
of $1.1 billion. We are still assessing the impact of ASU No. 2018-02 following the enactment of the Tax Cuts and Jobs Act
in December 2017, on deferred taxes included in accumulated other comprehensive income and have not determined the
amount of deferred income taxes on net unrealized gains on equity securities that will be reclassified to retained earnings on
January 1, 2018.
Other ASUs that we expect have the most potential to significantly impact our consolidated financial position, results of
operations or cash flows upon adoption and are currently evaluating are as follows:
• ASU No. 2016-02, Leases (Topic 842)
• ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
• ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects
from Accumulated Other Comprehensive Income
See note 1(w) of the notes to consolidated financial statements for discussion of all of these ASUs and the expected effects on
our consolidated financial position, results of operations and cash flows.
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Markel Corporation & Subsidiaries
M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
Key Performance Indicators
An important measure of our financial success is our ability to grow book value per share at a high rate of return over a long
period of time. To mitigate the effects of short-term volatility, we measure ourselves over a five-year period. We believe that
growth in book value per share is a comprehensive measure of our success because it includes all underwriting, investing and
operating results. We measure underwriting results by our underwriting profit or loss and combined ratio. We measure investing
results by our net investment income and net realized gains (losses) as well as our taxable equivalent total investment return.
We measure our other operating results, which primarily consist of our Markel Ventures operations, by our revenues and net
income (loss), as well as earnings before interest, income taxes, depreciation and amortization (EBITDA). These measures are
discussed in greater detail under “Results of Operations.” As we continue to expand and diversify our operations beyond
underwriting and investing, we recognize that book value per share does not capture all of the economic value in our business,
as a growing portion of our operations are not recorded at fair value or otherwise captured in book value. As a result, beginning
in 2018, we will also measure our financial success through the growth in the market price of a share of our stock, or total
shareholder return. For the year ended December 31, 2017, our share price increased 26%. Over the past five years, our share
price increased at a compound annual rate of 21%.
Results of Operations
The following table presents the components of net income to shareholders.
(dollars in thousands)
U.S. Insurance segment underwriting profit
International Insurance segment underwriting profit (loss)
Reinsurance segment underwriting profit (loss)
Other Insurance (Discontinued Lines) segment
underwriting profit (loss)
Other underwriting profit
Net investment income
Net realized investment gains (losses)
Other revenues
Other expenses
Amortization of intangible assets
Interest expense
Loss on early extinguishment of debt
Income tax benefit (expense)
Net income attributable to noncontrolling interests
Years Ended December 31,
2017
2016
2015
$ 119,944
(33,598)
(299,217)
7,495
179
405,709
(5,303)
1,413,275
(1,307,980)
(80,758)
(132,451)
—
313,463
(5,489)
$ 152,745
47,205
106,835
$ 238,168
125,701
86,280
9,751
—
373,230
65,147
1,307,779
(1,190,243)
(68,533)
(129,896)
(44,100)
(169,477)
(4,754)
(20,442)
—
353,213
106,480
1,086,758
(1,046,805)
(68,947)
(118,301)
—
(152,963)
(6,370)
NET INCOME TO SHAREHOLDERS
$ 395,269
$ 455,689
$ 582,772
Net income to shareholders decreased 13% from 2016 to 2017 due to an underwriting loss and net realized investment losses in
2017 compared to an underwriting profit and net realized investment gains in 2016. These decreases were partially offset by
recording a one-time tax benefit of $339.9 million in the fourth quarter of 2017, primarily related to the remeasurement of our
U.S. net deferred tax liability at the lower enacted U.S. corporate tax rate as a result of the TCJA. See further discussion of the
impact of the TCJA in note 8 of the notes to consolidated financial statements. Net income to shareholders decreased 22% from
2015 to 2016 due to less favorable underwriting results, a loss on early extinguishment of debt and lower net realized investment
gains, partially offset by more favorable results within our other operations compared to 2015. The components of net income to
shareholders are discussed in further detail under “Underwriting Results,” “Life and Annuity Benefits,” “Investing Results,”
“Markel Ventures Operations” and “Interest Expense, Loss on Early Extinguishment of Debt and Income Taxes.”
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Underwriting Results
Underwriting profits are a key component of our strategy to grow book value per share. We believe that the ability to achieve
consistent underwriting profits demonstrates knowledge and expertise, commitment to superior customer service and the
ability to manage insurance risk. The property and casualty insurance industry commonly defines underwriting profit or loss as
earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. We use
underwriting profit or loss as a basis for evaluating our underwriting performance. The combined ratio is a measure of
underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting,
acquisition and insurance expenses to earned premiums. The combined ratio is the sum of the loss ratio and the expense ratio.
A combined ratio less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an
underwriting loss. The loss ratio represents the relationship of incurred losses and loss adjustment expenses to earned
premiums. The expense ratio represents the relationship of underwriting, acquisition and insurance expenses to earned
premiums.
The following table presents selected data from our underwriting operations.
(dollars in thousands)
Gross premium volume (1)
Net written premiums
Net retention (1)
Earned premiums
Losses and loss adjustment expenses
Underwriting, acquisition and insurance expenses
Underwriting profit (loss)
U.S. GAAP Combined Ratios
U.S. Insurance
International Insurance
Reinsurance
Other Insurance (Discontinued Lines)
Markel Corporation (Consolidated)
Years Ended December 31,
2017
2016
2015
$ 5,253,107
$ 4,417,787
$ 4,796,645
$ 4,001,020
$ 4,632,912
$ 3,819,293
84%
83%
82%
$ 4,247,978
$ 2,865,761
$ 1,587,414
$ (205,197)
$ 3,865,870
$ 2,050,744
$ 1,498,590
$ 316,536
$ 3,823,532
$ 1,938,745
$ 1,455,080
$ 429,707
95%
104%
132%
NM(2)
105%
93%
94%
87%
NM(2)
92%
89%
86%
90%
NM(2)
89%
(1) Gross premium volume and net retention for the year ended December 31, 2017 exclude $253.9 million of gross written premium
attributable to our program services business, which was 100% ceded.
(2) NM—Ratio is not meaningful. Further discussion of Other Insurance (Discontinued Lines) underwriting profit (loss) follows.
Underwriting results in 2017 included $565.3 million, or 13 points, of underwriting loss from Hurricanes Harvey, Irma, Maria
and Nate as well as the earthquakes in Mexico and wildfires in California (2017 Catastrophes). The underwriting loss on the
2017 Catastrophes was comprised of $585.4 million of estimated net losses and $20.1 million of net assumed reinstatement
premiums. The 2016 consolidated combined ratio included $68.7 million of underwriting loss, or two points on the
consolidated combined ratio, related to Hurricane Matthew and the Canadian wildfires (2016 Catastrophes).
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Markel Corporation & Subsidiaries
M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
The following table summarizes, by segment, the components of the underwriting losses related to the 2017 Catastrophes.
(dollars in thousands)
Losses and loss adjustment expenses
Ceded (assumed) reinstatement premiums
Underwriting loss
Impact on combined ratio
Year Ended December 31, 2017
U.S.
Insurance
$ 132,159
9,001
$ 141,160
International
Insurance
$ 122,817
3,390
$ 126,207
Reinsurance
Consolidated
$ 330,384
(32,465)
$ 297,919
$ 585,360
(20,074)
$ 565,286
6%
13%
32%
13%
The estimated net losses and loss adjustment expenses on the 2017 Catastrophes are net of estimated reinsurance recoveries of
$490.3 million. Both the gross and net loss estimates on the 2017 Catastrophes represent our best estimate of losses based upon
information currently available. Our estimate for these losses is based on claims received to date and detailed policy level
reviews, industry loss estimates, output from both industry and proprietary models as well as a review of in-force contracts.
The estimate is dependent on broad assumptions about coverage, liability and reinsurance. Due to these factors, we believe
our gross and net loss estimates on the 2017 Catastrophes have a high degree of volatility. While we believe our reserves for the
2017 Catastrophes as of December 31, 2017 are adequate, we continue to closely monitor reported claims and will adjust our
estimates of gross and net losses as new information becomes available. The net losses for the 2017 Catastrophes were within
our risk tolerance for events of this magnitude.
The increase in the consolidated combined ratio from 2017 to 2016 was driven by the impact of the 2017 Catastrophes.
Excluding the impact of underwriting losses related to the 2016 Catastrophes and 2017 Catastrophes described above, the
combined ratio increased due to a higher current accident year loss ratio and less favorable prior accident year loss ratio,
partially offset by a lower expense ratio. The increase in the current accident year loss ratio is primarily due to higher current
accident year loss ratios in our International Insurance and Reinsurance segments in 2017 compared to 2016. The decrease in
the expense ratio in 2017 compared to 2016 is primarily driven by a favorable impact from higher earned premium volume and a
decrease in profit sharing expenses in 2017 compared to 2016. These decreases in the expense ratio were partially offset by an
unfavorable impact from changes in the mix of business in our International Insurance and Reinsurance segments. The increase
in the consolidated combined ratio from 2015 to 2016 was driven by less favorable development on prior years’ loss reserves in
2016 compared to 2015.
The 2017 combined ratio included $501.5 million of favorable development on prior years’ loss reserves compared to
$505.2 million in 2016. Although favorable development on prior years’ loss reserves remained consistent in 2017 compared
to 2016, development on prior years’ loss reserves had a less favorable impact on the combined ratio in 2017 due to higher
earned premium volume in 2017 compared to 2016. In 2017, prior years’ loss reserves in our Reinsurance segment included
$85.0 million, or two points, of adverse development on prior years’ loss reserves resulting from a decrease in the discount rate,
known as the Ogden Rate, required in the calculation of lump sum awards in U.K. bodily injury cases. Effective March 20, 2017,
the Ogden Rate decreased from plus 2.5% to minus 0.75%, which represents the first rate change since 2001. The effect of the
rate change is most impactful to our U.K. auto casualty exposures through reinsurance contracts written in our Reinsurance
segment. We ceased writing new U.K. auto business in late 2014. The reduction in the Ogden Rate increased the expected
claims payments on these exposures, and management increased loss reserves accordingly. Our estimate of the ultimate cost of
settling these claims is based on many factors, and is subject to increase or decrease as the effect of changes in these factors
becomes known over time. In 2016, favorable development on prior years’ loss reserves in our U.S. Insurance segment was net
of $71.2 million, or two points on the consolidated combined ratio, of adverse development on our medical malpractice and
specified medical product lines. There was no significant development on these lines in 2017.
The decrease in favorable development on prior years’ loss reserves in 2016 compared to 2015 was due in part to the adverse
development in our U.S. Insurance segment on our medical malpractice and specified medical product lines, as described above.
Favorable development on prior years’ loss reserves in 2015 included $82.7 million, or two points on the 2015 consolidated
combined ratio, of favorable development attributable to a decrease in the estimated volatility of our consolidated net reserves
for unpaid losses and loss adjustment expenses, as a result of ceding a significant portion of our A&E exposures to a third party.
As a result of this decrease in estimated volatility, our level of confidence in our net reserves for unpaid losses and loss
adjustment expenses increased. Therefore, management reduced prior years’ loss reserves in order to maintain a consolidated
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confidence level in a range consistent with our historic levels. This reduction in prior years’ loss reserves occurred across all
three of our ongoing underwriting segments. The decrease in favorable development on prior years’ loss reserves in 2016 was
also attributable to less favorable development on prior years’ loss reserves in our International Insurance segment.
In connection with our quarterly reviews of loss reserves, the actuarial methods we used have exhibited a favorable trend for the
2010 to 2016 accident years during 2017. This trend was observed using statistical analysis of actual loss experience for those
years, particularly with regard to most of our long-tail books of business within the U.S. Insurance and International Insurance
segments, which developed more favorably than we had expected based upon our historical experience. As actual losses
experienced on these accident years have continued to be lower than anticipated, it has become more likely that the
underwriting results will prove to be better than originally estimated. Additionally, as most actuarial methods rely upon
historical reporting patterns, the favorable trends experienced on earlier accident years have resulted in a re-estimation of our
ultimate incurred losses on more recent accident years. When we experience loss frequency or loss severity trends that are more
favorable than we initially anticipated, we often evaluate the loss experience over a period of several years in order to assess the
relative credibility of loss development trends. In each of the past three years, based upon our evaluations of claims
development patterns in our long-tail, and often volatile, lines of business, we gave greater credibility to the favorable trend. As
a result, our actuaries reduced their estimates of ultimate losses, and management incorporated this favorable trend into its best
estimate and reduced prior years’ loss reserves accordingly.
While we believe it is possible that there will be additional favorable development on prior years’ loss reserves in 2018, we
caution readers not to place undue reliance on this favorable trend. Despite stabilization of prices on certain product lines
during the last three years, we still consider the overall property and casualty insurance market to be soft. The impact on our
underwriting results from the soft insurance market cannot be fully quantified in advance.
The following discussion provides more detail by segment of the underwriting results described above. Following this
segment-based discussion is a summary table of prior years’ loss reserve development.
U.S. Insurance Segment
The combined ratio for the U.S. Insurance segment for 2017 was 95% (including six points for the underwriting loss on the 2017
Catastrophes) compared to 93% (including one point for the underwriting loss on the 2016 Catastrophes) in 2016 and 89% in
2015. The increase in the 2017 combined ratio was due to the impact of the 2017 Catastrophes, partially offset by more
favorable development of prior years’ loss reserves. The increase in the 2016 combined ratio was due to less favorable
development of prior years’ loss reserves.
The U.S. Insurance segment’s 2017 combined ratio included $301.9 million of favorable development on prior years’ loss
reserves compared to $204.9 million in 2016 and $299.0 million in 2015. The increase in favorable development was primarily
due to adverse development on our medical malpractice and specified medical product lines in 2016, which totaled $71.2
million or three points on the segment combined ratio. There was no significant development on these product lines in 2017.
Also contributing to the increase in favorable development on prior years’ loss reserves was favorable development on our
specialty programs business in 2017 compared to slightly adverse development on this business in 2016 and more favorable
development on our workers’ compensation product line in 2017 compared to 2016. These increases in favorable development
were partially offset by less favorable development on our property product lines in 2017 compared to 2016. The decrease in
favorable development on prior years’ loss reserves in 2016 was driven by adverse development on our medical malpractice and
specified medical product lines in 2016, as described above, and less favorable development on our property product lines in
2016 compared to 2015. Additionally, favorable development on prior years’ loss reserves in 2015 included $35.2 million, or two
points on the segment combined ratio, attributable to the decrease in the volatility of our consolidated net reserves for unpaid
losses and loss adjustment expenses, as previously discussed. The following is a discussion of the product lines with the most
significant development on prior years’ loss reserves in the U.S. Insurance segment during the last three years.
In 2017 we experienced $93.9 million of favorable development on various long-tail general and excess liability lines. The
favorable development occurred across several accident years, but was most significant on the 2011 to 2016 accident years.
In 2016, we experienced $104.0 million of favorable development on various long-tail general and excess liability lines. The
favorable development occurred across several accident years, but were most significant on the 2013 to 2015 accident years.
In 2015, we experienced $111.3 million of favorable development on various long-tail general and excess liability lines,
131
Markel Corporation & Subsidiaries
M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
primarily on the 2011 to 2014 accident years. In 2017, the favorable development was due in part to favorable case incurred loss
development on certain of our general liability product lines as well as a decrease in the frequency and severity of claims other
general liability product lines. In 2015 and 2016, the favorable development was due in part to lower loss severity than originally
anticipated. Our binding and brokerage casualty business includes product lines that are long-tail and volatile in nature. During
2017, 2016 and 2015, actual incurred losses and loss adjustment expenses on prior accident years for reported claims on certain
long-tail casualty lines were $52.3 million, $51.8 million, and $40.0 million, respectively, less than we anticipated in our
actuarial analyses. As a result, our actuaries reduced their estimates of ultimate losses in 2017, 2016 and 2015, and management
assigned greater credibility to this favorable experience and reduced prior years’ loss reserves accordingly.
The favorable development on prior years’ loss reserves in the U.S. Insurance segment in 2017, 2016 and 2015 also included
$65.6 million, $41.1 million, and $36.6 million, respectively, of favorable development in our workers’ compensation unit. In
2017, the favorable development was most significant on the 2012 to 2016 accident years. In 2016, the favorable development in
our workers’ compensation unit was most significant on the 2012 to 2015 accident years. In 2015, the favorable development in
our workers’ compensation unit was most significant on the 2011 to 2014 accident years. When we acquired this business in
2010, we supplemented our limited data with longer-tailed industry development factors and adopted a more conservative loss
reserving position until we had sufficient data to determine how the loss reserves develop. During 2015, our actuaries gave more
weight to our own data and placed less reliance on industry data as part of the reserving for this product line. As a result, our
actuaries reduced their estimates of ultimate losses in those years. Management assigned greater credibility to this favorable
experience and reduced prior years’ loss reserves accordingly. During 2016, actual incurred losses and loss adjustment expenses
on prior accident years for reported claims was $24.9 million less than we anticipated in our actuarial analysis, due in part to
lower loss severity than originally anticipated. As a result, our actuaries reduced their estimates of ultimate losses in 2016 and
management assigned greater credibility to this favorable experience and reduced prior years’ loss reserves accordingly. During
2017, actual incurred losses and loss adjustment expenses on prior accident years for reported claims was $44.8 million less than
we anticipated in our actuarial analysis, due in part to lower loss severity than originally anticipated, and improvement in the
claim closure ratios. As a result, our actuaries reduced their estimates of ultimate losses in 2017 and management assigned
greater credibility to this favorable experience and reduced prior years’ loss reserves accordingly.
