2018
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 (loss) to shareholders
Comprehensive income (loss) 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 (loss)
Book value
Growth (decline) in book value
Closing stock price
Growth (decline) in stock price
O P E R AT I N G H I G H L I G H T S
$
2018
7,864
4,788
4,712
$
2017
5,507
4,418
4,248
2016
$ 4,797
4,001
3,866
98%
105%
92%
6,841
(128)
(376)
6,062
395
1,175
$ 19,238
33,306
3,010
9,081
$ 20,570
32,805
3,099
9,504
5,612
456
667
$ 19,059
25,875
2,575
8,461
25%
25%
23%
13,888
$
(9.55)
$ 653.85)
13,904
$ 25.81
$ 683.55
13,955
$ 31.27
$ 606.30
(4)%
13%
8%
$ 1,038.05)
$ 1,139.13
$ 904.50
(9)%
26%
2%
• Total operating revenues increased $780 million, or 13%
• Comprehensive loss to shareholders of $376 million, driven by declines in the fair value of our
investment portfolio
• Combined ratio of 98%, including six points of catastrophe losses
• Book value per share was $653.85, representing a 7% compound annual growth rate over the
five-year period
• Growth in our investment management operations included the acquisition of Nephila, an
investment manager offering a broad range of investment products, including insurance-linked
securities, catastrophe bonds, insurance swaps and weather derivatives
• Growth in our Markel Ventures operations included the acquisition of Brahmin, a creator of fashion
leather handbags
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
Consolidated Financial Statements
2
16
42
52
54
55, 56
57
Notes to Consolidated Financial
Statements
Management’s Discussion & Analysis
Critical Accounting Estimates
Safe Harbor and Cautionary Statement
Legal Proceedings
Other Information
Directors and Executive Officers
Index for Form 10-K
61
125
127
164
166
168
170
171
2018
To Our Business Partners
Greetings. Here is our annual report to you for the
year 2018.
Short Version
At Markel, we aspire to build one of the world’s great
companies. Our core values remain integrity,
adaptability, continuous learning, and humility, among
others. We wrote the Markel Style over 30 years ago
to describe our values and culture. We believe this
statement of our values ties our varied businesses
together. Today, it does so for more people and in
more places than ever before. As to tomorrow and
beyond, while we’ve grown tremendously over
decades, we feel like we’re just getting started.
Each year we write you this letter to update you on
the condition and performance of your company. This
year’s letter will be longer than usual (not necessarily
due to popular demand). We’d like to take some extra
time and space to describe our strategic initiative in
the Insurance Linked Securities (ILS) market, and to
answer some specific questions many of you have
raised in recent months about that initiative. As usual,
we also have a lot to tell you about our existing
insurance, ventures, and investment activities.
F I N A N C I A L H I G H L I G H T S
If you’d like the summary version of 2018, here it is.
2018 was a good, but not great, year. We grew the
business both organically and by acquisition. We
increased the capabilities of the Markel Corporation in
every aspect of our business. As a marker of this
growth we set a new record in revenues. While we are
reporting lower bottom line profitability due to
downdrafts in investment markets and ongoing high
levels of insured catastrophes, we believe that the
economic value of Markel stands at a new record level
as well. Finally, we ended the year with fewer shares
of Markel than at the beginning, so each share of
Markel that you own represents a bigger piece of the
company than what it did a year ago.
Extended Play Version
As we noted last year, we define a great company as
one with a win/win/win structure. Our customers win
as we serve them with products and services that
make their lives better. Our associates win because we
(in millions, except per share data)
2018
2017
2016
2015
2014
2013
2012
2011
2010
Total operating revenues
Gross written premiums
Combined ratio
Investment portfolio
Portfolio per share
Net income (loss) to shareholders $
Comprehensive income (loss)
$ 6,841%)
$ 7,864%)
98%)
6,062% 5,612% 5,370% 5,134% 4,323% 3,000% 2,630% 2,225%
5,507% 4,797% 4,633% 4,806% 3,920% 2,514% 2,291% 1,982%
97%
$ 19,238%) 20,570% 19,059% 18,181% 18,638% 17,612% 9,333% 8,728% 8,224%
$1,385.24%)1,479.45% 1,365.72%1,302.48%1,334.89%1,259.26% 969.23% 907.20% 846.24%
267%
456% 583%
(128)%
395%
321%
105%
281%
102%
142%
253%
89%
95%
97%
97%
92%
to shareholders
Shareholders’ equity
Book value per share
5-Year CAGR in book
value per share (1)
Closing stock price
(1) CAGR— compound annual growth rate
2
$ (376)% 1,175%
252% 431%
$ 9,081%)
9,504% 8,461% 7,834% 7,595% 6,674% 3,889% 3,388% 3,172%
$ 653.85%) 683.55% 606.30% 561.23% 543.96% 477.16% 403.85% 352.10% 326.36%
936% 459% 504%
667% 233%
7%)
13%
$1,038.05%)1,139.13% 904.50% 883.35% 682.84% 580.35% 433.42% 414.67% 378.13%
11%
14%
17%
11%
11%
9%
9%
enjoy our jobs, and through them provide the means
to serve our families, our colleagues, our customers,
our communities, and ourselves. Our shareholders win
because by doing these things in positive and
sustainable ways, we create financial value which
shows up in the increasing value of Markel over time.
In order to build one of the world’s great companies
we need to have what someone once called, “The
Right Owners, the Right Associates, and the Right
Strategy.” Over the course of this letter we’ll try to
address each of those issues.
Right Owners
The first idea is that of the “Right Owners.” As your
management team, we want and need a partnership
with our owners. We need that partnership to be long
term, and not subject to short term whims of market
disruptions, or false objectives derived from too short
term an orientation. We need our partners to want the
same things as we do, namely, the long term creation
of one of the world’s great companies. That notion
embeds ideas about sustainability, diversity, resilience,
durability, and adaptability that have served as the
hallmarks of Markel since our inception.
Having the right owners with a suitable long term time
horizon provides us with an immense competitive
advantage. In today’s world, short term and artificial
time pressures permeate too many decisions. Our dual
time horizon of, Forever and Right Now, allows us to
make necessary, Right Now, decisions on a day by day
basis. But, we always get to make those decisions with
the Forever mindset guiding us while we do so. That is
an incredibly rare advantage in today’s world. It would
not happen without you as long term committed
owners. For that we are greatly appreciative.
Thank you.
In order to earn the trust and respect of the right
owners, we treat you as full partners. We think about
what we would want to receive from management
if our roles were reversed. If we were distant
shareholders, and away from any contact for a year,
we would want to know how is the firm doing. We
might wonder what is going well and what is not going
well. Is the firm going in new directions or maintaining
the direction that you told us about last year? Did we
add to the businesses we already owned? Did we
buy any new businesses? Were there any major
management changes, and what else took place that
mattered at Markel last year?
These are the sorts of questions we’ll attempt to
answer in this letter, and the spirit in which we’ll
describe our current circumstances as well as our
ongoing hopes and dreams for the future.
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
20-Year
1998 CAGR(1)
95%
$ 2,069% 1,977)% 2,551% 2,576% 2,200% 2,262% 2,092% 1,770% 1,397)% 1,094)% 524)%
$ 1,906% 2,213)% 2,359% 2,536% 2,401% 2,518% 2,572% 2,218% 1,774)% 1,132)% 595)%
101%)
426% 15%
437% 16%
%
98%
$ 7,849% 6,893)% 7,775% 7,524% 6,588% 6,317% 5,350% 4,314% 3,591)% 3,136)% 1,625)% 1,483% 14%
$799.34% 702.34)% 780.84% 752.80% 672.34% 641.49% 543.31% 438.79% 365.70)% 427.79)% 290.69)% 268.49% 9%
$ 202% (59)% 406%
%
148% 165% 123%
103% 124%)
75% (126)%
114%)
393%
101%
(28)%
99%)
41)%
57%
88%
87%
96%
99%
%
68%
82)% (40)%
$ 591% (403)% 337%
$ 2,774% 2,181)% 2,641% 2,296% 1,705% 1,657% 1,382% 1,159% 1,085)% 752)% 383)%
425% 17%
$282.55% 222.20 % 265.26% 229.78% 174.04% 168.22% 140.38% 117.89% 110.50)% 102.63)% 68.59)% 77.02% 11%
64% 273% 222%
73% (77)%
551%
11%
%
$340.00% 299.00)% 491.10% 480.10% 317.05% 364.00% 253.51% 205.50% 179.65)% 181.00)% 155.00)% 181.00% 9%
18%)
21%)
22%)
10%)
23%
20%
13%
13%
18%
16%
11%
3
Right People
The second idea is that of the “Right People.” We
believe we have a great formula to help us attract and
retain the right people. It is called the Markel Style.
The Style explicitly describes attributes such as hard
work, pursuing excellence, integrity, having a sense of
humor, and adapting to change, among others. It also
talks about having fun while doing so.
The Markel Style serves as a written monument to
who we are as the people of Markel. It talks about
why we work hard, and how our ultimate goal of
winning stems from doing things for others. We
believe that the ultimate value of a firm derives from
the value that the firm delivers to its customers…
others. The Markel Style applies to every single person
of this organization whether they are in the insurance,
ventures, or investment operations.
Five years ago 7,200 associates called Markel their
professional home. Today, that number stands at over
17,000. Today there are over 17,000 unique stories of
people helping others. They are doing so in their work
by providing products and solutions that meet the
needs of a customer. They are doing so by having the
means to take care of their families and their
communities. They are doing so by setting examples,
teaching, mentoring, coaching, listening, learning,
giving, and helping, in countless ways, in countless
situations.
We continue to attract the right people who yearn for
the values embedded in the Markel Style. We thank
them for what they do. We’re committed to running
Markel in such a way as to continue to create this
opportunity for more and more people over time.
Thank you for this opportunity.
Right Strategy
The third idea is that of the “Right Strategy.” In our
initial annual report in 1986 we described our overall
strategy as one of “Diversification and Specialization.”
That continues to be the case. Diversification means
that we pursue more than one business or idea at a
time. This creates a tough, flexible, and resilient
organization, capable of withstanding setbacks in any
one area. Diversity, and being good at it, allows us to
continue to move forward no matter what. And we
have observed over the years that “no matter what”
seems to happen on a recurring basis.
We also believe diversity applies to more than just the
list of businesses we’re in. It means diversity in the
people of our organization. We need people with
different skills, backgrounds, and points of view, to
bring robust talent to the tasks at hand.
Diversity also means doing business in more than one
place. Over the years we’ve grown from a small local
business in Richmond, Virginia to a global operation.
The sun is always shining on some Markel facility
somewhere in the world.
Specialization means being good at something
specific. Markel bursts at the seams with world class
experts in the disciplines of insurance, reinsurance,
investments, safety, risks, industrial equipment,
securitizations, medical services, horticulture,
consumer goods, transportation equipment,
affordable housing, and so on and so on. We bring
specialized expertise to bear on challenging problems.
As we solve those problems for our customers, we
serve them, and make them better off than they
would be without us.
Each customer problem we solve today gives us the
opportunity to solve another one tomorrow. That is
the ultimate formula for the sustainability of Markel
over time.
The tactics of how we accomplish those worthy goals
change over time. It is our job as the associates of
Markel to figure that out. It’s a fun and challenging
task to do so. And that challenge helps to motivate us
and drive the excellence you find in this company.
4
We believe we’re pursuing the “Right Strategy” of
being “Diversified and Specialized.” We view the long
term record of excellent financial performance as a
validation of that statement, and we expect to
continue to refine and adapt our tactics to build on
that record going forward.
2018 Financial Results
Usually, when people have a headline like, “2018
Financial Results” they mean just for the year 2018.
We mean that and more.