In 2017 we experienced $27.4 million of favorable development in our personal lines business, primarily on the 2013 to 2016
accident years. The favorable development occurred across multiple personal lines products and was driven primarily by a
decrease in claim severity, as well as claim frequency. As a result, our actuaries reduced their estimates of ultimate losses in
2017 and management assigned greater credibility to this favorable experience and reduced prior years’ loss reserves accordingly.
In 2017 and 2016, we also experienced favorable development in certain of our professional liability product lines. In 2017, we
experienced $25.5 million of favorable development on our professional liability product lines, primarily on the 2015 to 2016
accident years. In 2017, the favorable development occurred across multiple professional liability lines and was driven primarily
by favorable case incurred loss development. Actual case incurred losses were less than expected. As a result of these factors, our
actuarial estimates of the ultimate liability for unpaid losses and loss adjustment expenses were reduced, and management
reduced prior years’ loss reserves accordingly. In 2016, favorable development on our professional liability product lines was
more than offset by adverse development of $71.2 million on our medical malpractice and specified medical product lines,
primarily on the 2010 through 2015 accident years. The adverse development on both of these product lines was driven by an
increase in the proportion of business written on classes with higher claim frequencies relative to other classes of business
within these product lines over the last several years, including correctional facilities, locum tenens and contract staffing.
Beginning in late 2015, we saw an increase in claim frequencies on these classes, which was inconsistent with the historical
trends indicated by our actuarial analyses. In 2016, we continued to see steady increases in claim frequencies, as well as
increases in claims payments on these classes of business. As a result, we gave more credibility to this new trend and
management increased loss reserves accordingly. In response, we took corrective actions for business written in the affected
classes. Excluding the adverse development on our medical malpractice and specified medical product lines, we experienced
$38.0 million of favorable development on our other professional liability programs during 2016, primarily on the 2014 and 2015
accident years. The favorable development occurred across multiple professional liability lines and was driven by a combination
of factors, including lower loss severity than was originally anticipated and a decrease in the frequency of claims and large
losses. As a result of these factors, our actuarial estimates of the ultimate liability for unpaid losses and loss adjustment
expenses were reduced, and management reduced prior years’ loss reserves accordingly.
132
In 2016, we experienced favorable development on prior years’ loss reserves on our property product lines, primarily our inland
marine and brokerage property lines. Favorable development on our inland marine business totaled $20.1 million in 2016,
primarily on the 2014 and 2015 accident years. Favorable development totaled $27.5 million in 2015, primarily on the 2013 and
2014 accident years. In both years, the favorable development was attributable to lower than expected frequency of large loss
events. Favorable development on our brokerage property product lines totaled $17.9 million in 2016 and was due to lower than
expected losses and development on known claims, primarily on the 2012 to 2014 accident years. In 2015, favorable
development totaled $35.0 million and was due to lower than expected frequency of large loss events, primarily on the 2013 and
2014 accident years. As a result of these factors, our actuarial estimates of the ultimate liability for unpaid losses and loss
adjustment expenses decreased, and management reduced prior years’ loss reserves accordingly.
International Insurance Segment
The combined ratio for the International Insurance segment was 104% (including 13 points for the underwriting loss on the
2017 Catastrophes) for 2017 compared to 94% (including one point for the underwriting loss on the 2016 Catastrophes) for
2016 and 86% for 2015. The increase in the 2017 combined ratio was driven by the impact of the 2017 Catastrophes, partially
offset by a lower expense ratio and more favorable development of prior years’ loss reserves. Excluding the impact of
underwriting losses related to the 2016 Catastrophes and 2017 Catastrophes described above, the current accident year loss
ratio increased, primarily due to higher attritional losses on our property product lines in 2017 compared to 2016. The decrease
in the expense ratio was attributable to the write off of previously capitalized software development costs in 2016 and lower
profit sharing in 2017 compared to 2016. These decreases were partially offset by an unfavorable impact from changes in the
mix of business in this segment, most notably as the result of higher retentions on products with higher net commission rates
in 2017 compared to 2016.
The increase in the 2016 combined ratio was driven by less favorable development of prior years’ loss reserves and a higher
expense ratio, partially offset by a lower current accident year ratio in 2016 compared to 2015. The 2016 current accident year
loss ratio included $12.0 million, or one point on the segment combined ratio, of underwriting loss related to Hurricane
Matthew. We also experienced higher attritional and large losses on our marine and energy product lines in 2016. The impact of
these losses on the 2016 current accident year loss ratio was more than offset by lower attritional losses in our general liability
product lines in 2016 compared to 2015 and a decrease in management’s best estimate of ultimate loss ratios on various product
lines in 2016, as previously discussed. The increase in the 2016 expense ratio was attributable to higher broker commissions in
2016 compared to 2015 and the write off of previously capitalized software development costs in 2016, partially offset by lower
profit sharing costs in 2016 compared to 2015.
The International Insurance segment’s 2017 combined ratio included $198.7 million of favorable development on prior years’
loss reserves compared to $164.7 million of favorable development in 2016 and $248.8 million of favorable development in
2015. The increase in favorable development in 2017 compared to 2016 was driven by more favorable development on our
general liability product lines in 2017. Development on prior years’ loss reserves was less favorable in 2016 compared to 2015
driven by less favorable development on our marine and energy and general liability product lines. Additionally, favorable
development on prior years’ loss reserves in 2015 included $32.3 million, or four points on the segment combined ratio,
attributable to the decrease in volatility of our consolidated net reserves for unpaid losses and loss adjustment expenses, as
previously discussed. In 2017, 2016 and 2015, favorable development on prior years’ loss reserves occurred across several
product lines, but was most significant on our professional liability, general liability and marine and energy product lines. In all
three years, the favorable development was driven by lower than expected claims activity on prior accident years and favorable
claims settlements. Favorable development on our professional liability product lines totaled $74.9 million in 2017 compared to
$66.6 million in 2016 and $39.7 million in 2015. Favorable development on our marine and energy product lines totaled $35.5
million in 2017 compared to $39.6 million in 2016 and $64.8 million in 2015. Favorable development on our general liability
product lines totaled $50.2 million in 2017 compared to $23.1 million in 2016 and $60.9 million in 2015. In 2017, the favorable
development on prior years’ loss reserves in the International Insurance segment was most significant on the 2013 to 2015
accident years. In 2016, the favorable development on prior year loss reserves was most significant on the 2013 and 2014
accident years. In 2015, the favorable development on prior years’ loss reserves was most significant on the 2012 to 2014
accident years.
133
Markel Corporation & Subsidiaries
M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
Reinsurance Segment
The combined ratio for the Reinsurance segment was 132% (including 32 points for the underwriting loss on the 2017
Catastrophes) for 2017 compared to 87% (including four points for the underwriting loss on the 2016 Catastrophes) for 2016
and 90% for 2015. The increase in the 2017 combined ratio was driven by the impact of the 2017 Catastrophes and adverse
development on prior years’ loss reserves attributable to the decrease in the Ogden rate in 2017. These increases were partially
offset by a lower expense ratio in 2017 compared to 2016. Excluding the impact of underwriting losses related to the 2016
Catastrophes and 2017 Catastrophes described above, the current accident year loss ratio increased, primarily due to more
unfavorable premium adjustments in 2017 compared to 2016. The decrease in the expense ratio in 2017 compared to 2016 was
primarily due to lower profit sharing expenses and a favorable impact from higher earned premium, including reinstatement
premiums related to the 2017 Catastrophes. These decreases in the expense ratio were partially offset by the impact of higher
earned premium on our quota share business in 2017 compared to 2016, which carries a higher commission rate than other
business in the Reinsurance segment.
The decrease in the combined ratio in 2016 was driven by more favorable development on prior years’ loss reserves and a lower
current accident year loss ratio, partially offset by a higher expense ratio in 2016 compared to 2015. The 2016 current accident
year loss ratio included $18.7 million, or two points on the segment combined ratio, of underwriting loss related to the Canadian
wildfires and $16.2 million, or two points on the segment combined ratio, of underwriting loss related to Hurricane Matthew.
The impact of these losses on the 2016 current accident year loss ratio was more than offset by lower attritional losses and a
decrease in management’s best estimate of ultimate loss ratios on various product lines, as previously discussed. The increase
in the expense ratio was primarily due to higher profit sharing expenses and broker commissions in 2016 compared to 2015.
The Reinsurance segment’s 2017 combined ratio included $7.8 million of adverse development on prior years’ loss reserves
compared to $125.5 million of favorable development in 2016 and $97.9 million in 2015. The adverse development in 2017 is
primarily due to the decrease in the Ogden Rate, as previously discussed, which resulted in $85.0 million of adverse
development, or nine points on the Reinsurance segment’s combined ratio. We also experienced adverse development in 2017
on our professional liability product line. Largely offsetting this adverse development in 2017 was favorable development on our
property product lines. The increase in favorable development in 2016 compared to 2015 was driven by more favorable
development on our property product lines. Favorable development on prior years’ loss reserves in 2015 included $15.2 million,
or two points on the segment combined ratio, attributable to the decrease in volatility of our consolidated net reserves for
unpaid losses and loss adjustment expenses, as previously discussed. In 2017 and 2016, favorable development on prior years’
loss reserves was most significant on our property product lines, with the remaining favorable development occurring across
several product lines. In 2015, favorable development on prior years’ loss reserves was most significant on our casualty and
property product lines.
Favorable development on prior years’ loss reserves on our property lines of business in 2017, 2016 and 2015 were $41.2 million,
$67.6 million and $21.1 million, respectively. In 2017 and 2016, the favorable development on prior years’ loss reserves on these
lines was most significant on the 2013 to 2015 accident years. In 2015, the favorable development on prior years’ loss reserves
was most significant on the 2012 to 2014 accident years. In all three years, the favorable development on prior years’ loss
reserves was due in part to lower than expected development on reported events, favorable claims settlements and lower than
expected claims activity. As a result of these factors, our actuaries reduced their estimates of ultimate losses, and management
reduced prior years’ loss reserves accordingly.
Favorable development on our casualty lines in 2015 totaled $27.4 million, and was primarily attributable to our general
casualty and professional liability business. During 2015, management gained more confidence in the actuarial projections on
these product lines and reduced prior years’ loss reserves accordingly.
Other Insurance (Discontinued Lines) Segment
The majority of the losses and loss adjustment expenses and the underwriting, acquisition and insurance expenses for the Other
Insurance (Discontinued Lines) segment are associated with A&E exposures or other acquired lines of business that were
discontinued in conjunction with the acquisition. Given the insignificant amount of premium earned in the Other Insurance
(Discontinued Lines) segment, we evaluate this segment’s underwriting performance in terms of dollars of underwriting profit
or loss instead of its combined ratio.
134
The Other Insurance (Discontinued Lines) segment produced an underwriting profit of $7.5 million in 2017 compared to an
underwriting profit of $9.8 million in 2016 and an underwriting loss of $20.4 million in 2015. The underwriting profit in 2017
was due in part to the Part VII transaction completed during the period. See note 9 of the notes to consolidated financial
statements. The underwriting profit in 2016 was driven by a commutation that was completed during the period. The
underwriting loss in 2015 included $25.4 million of adverse loss reserve development on A&E exposures.
In March and October 2015, we completed two retroactive reinsurance transactions through which we ceded a significant
portion of our A&E exposures to a third party. At the time of the transactions, reserves for unpaid losses and loss adjustment
expenses on the policies ceded totaled $170.5 million. The first transaction resulted in a gain of $5.1 million, which was
deferred and is being recognized in earnings in proportion to actual reinsurance recoveries received pursuant to the transaction.
The second transaction resulted in an underwriting loss of $10.1 million, including $7.1 million of losses and loss adjustment
expenses, all of which was recognized during 2015. Following the October 2015 retroactive reinsurance transaction, our
actuaries increased their estimate of the ultimate losses on the remaining A&E claims and management increased prior years’
loss reserves by $15.0 million. Without the diversification of a larger portfolio of loss reserves, there is greater uncertainty
around the potential outcomes of the remaining claims, and management strengthened reserves accordingly.
We complete an annual review of our A&E exposures during the third quarter of the year unless circumstances suggest an
earlier review is appropriate. During our 2015, 2016 and 2017 reviews, we determined that no adjustment to loss reserves
was required.
A&E loss reserves are subject to significant uncertainty due to potential loss severity and frequency resulting from an uncertain
and unfavorable legal climate. Our A&E reserves are not discounted to present value and are forecasted to pay out over the next
40 to 50 years as claims are settled. We seek to establish appropriate reserve levels for A&E exposures, including A&E exposures
ceded to third parties under retroactive reinsurance transactions; however, these reserves could be subject to increases in the
future. As of December 31, 2017, our reinsurance recoverable on unpaid losses for A&E exposures was 62% of our gross reserves
for A&E exposures. See note 9(c) of the notes to consolidated financial statements for further discussion of our exposures to
A&E claims.
The following tables summarize the increases (decreases) in prior years’ loss reserves by segment, as discussed above.
(dollars in millions)
U.S. Insurance
International
Insurance
Reinsurance
Other
Insurance
(Discontinued
Lines)
Year Ended December 31, 2017
U.S. Insurance:
General liability
Workers’ compensation
Professional liability
Personal Lines
International Insurance:
Professional liability
Marine and energy
General liability
Reinsurance:
Ogden rate decrease
Property
$ (93.9)
(65.6)
(25.5)
(27.4)
$ (74.9)
(35.5)
(50.2)
Other Insurance (Discontinued Lines):
A&E and other discontinued lines
Net other prior years’ redundancy
(89.5)
(38.1)
Increase (decrease)
$ (301.9)
$ (198.7)
$ 85.0
(41.2)
(36.0)
$
7.8
Total
$ (93.9)
(65.6)
(25.5)
(27.4)
(74.9)
(35.5)
(50.2)
85.0
(41.2)
$ (8.5)
1—
$ (8.5)
(8.5)
(163.6)
$ (501.3)(1)
(1) Total decrease in prior years’ loss reserves excludes $0.2 million of favorable development on our program services business, which is
included in our consolidated underwriting results but is not included in a reportable segment.
135
Markel Corporation & Subsidiaries
M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
Year Ended December 31, 2016
(dollars in millions)
U.S. Insurance
International
Insurance
Reinsurance
Other
Insurance
(Discontinued
Lines)
$ (104.0)
(41.1)
(17.9)
(20.1)
71.2
(38.0)
U.S. Insurance:
General liability
Workers’ compensation
Property:
Brokerage property
Inland marine
Professional liability:
Medical malpractice and
specified medical
All other
International Insurance:
Professional liability
Marine and energy
General liability
Reinsurance:
Property
$ (66.6)
(39.6)
(23.1)
Other Insurance (Discontinued Lines):
A&E and other discontinued lines
Net other prior years’ redundancy
(55.0)
(35.4)
Decrease
$ (204.9)
$ (164.7)
$ (67.6)
(57.9)
$ (125.5)
Total
$ (104.0)
(41.1)
(17.9)
(20.1)
71.2
(38.0)
(66.6)
(39.6)
(23.1)
(67.6)
$ (10.1)
1—
$ (10.1)
(10.1)
(148.3)
$ (505.2)
(dollars in millions)
U.S. Insurance
International
Insurance
Reinsurance
Other
Insurance
(Discontinued
Lines)
Year Ended December 31, 2015
$ (111.3)
(36.6)
(35.0)
(27.5)
U.S. Insurance:
General liability
Workers’ compensation
Property:
Brokerage property
Inland marine
International Insurance:
Marine and energy
General liability
Professional liability
Reinsurance:
Casualty
Property
Other Insurance (Discontinued Lines):
Loss on retroactive reinsurance
transaction
Other A&E exposures
Impact of retroactive reinsurance
$ (64.8)
(60.9)
(39.7)
$ (27.4)
(21.1)
transactions on reserve volatility
Net other prior years’ redundancy
(35.2)
(53.4)
(32.3)
(51.1)
(15.2)
(34.2)
$ 7.1
18.3
1—
(7.5)
Total
$ (111.3)
(36.6)
(35.0)
(27.5)
(64.8)
(60.9)
(39.7)
(27.4)
(21.1)
7.1
18.3
(82.7)
(146.2)
Increase (decrease)
$ (299.0)
$ (248.8)
$ (97.9)
$ 17.9
$ (627.8)
136
Over the past three years, we have experienced favorable development on prior years’ loss reserves ranging from 6% to 7% of
beginning of year net loss reserves. In 2017, we experienced favorable development of $501.5 million, or 6% of beginning of year
net loss reserves, compared to $505.2 million, or 6% of beginning of year net loss reserves, in 2016 and $627.8 million, or 7% of
beginning of year net loss reserves, in 2015.
It is difficult for management to predict the duration and magnitude of an existing trend and, on a relative basis, it is even more
difficult to predict the emergence of factors or trends that are unknown today but may have a material impact on loss reserve
development. In assessing the likelihood of whether the above favorable trends will continue and whether other trends may
develop, we believe that a reasonably likely movement in prior years’ loss reserves during 2018 would range from favorable
development of less than 1%, or $50 million, to favorable development of approximately 7%, or $650 million, of December 31,
2017 net loss reserves.
Premiums
The following table summarizes gross premium volume.
GROSS PREMIUM VOLUME
(dollars in thousands)
U.S. Insurance
International Insurance
Reinsurance
Other Insurance (Discontinued Lines)
TOTAL UNDERWRITING
Program Services
TOTAL
Years Ended December 31,
2017
2016
2015
$ 2,885,279
1,255,922
1,112,101
(195)
5,253,107
253,853
$ 2,635,266
1,119,815
1,041,055
509
$ 2,504,096
1,164,866
965,374
(1,424)
4,796,645
4,632,912
—
—
$ 5,506,960
$ 4,796,645
$ 4,632,912
We monitor the effect of movements in foreign currency exchange rates on gross premium volume and earned premiums. To
the extent there are significant variations in foreign currency exchange rates between the U.S. dollar and the foreign currencies
in which our insurance business is transacted, management uses the change in gross premium volume and earned premiums
at a constant rate of exchange to evaluate trends in premium volume. The impact of foreign currency translation is excluded,
when significant, as the effect of fluctuations in exchange rates could distort the analysis of trends. When excluding the effect
of foreign currency translation on changes in premium, management uses the current period average exchange rates to translate
both the current period and the prior period foreign currency denominated gross premiums written and earned premiums.
Gross premium volume in our underwriting segments increased 10% in 2017 compared to 2016. The increase in gross premium
volume was attributable to an increase in gross premium volume across all three of our ongoing underwriting segments. Also
impacting consolidated gross premium volume was $253.9 million of gross premium written through our program services
business acquired as part of the State National transaction, which is not included in our underwriting segments. All gross
premium written in our program services business was ceded to third parties in 2017.
Gross premium volume in our U.S. Insurance segment increased 9% in 2017 compared to 2016 driven by growth within our
general liability product lines, personal lines and specialty programs business as well the contribution of premiums from our
new surety and collateral protection product lines which were acquired in 2017. Gross premium volume in our International
Insurance segment increased 12% in 2017 compared to 2016 primarily due to higher premium volume within our marine and
energy and general liability product lines. Gross premium volume in our Reinsurance segment increased 7% in 2017 compared
to 2016 driven by $136.5 million of premium related to two large specialty quota share treaties entered into in the first quarter
of 2017, as well as a favorable impact from assumed reinstatement premiums in our property product lines resulting from the
2017 Catastrophes. These increases were partially offset by lower gross premium volume in our auto and general liability
product lines. Significant variability in gross premium volume can be expected in our Reinsurance segment due to individually
significant deals and multi-year contracts.
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Markel Corporation & Subsidiaries
M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
Gross premium volume increased 4% in 2016 compared to 2015. The increase in gross premium volume was attributable to
the U.S. Insurance and Reinsurance segments, partially offset by lower gross premium volume in our International Insurance
segment. Gross premium volume in our U.S. Insurance segment increased 5% in 2016 compared to 2015 driven by higher
premium volumes, primarily within our general liability and personal lines of business. The increase was also attributable to an
additional week of gross premium volume during the first quarter of 2016 compared to the same period of 2015 based on
differences in the timing of our underwriting systems closings. The timing of our underwriting systems closings has a negligible
impact on our premium earnings as premiums are earned over the policy period. Gross premium volume in our International
Insurance segment decreased 4% in 2016 compared to 2015 primarily due to an unfavorable impact from foreign currency
exchange rate movements, as well as lower premium volume within our marine and energy product lines. Gross premium
volume in our Reinsurance segment increased 8% in 2016 compared to 2015 driven by our general liability and property lines,
due to new business and a favorable impact from the timing of renewals on multi-year contracts in 2016 compared to 2015.
These increases were partially offset by lower gross premium volume within our auto, professional liability and credit and
surety reinsurance product lines.
We continued to see small price decreases across many of our product lines during 2017, especially in our international
business on our property and marine and energy product lines. Our large account business is also subject to more pricing
pressure and competition remains strong in the reinsurance market. However, following the high level of natural catastrophes
that occurred in the third and fourth quarters of 2017, beginning in first quarter of 2018, we saw more favorable rates,
particularly on our catastrophe exposed product lines. We are also seeing more stabilized pricing on our other product lines and
continue to see pricing margins in most reinsurance lines of business. Despite stabilization of prices on certain product lines
during the last several years, we still consider the overall property and casualty insurance market to be soft. When we believe
the prevailing market price will not support our underwriting profit targets, the business is not written. As a result of our
underwriting discipline, gross premium volume may vary when we alter our product offerings to maintain or improve
underwriting profitability.
The following table summarizes net written premiums.
NET WRITTEN PREMIUMS
(dollars in thousands)
U.S. Insurance
International Insurance
Reinsurance
Other Insurance (Discontinued Lines)
TOTAL
Years Ended December 31,
2017
2016
2015
$ 2,432,477
1,007,319
978,160
(169)
$ 2,237,163
864,494
898,728
635
$ 2,106,490
888,214
824,324
265
$ 4,417,787
$ 4,001,020
$ 3,819,293
All gross premium written in our program services business was ceded to third parties in 2017, resulting in zero net written
premiums. Within our underwriting operations, we purchase reinsurance and retrocessional reinsurance in order to manage our
net retention on individual risks and enable us to write policies with sufficient limits to meet policyholder needs. Net retention
of gross premium volume for our underwriting operations was 84% in 2017, 83% in 2016 and 82% in 2015. In 2017, higher
retention in our International Insurance and Reinsurance segments was partially offset by lower retention in our U.S. Insurance
segment. The increase in net retention within the International Insurance segment in 2017 was largely due to higher retention
on our professional liability product lines. The increase in net retention within the Reinsurance segment for 2017 was primarily
due to changes in the mix of business. Net retention in the U.S. Insurance segment decreased in 2017 compared to 2016 due to
lower retention on our specialty programs and personal lines business, partially offset by higher retention on our casualty
product lines.
In 2016, retention increased in all three of our ongoing underwriting segments compared to 2015. These increases were largely
due to changes in mix of business.
138
The following table summarizes earned premiums.
EARNED PREMIUMS
(dollars in thousands)
U.S. Insurance
International Insurance
Reinsurance
Other Insurance (Discontinued Lines)
TOTAL
Years Ended December 31,
2017
2016
2015
$ 2,364,121
949,912
934,114
(169)
$ 2,175,332
853,512
836,264
762
$ 2,105,212
879,426
838,543
351
$ 4,247,978
$ 3,865,870
$ 3,823,532
All gross premium written in our program services business was ceded to third parties in 2017, resulting in zero earned
premiums. Consolidated earned premiums for 2017 increased 10% compared to 2016. The increase in earned premiums was
attributable to higher earned premiums across all three of our ongoing underwriting segments and the favorable impact of net
assumed reinstatement premiums. The increase in earned premiums in our U.S. Insurance segment was primarily due to an
increase in gross premium volume and higher retention in our general liability product lines. The increase was also attributable
to earned premiums within our new surety and collateral protection product lines, as previously discussed. The increase in
earned premiums in our International Insurance segment was attributable to an increase in gross premium volume in our
marine and energy product line and an increase in gross premium volume and higher retention in our professional liability
product lines. The increase in earned premiums in our Reinsurance segment was primarily due to higher earned premiums in
our property product lines due to the favorable impact of reinstatement premiums related to the 2017 Catastrophes, higher
earned premium from the two large specialty quota share treaties entered into in the first quarter of 2017, as previously
discussed, as well as higher earned premiums in our professional liability and general liability product lines. These increases
were partially offset by lower earned premiums in our auto product line.
Consolidated earned premiums for 2016 increased 1% compared to 2015. Higher earned premiums in our U.S. Insurance
segment more than offset lower earned premiums in our International Insurance segment. The increase in earned premiums in
our U.S. Insurance segment was primarily due to the increases in gross premium volume as previously discussed. The decrease
in earned premiums in our International Insurance segment was primarily due to an unfavorable impact from movements in
foreign currency exchange rates. Additionally, higher earned premiums in our professional liability product lines were offset by
lower earned premiums in our marine and energy product lines within the International Insurance segment.
Life and Annuity Benefits
The Other Insurance (Discontinued Lines) segment included other revenues of $2.0 million and other expenses of $28.2 million
for 2017, other revenues of $1.9 million and other expenses of $26.5 million for 2016, and other revenues of $0.6 million and
other expenses of $29.1 million for 2015 related to our life and annuity reinsurance business. This business is in run-off, and we
are not writing any new life and annuity reinsurance contracts. The life and annuity benefit reserves are recorded on a net
present value basis using assumptions that were determined when the portfolio of contracts was acquired. The accretion of this
discount is recognized in the statement of income and comprehensive income as other expenses. Invested assets and the related
investment income that support the life and annuity reinsurance contracts are reported in the Investing segment. As a result,
we expect the results reported in the Other Insurance (Discontinued Lines) segment attributable to our life and annuity business
will continue to reflect losses in future periods due to the accretion of the discount on the life and annuity benefit reserves,
which are forecast to pay out over the next 40 to 50 years. Other revenues attributable to the life and annuity business included
in the Other Insurance (Discontinued Lines) segment represent ongoing premium adjustments on existing contracts.
On April 24, 2015, we completed a novation that transferred our obligations under a reinsurance contract for life and annuity
benefit policies to a third party in exchange for cash payments totaling $29.0 million, net of commissions. At the time of the
transaction, reserves for life and annuity benefits on the novated reinsurance contract totaled $32.6 million, resulting in a gain
of $3.6 million that was recorded as an offset to other expenses.
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M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
Investing Results
Our business strategy recognizes the importance of both consistent underwriting and operating profits and superior investment
returns to build shareholder value. We rely on sound underwriting practices to produce investable funds while minimizing
underwriting risk.
The following table summarizes our investment performance.
(dollars in thousands)
Net investment income
Net realized investment gains (losses)
Change in net unrealized gains on investments
Investment yield (1)
Taxable equivalent total investment return,
before foreign currency effect
Taxable equivalent total investment return
Invested assets, end of year
Years Ended December 31,
2017
2016
405,709
$
$
(5,303)
$ 1,125,440
$
373,230
$ 65,147
$ 342,111
$
$
$
2.6%
9.2%
10.2%
2.4%
5.0%
4.4%
2015
353,213
106,480
(457,584)
2.3%
0.5%)
(0.7)%
$ 20,570,337
$ 19,058,666
$ 18,181,345
(1) Investment yield reflects net investment income as a percentage of monthly average invested assets at amortized cost.
Investments, cash and cash equivalents and restricted cash and cash equivalents (invested assets) increased 8% in 2017. The
increase in the investment portfolio in 2017 was attributable to an increase in net unrealized gains on investments of $1.1
billion, net proceeds from our net issuance of long-term debt of $592.9 million and cash flows from operations of $858.5 million,
partially offset by cash flows used by investing activities of $744.5 million. Invested assets increased 5% in 2016. The increase
in the investment portfolio in 2016 was attributable to an increase in net unrealized gains on investments of $342.1 million,
net proceeds from our net issuance of long-term debt of $271.7 million and cash flows from operations of $534.6 million.
In 2015, we continued to gradually build liquidity with higher cash balances due to continuing low interest rates and sales of
certain securities from our equity portfolio. We increased our holdings of cash and cash equivalents and short-term investments
and reduced our holdings of fixed maturities. During 2016, we increased our holdings of equity securities and fixed maturities
and decreased our holdings of cash and cash equivalents and short-term investments in order to achieve higher returns and to
more closely match the duration of our fixed maturity portfolio with our insurance liabilities. During 2017, we increased our
holdings of equity securities in order to achieve higher returns. Additionally, our holdings of cash and cash equivalents increased
primarily due to operating cash inflows, the issuance of long-term debt and maturities of fixed maturities held for anticipated
claim payments for the 2017 Catastrophes. As of December 31, 2017, we had paid 27% of our estimated losses for the 2017
Catastrophes. Also in 2017, we decreased our holdings of short-term investments to fulfill the cash needed for acquisitions.
Short-term investments, cash and cash equivalents and restricted cash and cash equivalents represented 23% of our invested
assets at December 31, 2017 and 2016. Fixed maturities represented 48% of our invested assets at December 31, 2017 compared
to 52% at December 31, 2016. Equity securities at December 31, 2017 represented 29% of our invested assets compared to 25%
at December 31, 2016. The increase in the proportion of equity securities at December 31, 2017 compared to December 31, 2016
is primarily due to an increase in the estimated fair value of our equity portfolio as a result of strong overall equity market
performance.
Net investment income increased 9% in 2017 compared to 2016. Net investment income in 2017 included higher short-term
investment income compared to 2016, driven by higher short-term interest rates and higher dividend income due to increased
equity holdings. Net investment income increased 6% in 2016 compared to 2015. Net investment income in 2016 included
higher interest income on our fixed maturity portfolio compared to 2015, primarily due to increased holdings of fixed
maturities. An increase in short-term investment income, driven by higher short-term interest rates, was largely offset by lower
dividend income in 2016 compared to 2015 as equity securities purchased in 2016 have lower dividend yields than the equity
securities sold in late 2015 and early 2016.
140
Net realized investment losses were $5.3 million in 2017 compared to net realized investment gains of $65.1 million and
$106.5 million in 2016 and 2015, respectively. Net realized investment gains (losses) include gains and losses from sales of
securities, losses from write downs for other-than-temporary declines in the estimated fair value of investments and gains and
losses on securities measured at fair value through net income. See note 3(f) of the notes to consolidated financial statements for
further details on the components of net realized investment gains (losses). In 2017, gains on sales of equity securities were
more than offset by a $52.0 million loss on our investment in certain insurance-linked securities funds (ILS Funds) as a result of
a decrease in the net asset value of the ILS Funds. This decrease was driven by the impact of losses from Hurricanes Harvey,
Irma and Maria and the wildfires in California on the underlying reinsurance contracts in which the ILS Funds are invested. In
2016 and 2015, net realized investment gains were related to sales of equity securities and fixed maturities. During 2017, 2016
and 2015, we liquidated certain equity securities in our portfolio in light of our outlook on the economic and competitive
environment facing those companies and our decision to reallocate capital to other equity securities with greater potential for
long-term investment returns. Given our long-term focus, variability in the timing of realized and unrealized gains and losses
is to be expected.
Net realized investment gains (losses) in 2017, 2016 and 2015 included $3.8 million, $7.7 million and $5.8 million, respectively,
of realized losses from sales of fixed maturities and equity securities. Proceeds received on securities sold at a loss were $306.1
million in 2017, $138.3 million in 2016 and $154.5 million in 2015.
In 2017, 90% of the gross realized losses related to securities that had been in a continuous unrealized loss position for less than
one year. Gross realized losses in 2017 included $7.6 million of write downs for other-than-temporary declines in the estimated
fair value of investments. These write downs were made with respect to three equity securities and one fixed maturity security.
We complete a detailed analysis each quarter to assess whether the decline in the fair value of any investment below its cost
basis is deemed other-than-temporary. At December 31, 2017, we held securities with gross unrealized losses of $57.3 million,
or less than 1% of invested assets. All securities with unrealized losses were reviewed, and we believe that there were no other
securities with indications of declines in estimated fair value that were other-than-temporary at December 31, 2017. However,
given the volatility in the debt and equity markets, we caution readers that further declines in fair value could be significant and
may result in additional other-than-temporary impairment charges in future periods. Variability in the timing of realized and
unrealized gains and losses is to be expected. See note 3(b) of the notes to consolidated financial statements for further
discussion of unrealized losses.
In 2016, 52% of the gross realized losses related to securities that had been in a continuous unrealized loss position for less than
one year. Gross realized losses in 2016 included $18.4 million of write downs for other-than-temporary declines in the
estimated fair value of investments. These write downs were made with respect to 22 equity securities.
In 2015, 72% of the gross realized losses related to securities that had been in a continuous unrealized loss position for less than
one year. Gross realized losses in 2015 included $44.5 million of write downs for other-than-temporary declines in the
estimated fair value of investments. These write downs were made with respect to 21 equity securities.
In 2017, net unrealized gains on investments increased $1.1 billion, primarily due to an increase in the estimated fair value of
our equity portfolio as a result of strong overall equity market performance. In 2016, net unrealized gains on investments
increased $342.1 million due to an increase in the estimated fair value of our equity portfolio, as a result of strong overall equity
market performance, partly offset by a decrease in the fair value of our fixed maturity portfolio, as interest rates increased during
2016. In 2015, net unrealized gains on investments decreased $457.6 million due to a decrease in the estimated fair value of our
equity portfolio, as a result of lower overall equity market performance, and our fixed maturity portfolio, as interest rates
increased during 2015.
We also evaluate our investment performance by analyzing taxable equivalent total investment return, which is a non-GAAP
financial measure. Taxable equivalent total investment return includes items that impact net income, such as coupon interest
on fixed maturities, dividends on equity securities and realized investment gains or losses, as well as changes in unrealized gains
or losses, which do not impact net income. Certain items that are included in net investment income have been excluded from
the calculation of taxable equivalent total investment return, such as amortization and accretion of premiums and discounts on
our fixed maturity portfolio, to provide a comparable basis for measuring our investment return against industry investment
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M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
returns. The calculation of taxable equivalent total investment return also includes the current tax benefit associated with
income on certain investments that is either taxed at a lower rate than the statutory income tax rate or is not fully included in
federal taxable income. We believe the taxable equivalent total investment return is a better reflection of the economics of our
decision to invest in certain asset classes. We focus on our long-term investment return, understanding that the level of realized
and unrealized investment gains or losses may vary from one period to the next.