For the year 2018, at the top line, we reported total
revenues of $6.8 billion compared to $6.1 billion in
2017. At the bottom line, we reported a
comprehensive loss of ($376 million) compared to
comprehensive income of $1.2 billion in 2017. We’ll
break out the steps and items between the top and
bottom line over the course of this report but those
are the annual, twelve month results. Additionally,
Markel shares closed the year at a price of $1,038
compared to $1,139 a year ago.
We measure ourselves over longer and more
important time frames as well. Longer term results
matter more, and provide better and more robust data
as to how we are doing in achieving our ultimate
goals. As a tool to help reinforce this message, we use
five year calculations as the basis for the vast majority
of our management incentive compensation programs
as opposed to year by year measurements. We think
this helps to demonstrate and reinforce the fact that
we put our money where our mouth is when it comes
to the importance of a long term time horizon.
With a five year view, here are the same numbers. At
the top line we reported revenues of $29.0 billion
from 2014 to 2018 compared to $14.2 billion from
2009 to 2013. At the bottom line we earned
comprehensive income of $2.6 billion in the 5 years
from 2014 to 2018 compared to $2.2 billion in the
years from 2009 to 2013. Additionally, Markel shares
closed 2018 at a price of $1,038 compared to $580
at the end of 2013.
Markel Corporation
It’s unusual for companies to describe their progress
in this sort of multi-year fashion. We do so because
we think it highlights the long term focus with which
we operate. We also think that it washes away some
portion of short term market volatility distortions. We
think looking at the fundamental economic measures
over long time horizons helps us to make better long
term decisions. We back up that belief by tying the
bulk of our incentive compensation to the
accomplishment of long term goals.
We provide even more data which describes and
supports our long term focus in the chart at the
bottom of this letter. We show 21 years of key
financial items and we do so every year in this letter.
We report in this way by design. It helps us keep our
focus on doing the right thing every day to accomplish
long term and enduring excellence. We wish to
minimize short term distractions and costly stop gap
behaviors which might puff up short term results at
the possible expense of long term performance.
Captain’s Log 2018
In 2018, we made excellent progress in continuing to
build the long term economic value of Markel but it
was a challenging year. We made some mistakes in
certain areas. We experienced short term mark to
market declines in our investment portfolio, and we
look back wishing that we had done some things
differently a year ago.
The good news from this report though is that we
learned immense lessons during 2018. We continued
to relentlessly and continuously learn, and to increase
our capabilities to serve our customers, associates,
and shareholders as we move forward.
Specifically, the challenges in 2018 included the
second successive year of higher than average
property catastrophe losses as manifested in record
hurricane, typhoon, and wildfire losses. Not
surprisingly, those losses affected our insurance,
reinsurance, and Insurance Linked Securities
5
operations. We also experienced headwinds in our
publicly traded investment portfolio from rising
interest rates and negative overall equity market
returns. We also experienced highs and lows in our
diverse Markel Ventures business operations.
We are incredibly optimistic that we learned immense
lessons from each of those experiences and we will go
on to use that knowledge and wisdom to build the
future value of Markel. We’re also pleased and
relieved to report to you that over the years we’ve
built a resilient and durable business. We can and did
absorb some painful lessons in 2018, yet we still
earned reasonably good financial results while doing
so. That statement becomes even truer when viewed
over longer time frames such as the five rather than
one year time period.
We also have some excellent news from 2018.
Namely, we acquired Nephila, the market leader in
Insurance Linked Securities, and we added Brahmin
Leather to our Markel Ventures operations. We also
worked to improve our skills and capabilities within all
of the existing insurance, investment, and ventures
operations.
In our existing operations we pursued the
non-glamorous daily tasks of day to day execution
and daily work. As always, we tended to our
businesses one day, one customer, one decision, at a
time. We helped our long standing associates with
training, and experience, to become better at their
daily work, and to learn new skills and capabilities. We
also added talented individuals with specific skills and
capabilities all across the organization to help us all
continuously adapt and grow.
Today, newer skills might be called digital, or cyber, or
analytics, or other terms. Those words speak to the
increasing complexity of today’s world. We need to
constantly develop new capabilities in whatever skills
the marketplace needs. This concept is nothing new,
and we’ve been doing it at Markel for decades. Expect
us to continue. Stopping means death and we have no
interest in that.
Five year view
One of the benefits of looking at the five year
comparison of numbers is that you can start to see
things with a clearer perspective than year by year.
When you look at the last five years at Markel you see
the transformation of your company in stark terms.
Here are some of the ways we’ve transformed Markel.
In the U.S. we combined our insurance operations
from their separate silos of wholesale and retail. Our
simple goal is to seamlessly provide all customers of
Markel with any insurance capability found within our
organization. We want to be able to provide insurance
coverage to our customers in whatever way they want
to buy it.
Some coverages will be available on-line and direct
to consumer. For example, our coverages for
motorcycles, boats, horses, liability for directors
of non-profit entities, and many other lines can
be researched and purchased on-line directly
from Markel.
Other forms of insurance require the expertise of
retail insurance agency networks. We have direct
access and availability of appropriate insurance to
retail insurance agents as they explain coverages,
and provide and share servicing responsibility, for
those customers.
Finally, complex and large scale insurance products
require the specialized knowledge and distribution
capabilities of wholesale insurance brokers, and large
international insurance agency operations. Through
the offerings of our Markel Assurance division, we can
meet the needs of those customers and that
distribution system as well.
Five years ago, each of those efforts operated in
semi-autonomous silos with minimal overlap. Today,
we are approaching the ability to match the
6
Markel Corporation
Through our Global Reinsurance capabilities
headquartered in Bermuda and with US, UK, and other
locations, we offer global reinsurance coverages.
Five years ago the gross written premiums of our
reinsurance operations were $566 million, in 2018
they were $1.1 billion.
Reinsurance by its nature tends to be volatile from
year to year. While we’ve suffered the blows of back
to back years of record high catastrophe losses, we
are confident in the leadership of our reinsurance
business and we expect meaningful and positive
returns on capital from our ongoing reinsurance
activities.
The change in the scope and scale of our Insurance
Linked Securities (ILS) operations over the last five
years is the most dramatic of all. Five years ago the
revenues of our ILS business were $0. In 2018 they
were $92 million. We’ll pick up the discussion of
ILS shortly.
In our Markel Ventures operations, five years ago we
reported total revenues of $686 million and EBITDA
of $84 million. In 2018 we reported total revenues of
$1.9 billion and EBITDA of $170 million. We use the
imperfect tool of EBITDA to give you a least-worst
proxy of the earning power of the Markel Ventures
companies. We think EBITDA gives you a better view
of the underlying economic earnings power of the
Markel Ventures companies since purchase
accounting tends to distort the GAAP measure of net
income. The distortion is especially true in the early
years following acquisitions. Over time, as the base of
Markel Ventures grows and amortization of purchase
accounting items diminish, the net income
measurement should converge towards the same rate
of change as the EBITDA measure.
capabilities that exist within Markel to any customer,
anywhere.
Five years ago, the gross written premium revenues of
the preceding divisions that now make up the
combined Markel Assurance grouping were $1.6
billion. In 2018, those gross written premiums were
$2.1 billion. The growth reflects our increased ability
to provide whatever our customer wants and needs in
whatever method they wish to purchase it. We’re just
trying to get out of our own way here in order to give
the customer what they want, how and where they
want it.
We also operate internationally with our London
based Markel International operations. With a
combination of licenses owned by Markel
International, as well as those markets where we can
operate through our licenses with Lloyd’s of London,
we can serve customers all around the globe.
Our international operations offer local market
coverages to local customers in the UK, Canada,
Continental Europe, and Asia, with local offices and
local presence. We also offer global coverages to
global customers through the combined capabilities of
Markel Assurance and Markel International along with
our Lloyd’s, and Markel Global Reinsurance
capabilities.
Also, while Brexit looms large as a current issue for
the UK, we prepared years in advance to be ready for
such a development. Namely, we established a local
German presence several years ago. We’ve worked to
continuously develop our capabilities within Europe on
a separate and standalone basis from the UK. As such,
we believe we’re prepared to adapt to whatever Brexit
outcome ultimately takes place.
Five years ago the gross written premiums of our
International Insurance operations were $826 million,
in 2018 they were $1.1 billion.
The seeds of Markel Ventures, planted decades
ago, now show up as meaningful crops. Expect this
to continue.
7
Insurance Linked Securities (ILS) Strategy
Discussion - "Everything You’ve always
wanted to know about Insurance Linked
Securities but were afraid to ask."
Over the last several years, we’ve been on a multi-year
and multi-acquisition process to build our capabilities
in the insurance linked securities market. Through the
acquisitions of ILS managers CATCo, and Nephila, as
well as State National, with its necessary regulatory
servicing and licensing capabilities, we’ve assembled
the largest single entity that participates in the
Insurance Linked Securities market. We are incredibly
optimistic about the future of this business and what
it means for Markel as a whole.
That said, we encountered unexpected challenges in
our CATCo ILS management operations in 2018. As
we announced in December, we received inquiries
from U.S. and Bermuda authorities into loss reserves
recorded in late 2017 and early 2018 at CATCo and
its subsidiaries. We are fully cooperating. We continue
to investigate the issue, and we retained first rate
outside advisors to conduct a fulsome inquiry into the
matter. As of this writing, the investigation remains
ongoing. We will report on the outcomes of the
investigation when it concludes.
We are confident that our efforts in Insurance Linked
Securities will prove to be a valuable and important
strategic pillar of our operations at Markel. We will
learn, and we will adapt as necessary, to make our ILS
operations a key contributor to our results over time.
In response to many of your questions, we thought it
would be a good idea to describe the nature of the
Insurance Linked Securities business. What is it? What
are Insurance Linked Securities? How does this market
work? What do buyers want? What do sellers want?
What is Markel’s role in the business and what are our
potential risks and rewards?
As a first step to answer these questions, take the
point of view of the buyer of an ILS product. In one
incredibly oversimplified example, that buyer could be
8
a major insurance company that sells a broad variety
of coverages in a given market. If a company sold
homeowners coverages, auto coverages, business
interruption coverages, and other lines in markets like
Florida or California, they might be concerned that a
single event in one location could cause losses across
all of the products they sell. As we’ve seen in recent
years, hurricanes in Florida and wildfires in California
caused massive losses to whatever stood in harm’s
way. All and every coverage was hit, and often well
beyond what industry participants expected to be
the case.
In order to protect themselves, major insurance
companies might buy a type of an insurance linked
security known as an “Industry Loss Warranty” (ILW)
cover. These covers provide buyers with
reimbursement if total industry losses from an event
exceed a certain amount. This is in essence a
reinsurance purchase, but it is not tied to specific
coverages or policies. It just is meant to provide some
reimbursement to the buyer if the total industry
losses go over a certain amount.
An ILS manager finds buyers who are looking for this
type of coverage.
As the ILS manager finds buyers who seek this sort of
coverage, it needs to find sellers (capital providers),
who will provide the capital to fund losses if they
occur.
The sellers of the coverage (the investors) put up cash
to pay for losses if they occur.
In exchange, if there are no or limited losses, the
investors receive their cash back, plus the cash that
the buyers paid to put the coverage into place.
The ILS manager puts the transaction together and
matches up the buyers and sellers with specific terms,
rates and coverages. It facilitates the custody of the
cash during the time of coverage, and settles out the
cash in, and cash out, for all parties. The manager
typically provides only a small, if any, amount of the
underlying capital behind these transactions. The bulk
of the capital comes from the investors, and the ILS
manager earns management fees, as well as
performance fees based on outcomes.
To continue with the math of how this might work in
very simple terms consider the following example.
Assume a buyer paid a premium of 25% of the total
coverage for an ILW policy. That means they are
paying $25 million for $100 million in coverage. The
sellers/investors put up $75 million of cash. That cash
gets added to the $25 million of the premium from
the ILW buyer and the $100 million total amount is
held in escrow in the form of cash.
If you assume the over-simplified example of no fees
or expenses, the 25% rate for that coverage implies
that the event being covered would happen once in
four years.
Here’s what happens for the investors if there are no
losses (what the actuaries assumed would happen in
three out of four years for this type of coverage). The
buyer would be out $25 million but have been
protected against a catastrophic outcome.
The investors would receive their $75 million back and
the $25 million cash paid by the buyer. That would
produce a return of 33% ($25 million divided by $75
million). That’s why sellers/investors provide capital
for these transactions.
That would be the result in any one year, for one
policy, when there weren’t any losses. These products
are for large losses, and big catastrophes, so that is
not an unrealistic outcome in any one year.
Obviously, if those conditions prevailed continuously,
the market would stop because that outcome is too
favorable to the sellers, and the buyers are paying too
much for the risk they’re seeking to reduce.
Markel Corporation
With the same math over four years, the numbers
should balance out perfectly. If the losses truly do
occur once every four years, then collectively the
buyers and the sellers each put in $100 million and
they each took out $100 million over time.
The real world is obviously more complicated than
that over-simplified example. Many things in life are
more complicated to do than they are to say. That is
certainly the case for Insurance Linked Securities.
Here are some of the complexities, and how they
start to affect real world outcomes.
The first complexity is to acknowledge that the real
world will not play out in a precise one in four way.
For instance, assume that the big catastrophic event
took place once every three years rather than once
every four years. What happens then?
In that case, over the three years, buyers would have
paid a cumulative premium for the coverage of $75
million (3 years x $25 million), and they would have
collected a loss payment of $100 million when the
catastrophe occurred. They’d be up a net $25 million
on the trade and the sellers/investors would be net
$25 million behind ($75 million collected over 3
years minus the $100 million of loss payments).
Following the same math and logic, if the event took
place once every five years, the buyers would be
behind a net amount of $25 million and the sellers
would be up by an equal and opposite amount.
As such, the first part of the equation for an ILS
manager is to attempt to underwrite the risk of the
product as to the frequency (how often it might
happen) and the severity (the cost when it does). Our
ILS managers and their actuaries use various tools to
attempt to calculate appropriate pricing that will
roughly balance out the equation for buyers and
sellers over time. That is the first and most
challenging complexity when we go from the
oversimplified example to the real world.
9
Also, fees and expenses are not zero. Buyers will pay a
price that is ultimately higher than the actuarial
technical rate because they get something more than
just a reimbursement for when a loss happens. They
get to structure their balance sheet in a way that
helps to prevent a “risk of ruin.” That is a valuable
assurance, and they will pay something to provide
themselves with assurance that they will be
financially solvent after major catastrophes to be able
to continue to operate.
ILS products provide real and valuable benefits to
their customers to protect them in the event of major
catastrophes. Even if the catastrophe doesn’t happen,
the ability to operate with confidence, and in a
financially sound and protected manner, is of the
foremost importance. This is a win-win circumstance
for the ILS manager and its buyers.
For the investors, the returns from their investments
should not be correlated to overall financial markets,
general economic conditions, or other circumstances.
Investments in Insurance Linked Securities provide
diverse and independent cash flows for their
portfolios. This ability to earn returns that are
separate and distinct from stock markets, interest rate
moves, or other factors is of value to investors seeking
to manage investment portfolios. As such, an ILS
manager provides a product that helps investors meet
their objectives. We can earn a fair and appropriate fee
as compensation for doing so. Again, this is a win-win
relationship between ILS managers and the investors.
Additionally, the fees and expenses associated with
these transactions, as well as the returns on capital
supporting these deals, tend to be lower than those
associated with traditional forms of reinsurance
coverage. That is one of the reasons the Insurance
Linked Security market developed. The world
continues to demand better, faster, and cheaper
solutions to all problems, and the ILS market
addresses that dynamic for insurance products.
In the short run, compared to hundreds of years of
traditional insurance coverages, this is a relatively new
market. In 2018 a series of record-setting
catastrophes in multiple markets caused the investors
in ILS markets to experience losses. This was the
second year in a row of such events, and those losses
have triggered much discussion about the results and
long term viability of the ILS market. We believe in the
future of the ILS market and that the results will
balance back out towards a more sustainable
equilibrium.
In hindsight, CATCo’s initial estimates for the
catastrophe losses of 2017 and 2018 proved to be
too low. The losses to investors on CATCo products
have exceeded initial estimates.
Among other matters, the reserve setting process at
CATCo involves a unique challenge in that products
such as Industry Loss Warranty covers end up with a
completely binary outcome. To continue our extreme
and oversimplified example, if the industry loss
number in a given contract is set at $5 billion, and
industry losses turn out to be $4,999,999,999, the
loss for the sellers/investors in the ILS security is zero.
If the overall industry loss deteriorates by $2, that
means the ILS contract would go to a total loss that
might be hundreds of millions.
Determining a point estimate for what that loss might
be, and doing so for a wildfire that is burning while
you are in the room and trying to come up with that
number, is a tough task. Frankly, it is impossible to get
it exactly right.
Going forward, we are revisiting and reexamining the
processes and elements that go into the setting of
reserves, pricing decisions, and actuarial matters at
CATCo. We remain committed to operating with
complete integrity and to the very best of our ability.
10
Markel Corporation
We understand the trust you have placed in us
and there is nothing more important to us than
deserving it.
We occupy a unique position in the insurance/risk
transfer industry to provide a full and complete
solution to buyers and sellers in this realm.
We are optimistic that we will end up with an
improved ILS investment management operation
over time. Insurance Linked Securities provide
fundamentally sound and valuable services for
both buyers and sellers of the product.
We hope that this discussion helps to provide clarity
on the nature of the Insurance Linked Security
business and why we believe it to be an important
element of our long term platform at Markel.
Nephila and State National
In 2018 we purchased Nephila. Nephila literally
started the ILS market 20 years ago and they are the
number one player in the ILS industry.
Nephila operates in a different portion of the ILS
market than CATCo. For Nephila, losses tend to be
more frequent but less severe. As such, the risks and
rewards for both buyers and sellers tend to be more
tightly dispersed than would be the case at CATCo.
Frank Majors and Greg Hagood started Nephila
in 1997 and built a wonderful organization over
decades. As they reviewed their options for sustaining
their company and building its future, they believed
that Markel offered the best fit culturally and
professionally for the Nephila team. We agree.
We are delighted with the early months of Nephila
joining Markel and we believe that the combined
platform of Nephila, along with State National, along
with CATCo, along with our existing reinsurance
operations, gives us the number one market position
to meet the needs of buyers and sellers in this arena.
State National’s fronting capabilities provide many of
the licensing and regulatory processes and
mechanisms necessary to operate in the ILS and
alternative capital world.
With our current array of capabilities, we offer the
broadest based, most comprehensive marketplace, to
address risks through Insurance Linked Securities. We
believe that over time, the ILS market addresses more
risk areas than just property catastrophe coverages.
We are already providing risk transfer products that
deal with areas such as weather and energy, and we
expect to continue to increase the percentage of risk
transfers that might be suitably addressed by the ILS
mechanism.
As the number one player in this market, we have the
advantage of more flow, and more conversations,
about how we can meet the needs of buyers and
sellers in this marketplace than anyone else. The
ultimate size and scale of this idea could be one of the
most important strategic moves we’ve ever made.
Stay tuned. We’re learning and figuring it out.
Today, we know more about how to price and describe
risk in this marketplace than we did yesterday. We’re
more sensitive to hidden or previously unthought-of
correlations that can cause events to cluster in ways
that they did not in the past. We’re more sensitive to
the implications of climate change, and how that
might increase both loss frequency and severity along
with more correlation of previously uncorrelated
events. Our predictive models, both within Markel, and
those available from industry sources, are more robust
now that they’ve been tested and modified based on
the experiences of 2017 and 2018.
11
And, the prices for transferring these risks are higher
in 2019 than what they’ve been in the two previous
years. Higher prices help while learning.
while still facing historically high catastrophe losses is
a marker of the improvement in our capabilities and
decisions all around the insurance organization.
The Strategic Platforms of Markel
2 - ILS
There are five strategic platforms embedded in Markel
at this point. In alphabetical order they are as follows
1 - Insurance & Reinsurance
2 - Insurance Linked Securities
3 - Investments
4 - Markel Ventures
5 - Our Mindset
1 - Insurance & Reinsurance
This is our legacy at Markel and the foundation of our
company. It’s how we started, and the basis for what
we’ve been able to do in building up the rest of Markel
over time.
In our insurance operations we produced Gross
Written Premiums of $5.8 billion in 2018 compared
to $5.3 billion in 2017. We operated profitably with a
combined ratio of 98% despite six points of
catastrophe losses during the year and we continued
to adapt and refine our insurance operations on a
continuous basis.
While insurance marketplace conditions remain tough
and hyper competitive, we are pleased to report
underwriting profitability for the year. You can observe
that we’ve earned underwriting profits in 14 of the 21
years in the chart included in the letter. We remain
committed to earning underwriting profits on a
consistent year by year basis. We’ve learned from each
episode of higher industry catastrophes and we would
expect to improve this ratio in the years to come.
We’re especially pleased that we were able to report
an underwriting profit in 2018 with a combined ratio
of 98% compared to the underwriting loss in 2017
and the combined ratio of 105%. Catastrophe losses
remained elevated in 2018. For us to be able to move
from an underwriting loss to an underwriting profit
12
We expect 2019 to be a year of improving and
expanding our product offerings for the benefit of
buyers and investors as we continue to build a robust
and important platform for the future (see previous
discussion).
3 - Investments
In our investment operations we earned a total return
of (1.0%) in 2018 compared to 10.2% in 2017. In our
equity operations we reported a loss of (3.5%)
compared to a gain of 25.5% in 2017. As always,
equities remain volatile in any given year and the year
to year comparison demonstrates both types of
volatility (up and down).
Over the longer term we’ve earned excellent returns
on our equity investments. In keeping with the five
year theme of this letter, we earned 9.7% on our
equities over the last five years compared to 3% on
our fixed income portfolio. This is an excellent
outcome, and provides evidence for why we continue
to commit a higher percentage of our investment
portfolio to equities than most insurance based
organizations.
We continue to follow our longstanding four part
equity investment discipline of seeking investments in
1-profitable businesses with good returns on capital
and not too much leverage with 2-management
teams with equal measures of talent and integrity,
3-with reinvestment opportunities and capital
discipline at 4-reasonable prices.
Long term readers of this letter will recognize that
catechism of how we describe our equity investing
approach. It has not changed in decades and we think
the thought process remains durable and effective in
making productive investment decisions.
While we produced a return of negative (3.5%) in
2018 on our equities, and we do hate negative
returns, we do take some comfort in the fact that this
performance exceeded the loss of (4.4%) experienced
in the S&P 500. We’ve outperformed the S&P 500
index by more than 100 basis points for over 30 years.
We are proud of this record. We think it remains one
of the best in the entire investment industry. We hope
you take comfort that our approach remains sound in
both theory and in execution.
In our publicly traded fixed income portfolio we
earned a total return of 1.3% in 2018 compared to
3.4% in 2017. Just as is the case with equity
investments, we have a stated discipline to manage
fixed income securities. We allocate enough funds to
more than provide for our estimate of the ultimate
claim payments of our insurance operations. We
match those funds in duration and currencies to our
expected liabilities, and we invest them exclusively in
the highest credit quality investment options that we
can find. We seek to minimize credit risk and we don’t
try to predict or forecast moves in interest rates.
In a rising interest rate environment, the market value
of those securities declines. That is what happened in
2018. We normally hold our positions until they
mature. As such, those short term fluctuations do not
affect our ability to meet the liabilities of our
insurance claims and we continue to protect our
balance sheet. Mark to market accounting requires us
to report the market volatility of the bonds that we
hold for multiple years. Mark to market accounting
does not allow us to adjust the net present value of
our estimates of future claims payments as interest
rates change. In any given year, this causes an
accounting presentation mismatch to economic
reality. We’re following U.S. GAAP accounting and
adjusting the market value of the bonds on the asset
side of the balance sheet. We are also following U.S.