The following table reconciles investment yield to taxable equivalent total investment return.
Investment yield (1)
Adjustment of investment yield from amortized cost to fair value
Net amortization of net premium on fixed maturities
Net realized investment gains (losses) and change in net unrealized
gains on investments
Taxable equivalent effect for interest and dividends (2)
Other (3)
Taxable equivalent total investment return
Years Ended December 31,
2017
2.6%
(0.5)%
0.4%
5.9%
0.4%
1.4%
10.2%
2016
2.4%
(0.4)%
0.4%
2.3%
0.4%
(0.7)%
4.4%
2015
2.3%
(0.4)%
0.5%
(2.0)%
0.4%
(1.5)%
(0.7)%
(1) Investment yield reflects net investment income as a percentage of monthly average invested assets at amortized cost.
(2) Adjustment to tax-exempt interest and dividend income to reflect a taxable equivalent basis.
(3) Adjustment to reflect the impact of changes in foreign currency exchange rates and time-weighting the inputs to the calculation of
taxable equivalent total investment return.
Markel Ventures Operations
Our Markel Ventures operations are comprised of a diverse portfolio of businesses that operate outside of the specialty insurance
marketplace. These businesses are viewed by management as separate and distinct from our insurance operations. While each of
these businesses is operated independently from one another, we aggregate their financial results into two industry groups:
manufacturing and non-manufacturing. Our manufacturing operations are comprised of manufacturers of transportation and
other industrial equipment. Our non-manufacturing operations are comprised of businesses from several industry groups,
including consumer goods and services (including healthcare) and business services.
We consolidate our Markel Ventures operations on a one-month lag. Operating revenues and expenses associated with our
Markel Ventures operations are included in other revenues and other expenses in the consolidated statements of income and
comprehensive income. See note 21 of the notes to consolidated financial statements for the components of other revenues and
other expenses associated with Markel Ventures.
142
The following tables summarize the amounts recognized in the consolidated balance sheets and consolidated statements of
income related to Markel Ventures.
(dollars in thousands)
ASSETS
Cash and cash equivalents
Receivables
Goodwill
Intangible assets
Other assets
TOTAL ASSETS
LIABILITIES AND EQUITY
Senior long-term debt and other debt(1)
Other liabilities
Total Liabilities
Redeemable noncontrolling interests
Shareholders’ equity (2)
Noncontrolling interests
Total Equity
TOTAL LIABILITIES AND EQUITY
December 31,
2017
2016
$ 165,172
190,300
424,982
400,656
719,618
$ 105,316
97,921
237,767
234,113
531,106
$ 1,900,728
$ 1,206,223
$ 554,282
345,608
$ 294,702
217,804
899,890
166,270
837,060
(2,492)
834,568
512,506
73,678
621,639
(1,600)
620,039
$ 1,900,728
$ 1,206,223
(1) Senior long-term debt and other debt as of December 31, 2017 and 2016 included $476.0 million and $211.0 million, respectively, of debt due
to other subsidiaries of Markel Corporation, which is eliminated in consolidation.
(2) Shareholders’ equity includes $663.6 million and $520.7 million as of December 31, 2017 and 2016, respectively, which represents Markel
Corporation’s investment in Markel Ventures and is eliminated in consolidation.
(dollars in thousands)
OPERATING REVENUES
Net investment income
Other revenues
Total Operating Revenues
OPERATING EXPENSES
Amortization of intangible assets
Other expenses
Total Operating Expenses
Operating Income
Interest expense(1)
Income Before Income Taxes
Income tax expense (benefit)
Net Income
Net income attributable to noncontrolling interests
Years Ended December 31,
2017
2016
2015
$
332
1,336,820
$ 109
1,214,449
$ 5
1,047,516
1,337,152
1,214,558
1,047,521
31,429
1,185,843
1,217,272
119,880
20,009
99,871
(9,303)
109,174
5,615
29,105
1,071,943
1,101,048
113,510
15,718
97,792
36,005
61,787
5,615
27,443
978,058
1,005,501
42,020
13,982
28,038
10,641
17,397
6,370
NET INCOME TO SHAREHOLDERS
$ 103,559
$ 56,172
$ 11,027
(1) Interest expense for the years ended December 31, 2017, 2016 and 2015 includes intercompany interest expense of $12.3 million,
$9.7 million and $9.4 million, respectively, which is eliminated in consolidation.
143
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M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
Revenues from our Markel Ventures operations increased in 2017 compared to 2016, primarily due to the acquisition of Costa
Farms in August 2017, the results of which are included in our non-manufacturing operations. We also experienced higher sales
volumes in our non-manufacturing operations, partially offset by lower revenues in our manufacturing operations, primarily
driven by lower sales volumes at one of our transportation-related manufacturing businesses.
Revenues from our Markel Ventures operations increased in 2016 compared to 2015 primarily due to the acquisition of CapTech
in December 2015. We also experienced higher sales volume from one of our transportation-related manufacturing businesses.
The following table summarizes the net expense (benefit), before taxes and non-controlling interests, of significant items
included in Markel Ventures operating expenses.
(dollars in thousands)
Insurance recoveries
Storm losses
Increase in contingent consideration obligations
Goodwill impairment
Total
Year Ended December 31,
2017
$ (64,029)
19,598
18,997
—
$ (25,434)
2016
$ —
—
10,276
18,723
$ 28,999
2015
$ —
—
31,187
14,880
$ 46,067
In 2017, operating expenses for Markel Ventures included insurance recoveries, net of related storm losses, at one of our
non-manufacturing businesses attributable to Hurricane Irma. Insurance recoveries include payments for the replacement cost
of damaged structures and expected profits from damaged inventory that would have otherwise been sold in 2017 and 2018.
Operating expenses for the year ended December 31, 2017 included expense attributable to an increase in our estimate of the
contingent consideration obligation related to our acquisition of Costa Farms. Operating expenses for the year ended December
31, 2016 included a similar charge related to 2015 acquisition of CapTech and the year ended December 31, 2015 included a
similar charge related to our 2014 acquisition of Cottrell. A portion of the purchase consideration for these acquisitions was
based on post-acquisition earnings, as defined in the respective purchase agreements. Our initial estimate of the contingent
consideration we expected to pay was included in the allocation of the purchase price at the acquisition date. Subsequent
increases in our expectation of the contingent consideration obligation result in a charge to operating expenses. As of December
31, 2017, the fair value of our outstanding contingent consideration obligation for Costa Farms and CapTech was $49.4 million
and $13.6 million, respectively, which reflects the maximum amount payable under the respective purchase agreements. The
contingent consideration obligation for Cottrell was paid in 2016 and a portion of the contingent consideration obligation for
CapTech was paid in 2017.
Operating expenses in 2016 included a goodwill impairment charge related to one of our industrial manufacturing reporting
units. Operating expenses in 2015 included a goodwill impairment charge related to one of our healthcare reporting units.
Net income to shareholders in 2017 also included a provisional one-time tax benefit of $37.1 million in the fourth quarter
related to the remeasurement of Markel Ventures’ net deferred tax liabilities at the lower enacted U.S. corporate tax rate as
a result of the TCJA. See note 8 of the notes to consolidated financial statements for further discussion of the TCJA.
Excluding the impact of the significant operating expense items discussed above in all three years and the TCJA in 2017,
net income to shareholders decreased from 2016 to 2017 and increased from 2015 to 2016. The decrease in net income to
shareholders in 2017 was due to higher materials costs and lower sales volumes in certain of our manufacturing operations,
partially offset by higher sales volumes in certain of our non-manufacturing operations. The increase in net income to
shareholders in 2016 was due to higher sales volumes in one of our transportation-related manufacturing businesses,
improved results across our non-manufacturing businesses and the contribution of earnings from CapTech.
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The following table summarizes the cash flows attributable to Markel Ventures for the years ended December 31, 2017, 2016
and 2015.
(dollars in thousands)
Cash and cash equivalents, beginning of year
Net cash provided by operating activities
Net cash used by investing activities
Net cash provided (used) by financing activities (1, 2)
Years Ended December 31,
2017
2016
2015
$ 105,316
195,054
(456,586)
321,388
$ 120,889
100,105
(55,293)
(60,385)
$ 106,552
166,702
(96,073)
(56,292)
Increase (decrease) in cash and cash equivalents
59,856
(15,573)
14,337
CASH AND CASH EQUIVALENTS, END OF YEAR
$ 165,172
$ 105,316
$ 120,889
(1) Net cash provided (used) by financing activities for the years ended December 31, 2017 and 2015 includes capital contributions from our
holding company (Markel Corporation) of $145.0 million and $22.8 million, respectively, which are eliminated in consolidation. There were
no capital contributions from our holding company for the year ended December 31, 2016.
(2) Net cash provided (used) by financing activities for the year ended December 31, 2017 includes net additions to debt of $265.0 million, which
are eliminated in consolidation. Net cash provided (used) by financing activities for the years ended December 31, 2016 and 2015 includes
net repayments of debt of $5.9 million and $36.0 million, respectively, which are eliminated in consolidation.
The increase in net cash used by investing activities in 2017 compared to 2016 and 2015 was due to cash, net of cash acquired,
of $408.5 million used for acquisitions during the year ended December 31, 2017. These acquisitions were funded through
capital contributions from our holding company (Markel Corporation) and financing from our insurance subsidiaries.
Markel Ventures earnings before interest, income taxes, depreciation and amortization (EBITDA) is a non-GAAP financial
measure. We use Markel Ventures EBITDA as an operating performance measure in conjunction with U.S. GAAP measures,
including revenues and net income, to monitor and evaluate the performance of our Markel Ventures operations. Because
EBITDA excludes interest, income taxes, depreciation and amortization, it provides an indicator of economic performance that
is useful to both management and investors in evaluating our Markel Ventures businesses as it is not affected by levels of debt,
interest rates, effective tax rates, levels of depreciation and amortization resulting from purchase accounting. The following
table reconciles consolidated net income to shareholders, to Markel Ventures EBITDA, net of noncontrolling interests.
(dollars in thousands)
Net income to shareholders
(Income) Loss before income taxes from other Markel operations
Income tax expense (benefit) from other Markel operations
Markel Ventures net income to shareholders
Interest expense (1)
Income tax expense
Depreciation expense
Amortization of intangible assets
Markel Ventures EBITDA – Total
Markel Ventures EBITDA – Manufacturing
Markel Ventures EBITDA – Non-Manufacturing
Markel Ventures EBITDA – Total
Years Ended December 31,
2017
2016
2015
$ 395,269
12,450
(304,160)
103,559
18,345
(11,494)
38,514
28,691
$ 177,615
$ 104,938
72,677
$ 177,615
$ 455,689
(532,989)
133,472
$ 582,772
(714,067)
142,322
56,172
14,900
34,502
32,759
26,796
11,027
13,287
10,710
30,478
25,776
$ 165,129
$ 91,278
$ 120,993
44,136
$ 88,822
2,456
$ 165,129
$ 91,278
(1) Interest expense for the years ended December 31, 2017, 2016 and 2015 includes intercompany interest expense of $12.3 million,
$9.7 million and $9.4 million, respectively.
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O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
Markel Ventures EBITDA for the years ended December 31, 2017, 2016 and 2015, was impacted by the significant operating
expense items previously discussed. Excluding the impact of the significant operating expense items in all three years, EBITDA
decreased from 2016 to 2017 and increased from 2015 to 2016. The decrease in 2017 was a result of higher materials costs and
lower sales volumes in certain of our manufacturing operations, partially offset by higher sales volumes in certain of our
non-manufacturing operations, as previously discussed. The increase in 2016 was due to higher sales volumes in one of our
transportation-related manufacturing businesses, improved results across our non-manufacturing businesses and the
contribution of earnings from CapTech.
Interest Expense, Loss on Early Extinguishment of Debt and Income Taxes
Interest Expense and Loss on Early Extinguishment of Debt
Interest expense was $132.5 million in 2017 compared to $129.9 million in 2016 and $118.3 million in 2015. The increase in
interest expense in 2017 compared to 2016 was due to interest expense associated with our 5.0% unsecured senior notes issued
in the second quarter of 2016 and our 3.50% and 4.30% unsecured senior notes issued during the fourth quarter of 2017,
partially offset by the partial purchase of our 7.125% unsecured senior notes and our 7.35% unsecured senior notes in the
second quarter of 2016 and the repayment of our 7.20% unsecured senior notes in the second quarter of 2017. The increase in
interest expense in 2016 compared to 2015 was due to interest expense associated with our 5.0% unsecured senior notes which
were issued in the second quarter of 2016, partially offset by the partial purchase of our 7.125% unsecured senior notes and our
7.35% unsecured senior notes in the second quarter of 2016.
In the second quarter of 2016, we issued $500 million of 5.0% unsecured senior notes due April 5, 2046. Net proceeds were
$493.1 million. We used a portion of these proceeds to purchase $70.2 million of principal on our 7.35% unsecured senior notes
due 2034 and $108.8 million of principal on our 7.125% unsecured senior notes due 2019 through a tender offer at a total
purchase price of $95.0 million and $126.4 million, respectively.
In connection with the tender offer and purchase, we recognized a loss on early extinguishment of debt of $44.1 million during
2016. Replacing this debt with our 5.0% unsecured senior notes due April 5, 2046 extended the average term of our unsecured
senior notes at a more favorable interest rate.
Income Taxes
On December 22, 2017, the U.S. enacted the TCJA, which made significant modifications to U.S. federal income tax law, most
of which are effective January 1, 2018. The TCJA, among other changes, (1) reduces the U.S. corporate tax rate from 35% to
21%, (2) imposes a one-time deemed repatriation tax on unremitted foreign earnings which were not previously subject to U.S.
income tax, (3) moves the U.S. from a worldwide tax system towards a territorial tax system and (4) modifies the manner in
which property and casualty insurance loss reserves are computed for federal income tax purposes. U.S. GAAP requires
companies to recognize the effect of tax law changes in the period of enactment.
See note 8 of the notes to consolidated financial statements for further discussion of the TCJA.
The effective tax rate for the year ended December 31, 2017 is not meaningful as a result of the significant tax benefit resulting
from enactment of the TCJA. Therefore, we also analyzed our adjusted effective tax rate, which excludes the impact of the
TCJA and is a non-GAAP measure. The following table summarizes our effective tax rate and adjusted effective tax rate for
the years ended December 31, 2017 and 2016.
Effective tax rate
Impact of TCJA on effective tax rate
Adjusted effective tax rate
146
Years Ended December 31,
2017
(359)%
(389)
30%
2016
27%
—
27%
2015
21%
—
21%
In 2017, the adjusted effective tax rate differs from the statutory rate of 35% primarily as a result of tax-exempt investment
income partially offset by the impact of a lower tax benefit from losses attributable to our foreign operations, which are taxed at
a lower rate. The increase in the adjusted effective tax rate in 2017 compared to the effective tax rate in 2016 was primarily due
to an increase in the proportion of U.S. earnings taxed at 35% in 2017 compared to 2016 and the impact of losses from our
foreign operations on our 2017 effective tax rate. These increases were partially offset by the impact of tax-exempt investment
income, which relative to lower income before income taxes in 2017 compared to 2016 produced a larger benefit on our effective
tax rate in 2017.
In 2016, the effective tax rate differs from the statutory rate of 35% primarily as a result of tax-exempt investment income. In
2015, the effective tax rate differs from the statutory rate of 35% primarily as a result of tax credits for foreign taxes paid and
tax-exempt investment income. In previous periods, certain foreign taxes paid were not available for use as tax credits against
our U.S. provision for income taxes. Based on our earnings from our foreign operations in 2015, significant foreign taxes paid,
both in 2015 and prior periods, were used as credits against our U.S. provision for income taxes in 2015. Our recognition of these
tax credits in 2015 had a favorable impact on our 2015 effective tax rate of 8%, compared to 2% in 2016.
With few exceptions, we are no longer subject to income tax examination by tax authorities for years ended before January 1, 2014.
The impact of the TCJA on our future effective tax rate will depend on numerous factors and assumptions, including any
changes to or interpretations of the new law. We expect that overall, the TCJA will have a favorable impact on our future
after-tax earnings, primarily due to the lower U.S. corporate tax rate effective January 1, 2018. Based on our current estimates,
in most years, we expect our future effective tax rate will range from 16% to 18%. However, we also expect increased volatility
in pre-tax income and, therefore, in our effective tax rate beginning in 2018, as a result of including unrealized gains and losses
on our equity portfolio in net income, rather than in other comprehensive income. For example, we recognized net unrealized
gains on equity securities for the years ended December 31, 2017 and 2016 of $1.0 billion and $398.8 million, respectively,
compared to net unrealized losses on equity securities of $320.3 million for the year ended December 31, 2015. Additionally,
our estimate of the effective tax rate in future periods is subject to our assertion that we are indefinitely reinvested in our
foreign subsidiaries. See note 8 of the notes to consolidated financial statements for further discussion of the impact of our
indefinite reinvestment assertion.