GAAP accounting and not adjusting for the change in
the economic net present value of the claims
payments on the liability side of the balance sheet.
Markel Corporation
This process repeats itself every year and the swings
of any given year resolve back towards the other
direction in subsequent years. Nothing new to report.
More importantly, the recurring dividend and interest
income from our portfolio totaled $434 million in
2018 compared to $406 million in 2017. Over the five
year time frame we’ve been talking about total
recurring dividend and interest income was $1.9
billion in the 2014-2018 period compared to $1.4
billion in the 2009-2013 period. The recurring income
is only a portion of the total investment returns, but
we think the increase in that number over time
demonstrates the soundness and productiveness
of our investment approach.
4 - Markel Ventures
In 2018 we reported revenues of $1.9 billion
compared to $1.3 billion in 2017. EBITDA totaled
$170 million compared to $188 million. As we’ve
stated for several years, purchase accounting tends to
create year by year distortions from our view of
economic reality. That effect is the largest in the early
years following an acquisition and bigger deals can
often produce bigger purchase accounting effects.
That was very much the case in 2018 with the swings
from our largest deal ever, Costa Farms. In 2017, the
effects of Hurricane Irma, associated insurance
recoveries from that event, inventory replacements,
earn out calculations and other items increased
EBITDA in 2017 and decreased it in 2018. As such the
year by year comparison doesn’t do a good job of
directionally describing the business.
When you examine longer periods of time, those
distortions fade away and the economic reality of the
underlying business comes through. Keeping with our
theme of looking at results over five year periods, the
results from Markel Ventures shine through. Over the
last five year period, revenues totaled $6.4 billion
compared to $1.7 billion and EBITDA totaled $709
million compared to $206 million.
13
The ongoing growth and maturity of Markel Ventures
represents a valuable pillar of the long term growth
and soundness of the Markel Corporation. The cash
flows from our Markel Ventures operations are
somewhat independent of insurance cycles, interest
rate movements, and public equity volatility. As such,
the recurring cash flows from the Markel Ventures
operations create optionality for Markel to have cash
coming in the door from multiple sources on a
relatively consistent and recurring basis.
In order to take advantage of opportunities in times
of crisis or financial market disruptions, you need two
things, Courage and Cash. Markel Ventures helps on
both fronts as the growing record of cash consistently
coming in provides us with the tangible and the
intangible materials to make good capital allocation
decisions.
During the year we also welcomed Brahmin Leather to
the Markel organization. We’re thrilled to do so. Bill
and Joan Martin, along with their son Scott, built a
marvelous organization over 30 years at Brahmin.
Susan Thacker joined as CEO a few years ago. Susan
and Scott will continue to lead the company and we’re
delighted to welcome them to Markel. Please check
out their products on Brahmin.com and enjoy the
quality and style of Brahmin products.
In our existing Markel Ventures operations we enjoyed
a year of overall growth and solid profitability. We
encountered challenges connected to running
businesses, and we continued to support our
managers with capital and the message of consistent
long term focus. We want to operate every segment
of Markel Ventures with the mindset of doing the
right thing, and doing things for our customers rather
than to them.
The results of this mindset continue to bear fruit and
we expect more growth from Markel Ventures over
time. As we have said during the last several years,
market prices for acquisitions tend to be quite high.
Consequently, we’ve exercised discipline and not
chased after deals. Fortunately, our demonstrated
performance, and our values based culture, continues
to cause our phone to ring with incoming
opportunities.
People know about Markel and the values by which
we run this company. That doesn’t appeal to
everyone, but it appeals to some. In the highly
competitive arena to purchase wonderful businesses,
this is a profound strategic advantage. Some people
value our long term, sustainable approach and we
continue to answer the phone when they’re looking
for a new home. We will behave in such a way to keep
that going.
5 - Mindset
If you describe something as being in 3D you’re talking
about the measurable, tangible elements of height,
width, and depth. A common practice is to call time
the fourth dimension. Throughout this letter, we’ve
written extensively and repeatedly about the concept
of time and our approach to thinking in long term
ways. At the same time, we understand and
appreciate the need to make decisions and take
actions constantly, and we’ve written in previous years
about our dual time horizon of forever and right now
in order to provide the right focus to the right time
periods for any given decision or process.
We’d like to suggest that the Mindset with which we
operate Markel is something like a fifth dimension.
There is such a thing, at least conceptually. The fifth
dimension is an abstract mathematical concept that
suggests that movement, and change, through time
and space, alter the easily measured items of the first
three dimensions.
At the risk of getting too weird, what we mean by this
reference is that our culture, the values we attempt to
describe and teach through the written word of the
Markel Style, our beliefs, the way we interact with our
customers and our colleagues, are all examples of this
fifth dimension of a mindset that pervades Markel.
14
Markel Corporation
We recruit for people who seem to intuitively
understand this concept. We promote and celebrate
people within the organization who seem to behave in
ways that make this intangible idea real, and we look
for acquisitions and new ideas which fit this construct.
We believe that our purposeful embrace of this
intangible idea is the “secret sauce” of Markel. Our
mindset is a fifth dimension. It guides us as leaders,
and provides explicit and implicit forces that help us
make better decisions that show up in our quantifiable
measures of the first through fourth dimension i.e.
annual financial results over many years.
Not Yet
While traveling this year we met a CEO who described
his company as a “Not Yet” company. He started
a business from scratch and has built a global
multi-billion firm from nothing. As he said, he doesn’t
say no to new ideas or new opportunities because he
is only in the fill in the blank _____ business. He says
that his company has “Not Yet” considered a new
potential idea, but perhaps it could and should. He
spoke profoundly about the need to embrace change
by reminding us that, “resisting change is like holding
your breath. If you get good at it you’ll die.”
When new technology creates new products, new
services, and new risks, there is “Not Yet” a way to
actuarially understand the risks involved and to create
an insurance bridge between the capabilities of
entrepreneurs and the demand of customers for new
products or services. The people of Markel figure out
ways to create that bridge, and allow for progress that
new products and technology bring to society.
When people built businesses in diverse fields such as
bakery equipment, car hauling trailers, medical
services, truck flooring, houseplants, affordable
housing, and other products and services, there was
“Not Yet” an obvious home at Markel for those firms
to continue to serve and prosper as their ownership
structure changed and generations passed. The
people of Markel figured out a way to sustain the
values of service and durability through our Markel
Ventures entity.
Our mindset of “Not Yet” powers our drive to continue
to build Markel into one of the world’s great
companies. So far, so good.
We can’t wait to get to work every day and learn how
to be better. It’s an exhilarating way to live and a great
formula for building a business.
Embracing change, and following the doctrine of “Not
Yet”, in many ways describes the history of Markel.
Thank you for your support and partnership.
Respectfully submitted,
When Sam Markel started this business, there was
“Not Yet” an insurance product that covered losses
and injuries caused by the growing presence of
automobiles compared to horses. Markel figured out a
way to provide that coverage and improve the safety
and outcomes for our customers, the drivers and
passengers of that day and place.
When the interstate highway system came into being,
there was “Not Yet” an insurance product that covered
the new risk of what happens when heavy trucks hit
lighter cars. Markel figured out a way to provide those
coverages and help make driving safer for all.
Thomas S. Gayner, Co-Chief Executive Officer
Richard R. Whitt, III, Co-Chief Executive Officer
15
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 and reinsurance operations
• Investing - our investing activities are primarily related to our underwriting operations
• Markel Ventures - our Markel Ventures operations include our controlling interests in a diverse portfolio of businesses that
operate outside of the specialty insurance marketplace
• Investment management - our investment management operations include investment fund managers that offer a variety of
investment products, including insurance-linked securities, catastrophe bonds, insurance swaps and weather derivatives
• Program services - our program services business serves as a fronting platform that provides other insurance companies access
to the United States (U.S.) property and casualty insurance market
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.
16
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 2017, the E&S market represented $45 billion, or 7%, of the $642 billion U.S. property and casualty industry.(1)
In 2017, we were the third largest E&S writer in the U.S. 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 U.S.
reinsurance operations are conducted through Markel Global Reinsurance Company (Markel Global Re), a Delaware-domiciled
reinsurance company.
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 (U.K.), 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 $67 billion of gross written premium
in 2017.(2) In 2017, the U.K. non-life insurance market was the largest in Europe and fourth largest in the world.(3) In 2017, 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 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 2017, corporate capital providers accounted for approximately 90% of total underwriting capacity in Lloyd’s.(5)
In anticipation of the U.K.’s expected exit from the European Union in 2019, which could impact MIICL and Markel Syndicate
3000’s ability to transact business in the remaining European Union member states and Switzerland, in 2018, we established
Markel Insurance SE (MISE), a regulated insurance carrier located in Munich, Germany. From its offices in Germany, MISE can
transact business in all remaining European Union member states and throughout the European Economic Area (EEA). MISE
has established branches in Ireland, the Netherlands, Spain and the U.K. For further discussion regarding the U.K.’s expected
exit from the European Union, see “Brexit Developments” under Management’s Discussion & Analysis of Financial Condition
and Results of Operations.
(1) Market Segment Report - U.S. Surplus Lines, A.M. Best (September 14, 2018).
(2) London Company Market Statistics Report, International Underwriting Association (October 2018).
(3) sigma, Swiss Re Institute (March 2018).
(4) Market Segment Report - Global Reinsurance, A.M. Best (September 4, 2018).
(5) Lloyd’s Annual Report 2017.
17
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
In Latin America, we provide reinsurance through MIICL, using our representative office in Bogota, Colombia and our service
company in Buenos Aires, Argentina, and through Markel Resseguradora do Brasil S.A. (Markel Brazil Re), our reinsurance
company in Rio de Janeiro, Brazil. MIICL is also able to offer reinsurance in a number of Latin American countries through
offices outside of Latin America. We also provide insurance through Markel Seguradora do Brasil S.A. (Markel Brazil), our
insurance company in Rio de Janeiro, Brazil.
In Bermuda, we write business in the worldwide insurance and reinsurance markets. The Bermuda property and casualty
insurance and reinsurance market produced $66 billion of gross written premium in 2016.(1) 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 35th largest reinsurer in 2017, as measured by worldwide gross reinsurance premium
writings.(2)
In 2018, 21% of gross premium writings from our underwriting segments related to foreign risks (i.e., coverage for risks or
cedents located outside of the U.S.), of which 39% were from the U.K. and 11% were from Canada. In 2017, 21% of our
premium writings related to foreign risks, of which 34% were from the U.K. and 12% were from Canada. In 2016, 23% of our
premium writings related to foreign risks, of which 32% were from the U.K. and 11% 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, 2018, 2017 and 2016, the top three
independent brokers accounted for 25%, 27% and 28%, 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
(1) Bermuda Monetary Authority 2017 Annual Report.
(2) Market Segment Report - Global Reinsurance, A.M. Best (September 4, 2018).
18
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
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 across most of our property product lines, as well as on our marine and energy
line beginning in 2013 and continuing through 2017. 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, in 2018, we experienced slightly more favorable rates, particularly on our catastrophe exposed
and loss affected product lines. However, we also experienced rate decreases on other product lines and the market remains
competitive.
We routinely review the pricing of our major product lines and will continue to pursue price increases in 2019, 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.
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 2018, our combined ratio
was 98%. 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.
Markel Corporation
M
M
Industry Average*
110%
110%
100%
100%
90%
90%
80%
80%
101%
95% 97%
97%
107%
98%
102%
89%
102%
101%
97%
92%
105%
104%
97% 96%
98%
95%
102%
97%
2018
2014 2015 2016 2017 2018
2010 2011 2012 2013 2014
2014
2015
2016
2017
*
*
* Source: A.M. Best Company. Industry Average is estimated for 2018.