Comprehensive Income to Shareholders
Comprehensive income to shareholders was $1.2 billion, $667.0 million and $232.7 million in 2017, 2016 and 2015,
respectively. Comprehensive income to shareholders for 2017 included an increase in net unrealized gains on investments,
net of taxes, of $763.0 million and net income to shareholders of $395.3 million. Comprehensive income to shareholders for
2016 included net income to shareholders of $455.7 million and an increase in net unrealized gains on investments, net of taxes,
of $242.2 million. Comprehensive income to shareholders for 2015 included net income to shareholders of $582.8 million, a
decrease in net unrealized gains on investments, net of taxes, of $320.5 million and a decrease in foreign currency translation
adjustments, net of taxes, of $29.3 million.
For the years ended December 31, 2017 and 2016, book value per share increased 13% and 8%, respectively, primarily due to
comprehensive income to shareholders, as described above.
147
Markel Corporation & Subsidiaries
M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
The following graph presents book value per share and the five-year compound annual growth rate (CAGR) in book value per
share for the past five years as of December 31.
17%
14%
$700
$600
$500
$400
$300
e
r
a
h
s
r
e
p
e
u
l
a
v
k
o
o
B
543.96
561.23
$200
477.16
11%
11%
11%
606.30
683.55
$100
$0
2013 2014 2015 2016 2017
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
R
G
A
C
r
a
e
Y
-
e
v
i
F
Liquidity and Capital Resources
We seek to maintain prudent levels of liquidity and financial leverage for the protection of our policyholders, creditors and
shareholders. Our debt to capital ratio was 25% at December 31, 2017 and 23% at December 31, 2016.
At December 31, 2017, our holding company (Markel Corporation) held $2.7 billion of invested assets compared to $2.5 billion
at December 31, 2016. The increase in holding company invested assets is primarily due to dividends received from our
subsidiaries and net proceeds from the issuance of unsecured senior notes, partially offset by cash paid for acquisitions and
capital contributions to our subsidiaries. At December 31, 2017, invested assets approximated 22 times annual interest expense
of the holding company. Excess liquidity at Markel Corporation is available to increase capital at our insurance subsidiaries,
complete acquisitions, repurchase shares of our common stock or retire debt.
Our Board of Directors has approved the repurchase of up to $300 million of common stock under a share repurchase program
(the Program). Under the Program, we may repurchase outstanding shares of common stock from time to time, primarily through
open-market transactions. The Program has no expiration date but may be terminated by the Board of Directors at any time. As
of December 31, 2017, we had repurchased 183,735 shares of common stock at a cost of $158.0 million under the Program.
Our underwriting operations collect premiums and pay claims, reinsurance costs and operating expenses. Premiums collected
and positive cash flows from the underwriting operations are invested primarily in short-term investments and long-term fixed
maturities. Short-term investments held by our insurance subsidiaries provide liquidity for projected claims, reinsurance costs
and operating expenses. As a holding company, Markel Corporation receives cash from its subsidiaries as reimbursement for
operating and other administrative expenses it incurs. The reimbursements are made within the guidelines of various
management agreements between the holding company and its subsidiaries.
The holding company has historically relied upon dividends from its domestic subsidiaries to meet debt service obligations.
Under the insurance laws of the various states in which our domestic insurance subsidiaries are incorporated, an insurer is
restricted in the amount of dividends it may pay without prior approval of regulatory authorities. At December 31, 2017, our
domestic insurance subsidiaries and Markel Bermuda Limited could pay ordinary dividends of $879.9 million during the
following twelve months under these laws.
148
There are also regulatory restrictions on the amount of dividends that our foreign insurance subsidiaries may pay based on
applicable laws in the United Kingdom. At December 31, 2017, our foreign subsidiaries, with the exception of certain of our
Bermuda subsidiaries, are considered reinvested indefinitely and no provision for deferred United States income taxes has been
recorded. At December 31, 2017, cash and cash equivalents, restricted cash and cash equivalents and short-term investments
of $1.1 billion were held by our foreign subsidiaries. We do not expect the amount of cash and cash equivalents, restricted
cash and cash equivalents and short-term investments that are attributable to foreign subsidiaries that are considered
reinvested indefinitely, and not available for distributions to the holding company, to have a material effect on our liquidity
or capital resources.
Net cash provided by operating activities was $858.5 million, $534.6 million and $651.2 million in 2017, 2016 and 2015,
respectively. Net cash flows from operating activities for the year ended December 31, 2017 reflected higher premium
collections, primarily in the U.S. Insurance and Reinsurance segments, and lower payments for income taxes and employee
profit sharing compared to the same period of 2016. Also reflected in net cash flows from operating activities for 2017 was
higher claims settlement activity across all of our underwriting segments compared to 2016, primarily as a result of the 2017
Catastrophes that occurred in the second half of 2017. As of December 31, 2017 we had paid 27% of our total estimated net
losses on the 2017 Catastrophes. Net cash provided by operating activities in 2017 was net of a $45.8 million payment made in
connection with the commutation of a property and casualty insurance contract. The decrease in net cash provided by operating
activities in 2016 compared to 2015 was due in part to higher claims payments in the U.S. Insurance segment, in particular on
our professional liability lines of business, as well as higher payments for employee profit sharing in 2016 compared to 2015.
Net cash provided by operating activities in 2016 was net of a $51.9 million payment made in connection with the
commutation of a property and casualty deposit contract. Cash flows in 2016 also included payments totaling $47.0 million to
settle contingent purchase consideration obligations, of which $32.9 million was included in operating activities. Net cash
provided by operating activities in 2015 was net of cash payments totaling $156.4 million made in connection with two
retroactive reinsurance transactions completed in 2015, in which we ceded two portfolios of policies comprised of liabilities
arising from A&E exposures to a third party. Net cash provided by operating activities in 2015 was also net of a $29.0 million
cash payment made to transfer our obligations under a reinsurance contract for life and annuity benefits to a third party.
Net cash used by investing activities was $744.5 million in 2017 compared to net cash used by investing activities of
$1.6 billion in 2016 and net cash provided by investing activities of $63.4 million in 2015. Net cash used by investing activities
in 2017 included $1.4 billion, net of cash acquired, used for acquisitions, offset by $531.3 million of proceeds from maturities
and sales of fixed maturities and sales of equity securities, net of purchases. In 2017, we reduced our holdings of short-term
investments to fulfill the cash need for acquisitions. Net cash used by investing activities in 2016 included the purchases of
fixed maturities and equity securities, net of proceeds from sales, of $877.0 million. We also allocated more cash and cash
equivalents to short-term investments to achieve higher returns while still maintaining adequate liquidity. Net cash provided
by investing activities in 2015 included proceeds from the sales and maturities of investments, net of purchases of investments,
of $466.3 million, partially offset by $261.5 million, net of cash acquired, used for acquisitions, and $79.8 million used to
purchase property and equipment. See “Investing Results” for further discussion of changes in our allocation of funds within the
investment portfolio in 2015, 2016 and 2017. Cash flow from investing activities is affected by various factors such as
anticipated payment of claims, financing activity, acquisition opportunities and individual buy and sell decisions made in the
normal course of our investment portfolio management.
Invested assets increased to $20.6 billion at December 31, 2017 from $19.1 billion at December 31, 2016. Net unrealized gains
on investments, net of taxes, were $2.5 billion at December 31, 2017 compared to $1.7 billion at December 31, 2016. The
increase in net unrealized gains on investments, net of taxes, in 2017 was primarily due to an increase in the estimated fair
value of our equity portfolio, as a result of strong overall equity market performance.
Net cash provided by financing activities was $256.3 million in 2017 compared to net cash provided by financing activities of
$152.0 million in 2016 and net cash used by financing activities of $74.2 million in 2015. During 2017, we issued $300 million
of 3.50% unsecured senior notes due November 1, 2027 and $300 million of 4.30% unsecured senior notes due November 1,
2047. Net proceeds were $297.4 million and $295.5 million, respectively, to be used for general corporate purposes. Also in 2017,
we used cash of $90.6 million to repay the remaining outstanding balance of our 7.20% unsecured senior notes due April 14,
2017 and also used cash of $84.3 million to repay debt assumed in connection with acquisitions. During 2016, we issued $500
million of 5.0% unsecured senior notes due April 5, 2046. Net proceeds were $493.1 million. We used a portion of these
proceeds to purchase $70.2 million of principal on our 7.35% senior notes due 2034 and $108.8 million of principal on our
149
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M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
7.125% senior notes due 2019 through a tender offer at a total purchase price of $95.0 million and $126.4 million, respectively.
During 2017, 2016 and 2015, cash of $110.8 million, $51.1 million and $31.5 million, respectively, was used to repurchase
shares of our common stock.
In recent years, we have completed numerous reinsurance commutations, which involve the termination of ceded or assumed
reinsurance contracts. Our commutation strategy related to ceded reinsurance contracts is to reduce credit exposure and
eliminate administrative expenses associated with the run-off of reinsurance placed with certain reinsurers. Our commutation
strategy related to assumed reinsurance contracts is to reduce our loss exposure to long-tailed liabilities assumed under
reinsurance agreements that were entered into by companies we acquired prior to our acquisition. We will continue to pursue
commutations, or similar reinsurance transactions, when we believe they meet our objectives. As previously discussed, during
2015, we completed two retroactive reinsurance transactions to cede two portfolios of policies primarily comprised of liabilities
arising from A&E exposures to a third party. See “Critical Accounting Estimates” for further discussion. We also completed a
novation that transferred our obligations under a reinsurance contract for life and annuity benefit policies to a third party. In
2016 and 2017, we completed commutations that transferred our obligations under a property and casualty deposit contract
and insurance contract, respectively. While we recognize that these transactions have the short term impact of reducing
investment income, we have significantly reduced the uncertainty around these exposures and increased our flexibility
regarding capital allocation.
We have credit risk to the extent any of our reinsurers are unwilling or unable to meet their obligations under our ceded
reinsurance agreements. Within our underwriting operations, our reinsurance recoverable balance for the ten largest reinsurers
was $1.6 billion at December 31, 2017, representing 61% of the balance, before considering allowances for bad debts. All of
our ten largest reinsurers within our underwriting operations were rated “A” or better by A.M. Best. We were the beneficiary
of letters of credit, trust accounts and funds withheld in the aggregate amount of $401.5 million at December 31, 2017,
collateralizing reinsurance recoverable balances due from these ten reinsurers. Within our program services business, our
reinsurance recoverable balance for the ten largest reinsurers was $1.7 billion at December 31, 2017, representing 79% of the
balance, before considering allowances for bad debts. Five of our ten largest reinsurers within our program services business
were rated “A” or better by A.M. Best. We were the beneficiary of letters of credit, trust accounts and funds withheld in the
aggregate amount of $1.5 billion at December 31, 2017, collateralizing reinsurance recoverable balances due from these ten
reinsurers. See note 15 of the notes to consolidated financial statements for further discussion of reinsurance recoverables
and exposures.
Within our underwriting operations, we attempt to minimize credit exposure to reinsurers through adherence to internal
reinsurance guidelines. We monitor changes in the financial condition of each of our reinsurers, and we assess our concentration
of credit risk on a regular basis. Within our program services business, we mitigate credit risk by either selecting well
capitalized, highly rated authorized reinsurers or requiring that the reinsurer post substantial collateral to secure the reinsured
risks. While we believe that net reinsurance recoverable balances are collectible, deterioration in reinsurers’ ability to pay, or
collection disputes, could adversely affect our operating cash flows, financial position and results of operations.
150
Unpaid losses and loss adjustment expenses were $13.6 billion and $10.1 billion at December 31, 2017 and 2016, respectively.
The following table summarizes case reserves and IBNR reserves. As described in note 9 to consolidated financial statements,
unpaid losses and loss adjustment expenses attributable to acquisitions are recorded at fair value as of the acquisition date,
which consists of the present value of the expected net loss and loss adjustment expense payments plus a risk premium. Unpaid
losses and loss adjustment expenses included in the consolidated balance sheet include the unamortized portion of any fair
value adjustments recorded in conjunction with an acquisition and any adjustments to discount reserves; however, as these
amounts do not represent case or IBNR reserves, they are excluded from the table below. See note 9 of the notes to consolidated
financial statements and “Critical Accounting Estimates” for a discussion of estimates and assumptions related to unpaid losses
and loss adjustment expenses.
(dollars in thousands)
U.S. Insurance
International
Insurance
Reinsurance
Other
Insurance
(Discontinued
Lines)
Program
Services
Consolidated
December 31, 2016
Case reserves
IBNR reserves
$ 1,355,146
2,972,020
$ 1,350,517
2,003,996
$ 1,219,119
2,104,783
$ 188,892
240,377
$ 759,943
1,435,488
$ 4,873,617
8,756,664
TOTAL
$ 4,327,166
$ 3,354,513
$ 3,323,902
$ 429,269
$ 2,195,431(1)
$ 13,630,281
December 31, 2016
Case reserves
IBNR reserves
$ 1,088,388
2,754,209
$ 1,188,171
1,841,042
$ 819,405
1,813,361
$ 248,729
293,458
$ —
—
$ 3,344,693
6,702,070
TOTAL
$ 3,842,597
$ 3,029,213
$ 2,632,766
$ 542,187
$ —
$ 10,046,763
(1) All of the premium written in our program services business is ceded to third parties, resulting in reinsurance recoverables on paid and
unpaid losses of $2.2 billion as of December 31, 2017. We are the beneficiary of letters of credit, trust accounts and funds withheld in the
aggregate amount of $1.9 billion at December 31, 2017, collateralizing these reinsurance recoverable balances in our program services
business.
The following table summarizes our contractual cash payment obligations at December 31, 2017.
(dollars in thousands)
Senior long-term debt and other debt(2)
Unpaid losses and loss adjustment
expenses (estimated)
Life and annuity benefits (estimated)
Operating leases
Payments Due by Period (1)
Total
Less than 1
year
1-3 years
4-5 years
More than
5 years
$ 5,080,481
$ 241,513
$ 876,499
$ 831,574
$ 3,130,895
13,630,281
1,423,225
311,722
3,203,638
88,828
53,398
4,598,591
146,103
81,985
2,565,085
135,343
63,924
3,262,967
1,052,951
112,415
TOTAL
$ 20,445,709
$ 3,587,377
$ 5,703,178
$ 3,595,926
$ 7,559,228
(1) See notes 9, 10, 11 and 16 of the notes to consolidated financial statements for further discussion of these obligations.
(2) Amounts include interest.
Senior long-term debt and other debt, excluding net unamortized premium and net unamortized debt issuance costs, was
$3.1 billion at December 31, 2017 and $2.6 billion at December 31, 2016.
We maintain a revolving credit facility, which provides $300 million of capacity for future acquisitions, investments,
repurchases of our capital stock and for general corporate purposes. At our discretion, $200 million of the total capacity may
be used for secured letters of credit. We may increase the capacity of the facility to $500 million subject to certain terms and
conditions. This facility expires in August 2019. As of December 31, 2017 and 2016, there were no borrowings outstanding
under our revolving credit facility.
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M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
We were in compliance with all covenants contained in our revolving credit facility at December 31, 2017. To the extent that
we are not in compliance with our covenants, our access to the revolving credit facility could be restricted. While we believe
this to be unlikely, the inability to access the revolving credit facility could adversely affect our liquidity. See note 11 of the
notes to consolidated financial statements for further discussion of our revolving credit facility.
Reserves for unpaid losses and loss adjustment expenses represent future contractual obligations associated with property and
casualty insurance and reinsurance contracts issued to our policyholders or other insurance companies. Information presented
in the table of contractual cash payment obligations is an estimate of our future payment of claims as of December 31, 2017.
Payment patterns for losses and loss adjustment expenses were generally based upon historical claims patterns. Each claim is
settled individually based upon its merits and certain claims may take years to settle, especially if legal action is involved. The
actual cash payments for settled claims will vary, possibly significantly, from the estimates shown in the preceding table. The
unpaid losses and loss adjustment expenses in the table above are our gross estimates of known liabilities as of December 31,
2017. The expected payments by period are the estimated payments at a future time, whereas the reserves for unpaid losses and
loss adjustment expenses included in the consolidated balance sheet include the unamortized portion of any fair value
adjustments for unpaid losses and loss adjustment expenses assumed in conjunction with an acquisition.
Reserves for life and annuity benefits represent future contractual obligations associated with reinsurance contracts issued to
other insurance companies. Information presented in the table of contractual cash payment obligations is an estimate of our
future payment of benefits as of December 31, 2017. The assumptions used in estimating the likely payments due by period are
based on cedent experience, industry mortality tables, and our expense experience. Due to the inherent uncertainty in the
process of estimating the timing of such payments, there is a risk that the amounts paid in any such period can be significantly
different from the estimates shown in the preceding table. The life and annuity benefits in the above table are our gross
estimates of known obligations as of December 31, 2017. These obligations are computed on a net present value basis in the
consolidated balance sheet as of December 31, 2017, whereas the expected payments by period in the table above are the
estimated payments at a future time and do not reflect a discount of the amount payable.
At December 31, 2017, we had $4.6 billion of invested assets held in trust or on deposit for the benefit of policyholders or ceding
companies or to support underwriting activities. Additionally, we have pledged investments and cash and cash equivalents
totaling $349.5 million at December 31, 2017 as security for letters of credit that have been issued by various banks on our
behalf. These invested assets and the related liabilities are included on our consolidated balance sheet. See note 3(h) of the notes
to consolidated financial statements for further discussion of restrictions over our invested assets.
Our insurance operations require capital to support premium writings, and we remain committed to maintaining adequate
capital and surplus at each of our insurance subsidiaries. The National Association of Insurance Commissioners (NAIC)
developed a model law and risk-based capital formula designed to help regulators identify domestic property and casualty
insurers that may be inadequately capitalized. Under the NAIC’s requirements, a domestic insurer must maintain total capital
and surplus above a calculated threshold or face varying levels of regulatory action. Capital adequacy of our foreign insurance
subsidiaries is regulated by applicable laws of the United Kingdom, Bermuda and other jurisdictions. At December 31, 2017, the
capital and surplus of each of our insurance subsidiaries significantly exceeded the amount of statutory capital and surplus
necessary to satisfy regulatory requirements.
We have access to various capital sources, including dividends from certain of our insurance subsidiaries, holding company
invested assets, undrawn capacity under our revolving credit facility and access to the debt and equity capital markets. We
believe that we have sufficient liquidity to meet our capital needs.
152
Market Risk Disclosures
Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the
result of changes in equity prices, interest rates, foreign currency exchange rates and commodity prices. Our consolidated
balance sheets include assets and liabilities with estimated fair values that are subject to market risk. Our primary market risks
have been equity price risk associated with investments in equity securities, interest rate risk associated with investments in
fixed maturities and foreign currency exchange rate risk associated with our international operations. Various companies within
our Markel Ventures operations are subject to commodity price risk; however, this risk is not material to the Company.
The estimated fair value of our investment portfolio at December 31, 2017 was $20.6 billion, 71% of which was invested in
fixed maturities, short-term investments, cash and cash equivalents and restricted cash and cash equivalents and 29% of which
was invested in equity securities. At December 31, 2016, the estimated fair value of our investment portfolio was $19.1 billion,
75% of which was invested in fixed maturities, short-term investments, cash and cash equivalents and restricted cash and cash
equivalents and 25% of which was invested in equity securities.
Our fixed maturities, equity securities and short-term investments are recorded at fair value, which is measured based upon
quoted prices in active markets, if available. We determine fair value for these investments after considering various sources of
information, including information provided by a third party pricing service. The pricing service provides prices for substantially
all of our fixed maturities and equity securities. In determining fair value, we generally do not adjust the prices obtained from
the pricing service. We obtain an understanding of the pricing service’s valuation methodologies and related inputs, which
include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, duration, credit ratings, estimated
cash flows and prepayment speeds. We validate prices provided by the pricing service by reviewing prices from other pricing
sources and analyzing pricing data in certain instances.
Equity Price Risk
We invest a portion of shareholder funds in equity securities, which have historically produced higher long-term returns relative
to fixed maturities. We seek to invest in profitable companies, with honest and talented management, that exhibit reinvestment
opportunities and capital discipline, at reasonable prices. We intend to hold these investments over the long term and focus on
long-term total investment return, understanding that the level of unrealized gains or losses on investments may vary from one
period to the next. See note 3(a) of the notes to consolidated financial statements for disclosure of gross unrealized gains and
losses by investment category. Through December 31, 2017, changes in the estimated fair value of the equity portfolio are
presented as a component of shareholders’ equity in accumulated other comprehensive income, net of taxes. Effective January 1,
2018, changes in the estimated fair value of the equity portfolio will be presented in net income. See note 1(w) of the notes to
consolidated financial statements for further discussion of this accounting change.
At December 31, 2017, our equity portfolio was concentrated in terms of the number of issuers and industries. Such
concentrations can lead to higher levels of price volatility. At December 31, 2017, our ten largest equity holdings represented
$2.5 billion, or 41%, of the equity portfolio. Investments in the property and casualty insurance industry represented $1.1
billion, or 19%, of our equity portfolio at December 31, 2017. Our investments in the property and casualty insurance industry
included a $623.8 million investment in the common stock of Berkshire Hathaway Inc., a company whose subsidiaries engage
in a number of diverse business activities in addition to insurance. We have investment guidelines that set limits on the equity
holdings of our insurance subsidiaries.
153
Markel Corporation & Subsidiaries
M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
The following table summarizes our equity price risk and shows the effect of a hypothetical 35% increase or decrease in market
prices as of December 31, 2017 and 2016. The selected hypothetical changes do not indicate what could be the potential best or
worst case scenarios.
Estimated
Fair Value
Hypothetical
Price Change
Estimated
Fair Value after
Hypothetical
Change in Prices
Estimated
Hypothetical
Percentage Increase
(Decrease) in
Shareholders’ Equity
$ 5,968
$ 4,746
35% increase
35% decrease
35% increase
35% decrease
$ 8,057
3,879
$ 6,407
3,085
17.1%
(17.1)
13.1%
(13.1)
(dollars in millions)
As of December 31, 2017
Equity securities
As of December 31, 2016
Equity securities
Interest Rate Risk
Our fixed maturity investments and borrowings are subject to interest rate risk. Increases and decreases in interest rates
typically result in decreases and increases, respectively, in the fair value of these financial instruments.
The majority of our investable assets come from premiums paid by policyholders. These funds are invested predominantly in
high quality corporate, government and municipal bonds that generally match the duration of our loss reserves. The fixed
maturity portfolio, including short-term investments and cash and cash equivalents, has an average duration of 4.4 years and
an average rating of “AA.” See note 3(c) of the notes to consolidated financial statements for disclosure of contractual maturity
dates of our fixed maturity portfolio. The changes in the estimated fair value of the fixed maturity portfolio are presented as a
component of shareholders’ equity in accumulated other comprehensive income, net of taxes.
We work to manage the impact of interest rate fluctuations on our fixed maturity portfolio. The effective duration of the fixed
maturity portfolio is managed with consideration given to the estimated duration of our liabilities. We have investment
guidelines that limit the maximum duration and maturity of the fixed maturity portfolio.
We use a commercially available model to estimate the effect of interest rate risk on the fair values of our fixed maturity
portfolio and borrowings. The model estimates the impact of interest rate changes on a wide range of factors including duration,
prepayment, put options and call options. Fair values are estimated based on the net present value of cash flows, using a
representative set of possible future interest rate scenarios. The model requires that numerous assumptions be made about the
future. To the extent that any of the assumptions are invalid, incorrect estimates could result. The usefulness of a single
point-in-time model is limited, as it is unable to accurately incorporate the full complexity of market interactions.
154
The following table summarizes our interest rate risk and shows the effect of hypothetical changes in interest rates as of
December 31, 2017 and 2016. The selected hypothetical changes do not indicate what could be the potential best or worst
case scenarios.
(dollars in millions)
Estimated
Fair Value
Interest Rates Hypothetical Change
(bp=basis points)
in Interest Rates
Fair Value of
Fixed Maturities
Shareholders’
Equity
Hypothetical
Change in
Estimated
Fair Value after
Hypothetical Percentage
Increase (Decrease) in
13.9%
6.7
(6.3)
(12.3)
13.8%
6.6
(6.3)
(12.4)
11.3%
5.5
(5.1)
(10.0)
10.8%
5.2
(5.0)
(9.7)
FIXED MATURITY
INVESTMENTS
As of December 31, 2017
Total fixed maturity
investments
$ 9,941
As of December 31, 2016
Total fixed maturity
investments
$ 9,892
LIABILITIES ( 1 )
As of December 31, 2017
Borrowings
$ 3,351
As of December 31, 2016
Borrowings
$ 2,721
200 bp decrease
100 bp decrease
100 bp increase
200 bp increase
200 bp decrease
100 bp decrease
100 bp increase
200 bp increase
200 bp decrease
100 bp decrease
100 bp increase
200 bp increase
200 bp decrease
100 bp decrease
100 bp increase
200 bp increase
$ 11,323
10,606
9,319
8,720
$ 11,252
10,549
9,264
8,669
$ 4,015
3,653
3,096
2,880
$ 3,184
2,933
2,540
2,384
(1) Changes in estimated fair value have no impact on shareholders’ equity.
155
Markel Corporation & Subsidiaries
M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
Foreign Currency Exchange Rate Risk
We have foreign currency exchange rate risk associated with certain of our assets and liabilities. We manage this risk primarily
by matching assets and liabilities in each foreign currency, other than non-monetary assets and liabilities, as closely as possible.
Non-monetary assets primarily consist of goodwill and intangible assets. As of December 31, 2017 and 2016, the carrying value
of goodwill and intangible assets denominated in a foreign currency, which is not matched or hedged, was $225.9 million and
$208.7 million, respectively. The increase is primarily due to the weakening of the U.S. dollar against the United Kingdom
Sterling during 2017.
To assist with the matching of assets and liabilities in foreign currencies, we periodically purchase foreign currency forward
contracts and we purchase or sell foreign currencies in the open market. Our forward contracts are generally designated as
specific hedges for financial reporting purposes. As such, realized and unrealized gains and losses on these hedges are recorded as
currency translation adjustments and are part of other comprehensive income (loss). Our forward contracts generally have
maturities of three months. At December 31, 2017 and 2016, substantially all of our monetary assets and liabilities
denominated in foreign currencies were either matched or hedged.
At December 31, 2017 and 2016, 87% and 88%, respectively, of our invested assets were denominated in United States Dollars.
At December 31, 2017 and 2016, 84% and 81%, respectively, of our reserves for unpaid losses and loss adjustment expenses and
life and annuity benefits were denominated in United States Dollars. At those dates, the largest foreign currency denominated
balances within both our invested assets and reserves for unpaid losses and loss adjustment expenses and life and annuity
benefits were the Euro and United Kingdom Sterling.
Credit Risk
Credit risk is the potential loss resulting from adverse changes in an issuer’s ability to repay its debt obligations. We monitor
our investment portfolio to ensure that credit risk does not exceed prudent levels. We have consistently invested in high credit
quality, investment grade securities. Our fixed maturity portfolio has an average rating of “AA,” with 98% rated “A” or better
by at least one nationally recognized rating organization. Our policy is to invest in investment grade securities and to minimize
investments in fixed maturities that are unrated or rated below investment grade. At December 31, 2017, less than 1% of our
fixed maturity portfolio was unrated or rated below investment grade. Our fixed maturity portfolio includes securities issued
with financial guaranty insurance. We purchase fixed maturities based on our assessment of the credit quality of the underlying
assets without regard to insurance.
Our fixed maturity portfolio includes securities issued by foreign governments and non-sovereign foreign institutions. General
concern exists about the financial difficulties facing certain foreign countries in light of the adverse economic conditions
experienced over the past several years. We monitor developments in foreign countries, currencies and issuers that could pose
risks to our fixed maturity portfolio, including ratings downgrades, political and financial changes and the widening of credit
spreads. We believe that our fixed maturity portfolio is highly diversified and is comprised of high quality securities.
We obtain information from news services, rating agencies and various financial market participants to assess potential negative
impacts on a country or company’s financial risk profile. We analyze concentrations within our fixed maturity portfolio by
country, currency and issuer, which allows us to assess our level of diversification with respect to these exposures, reduce
troubled exposures should they occur and mitigate any future financial distress that these exposures could cause.
At December 31, 2017, we held fixed maturities of $42.2 million, or less than 1% of invested assets, from sovereign and
non-sovereign issuers domiciled in Portugal, Ireland, Italy, Greece, Spain or Brazil and $1.5 billion, or 7% of invested assets,
from sovereign and non-sovereign issuers domiciled in other European countries, including supranationals. At December 31,
2016, we held fixed maturities of $38.0 million, or less than 1% of invested assets, from sovereign and non-sovereign issuers
domiciled in Portugal, Ireland, Italy, Greece, Spain or Brazil and $1.5 billion, or 8% of invested assets, from sovereign and
non-sovereign issuers domiciled in other European countries, including supranationals.
156
General concern also exists about municipalities that experience financial difficulties during periods of adverse economic
conditions. We manage the exposure to credit risk in our municipal bond portfolio by investing in high quality securities
and by diversifying our holdings, which are typically either general obligation or revenue bonds related to essential products
and services.
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, we attempt to
anticipate the potential impact of inflation. We also consider inflation in the determination and review of reserves for losses
and loss adjustment expenses and life and annuity benefits since portions of these reserves are expected to be paid over extended
periods of time. This is especially true for our long-tailed lines of business. Although our life and annuity reinsurance business
is in run-off, we must monitor the effects inflation and changing interest rates have on the related reserves. We regularly
complete loss recognition testing to ensure that held reserves are sufficient to meet our future claim obligations in the current
investment environment.
Brexit Developments
On June 23, 2016, the U.K. voted to exit the European Union (E.U.) (Brexit), and on March 29, 2017, the U.K. government
delivered formal notice to the other E.U. member countries that it is leaving the E.U. A two-year period has now commenced
during which the U.K. and the E.U. will negotiate the future terms of the U.K.’s relationship with the E.U., including the terms
of trade between the U.K. and the E.U. Unless this period is extended, the U.K. will automatically exit the E.U., with or without
an agreement in place, after two years. During this period the U.K. will remain a part of the E.U. After Brexit terms are agreed,
Brexit could be implemented in stages over a multi-year period. No member country has left the E.U., and the rules for exit
(contained in Article 50 of the Treaty on European Union) are brief. The U.K. and the E.U. have agreed to the financial
settlement to be paid by the U.K. upon leaving the E.U.
Accordingly, there are significant uncertainties related to the political, monetary and economic impacts of Brexit, including
related tax, accounting and financial reporting implications. Brexit could also lead to legal uncertainty and potentially a large
number of new and divergent national laws and regulations, including new tax rules, as the U.K. determines which E.U. laws
to replace or replicate.
The effects of Brexit will depend in part on any agreements the U.K. makes to retain access to E.U. markets either during a
transitional period or more permanently. Brexit could impair or end the ability of both Markel International Insurance Company
Limited (MIICL) and our Lloyd’s syndicate to transact business in E.U. countries from our U.K. offices and MIICL’s ability to
maintain its current branches in E.U. member countries and in Switzerland. We have started the process to obtain regulatory
approval to establish an insurance company in Germany in order to continue transacting E.U. business if U.K. access to E.U.
markets ceases or is materially impaired. The Society of Lloyd’s has announced that it will be setting up a new European
insurance company in Brussels in order to maintain access to E.U. business for Lloyd’s syndicates. Access to E.U. markets
through a solution devised by the Society of Lloyd’s may supplement, or serve as an alternative to, a new E.U.-based insurance
carrier for business we transact in the E.U.
157
Markel Corporation & Subsidiaries
M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
Disclosure of Certain Activities Relating to Iran
Under the Iran Threat Reduction and Syria Human Rights Act of 2012, non-U.S. entities owned or controlled by U.S. persons
have been prohibited from engaging in activities, transactions or dealings with Iran to the same extent as U.S. persons. Effective
January 16, 2016, the Office of Foreign Assets Control of the U.S. Department of the Treasury adopted General License H,
which authorizes non-U.S. entities that are owned or controlled by a U.S. person to engage in most activities with Iran
permitted for other non-U.S. entities so long as they meet certain requirements.
Section 13(r) of the Securities Exchange Act of 1934 requires reporting of certain Iran-related activities that are now permitted
under General License H, including underwriting, insuring and reinsuring certain activities related to the importation of refined
petroleum products by Iran and vessels involved in the transportation of crude oil from Iran.
Certain of our non-U.S. insurance operations underwrite global marine hull policies and global marine hull war policies that
provide coverage for vessels or fleets navigating into and out of ports worldwide, potentially including Iran. Under a global
marine hull war policy, the insured is required to give notice before entering designated areas, including Iran. During the quarter
ended December 31, 2017 we have received notice that one or more vessels covered by a global marine hull war policy were
entering Iranian waters. However, no additional premium is required under global marine hull policies or global marine hull
war policies for calling into Iran. During the quarter ended December 31, 2017, we have not been asked to cover a specific
voyage into or out of Iran that would result in a separate, allocable premium for that voyage.
Certain of our non-U.S. reinsurance operations underwrite marine, energy, aviation and trade credit liability treaties on a
worldwide basis and, as a result, it is possible that the underlying insurance portfolios may have exposure to the Iranian
petroleum industry and its related products and service providers.
We provide two energy construction reinsurance contracts in Iran, two Iran-related marine liability contracts, two Iran-related
marine cargo contracts and one Iran-related hull war contract. These contracts have been underwritten through our syndicate
at Lloyd’s and one of our non-U.S. insurance companies. We expect our portion of the annual premium for these contracts to
be approximately $1 million in the aggregate. Except for these contracts, we are not aware of any premium apportionment with
respect to underwriting, insurance or reinsurance activities of our non-U.S. insurance subsidiaries reportable under Section
13(r). Should any such risks have entered into the stream of commerce covered by the insurance portfolios underlying our
reinsurance treaties, we believe that the premiums associated with such business would be immaterial.
Our non-U.S. insurance subsidiaries intend to continue to provide insurance and reinsurance for coverage of Iran-related risks,
if at all, only to the extent permitted under, and in accordance with, General License H or other applicable economic or trade
sanctions requirements or licenses.
158
Controls and Procedures
As of December 31, 2017, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls
and procedures pursuant to Securities Exchange Act Rule 13a-15 (Disclosure Controls). This evaluation was conducted under
the supervision and with the participation of our management, including the Principal Executive Officer (PEO) and the
Principal Financial Officer (PFO).