19
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 conjunction with the continued growth and diversification of our
business, beginning the first quarter of 2018 we changed the way we review our ongoing underwriting operations. In
determining how to monitor our underwriting results, management considers many factors, including the nature of the
insurance product sold, the type of account written and the type of customer served. Effective January 1, 2018, our chief
operating decision maker allocates resources to and assesses the performance of our ongoing underwriting operations on a global
basis in the following two segments: Insurance and Reinsurance. The Insurance segment includes all direct business and
facultative placements written across the Company. 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 development
on asbestos and environmental loss reserves and the results attributable to the run-off of life and annuity reinsurance business,
are monitored separately and are not included in a reportable segment.
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
2018 G R O S S P R E M I U M V O L U M E ($5.8 B I L L I O N)
82%
Insurance
Reinsurance
18%
I n s u r a n c e S e g m e n t
Our Insurance segment includes both hard-to-place risks written outside of the standard market on an E&S 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 primarily written through our Markel Assurance, Markel Specialty and Markel International divisions. As a result of
the acquisition of State National Companies, Inc. (State National), effective November 2017, we created the State National
division. The State National division’s collateral protection underwriting business is included in the Insurance segment and its
program services business is not included in a reportable segment.
28%
Markel
Specialty
Markel
International
24%
Markel
Assurance
44%
20
4%
State National
Markel Assurance Division
The Markel Assurance division writes commercial and Fortune 1000 accounts for brokers located in the U.S., Bermuda, Ireland
and the U.K. In the U.S. accounts are written on an E&S basis and on an admitted basis when a risk must remain with the
admitted insurance company for marketing and regulatory reasons. The E&S market focuses on hard-to-place risks and loss
exposures that generally cannot be written in the standard market. U.S. 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. The Markel Assurance
division also writes complex, Fortune 1000 accounts on an admitted and non-admitted basis. Our business that is written in the
admitted market is likewise focused on risks that, although unique and hard-to-place, can still be written in the standard market.
Markel Assurance business is primarily written through wholesale brokers, retail brokers and surplus lines general agents who
have limited quoting and binding authority. Admitted business produced by this division is written through MAIC, which is
authorized to write business in all 50 states and the District of Columbia. Business written on a non-admitted basis and in the
E&S market is primarily written 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, as well as MIC, Markel Bermuda and MIICL.
Markel Specialty Division
The Markel Specialty division writes program insurance and other specialty coverages for well-defined niche markets, primarily
on an admitted basis in the U.S. 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.
Business written in the Markel Specialty division is primarily written by retail insurance agents who have very limited or no
underwriting authority. 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.
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.
Markel International Division
The Markel International division writes business worldwide from our London-based platform and branch offices around the
world. This includes Markel Syndicate 3000, through which our Lloyd’s operations are conducted, and MIICL. Beginning in
2018, the Markel International division also includes business written through MISE, our regulated insurance company in
Germany. 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.
21
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
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 Insurance segment reported gross premium volume of $4.7 billion, earned premiums of $3.8 billion and an underwriting
profit of $228.8 million in 2018.
I N S U R A N C E S E G M E N T
2018 G R O S S P R E M I U M V O L U M E ($4.7 B I L L I O N)
11%
20%
11%
Property
Personal
Lines
Professional
Liability
10%
Marine and
Energy
7%
Specialty
Programs
7%
Workers’
Compensation
Other
11%
General
Liability
23%
Product offerings within the Insurance segment fall within the following major product groupings:
• General Liability
• Professional Liability
• Property
• Personal Lines
• Marine and Energy
• Specialty Programs
• Workers’ Compensation
• Other Product Lines
General Liability product offerings include a variety of primary and excess liability coverages targeting apartments and office
buildings, retail stores, contractors, consultants, construction professionals, financial service professionals, professional
practices, social welfare organizations and medical products, as well as businesses in the life sciences, energy, medical,
healthcare, pharmaceutical, recreational, transportation, heavy industrial 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.
22
Professional liability coverages include unique solutions for highly specialized professions, including architects and engineers,
lawyers, accountants, agents and brokers, service technicians and 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, professional indemnity, intellectual
property, 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 lower frequency and higher severity in nature than more standard
property risks. Our property coverages are exposed to windstorm losses that, based on the seasonal nature of those events, are
more likely to occur in the third and fourth quarters of the year. Our property risks range from small, single-location accounts to
large, multi-state, multi-location, multi-national accounts on a worldwide basis. 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;
• 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; and
• specie coverage for fine art on exhibition and in private collections, securities, bullion, precious metals, cash in transit
and jewelry.
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 and
pet health coverage.
Marine and energy products include a portfolio of coverages for cargo, energy, hull, liability, war and terrorism risks. The cargo
product line is an international transit-based book providing coverage for many types of cargo. Energy coverage includes all
aspects of oil and gas activities. Hull coverages consist of coverage for 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. War coverage includes protections for 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.
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 small to medium-sized commercial risks, including farms, zoos, animal theme parks,
safari parks and animal boarding, breeding and training facilities.
23
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
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 Insurance segment include:
• 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;
• coverages for equine-related risks, such as horse mortality, theft, infertility, transit and specified perils;
• crime coverage primarily targeting financial institutions and providing protection for bankers’ blanket bond, computer crime
and commercial fidelity;
• small business owners policies providing property and liability package coverage to small and medium sized businesses;
• accident and health coverage targeting affinity groups and schemes, high value and high risks accounts and sports groups;
• 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; 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 U.S., Bermuda and the U.K. Business written in the Global Reinsurance division is produced primarily through
Markel Global Re, which is licensed or accredited to provide reinsurance in all 50 states and the District of Columbia. The
Global Reinsurance division also writes business through Markel Bermuda and beginning in 2018, Markel Syndicate 3000. The
Markel International division operates primarily from our London-based platform and business is produced primarily through
MIICL. Markel International also conducts reinsurance operations from its platform in Latin America, which includes Markel
Brazil Re.
93%
Global
Reinsurance
7%
Markel International
24
Our Reinsurance segment reported gross premium volume of $1.1 billion, earned premiums of $928.6 million and an
underwriting loss of $118.3 million in 2018.
R E I N S U R A N C E S E G M E N T
2018 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)
43%
33%
Property
Casualty
Specialty
24%
Product offerings within the Reinsurance segment fall within the following major product groupings:
• Casualty
• Property
• Specialty
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 U.S. Our workers’ compensation business includes
standard and catastrophe-exposed workers’ compensation business. Medical malpractice reinsurance products are offered in
the United States and include 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 U.S.
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 U.S. exposures, with
the remainder coming from international property exposures. Our property products are exposed to windstorm losses that,
based on the seasonal nature of those events, are more likely to occur in the third and fourth quarters of the year.
25
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
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 coverage, marine and agriculture reinsurance products. Our
mortgage products offer coverage for private mortgage insurers in the U.S., Australia and Europe. Our public entity reinsurance
products offer customized programs for government risk pools, including counties, municipalities, schools, public housing
authorities and special districts (e.g. water, sewer, parks) located in the U.S. Types of coverage for public entities include general
liability, environmental impairment liability, cyber 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 products cover
personal accident, life, medical and workers’ compensation coverage, predominately on a per-event basis. 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 U.S. 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. See “Program Services” section below for an overview of ceded reinsurance within our program services
business, which is managed separately from our underwriting operations.
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 83% in 2018 and 84% in 2017. 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
U.S. 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.
The following table displays balances recoverable from our ten largest reinsurers by group from our underwriting operations at
December 31, 2018. 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, any collateral held by us and allowances for bad debts. These ten reinsurance groups represent approximately
61% of our $2.7 billion reinsurance recoverables balance attributed to our underwriting operations, before considering
allowances for bad debts.
26
Reinsurance Group
A.M. Best Rating
Reinsurance Recoverable
Fairfax Financial Group
AXIS Capital Holdings Limited
Munich Re Group
Lloyd’s of London
RenaissanceRe Holdings Ltd.
Alleghany Corporation
EXOR S.p.A
Liberty Mutual Holding Company
Swiss Re Group
Everest Re Group
Reinsurance recoverables for ten largest reinsurers
Total reinsurance recoverables
A
A+
A+
A
A+
A+
A
A
A+
A+
(dollars in thousands)
$ 251,692
195,608
193,690
183,033
159,469
143,913
141,452
133,648
127,578
107,353
1,637,436
$ 2,691,888
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 government, municipal and corporate 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.
We evaluate our investment performance by analyzing net investment income and net investment 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
investment gains or losses, as well as changes in unrealized gains or losses on available-for-sale securities, 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 U.S. taxable
income.
27
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
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 investment gains or losses and unrealized gains or losses
on available-for-sale securities may vary from one period to the next.
The following table summarizes our investment performance.
(dollars in thousands)
2018
2017
2016
2015
2014
Years Ended December 31,
Net investment income
Net investment gains (losses) (1)
Change in net unrealized investment
gains on available-for-sale securities
Investment yield (2)
$ 434,215%))
$ (437,596)%)
$ 405,709%) $ 373,230% $ 353,213%)
(5,303)% $ 65,147% $ 106,480%)
$
$ 363,230%
$ 46,000%
$ (299,446)%)
2.7%))
$ 1,125,440%) $ 342,111% $ (457,584)% $ 981,035%
2.4%
2.3%)
2.6%)
2.4%
(1) Effective January 1, 2018, we adopted ASU No. 2016-01. As a result, equity securities are no longer classified as available-for-sale with
unrealized gains and losses recognized in other comprehensive income; rather, all changes in the fair value of equity securities are now
recognized in net income. Prior periods have not been restated to conform to the current presentation. See note 1 of the notes to
consolidated financial statements.
(2) 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,
2018
2017
2016
2015
2014
Five-Year Ten-Year
Annual Annual
Return
Return
Equities
Fixed maturities (1)
Total portfolio, before foreign currency effect
Total portfolio
(3.5)%
1.3%
(0.7)%
(1.0)%
25.5% 13.5%
2.4%
3.4%
5.0%
9.2%
4.4%
10.2%
(2.5)% 18.6%
6.5%
1.6%
8.9%
0.5%
7.4%
(0.7)%
9.7% 14.9%
4.3%
3.0%
6.4%
4.5%
6.3%
3.9%
Invested assets, end of year (in millions)
$19,238)% $20,570
$19,059
$18,181
$18,638
(1) Includes short-term investments, cash and cash equivalents and restricted cash and cash equivalents.
28
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 investment gains (losses) and change
in net unrealized investment gains on
available-for-sale securities
Taxable equivalent effect for interest and dividends (2)
Other (3)
Taxable equivalent total investment return
Years Ended December 31,
2018
2.7%
2017
2.6%
2016
2015
2014
2.4%
2.3%
2.4%
(0.6)%
(0.5)%
(0.4)%
(0.4)%
(0.4)%
0.4%
0.4%
0.4%
0.5%
0.6%
(3.4)%
0.1%
(0.2)%
(1.0)%
5.9%
0.4%
1.4%
10.2%
2.3%
0.4%
(0.7)%
4.4%
(2.0)%
0.4%
(1.5)%
(0.7)%
5.9%
0.4%
(1.5)%
7.4%
(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, 2018, 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.
29
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
The following chart presents our fixed maturity portfolio, at estimated fair value, by rating category at December 31, 2018.
2018 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 ($10.0 B I L L I O N)
93%
AAA/AA
A
5%
1%
1%
BBB
Other
See “Market Risk Disclosures” in Management’s Discussion & Analysis of Financial Condition and Results of Operations for
additional information about investments.
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, including investment and capital allocation decisions, are made by our senior 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.
We monitor and report our Markel Ventures operations in our Markel Ventures segment. This segment includes a diverse
portfolio of businesses from different industries that offer various types of products and services to businesses and consumers.
See note 20 of the notes to consolidated financial statements for additional segment reporting disclosures.
In 2018, our Markel Ventures operations reported revenues of $1.9 billion, net income to shareholders of $35.3 million,
operating income of $77.5 million and earnings before interest, income taxes, depreciation and amortization (EBITDA) of
$169.9 million. We use Markel Ventures EBITDA as an operating performance measure in conjunction with revenues, operating
income and net income. See “Markel Ventures” in Management’s Discussion & Analysis of Financial Condition and Results of
Operations for more information on EBITDA.
30
M A R K E L V E N T U R E S S E G M E N T
2018 O P E R AT I N G R E V E N U E S ($1.9 B I L L I O N)
78%
Products
Services
22%
Our Markel Ventures products include:
• equipment used in baking systems and food processing;
• portable dredges;
• over-the-road car haulers and equipment;
• laminated oak and composite wood flooring used in the trucking industry;
• dormitory furniture, wall systems, medical casework and marine panels;
• storage and transportation equipment for specialty gas;
• ornamental plants;
• fashion handbags; and
• residential homes.
Our Markel Ventures services include:
• leasing and management of manufactured housing communities;
• behavioral healthcare;
• concierge health programs;
• retail intelligence; and
• management and technology consulting.
The majority of our businesses in this segment are headquartered across the United States, with subsidiaries of certain
businesses located outside of the United States. This segment offers a wide range of products and services across many markets
and encounters a variety of competitors that vary by product line, end market and geographic area. Each business within the
segment has several main competitors and numerous smaller ones in most of their end markets and geographic areas. Examples
of the end markets are as follows:
• U.S. consumer markets for residential construction, housing and healthcare;
• U.S. and international markets for food service, food production, automobile transporters, governments, miners, marine
operators, truck trailers and inter-modal containers and industrial and specialty gas;
• U.S. and international retail markets; and
• U.S. based businesses in the banking, financial services, energy, utilities, governments, retail and consumer goods, healthcare,
travel, and hospitality industries.
31
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
I n v e s t m e n t M a n a g e m e n t
Our investment management operations are comprised of our Markel CATCo operations, and effective November 2018,
the operations of Nephila Holdings Ltd.
Markel CATCo
Our Markel CATCo operations are conducted through Markel CATCo Investment Management Ltd. (MCIM). MCIM is an
insurance-linked securities investment fund manager headquartered in Bermuda focused on building and managing highly
diversified, collateralized retrocession and reinsurance portfolios covering global property catastrophe risks. MCIM serves as the
insurance manager for Markel CATCo Re Ltd. (Markel CATCo Re), a Bermuda Class 3 reinsurance company, and as the
investment manager for Markel CATCo Reinsurance Fund Ltd., a Bermuda exempted mutual fund company comprised of
multiple segregated accounts (Markel CATCo Funds). MCIM also serves as the investment manager to CATCo Reinsurance
Opportunities Fund Ltd. (CROF), a limited liability closed-end Bermuda exempted mutual fund company listed on a market
operated by the London Stock Exchange and on the Bermuda Stock Exchange. CROF invests substantially all of its assets in
Markel CATCo Reinsurance Fund Ltd.
Both Markel CATCo Re and the Markel CATCo Funds are unconsolidated subsidiaries of Markel Corporation. While the voting
shares in Markel CATCo Re and Markel CATCo Funds are held by MCIM, the underwriting results of Markel CATCo Re are
attributed to Markel CATCo Funds through the issuance of nonvoting preference shares. The performance of the Markel
CATCo Funds is attributed to its nonvoting preference shares, which are held by third party investors, including CROF, and by
us. As of December 31, 2018, MCIM’s net assets under management were $3.4 billion, a portion of which is attributable to our
investments in the Markel CATCo Funds. As of December 31, 2018, the fair value of our investments in the Markel CATCo
Funds and CROF totaled $58.2 million, which is included in equity securities on our consolidated balance sheet.
MCIM receives management fees for its investment management services based on the net asset value of the accounts
managed, as well as incentive fees based on the annual performance of the Markel CATCo Funds. Total revenues attributed to
MCIM for the year ended December 31, 2018 were $66.2 million, which are included in services and other revenues in our
consolidated statement of income and comprehensive income. See note 16 and note 17 of the notes to consolidated financial
statements for further details regarding our Markel CATCo operations.
For further details regarding recent developments within our Markel CATCo operations, see note 18 of the notes to
consolidated financial statements.
Nephila
In November 2018, we completed the acquisition of all of the outstanding shares of Nephila Holdings Ltd. (together with its
subsidiaries, Nephila). Through its subsidiaries, Nephila primarily serves as an insurance and investment fund manager
headquartered in Bermuda that offers a broad range of investment products, including insurance-linked securities, catastrophe
bonds, insurance swaps and weather derivatives.
Nephila serves as the investment manager to several Bermuda, Ireland and U.S. based private funds (the Nephila Funds). To
provide access for the Nephila Funds to the insurance, reinsurance and weather markets, Nephila also acts as an insurance
manager to certain Bermuda Class 3 and 3A reinsurance companies and as both a service company coverholder and agent with
binding authority for Lloyd’s Syndicate 2357 (Syndicate 2357) (collectively, the Nephila Reinsurers). The results of the Nephila
Reinsurers are attributed to the Nephila Funds primarily through derivative transactions between these entities. Neither the
Nephila Funds nor the Nephila Reinsurers are subsidiaries of Markel Corporation, and as such, these entities are not included
in our consolidated financial statements. As of December 31, 2018, Nephila’s net assets under management were $11.6 billion.
Nephila receives management fees for its investment and insurance management services based on the net asset value of the
accounts managed, and for certain funds, incentive fees based on the annual performance of the funds it manages. Total
revenues attributed to Nephila from the acquisition date to December 31, 2018 were $25.3 million, which are included in
services and other revenues in our consolidated statements of income and other comprehensive income. See note 17 of the
notes to consolidated financial statements for further details regarding our Nephila operations.
32
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 operations expanded to
include a program services business, which is provided through our 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 who sell, control and administer books of insurance business that are supported by third parties that
assume reinsurance risk, including Syndicate 2357. 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. Fronting refers
to business in which we write insurance on behalf of a capacity provider and then cede the risk under these policies to 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 program services customers and eliminate internal competition
for this business. Our program services business is primarily written through SNIC, NSIC and City National Insurance
Company (CNIC), all of which are domiciled in Texas, and United Specialty Insurance Company (USIC) and Independent
Specialty Insurance Company (ISIC), which are domiciled in Delaware. SNIC, NSIC, CNIC and ISIC 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 producers 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 for the year ended December 31, 2018 were $95.7 million. Our
program services business generated $2.1 billion of gross written premium volume for the year ended December 31, 2018.
In our program services business, we generally enter into a 100% quota share reinsurance agreement whereby we cede to the
capacity provider substantially all of our gross liability under all policies issued by and on behalf of us by the producer. 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 producer and premium taxes on the policies. In connection with writing this business, we also enter
into agency agreements with both the producer 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
operational 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.
Although we reinsure substantially all of the risks inherent in our program services business, we have certain programs that
contain limits on our reinsurers’ obligations to us, including loss ratio caps, aggregate reinsurance limits or exclusion of the
credit risk of producers. Under certain programs, including one program with Syndicate 2357, an unconsolidated affiliate, we
also bear underwriting risk for annual aggregate agreement year losses in excess of a limit that we believe is highly unlikely
to be exceeded. See note 17 of the notes to consolidated financial statements for further details regarding our program with
Syndicate 2357.
33
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
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, 2018. 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 75% of our $2.5 billion reinsurance recoverables 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(2)
James River Group Holdings, Ltd.
Tokio Marine Holdings, Inc.
Greenlight Capital Re, Ltd.
SOMPO Holdings, Inc.
Enstar Group Limited
MS&AD Insurance Group Holdings, Inc.
Allianz SE
A.M. Best
Rating
Gross
Reinsurance
Recoverable
Collateral
Applied (1)
Net
Reinsurance
Recoverable
(dollars in thousands)
A-
B++
A
A
A+
A-
A+
A-
A
A+
$ 603,140
406,783
370,874
170,808
123,664
54,892
47,204
45,586
39,472
37,688
$ 603,140
406,783
—
170,808
815
54,892
—
28,022
39,472
—
$
—
—
370,874
—
122,849
—
47,204
17,564
—
37,688
Reinsurance recoverables for ten largest gross reinsurers
1,900,111
1,303,932
596,179
Total reinsurance recoverables
$ 2,535,392
$ 1,751,098
$ 784,294
(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, 2018, we were the beneficiary of letters of credit, trust accounts and funds withheld in the
aggregate amount of $1.6 billion collateralizing reinsurance recoverable balances from our top 10 reinsurers and $2.2 billion for our total
reinsurance recoverables balance.
(2) Net reinsurance recoverable from Lloyd’s of London includes $179.8 million attributable to Syndicate 2357, an unconsolidated affiliate.
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. One of the ways we measure financial success is 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, 2018, book value per share decreased 4% primarily due to a
$233.5 million decrease in net unrealized gains on investments, net of taxes, and net loss to shareholders of $128.2 million. 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. Over the past five years, we
have grown book value per share at a compound annual rate of 7% to $653.85 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, we 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, 2018, our share price decreased 9%. Over the
past five years, our share price increased at a compound annual rate of 12%.
34
The following graph presents book value per share and share price for the past five years as of December 31.
$1,200
$1,000
$800
$600
$400
$200
$0
1,139.13
Book Value Per Share
Share Price
904.50
1,038.05
883.35
682.84
543.96
561.23
606.30
683.55
653.85
2014 2015 2016 2017 2018
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, the
United Kingdom, Germany and Bermuda. Our Markel Ventures, investment fund management 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.
35
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, 2018, the capital and surplus of each of our U.S. insurance subsidiaries was above
the minimum regulatory thresholds.
Own Risk and Solvency Assessment. We must submit an Own Risk and Solvency Assessment Summary Report (ORSA)
annually to the Illinois Department of Insurance, our lead state insurance regulator. 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.
Corporate Governance Annual Disclosure. We must submit a Corporate Governance Annual Disclosure (CGAD) annually to
California, Delaware, Nebraska and Virginia. The CGAD has not been adopted by Illinois, our lead state insurance regulator.
The CGAD describes the insurers or insurance group’s corporate governance framework and structure.
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, 2018, our U.S. insurance
subsidiaries could pay up to $466.0 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. The threshold for the program to go into effect (the triggering event) was $160 million in losses for 2018 and increases
to $180 million for 2019 and $200 million for 2020. Starting in January 2016, the amount that insurers must cover as a whole
through co-payments and deductibles, which is known as the aggregate retention amount, was established at $27.5 billion and
rises by $2 billion a year up to $37.5 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. The program is scheduled to expire in 2020.
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 adopted the Insurance Data Security Model Law in October 2017. The purpose of the model law is to
36
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. South Carolina adopted the model
law effective January 1, 2019. It is not clear whether other state legislatures will begin adopting the model law, or in what
form or when they will do so.
Consumer Privacy. California amended its existing Consumer Privacy Act of 2018 (Act) on September 23, 2018 to commence
on January 1, 2020. The Act will require a business collecting personal information about a consumer to disclose the
consumer’s right to delete personal information in a form that is reasonably accessible to consumers and in accordance with a
specified process. However, the Act is not applicable to a business collecting personal information pursuant to Federal law
including the Gramm Leach Bliley Act.
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, 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) 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 U.K.,
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.
37
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
MSM is required to satisfy the solvency requirements of Lloyd’s. In addition, our U.K. 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.
At least annually, MIICL and ECIC each submit an ORSA to the PRA and MSM submits an ORSA to Lloyd’s. 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. In addition, to comply with Solvency II
regulations, MIICL and ECIC must publish an annual solvency and financial condition report (SFCR).
On June 23, 2016, the U.K. 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 exit of the United Kingdom from the European Union could have a material adverse effect on us.”
Bermuda Insurance Regulation
The insurance and reinsurance industry in Bermuda is regulated by the Bermuda Monetary Authority (BMA). Markel
Bermuda is licensed by the BMA to conduct insurance business 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 term insurance
business also includes reinsurance business. 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, Class 3B, Class 4, Class C, Class D and
Class E insurers and reinsurers and groups.