Our management, including the PEO and PFO, does not expect that our Disclosure Controls will prevent all error and all fraud.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any,
have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that
breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
Based upon our controls evaluation, the PEO and PFO concluded that effective Disclosure Controls were in place to ensure
that the information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules
and forms.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we carried out an evaluation, under the supervision and with the
participation of our management, including the PEO and the PFO, of the effectiveness of our internal control over financial
reporting as of December 31, 2017. See Management’s Report on Internal Control over Financial Reporting and our independent
registered public accounting firm’s attestation report on the effectiveness of our internal control over financial reporting.
During 2017, we completed the acquisitions of Costa Farms and State National Companies, Inc. (State National), whose
combined assets and revenues represented approximately 15% of our consolidated assets and approximately 2% of our
consolidated operating revenues as of and for the year ended December 31, 2017. We currently exclude, and are in the process
of working to incorporate, Costa Farms and State National into our evaluation of internal controls over financial reporting.
There were no other changes in our internal control over financial reporting during the fourth quarter of 2017 that materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
159
Markel Corporation & Subsidiaries
M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S (continued)
Safe Harbor and Cautionary Statement
This report contains statements concerning or incorporating our expectations, assumptions, plans, objectives, future financial
or operating performance and other statements that are not historical facts. These statements are “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may use words such as “anticipate,”
“believe,” “estimate,” “expect,” “intend,” “predict,” “project” and similar expressions as they relate to us or our management.
There are risks and uncertainties that may cause actual results to differ materially from predicted results in forward-looking
statements. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves.
Additional factors that could cause actual results to differ from those predicted are set forth under “Risk Factors” or are included
in the items listed below:
• our expectations about future results of our underwriting, investing and other operations are based on current knowledge and
assume no significant man-made or natural catastrophes, no significant changes in products or personnel and no adverse
changes in market conditions;
• the effect of cyclical trends on our underwriting, investing and other operations, including demand and pricing in the
insurance, reinsurance and other markets in which we operate;
• actions by competitors, including the application of new or “disruptive” technologies or business models and consolidation,
and the effect of competition on market trends and pricing;
• we offer insurance and reinsurance coverage against terrorist acts in connection with some of our programs, and in other
instances we are legally required to offer terrorism insurance; in both circumstances, we actively manage our exposure, but if
there is a covered terrorist attack, we could sustain material losses;
• the frequency and severity of man-made and natural catastrophes (including earthquakes, fires and weather-related
catastrophes) may exceed expectations, are unpredictable and, in the case of fires and weather-related catastrophes, may be
exacerbated if, as many forecast, conditions in the oceans and atmosphere result in increased hurricane, flood, drought or
other adverse weather-related activity;
• emerging claim and coverage issues, changing legal and social trends, and inherent uncertainties in the loss estimation
process can adversely impact the adequacy of our loss reserves and our allowance for reinsurance recoverables;
• reinsurance reserves are subject to greater uncertainty than insurance reserves, primarily because of reliance upon the original
underwriting decisions made by ceding companies and the longer lapse of time from the occurrence of loss events to their
reporting to the reinsurer for ultimate resolution;
• changes in the assumptions and estimates used in establishing reserves for our life and annuity reinsurance book (which is in
runoff), for example, changes in assumptions and estimates of mortality, longevity, morbidity and interest rates, could result
in material increases in our estimated loss reserves for such business;
• adverse developments in insurance coverage litigation or other legal or administrative proceedings could result in material
increases in our estimates of loss reserves;
• the failure or inadequacy of any loss limitation methods we employ;
• changes in the availability, costs and quality of reinsurance coverage, which may impact our ability to write or continue to
write certain lines of business;
• the ability or willingness of reinsurers to pay balances due may be adversely affected by industry and economic conditions,
deterioration in reinsurer credit quality and coverage disputes, and collateral we hold may not be sufficient to cover a
reinsurer’s obligation to us;
• after the commutation of ceded reinsurance contracts, any subsequent adverse development in the re-assumed loss reserves
will result in a charge to earnings;
• regulatory actions can impede our ability to charge adequate rates and efficiently allocate capital;
• general economic and market conditions and industry specific conditions, including extended economic recessions or
expansions; prolonged periods of slow economic growth; inflation or deflation; fluctuations in foreign currency exchange
rates, commodity and energy prices and interest rates; volatility in the credit and capital markets; and other factors;
160
• economic conditions, actual or potential defaults in municipal bonds or sovereign debt obligations, volatility in interest and
foreign currency exchange rates and changes in market value of concentrated investments can have a significant impact on
the fair value of our fixed maturity and equity securities, as well as the carrying value of our other assets and liabilities, and
this impact may be heightened by market volatility;
• economic conditions may adversely affect our access to capital and credit markets;
• the effects of government intervention, including material changes in the monetary policies of central banks, to address
financial downturns and economic and currency concerns;
• the impacts that political and civil unrest and regional conflicts may have on our businesses and the markets they serve or
that any disruptions in regional or worldwide economic conditions generally arising from these situations may have on our
businesses, industries or investments;
• the impacts that health epidemics and pandemics may have on our business operations and claims activity;
• the impact on our businesses of the repeal, in part or in whole, or modification of U.S. health care reform legislation and
regulations;
• changes in U.S. tax laws or in the tax laws of other jurisdictions in which we operate and adjustments we may make in our
operations in response to those changes;
• a failure of our enterprise systems, or those of third parties upon which we may rely, or a failure to comply with data
protection or privacy regulations;
• our acquisitions may increase our operational and control risks for a period of time;
• we may not realize the contemplated benefits, including cost savings and synergies, of our acquisitions;
• any determination requiring the write-off of a significant portion of our goodwill and intangible assets;
• the loss of services of any executive officer or other key personnel could adversely impact one or more of our operations;
• our substantial international operations and investments expose us to increased political, operational and economic risks,
including foreign currency exchange rate and credit risk;
• the vote by the United Kingdom to leave the European Union, which could have adverse consequences for our businesses,
particularly our London-based international insurance operations;
• our ability to raise third party capital for existing or new investment vehicles and risks related to our management of third
party capital;
• the effectiveness of our procedures for compliance with existing and ever increasing guidelines, policies and legal and
regulatory standards, rules, laws and regulations;
• the impact of economic and trade sanctions and embargo programs on our businesses, including instances in which the
requirements and limitations applicable to the global operations of U.S. companies and their affiliates are more restrictive
than those applicable to non-U.S. companies and their affiliates;
• regulatory changes, or challenges by regulators, regarding the use of certain issuing carrier or fronting arrangements;
• our dependence on a limited number of brokers for a large portion of our revenues;
• adverse changes in our assigned financial strength or debt ratings could adversely impact us, including our ability to attract
and retain business, the amount of capital our insurance subsidiaries must hold and the availability and cost of capital;
• the political, legal, regulatory, financial, tax and general economic impacts, and others we cannot anticipate, of Brexit; and
• a number of additional factors may adversely affect our Markel Ventures operations, and the markets they serve, and
negatively impact their revenues and profitability, including, among others: adverse weather conditions, plant disease and
other contaminants; changes in government support for education, healthcare and infrastructure projects; changes in capital
spending levels; changes in the housing market; liability for environmental matters; volatility in the market prices for their
products; and volatility in commodity prices and interest and foreign currency exchange rates.
Our premium volume, underwriting and investment results and results from our other operations have been and will
continue to be potentially materially affected by these factors. By making forward-looking statements, we do not intend to
become obligated to publicly update or revise any such statements whether as a result of new information, future events or
other changes. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as
at their dates.
161
Markel Corporation & Subsidiaries
O T H E R I N F O R M A T I O N
Performance Graph
The following graph compares the cumulative total return (based on share price) on our common stock with the cumulative
total return of companies included in the S&P 500 Index and the Dow Jones Property & Casualty Insurance Companies Index.
This information is not necessarily indicative of future results.
$250
$300
$250
$200
$200
$150
$150
$100
$100
$50
$50
$0
$0
2012 2013 2014 2015 2016 2017
Markel Corporation
S&P 500
Dow Jones Property & Casualty Insurance
Years Ended December 31,
2012(1)
2013
2014
2015
2016
2017
Markel Corporation
S&P 500
Dow Jones Property & Casualty Insurance
$ 100
100
100
$ 134
132
132
$ 158
151
148
$ 204
153
162
$ 209
171
190
$ 263
208
223
(1) $100 invested on December 31, 2012 in our common stock or the listed index. Includes reinvestment of dividends.
Market and Dividend Information
Our common stock trades on the New York Stock Exchange under the symbol MKL. The number of shareholders of record as of
February 6, 2018 was approximately 350. The total number of shareholders, including those holding shares in street name or in
brokerage accounts, is estimated to be in excess of 140,000. Our current strategy is to retain earnings and, consequently, we
have not paid and do not expect to pay a cash dividend on our common stock.
High and low common stock prices as reported on the New York Stock Exchange composite tape for 2017 were $1,157.30
and $887.40, respectively. See note 24 of the notes to consolidated financial statements for additional common stock price
information.
162
Common Stock Repurchases
The following table summarizes our common stock repurchases for the quarter ended December 31, 2017.
Issuer Purchases of Equity Securities
(a)
(b)
(c)
Period
October 1, 2017 through October 31, 2017
November 1, 2017 through November 30, 2017
December 1, 2017 through December 31, 2017
Total
Total
Number of
Shares
Purchased
3,630
3,465
3,135
10,230
Average
Price
Paid per
Share
$ 1,076.61
$ 1,082.03
$ 1,120.67
$ 1,091.95
Total
Number of
Shares
Purchased as
Part
of Publicly
Announced
Plans
or Program(1)
3,630
3,465
3,135
10,230
(d)
Approximate
Dollar
Value of
Shares that
May Yet Be
Purchased
Under
the Plans or
Programs
(in thousands)
$ 149,229
$ 145,480
$ 141,967
$ 141,967
(1) The Board of Directors approved the repurchase of up to $300 million of our common stock pursuant to a share repurchase program publicly
announced on November 21, 2013 (the Program). Under the Program, we may repurchase outstanding shares of our common stock from
time to time in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 under the Securities
Exchange Act of 1934. The Program has no expiration date but may be terminated by the Board of Directors at any time.
Available Information and Shareholder Relations
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, Investor Relations, at the address of the corporate offices listed below, or by calling (800) 446-6671.
We make available free of charge on or through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange Commission. Our website address is www.markelcorp.com.
Transfer Agent
American Stock Transfer & Trust Co., LLC, Operations Center, 6201 15th Avenue, Brooklyn, NY 11219 (800) 937-5449
Code of Conduct
We have adopted a code of business conduct and ethics (Code of Conduct) which is applicable to all directors and associates,
including executive officers. We have posted the Code of Conduct on our website at www.markelcorp.com. We intend to satisfy
applicable disclosure requirements regarding amendments to, or waivers from, provisions of our Code of Conduct by posting
such information on our website. Shareholders may obtain printed copies of the Code of Conduct by writing Mr. Bruce Kay,
Investor Relations, at the address of the corporate offices listed below, or by calling (800) 446-6671.
Annual Shareholders’ Meeting
Shareholders of Markel Corporation are invited to attend the Annual Meeting to be held at Altria Theater, 6 North Laurel Street,
Richmond, Virginia at 4:30 p.m., May 14, 2018.
Corporate Offices
Markel Corporation, 4521 Highwoods Parkway, Glen Allen, Virginia 23060-6148 (804) 747-0136 (800) 446-6671
163
Markel Corporation & Subsidiaries
D I R E C T O R S A N D E X E C U T I V E O F F I C E R S
Directors
Alan I. Kirshner
Chairman of the Board
J. Alfred Broaddus, Jr.
Private Investor
K. Bruce Connell
Retired Executive Vice President
and Group Chief
Underwriting Officer
XL Capital Ltd.
Thomas S. Gayner
Co-Chief Executive Officer
Stewart M. Kasen
Retired President and
Chief Executive Officer
S & K Famous Brands, Inc.
Executive Officers
Lemuel E. Lewis
Retired Executive Vice President
and Chief Financial Officer
Landmark Communications, Inc.
Anthony F. Markel
Vice Chairman
Steven A. Markel
Vice Chairman
Darrell D. Martin
Retired Executive Vice President
and Chief Financial Officer
Markel Corporation
Michael O’Reilly
Retired Vice Chairman and
Chief Financial Officer
The Chubb Corporation
Michael J. Schewel
Vice President, General Counsel
and Secretary
Tredegar Corporation
Jay M. Weinberg
Retired Chairman Emeritus
Hirschler Fleischer, a professional
corporation
Richard R. Whitt, III
Co-Chief Executive Officer
Debora J. Wilson
Retired President and
Chief Executive Officer
The Weather Channel
Alan I. Kirshner
Executive Chairman since January 2016. Chairman of the Board since 1986. Chief Executive Officer from 1986 to December
2015. Director since 1978. Age 82.
Anthony F. Markel
Vice Chairman of Markel Corporation and the Board since May 2008. President and Chief Operating Officer from March 1992
to April 2008. Director since 1978. Age 76.
Steven A. Markel
Vice Chairman of Markel Corporation and the Board since March 1992. Director since 1978. Age 69.
Thomas S. Gayner
Co-Chief Executive Officer since January 2016. President and Chief Investment Officer from May 2010 to December 2015.
Chief Investment Officer from January 2001 to December 2015. President, Markel-Gayner Asset Management Corporation, a
subsidiary, since December 1990. Director from 1998 to 2004. Director since August 2016. Age 56.
Richard R. Whitt, III
Co-Chief Executive Officer since January 2016. President and Co-Chief Operating Officer from May 2010 to December 2015.
Senior Vice President and Chief Financial Officer from May 2005 to May 2010. Director since August 2016. Age 54.
Britton L. Glisson
Chief Administrative Officer since February 2009. President, Global Insurance from November 2014 to December 2017.
President, Markel Insurance Company, a subsidiary, from October 1996 to March 2009. Age 61.
Bradley J. Kiscaden
Executive Vice President and Chief Actuarial Officer since July 2012. Chief Actuarial Officer since March 1999. Age 55.
Anne G. Waleski
Executive Vice President and Chief Financial Officer since May 2014. Vice President and Chief Financial Officer since May
2010. Treasurer from August 2003 to November 2011. Age 51.
164
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
The aggregate market value of the shares of the registrant’s
Common Stock held by non-affiliates as of June 30, 2017 was
approximately $13,238,000,000.
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, 2017
Commission File Number 001-15811
MARKEL CORPORATION
(Exact name of registrant as specified in its charter)
A Virginia Corporation
IRS Employer Identification No. 54-1959284
4521 Highwoods Parkway, Glen Allen, Virginia 23060-6148
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code:
(804) 747-0136
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value
New York Stock Exchange, Inc.
(title of each class and name of the exchange on which
registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
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 for 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 whether the registrant has submitted
electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was
required to submit and post such files). 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 registrant’s knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [ ]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if
the registrant has elected not to use the extended transition
period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of
the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The number of shares of the registrant’s Common Stock
outstanding at February 6, 2018: 13,900,897.
Documents Incorporated By Reference
The portions of the registrant’s Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on May 14, 2018,
referred to in Part III.
Index and Cross References-Form 10-K Annual Report
Item No.
Part I
1. Business
1A. Risk Factors
1B. Unresolved Staff
Comments
2. Properties (note 6 and note 16)
3. Legal Proceedings (note 16)
4. Mine Safety Disclosures
Part II
5. Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer
Purchases of Equity Securities
6. Selected Financial Data
7. Management’s Discussion and Analysis of
Page
12-45, 162-163
38-45
NONE
72-73, 98
98-99
NONE
114, 162-163
46-47
Financial Condition and Results of Operations
115-161
7A. Quantitative and Qualitative Disclosures
About Market Risk
153-157
8. Financial Statements and Supplementary Data
The response to this item is submitted in Item 15.
9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure
9A. Controls and Procedures
9B. Other Information
Part III
10. Directors, Executive Officers and Corporate
Governance*
Code of Conduct
NONE
48-49, 159
NONE
164
163
11. Executive Compensation*
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters*
13. Certain Relationships and Related Transactions, and
Director Independence*
14. Principal Accounting Fees and Services*
*Portions of Item 10 and Items 11, 12, 13 and 14 will be
incorporated by reference from the Registrant’s Proxy
Statement for its 2018 Annual Meeting of Shareholders
pursuant to instructions G(1) and G(3) of the General
Instructions to Form 10-K.
Part IV
15. Exhibits, Financial Statement Schedules
a. Documents filed as part of this Form 10-K
(1) Reports of Independent Registered Public
49-50
Accounting Firm
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
and Comprehensive Income
52
Consolidated Statements of Changes in Equity 53
Consolidated Statements of Cash Flows
54
Notes to Consolidated Financial Statements 55-114
51
(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 and Notes thereto.