As a Class 4 general business and Class C long-term business insurer, Markel Bermuda is required to prepare and file with
the BMA statutory financial statements and additional audited GAAP financial statements that the BMA publishes with a
copy of the declaration of compliance required to be filed under the Bermuda Insurance Act and the auditor’s report. Markel
Bermuda is subject to enhanced capital requirements (ECR) in addition to the minimum solvency and liquidity requirements
prescribed by the Bermuda Insurance Act for all insurers. The ECR are 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, 2018, Markel Bermuda satisfied both the ECR 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 solvency margin or minimum liquidity ratio or if the declaration or payment of the dividend would cause a
breach of those requirements. In the case of a breach by Markel Bermuda of its applicable ECR, it will not declare or pay
dividends until the failure is rectified. 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
prior 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 statutory balance sheet unless at
38
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, 2018, Markel Bermuda could pay up to $373.9 million in dividends during the following 12 months
without making any additional filings with the BMA.
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 under the EU-US Covered Agreement 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 Brazil and 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 U.K. 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 exit of
the United Kingdom from the European Union could adversely affect us.”
MISE is subject to both financial and non-financial supervision by the Bundesanstalt fu
has licensed it to carry on insurance and reinsurance business in defined classes. MISE is required to submit quarterly and annual
financial statements to BaFin. MISE also must regularly submit an ORSA, a regular supervisory report and a SFCR, as well as tax
returns and additional financial disclosures. MISE also operates or has branch offices in other E.U. and EEA countries. MISE’s
activities in each E.U. and EEA country are subject to regulatory supervision by the regulator in that country.
r Finanzdienstleistungsaufsicht (BaFin), which
39
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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 is our lead insurance regulator for purposes of conducting the supervisory
college along with several other regulators.
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. Specifically, these laws and
regulations cover the following areas: safety, health, employment, the environment, U.S. and international trade,
anti-corruption, data privacy and security, government contracts as well as other specific regulatory areas applicable to the
companies’ operations.
Solicitors Regulation Authority. Markel Law LLP (ML), a wholly owned subsidiary, is a full service commercial law firm
with offices in Manchester and Croydon, England. ML employs more than 50 lawyers who provide legal services to small
and medium-sized enterprises in the U.K. ML 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.
Markel CATCo. 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 (as amended, the Advisers
Act) or as a “commodity pool operator” or “commodity trading adviser” with the U.S. Commodity Futures Trading
Commission (CFTC). However, MCIM is an “exempt reporting adviser” under the Advisers Act and as such is subject to
regulation by the U.S. Securities and Exchange Commission (SEC) and certain requirements under the Advisers Act. In
addition, as an exempt commodity pool operator, MCIM is subject to regulation by the CFTC and to certain requirements
under the Commodity Exchange Act of 1936, as amended.
MCIM serves as the investment manager for Markel CATCo Reinsurance Fund Ltd., a Bermuda exempted mutual fund
company comprised of multiple segregated accounts with limited liability under the Companies Act 1981 of Bermuda that
is registered as a segregated accounts company under the Bermuda Segregated Accounts Companies Act 2000.
MCIM also serves as the investment manager for CROF, a limited liability closed-ended exempted mutual fund company of
unlimited duration under the Companies Act 1981 of Bermuda. CROF’s shares are listed on a market operated by the
London Stock Exchange and on the Bermuda Stock Exchange.
40
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.
Nephila. Two of Nephila’s subsidiaries, Nephila Capital Ltd. (Nephila Capital), a Bermuda exempted company with limited liability,
and Nephila Advisors LLC (Nephila Advisors), a Delaware limited liability company, are registered with the SEC as investment
advisers under the Advisers Act. In addition, Nephila Capital is registered as a “commodity pool operator” and Nephila Advisors is
registered as a “commodity trading advisor,” each with the U.S. CFTC. Nephila Capital is also a registered insurance manager under
the Bermuda Insurance Act.
Nephila serves as the investment manager to the Nephila Funds, which are subject to regulation in the U.S., U.K., Bermuda
and Ireland.
With the exception of Syndicate 2357, the Nephila Reinsurers are subject to regulation and supervision of the BMA. Under the
Bermuda Insurance Act, and related regulations and policies of the BMA, each reinsurance company 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, each reinsurance company 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 each reinsurance company contract for local services, such as corporate secretary, insurance manager
and registered representative, at market rates.
Syndicate 2357 is subject to regulation and supervision of the PRA, FCA and Lloyd’s. Through its subsidiary, Nautical Management
Ltd. (Nautical), Nephila acts as the service company coverholder for Syndicate 2357. Nautical is a Bermuda exempted company with
limited liability that is licensed as an insurance agent and insurance manager under the Bermuda Insurance Act. A third party acts as
the registered Lloyd’s managing agent of Syndicate 2357. The managing agent is authorized by the PRA and Lloyd’s and regulated by
the PRA, the FCA and Lloyd’s. The managing agent is responsible for Syndicate 2357’s compliance with applicable PRA, FCA and
Lloyd’s rules and requirements. However, the managing agent has delegated its authority for binding risks into Syndicate 2357 to a
subsidiary of Nephila.
41
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
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 twenty insurance subsidiaries are rated by Best. All seventeen of our insurance subsidiaries rated by Best
have been assigned an FSR of “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.
Ten of our twenty insurance subsidiaries are rated by S&P. All ten 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.
Five of our twenty 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).
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 incentive fees earned
by our investment management businesses and returns on our investments in insurance-linked securities. Catastrophes also
may result in significant disruptions in our insurance and other operations, as well as loss of income and assets. If 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
42
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.
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, 2018,
our reserves for life and annuity benefits totaled $1.0 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 effect on our results of operations and financial condition.
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 as a result, our cash flow and our ability to service our debt depend 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, which account for a significant portion of our operating cash flows, may require prior regulatory notice or approval or
may be restricted by capital requirements imposed by regulatory authorities. In addition, our reinsurance contracts typically allow
the cedent, upon a reduction in an insurance company’s capital in excess of specified amounts, to terminate its contract on terms
disadvantageous to us or to exercise other remedies that may adversely affect us. Those contract provisions may have the effect of
limiting distributions by our insurance subsidiaries to us.
43
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
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 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 have a material adverse effect on 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 extended periods of intense price competition due to excessive
underwriting capacity as well as brief 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 could be 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 have a material adverse effect on shareholders’ equity. Additionally, our equity
investment portfolio is concentrated, and declines in the value of these significant investments could have a material
adverse effect on our financial results. Equity securities were 63% of our shareholders’ equity at both December 31, 2018 and
2017. Equity securities have historically produced higher returns than fixed maturities over long periods of time; 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 net income and 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 net income and shareholders’ equity. A material decrease in shareholders’ equity may have a
material adverse effect on our ability to carry out our business plans.
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
and volatility 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
44
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 effect 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.
As of December 31, 2018, we were the beneficiary of letters of credit, trust accounts and funds withheld in the aggregate amount of
$3.2 billion, collateralizing $5.2 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 insurance subsidiaries are subject to extensive supervision and regulation that may have a material adverse effect on our ability
to implement and achieve our business objectives. Our insurance subsidiaries are subject to extensive supervision and regulation by
the regulatory authorities in the various jurisdictions in which they conduct business, including state, national and international
insurance regulators. This supervision and regulation is intended for the benefit of policyholders rather than shareholders or holders
of debt securities. Regulatory authorities have broad regulatory, supervisory and administrative powers relating to, among other
things, 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 extensive ways, such as imposing
increased capital requirements. These 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 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. Each of our businesses is highly dependent on the 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, the management of
third party capital and providing products and services to businesses and consumers, 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 investments 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 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. Any such failure could also 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 senior unsecured debt agreements 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 costs
and other expenses of doing business, and have a material adverse effect on our results of operations and financial condition.
45
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
The amount of capital that our insurance subsidiaries have and must hold to maintain their financial strength and credit
ratings and meet other requirements can vary significantly from time to time and is sensitive to a number of factors outside
of our control. Capital requirements for our insurance subsidiaries are prescribed by the applicable insurance regulators and
the NAIC, while rating agencies establish requirements that inform ratings for our insurance subsidiaries and senior debt
securities. Projecting surplus and the related capital requirements is complex and requires making assumptions regarding
how our business will perform within the broader macroeconomic environment. Insurance regulators and rating agencies
evaluate company capital through financial models that calculate minimum capitalization requirements based on risk-based
capital formulas for property and casualty insurance groups and their subsidiaries. In any particular year, capital levels and
risk-based capital requirements may increase or decrease depending on a variety of factors including the amount of income
or losses generated by our insurance subsidiaries, the amount of additional capital our insurance subsidiaries must hold to
support business growth, the value of certain fixed maturities and equity securities in our investment portfolio, changes in
interest rates and foreign currency exchange rates, as well as changes to the regulatory and rating agency models used to
determine our required capital. In addition, the NAIC is developing a group capital calculation for U.S. based global
insurance groups. While still in its early stage, and even though it is not intended to be a prescribed capital requirement, this
calculation could have an impact on the amount of group capital we are required to hold and how it is allocated.
Information technology systems that we use could fail or suffer a security breach, which could have a material adverse effect
on us 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.
46
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.
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 Markel Ventures and 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, 2018, goodwill and intangible assets totaled $4.0 billion and represented 44% 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 for goodwill and by comparing the carrying value of the asset to its fair value for
indefinite-lived intangible assets. 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 2018 and 2017 we recorded $1.1 billion and $1.3 billion, respectively, of goodwill and intangible assets in connection
with the acquisitions of Nephila and Brahmin in 2018 and SureTec, Costa Farms and State National in 2017. Developments that
adversely affect the future cash flows or earnings of an acquired business may cause the goodwill or intangible assets recorded for it
to be impaired. For example, in 2018 we reduced the carrying value of the goodwill and intangible assets of the MCIM reporting unit,
acquired in 2015, to zero, which resulted in a combined goodwill and intangible assets impairment charge of $179.0 million.
The failure of any of the loss limitation methods we employ could have a material adverse effect on us. 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 have a material adverse effect on 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.
47
Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
The loss of one or more key executives or an inability to attract and retain qualified personnel could have a material adverse
effect on us. 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 have a material adverse effect on our ability to conduct or grow
our business.
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 U.K., Bermuda, Europe, Canada, Latin America, Asia Pacific and the Middle East. Our
international operations and investments expose us to increased political, operational and economic risks. 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 a
material adverse effect on our businesses.
Changes in regulations and interpretations relating to the Tax Cuts and Jobs Act could have a material adverse effect on us.
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 were effective January 1, 2018. The U.S. Treasury Department and the Internal
Revenue Service continue to issue guidance and interpretations of how provisions of the TCJA will be applied or otherwise
administered. Changes in regulations and interpretations relating to the TCJA could have a material adverse effect on our
results of operation and financial condition.
Our insurance companies and senior debt are rated by various rating agencies, and a downgrade or potential downgrade in
one or more of these ratings could have a material adverse effect on us. 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 and our senior debt securities
are rated by various rating agencies. 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 and other financial metrics. Rating agencies may
implement changes to their ratings methodologies or internal models that have the effect of increasing or decreasing the
amount of capital our insurance subsidiaries must hold or restrict how the company may deploy its capital in order to
maintain its current ratings. For example, for certain of our insurance subsidiaries, rating agencies may take into account in
their calculations the collateral provided to us by reinsurers. A change in this practice could adversely impact our ratings. 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 ratings 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. In addition a downgrade could 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 have a material adverse effect on 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.
We may require additional capital in the future, which may not be available or may only be available on unfavorable terms.