(3) See Index to Exhibits for a list of Exhibits filed as part
of this report
b. See Index to Exhibits and Item 15a(3)
c. See Index to Financial Statements and Item 15a(2)
16. Form 10-K Summary
NONE
165
Markel Corporation & Subsidiaries
Exhibit No. Document Description
Exhibit Index
3(i)
3(ii)
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
Amended and Restated Articles of Incorporation (incorporated by reference from Exhibit 3.1 in the Registrant’s report
on Form 8-K filed with the Commission May 13, 2011)
Bylaws, as amended (incorporated by reference from Exhibit 3.1 in the Registrant’s report on Form 8-K filed with the
Commission November 20, 2015)
Indenture dated as of June 5, 2001 between Markel Corporation and The Chase Manhattan Bank, as Trustee
(incorporated by reference from Exhibit 4.1 in the Registrant’s report on Form 8-K filed with the Commission
June 5, 2001)
Form of Third Supplemental Indenture dated as of August 13, 2004 between Markel Corporation and JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank), as Trustee, including form of the securities as Exhibit
A (incorporated by reference from Exhibit 4.2 in the Registrant’s report on Form 8-K filed with the Commission
August 11, 2004)
Form of Fifth Supplemental Indenture dated as of September 22, 2009 between Markel Corporation and The Bank of
New York Mellon (as successor to The Chase Manhattan Bank), as Trustee, including form of the securities as
Exhibit A (incorporated by reference from Exhibit 4.2 in the Registrant’s report on Form 8-K filed with the
Commission September 21, 2009)
Form of Sixth Supplemental Indenture dated as of June 1, 2011 between Markel Corporation and The Bank of New
York Mellon (as successor to The Chase Manhattan Bank), as Trustee, including form of the securities as Exhibit A
(incorporated by reference from Exhibit 4.2 in the Registrant’s report on Form 8-K filed with the Commission
May 31, 2011)
Form of Seventh Supplemental Indenture dated as of July 2, 2012 between Markel Corporation and The Bank of New
York Mellon (as successor to The Chase Manhattan Bank), as Trustee, including form of the securities as Exhibit A
(incorporated by reference from Exhibit 4.2 in the Registrant’s report on Form 8-K filed with the Commission
June 29, 2012)
Form of Eighth Supplemental Indenture dated as of March 8, 2013 between Markel Corporation and The Bank of
New York Mellon (as successor to The Chase Manhattan Bank), as Trustee, including form of the securities as
Exhibit A (incorporated by reference from Exhibit 4.2 in the Registrant’s report on Form 8-K filed with the
Commission March 7, 2013)
Form of Ninth Supplemental Indenture dated as of March 8, 2013 between Markel Corporation and The Bank of
New York Mellon (as successor to The Chase Manhattan Bank), as Trustee, including form of the securities as
Exhibit A (incorporated by reference from Exhibit 4.3 in the Registrant’s report on Form 8-K filed with the
Commission March 7, 2013)
Form of Tenth Supplemental Indenture dated as of April 5, 2016 between Markel Corporation and The Bank of New
York Mellon (as successor to The Chase Manhattan Bank), as Trustee, including form of the securities as Exhibit A
(incorporated by reference from Exhibit 4.2 in the Registrant’s report on Form 8-K filed with the Commission
March 31, 2016)
Form of Eleventh Supplemental Indenture dated as of November 2, 2017 between Markel Corporation and The Bank
of New York Mellon (as successor to The Chase Manhattan Bank), as Trustee, including form of the securities as
Exhibit A (incorporated by reference from Exhibit 4.2 in the Registrant’s report on Form 8-K filed with the
Commission November 2, 2017)
Form of Twelfth Supplemental Indenture dated as of November 2, 2017 between Markel Corporation and The Bank
of New York Mellon (as successor to The Chase Manhattan Bank), as Trustee, including form of the securities as
Exhibit A (incorporated by reference from Exhibit 4.3 in the Registrant’s report on Form 8-K filed with the
Commission November 2, 2017)
Indenture dated as of September 1, 2010, among Alterra Finance LLC, Alterra Capital Holdings Limited and The
Bank of New York Mellon, as Trustee (incorporated by reference from Exhibit 4.14 in the Registrant’s report on Form
10-Q filed with the Commission for the quarter ended June 30, 2013)
First Supplemental Indenture, dated as of September 27, 2010 between Alterra Finance LLC, Alterra Capital Holdings
Limited and The Bank of New York Mellon, as Trustee, including the form of the securities as Exhibit A
(incorporated by reference from Exhibit 4.15 in the Registrant’s report on Form 10-Q filed with the Commission for
the quarter ended June 30, 2013)
Form of Second Supplemental Indenture dated as of June 30, 2014 among Alterra Finance LLC, Alterra Capital
Holdings Limited and the Bank of New York Mellon, as Trustee ( incorporated by reference from Exhibit 4.16 in the
Registrant’s report on Form 10-Q filed with the Commission for the quarter ended June 30, 2014)
Form of Guaranty Agreement by Markel Corporation dated as of June 30, 2014 in connection with the Alterra
Finance LLC 6.25% Senior Notes due 2020 (incorporated by reference from Exhibit 4.17 in the Registrant’s report on
Form 10-Q filed with the Commission for the quarter ended June 30, 2014)
The registrant hereby agrees to furnish to the Securities and Exchange Commission, upon request, a copy of all other
instruments defining the rights of holders of long-term debt of the registrant and its subsidiaries.
10.1
Form of Credit Agreement dated as of August 1, 2014 among Markel Corporation, Markel Bermuda Limited, Alterra
Reinsurance USA Inc., Alterra Finance LLC, Alterra USA Holdings Limited, the lenders party from time to time
thereto, and Wells Fargo Bank, National Association, Administrative Agent, a Fronting Bank and Swingline Lender
("Wells Fargo Credit Agreement") (incorporated by reference from Exhibit 4.1 in the Registrant’s report on Form 10-Q
filed with the Commission for the quarter ended June 30, 2014)
First Amendment to Credit Agreement dated as of November 13, 2015, to the Wells Fargo Credit Agreement
(incorporated by reference from Exhibit 10.2 in the Registrant’s report on Form 10-K filed with the Commission for
the year ended December 31, 2015)
Second Amendment to Credit Agreement dated as of November 2, 2017, to the Wells Fargo Credit Agreement
(incorporated by reference from Exhibit 10.1 in the Registrant’s report on Form 8-K filed with the Commission
November 7, 2017)
Form of Amended and Restated Employment Agreement with Alan I. Kirshner (incorporated by reference from
Exhibit 10.2 in the Registrant’s report on Form 10-K filed with the Commission for the year ended
December 31, 2008)*
10.2
10.3
10.4
166
Exhibit No. Document Description
10.5
10.6
10.7
10.8
10.9
Amended and Restated Employment Agreement with Steven A. Markel (incorporated by reference from Exhibit 10.1 in
the Registrant’s report on Form 10-Q filed with the Commission for the quarter ended September 30, 2015)*
Amendment dated as of December 31, 2017 to Amended and Restated Employment Agreement with
Steven A. Markel* **
Form of Amended and Restated Employment Agreement with Anthony F. Markel (incorporated by reference from
Exhibit 10.4 in the Registrant’s report on Form 10-K filed with the Commission for the year ended
December 31, 2008)*
Form of Executive Employment Agreement with Thomas S. Gayner, Richard R. Whitt, III, F. Michael Crowley, Britton
L. Glisson, Anne G. Waleski and Bradley J. Kiscaden (incorporated by reference from Exhibit 10.5 in the Registrant’s
report on Form 10-K filed with the Commission for the year ended December 31, 2008)*
Letter Agreement dated November 16, 2017 between Markel Corporation and F. Michael Crowley (incorporated by
reference from Exhibit 10.1 in the Registrant’s report on Form 8-K filed with the Commission May 11, 2017)*
10.10 Markel Corporation Executive Bonus Plan (incorporated by reference from Exhibit 10.1 in the Registrant’s report on
Form 8-K filed with the Commission May 14, 2015)*
10.12
10.11 Markel Corporation Voluntary Deferred Compensation Plan (incorporated by reference from Exhibit 10.14 in the
Registrant’s report on Form 10-K filed with the Commission for the year ended December 31, 2015)*
Employee Stock Purchase and Bonus Plan (incorporated by reference from Exhibit 10.9 in the Registrant’s report on
Form 10-K filed with the Commission for the year ended December 31, 2008)*
2016 Employee Stock Purchase and Bonus Plan (incorporated by reference from Exhibit 10.2 in the Registrant’s report
on Form 8-K filed with the Commission May 19, 2016)*
10.13
10.14 Markel Corporation Omnibus Incentive Plan (incorporated by reference from Appendix B in the Registrant’s Proxy
10.15
10.16
Statement and Definitive 14A filed with the Commission April 2, 2003)*
Form of Restricted Stock Unit Award Agreement for Executive Officers (revised 2010) (incorporated by reference from
Exhibit 10.2 filed with the Commission in the Registrant’s report on Form 10-Q for the quarter ended March 31, 2010)
Form of Amended and Restated May 2010 Restricted Stock Unit Award Agreement for Executive Officers
(incorporated by reference from Exhibit 10.1 in the Registrant’s report on Form 10-Q filed with the Commission for the
quarter ended June 30, 2010)*
10.17 May 2010 Restricted Stock Units Deferral Election Form (incorporated by reference from Exhibit 10.2 in the
Registrant’s report on Form 10-Q filed with the Commission for the quarter ended June 30, 2010)*
10.18 Markel Corporation 2012 Equity Incentive Compensation Plan (incorporated by reference from Appendix A in the
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
Registrant’s Proxy Statement and Definitive 14A filed with the Commission March 16, 2012)*
Form of Time Based Restricted Stock Unit Award Agreement for Executive Officers for the 2012 Equity Incentive
Compensation Plan (incorporated by reference from Exhibit 10.22 in the Registrant’s report on Form 10-K filed with
the Commission for the year ended December 31, 2012)*
Form of Performance Based Restricted Stock Unit Award Agreement for Executive Officers for the 2012 Equity
Incentive Compensation Plan (incorporated by reference from Exhibit 10.23 in the Registrant’s report on Form 10-K
filed with the Commission for the year ended December 31, 2012)*
Restricted Stock Units Deferral Election Form for the 2012 Equity Incentive Compensation Plan (incorporated by
reference from Exhibit 10.24 in the Registrant’s report on Form 10-K filed with the Commission for the year ended
December 31, 2012)*
Form of Restricted Stock Unit Award Agreement for Executive Officers under the Markel Corporation 2012 Equity
Incentive Compensation Plan (incorporated by reference from Exhibit 10.1 in the Registrant’s report on Form 8-K filed
with the Commission May 17, 2013)*
Form of Performance Based Restricted Stock Unit Award Agreement for Executive Officers for the 2012 Equity
Incentive Compensation Plan (revised 2016) (incorporated by reference from Exhibit 10.1 in the Registrant’s report on
Form 10-Q filed with the Commission for the quarter ended March 31, 2016)*
Form of Time Based (Cliff Vesting) Restricted Stock Unit Award Agreement for Executive Officers for the 2012 Equity
Incentive Compensation Plan (revised 2016) (incorporated by reference from Exhibit 10.2 in the Registrant’s report on
Form 10-Q filed with the Commission for the quarter ended March 31, 2016)*
Form of Time Based (Graded Vesting) Restricted Stock Unit Award Agreement for Executive Officers for the 2012
Equity Incentive Compensation Plan (revised 2016) (incorporated by reference from Exhibit 10.3 in the Registrant’s
report on Form 10-Q filed with the Commission for the quarter ended March 31, 2016)*
2016 Equity Incentive Compensation Plan (incorporated by reference from Exhibit 10.1 in the Registrant’s report on
Form 8-K filed with the Commission May 19, 2016)*
Form of Performance Based Restricted Stock Unit Award Agreement for Executive Officers for the 2016 Equity
Incentive Compensation Plan (incorporated by reference from Exhibit 10.3 in the Registrant’s report on Form 10-Q
filed with the Commission for the quarter ended June 30, 2016)*
Form of Time Based (Cliff Vesting) Restricted Stock Unit Award Agreement for Executive Officers for the 2016 Equity
Incentive Compensation Plan (incorporated by reference from Exhibit 10.4 in the Registrant’s report on Form 10-Q
filed with the Commission for the quarter ended June 30, 2016)*
Form of Time Based (Graded Vesting) Restricted Stock Unit Award Agreement for Executive Officers for the 2016
Equity Incentive Compensation Plan (incorporated by reference from Exhibit 10.5 in the Registrant’s report on Form
10-Q filed with the Commission for the quarter ended June 30, 2016)*
Form of Restricted Stock Award Agreement for Outside Directors for the 2016 Equity Incentive Compensation Plan
(incorporated by reference from Exhibit 10.6 in the Registrant’s report on Form 10-Q filed with the Commission for the
quarter ended June 30, 2016)*
Form of Performance-Based Restricted Stock Unit Award Agreement for Executive Officers for the 2016 Equity
Incentive Compensation Plan (revised May 2017) (incorporated by reference from Exhibit 10.1 in the Registrant’s report
on Form 8-K filed with the Commission May 17, 2017)*
Aspen Holdings, Inc. Amended and Restated 2008 Stock Option Plan (incorporated by reference from Exhibit 99.1 in
the Registrant’s Registration Statement on Form S-8 (Reg. No. 333-170047))*
167
Markel Corporation & Subsidiaries
Exhibit No. Document Description
21
23
31.1
31.2
32.1
32.2
101
Certain Subsidiaries of Markel Corporation**
Consent of KPMG LLP**
Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/ 15d-14(a)**
Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/ 15d-14(a)**
Certification of Principal Executive Officer furnished Pursuant to 18 U.S.C. Section 1350**
Certification of Principal Financial Officer furnished Pursuant to 18 U.S.C. Section 1350**
The following consolidated financial statements from Markel Corporation’s Annual Report on Form 10-K for the year
ended December 31, 2017, filed on February 23, 2018, formatted in XBRL: (i) Consolidated Balance Sheets, (ii)
Consolidated Statements of Income and Comprehensive Income, (iii) Consolidated Statements of Changes in Equity,
(iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements.**
** Indicates management contract or compensatory plan or arrangement
** Filed with this report
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
/s/ Alan I. Kirshner
Alan I. Kirshner
Executive Chairman
(Principal Executive Officer)
February 23, 2018
/s/ Anne G. Waleski
Anne G. Waleski
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
February 23, 2018
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
/s/ Alan I. Kirshner
Alan I. Kirshner
/s/ Anthony F. Markel
Anthony F. Markel
/s/ Steven A. Markel
Steven A. Markel
/s/ Anne G. Waleski
Anne G. Waleski
/s/ Nora N. Crouch
Nora N. Crouch
/s/ J. Alfred Broaddus, Jr.
J. Alfred Broaddus, Jr.
/s/ K. Bruce Connell
K. Bruce Connell
/s/ Thomas S. Gayner
Thomas S. Gayner
/s/ Stewart M. Kasen
Stewart M. Kasen
/s/ Lemuel E. Lewis
Lemuel E. Lewis
/s/ Darrell D. Martin
Darrell D. Martin
/s/ Michael O’Reilly
Michael O’Reilly
/s/ Michael J. Schewel
Michael J. Schewel
/s/ Jay M. Weinberg
Jay M. Weinberg
/s/ Richard R. Whitt, III
Richard R. Whitt, III
/s/ Debora J. Wilson
Debora J. Wilson
168
Title
Executive Chairman,
Chairman of the Board
(Principal Executive Officer)
Director, Vice Chairman
Date
February 23, 2018
February 23, 2018
Director, Vice Chairman
February 23, 2018
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
M A R K E L C O R P O R AT I O N
Headquarters
Glen Allen, VA
Insurance
Asia Pacific
Singapore · Hong Kong · Dubai, United Arab Emirates · Kuala Lumpur, Malaysia · Labuan, Malaysia · Tokyo, Japan ·
Mumbai, India
Bermuda
Hamilton, Bermuda
Canada
Calgary, Canada · Montreal, Canada · Toronto, Canada · Vancouver, Canada
Europe
Barcelona, Spain · Dublin, Ireland · Madrid, Spain · Munich, Germany · Pierrefitte-en-Auge, France · Rotterdam, Netherlands ·
Stockholm, Sweden · Zurich, Switzerland
Latin America
Bogotá, Colombia · Buenos Aires, Argentina · Rio de Janeiro, Brazil
United Kingdom
Birmingham, England · Brinkworth, England · Bristol, England · Croydon, England · Leeds, England · London, England ·
Manchester, England · Reigate, England · Rugby, England · Sheffield, England
United States
Alpharetta, GA · Austin, TX · Bedford, TX · Chicago, IL · Cranston, RI · Deerfield, IL · Denver, CO · Geneva, IL ·
Glen Allen, VA · Henderson, NV · Hawley, PA · Houston, TX · Kansas City, MO · Kennesaw, GA · Marietta, GA ·
New York, NY · Omaha, NE · Ontario, CA · Pewaukee, WI · Plano, TX · Pleasanton, CA · Red Bank, NJ · San Antonio, TX ·
San Diego, CA · San Francisco, CA · Scottsdale, AZ · Summit, NJ · Tampa, FL · Warrenton, VA · Westminster, CA ·
Windsor, CT · Woodland Hills, CA
Markel Ventures
Europe
Gorinchem, Netherlands
United States
Baltimore, MD · Bethlehem, PA · Cape Girardeau, MO · Fairfield, NJ · Gainesville, GA · Glen Allen, VA ·
Miami, FL · Reading, PA · Richmond, VA · Temple, TX
Markel Corporation
4521 Highwoods Parkway
Glen Allen, Virginia 23060
(800) 446-6671
www.markelcorp.com