To the extent that cash flows generated by our operations are insufficient to fund future operating requirements, or that our
capital position is adversely impacted by a decline in the fair value of our investment portfolio, losses from catastrophe
events or otherwise, we may need to raise additional funds through financings or curtail our growth. We also may be
required to liquidate fixed maturities or equity securities, which may result in realized investment losses. Any further
sources of liquidity, including capacity needed for letters of credit, if available at all, may be on terms that are unfavorable to
48
us. Our access to additional sources of liquidity, and our ability to renew our revolving credit facility, which matures on August 1,
2019, will depend on a variety of factors, such as market conditions, the general availability of credit, the availability of credit to the
industries in which we operate, our results of operations, financial condition, credit ratings and credit capacity, as well as pending
litigation or regulatory investigations. Our ability to borrow under our revolving credit facility and letter of credit facilities is
contingent on our compliance with the covenants and other requirements under those facilities. Similarly, our access to capital may
be impaired if regulatory authorities or rating agencies take negative actions against us. Our inability to obtain adequate capital
when needed could have a negative impact on our ability to invest in, or take advantage of opportunities to expand, our businesses,
such as possible acquisitions or the creation of new ventures, and inhibit our ability to refinance our existing indebtedness on terms
acceptable to us. Any of these effects could have a material adverse effect on our results of operations and financial condition.
Our failure to comply with covenants and other requirements under our revolving credit facility, senior debt and other indebtedness
could have a material adverse effect on us. The agreements and indentures relating to our revolving credit facility, senior debt and
other indebtedness, including letter of credit facilities used by certain of our insurance subsidiaries, contain covenants and other
requirements. If we fail to comply with those covenants or requirements, the lenders, noteholders or counterparties under those
agreements and indentures could declare a default and demand immediate repayment of all amounts owed to them. In addition,
where applicable, our lenders may cancel their commitments to lend or issue letters of credit or require us to pledge additional or a
different type of collateral. A default under one debt agreement may also put us at risk of a cross-default under other debt agreements
or other arrangements. Any of these effects could have a material adverse effect on our results of operations and financial condition.
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 have a
material adverse effect on us. We market our insurance and reinsurance worldwide through insurance and reinsurance brokers. For
the year ended December 31, 2018, our top three independent brokers represented 25% 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 of misconduct
by our employees. 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 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 anti-bribery and regulations of the United
States, the United Kingdom 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, and may even conflict with, 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.
Losses from legal and regulatory actions may have a material adverse effect on us. We are involved in various legal actions, including
at times multi-party or class action litigation, some of which involve claims for substantial or indeterminate amounts. We are also
involved from time to time in various regulatory actions, investigations and inquiries, including market conduct exams by insurance
regulatory authorities. An unfavorable outcome in one or more of these matters could have a material adverse effect on our results of
operations and financial condition. If any regulatory authority takes action against us or we enter into an agreement to settle a
matter, we may incur sanctions or be required to pay substantial fines or implement remedial measures that could prove costly or
disruptive to our businesses and operations. Even if an unfavorable outcome does not materialize, these matters could have an
adverse impact on our reputation and result in substantial expense and disruption. See note 18 of the notes to consolidated financial
statements and “Legal Proceedings.”
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Markel Corporation & Subsidiaries
B U S I N E S S O V E R V I E W (continued)
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.
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 a material adverse effect on our results of operations and financial
condition. Moreover, we may not be able to maintain or 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. For example, catastrophe losses in 2017 and 2018 may materially adversely impact our ability to maintain or
raise capital at our investment management operations.
Recent developments at our Markel CATCo operations could have a material adverse effect on us. The U.S. Department of
Justice, U.S. Securities and Exchange Commission and Bermuda Monetary Authority are conducting inquiries into loss
reserves recorded in late 2017 and early 2018 at Markel CATCo Re (the Markel CATCo Inquiries). Subsequently, a putative
class action suit was filed by David Bergen naming Markel Corporation and certain present or former officers as defendants
(the Bergen Suit). The Bergen Suit alleges violations of the federal securities laws relating to the matters that are the subject
of the Markel CATCo Inquiries. In addition, as a result of matters uncovered in an internal review initiated in response to
the Markel CATCo Inquiries, two senior MCIM executives are no longer with MCIM (the MCIM Executive Departures).
The performance of MCIM depended heavily on the financial and managerial experience of those two senior executives.
Following their departure, the two senior MCIM executives each filed suit against MCIM and Markel Corporation alleging,
among other claims, breach of contract, defamation and invasion of privacy (the MCIM Executive Suits). See “Legal
Proceedings” for more information regarding the Markel CATCo Inquiries, Bergen Suit and MCIM Executive Suits. Further,
investors in the Markel CATCo Funds have been offered an additional opportunity to have some or all of their respective
investments in the Markel CATCo Funds redeemed (the Special Redemption).
In light of the Markel CATCo Inquiries, and taking into consideration the MCIM Executive Departures and the Special
Redemption, management concluded that MCIM’s ability to maintain or raise capital for the Markel CATCo Funds has been
adversely impacted. As a result, in the fourth quarter of 2018, the carrying value of the goodwill and intangible assets of the
MCIM reporting unit was reduced to zero, which resulted in an impairment charge of $179.0 million.
The Markel CATCo Inquiries, Bergen Suit, MCIM Executive Departures and MCIM Executive Suits, as well as other related
matters of which we are currently unaware, could result in additional claims, litigation, investigations, enforcement actions
or proceedings. For example, additional litigation may be filed by investors in the Markel CATCo Funds. We also could
become subject to increased regulatory scrutiny, investigations or proceedings in any of the jurisdictions where we operate.
If any regulatory authority takes action against us or we enter into an agreement to settle a matter, we may incur sanctions
or be required to pay substantial fines or implement remedial measures that could prove costly or disruptive to our
businesses and operations.
50
An unfavorable outcome in one or more of these matters, and others we cannot anticipate, could have a material adverse effect on
our results of operations and financial condition. In addition, we may take further steps to support our Markel CATCo operations,
including steps to mitigate potential risks or liabilities that may arise from the Markel CATCo Inquiries and related developments,
and some of those steps may have a material impact on our results of operations or financial condition. Even if an unfavorable
outcome does not materialize, these matters, and actions we may take in response, could have an adverse impact on our reputation
and result in substantial expense and disruption.
The exit of the United Kingdom from the European Union could have a material adverse effect on us. On June 23, 2016, the U.K.
voted to exit the E.U. (Brexit). Unless the date is extended, the U.K. will automatically exit the E.U. on March 29, 2019. The effects
of Brexit will depend in part on agreements, if any, the U.K. makes to retain access to E.U. markets. For almost two years the U.K.
and E.U have been negotiating 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. All Brexit terms must be ratified by the U.K. Parliament and the legislative bodies of the 27 E.U. member states.
The likelihood of the U.K. Parliament ratifying an agreement in its current form appears to be low. This significantly increases the
chance that the U.K. will leave the E.U. without an agreement regarding the U.K.’s relationship with the E.U.
Brexit could impair or end the ability of both MIICL and Syndicate 3000 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 states and in Switzerland. Without a Brexit agreement, U.K.
based insurers may be prohibited from administering policies for, or paying claims to, EEA policyholders post Brexit. In order to
provide certainty for its EEA policyholders, MIICL has commenced the transfer of its legacy EEA exposures, claims and policies to
MISE. However, this transfer must be approved by the U.K. High Court. While we expect this transfer to be approved by March 29,
2019, there is no assurance when or whether this approval ultimately will be granted or on what terms and conditions. If we do not
obtain this approval by the date Brexit occurs, our obligations to EEA policyholders may conflict with what we are permitted to do
by EEA regulators or under EEA regulations.
Lloyd’s also has commenced its transfer of legacy EEA exposures. However, Lloyd’s does not expect to obtain this approval by March
29, 2019, and there is no assurance the approval ultimately will be granted or on what terms and conditions. Lloyd’s has stated that it
intends to continue to pay valid EEA claims even in the absence of U.K. High Court approval. In that situation, Syndicate 3000 may
have little or no ability to act contrary to Lloyd’s direction, and this may put Syndicate 3000 in conflict with EEA regulators or in
breach of EEA regulations in what will be an uncertain regulatory environment.
The U.K.’s exit 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.
Significant uncertainties remain related to the political, monetary and economic impacts of Brexit, including related tax, accounting
and financial reporting implications. Brexit could also lead to legal and regulatory 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.
These impacts, combined with the legal and regulatory uncertainty, may adversely affect our operations and also may result in
increased claims arising from the impact on our policyholders. For example, in the absence of a Brexit agreement or a waiver for
cross border data transfers, many U.K. and E.U. companies, including our U.K. and E.U. based operations, may not be able to comply
with E.U. data privacy laws immediately upon the Brexit effective date.
Any of these effects of Brexit, and others we cannot anticipate, could have a material adverse effect on our results of operations and
financial condition.
A s s o c i a t e s
At December 31, 2018, we had approximately 17,400 employees, of whom approximately 12,800 were employed within our Markel
Ventures operations.
51
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
Product revenues
Services and other revenues
Total operating revenues
Net income (loss) to shareholders (2)
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 (1,3)
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 (4)
Closing stock price
5-Year CAGR in closing stock price(4)
R AT I O A N A LY S I S
U.S. GAAP combined ratio(5)
Investment yield(6)
Taxable equivalent total investment return(7)
Investment leverage(8)
Debt to capital
2018
2017
2016
$ 4,712%)
434%)
1,498%)
635%)
6,841%)
(128)%
(376)%
$ (9.55)%
$ 4,248%
406%
951%
462%
6,062%
395%
1,175%
$ 25.81%
$ 3,866%
373%
885%
422%
5,612%
456%
667%
$ 31.27%
$ 19,238%)
33,306%)
14,276%)
3,010%)
9,081%)
13,888%)
$ 20,570%
32,805%
13,584%
3,099%
9,504%
13,904%
$ 19,059%
25,875%
10,116%
2,575%
8,461%
13,955%
$ 653.85%)
(4)%
7)%
$ 1,038.05)%
12)%
$ 683.55%
13%
11%
$ 1,139.13%
21%
$ 606.30%
8%
11%
$ 904.50%
17%
98)%
3)%
(1)%
2.1)%
25)%
105%
3%
10%
2.2%
25%
92%
2%
4%
2.3%
23%
(1) Reflects the acquisition of Alterra Capital Holdings Limited effective May 1, 2013, which included the issuance of equity
totaling $2.3 billion.
(2) In accordance with the provisions of Financial Accounting Standards Board Accounting Standards Update (ASU)
No. 2016-01, beginning January 1, 2018, all changes in the fair value of equity securities are recognized in net income. See
further discussion of the impacts of adopting ASU No. 2016-01 in note 1 of the notes to consolidated financial statements.
(3) 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.
(4) CAGR—compound annual growth rate.
52
2015
2014
2013
2012
2011
2010
2009
$ 3,824)% $ 3,841%
363%
681%
203%
5,134%
321%
936%
$ 41.74)% $ 22.27%
353)%
872)%
215)%
5,370)%
583)%
233)%
$ 3,232%
317%
550%
161%
4,323%
281%
459%
$ 22.48%
$ 18,181)% $ 18,638%
25,198%
10,404%
2,251%
7,595%
13,962%
24,939)%
10,252)%
2,239)%
7,834)%
13,959)%
$ 17,612%
23,956%
10,262%
2,256%
6,674%
13,986%
$ 2,147)% $ 1,979% $ 1,731%
273%
156%
30%
2,225%
267%
431%
$ 25.89)% $ 14.60% $ 27.27%
282)%
367)%
172)%
3,000)%
253)%
504)%
264%
215%
136%
2,630%
142%
252%
$ 9,333)% $ 8,728% $ 8,224%
10,826%
5,398%
1,016%
3,172%
9,718%
12,557)%
5,371)%
1,493)%
3,889)%
9,629)%
11,532%
5,399%
1,294%
3,388%
9,621%
$ 1,816%)
260%)
83%)
7%)
2,069%)
202%)
591%)
$ 20.52%)
$ 7,849)%
10,242%)
5,427)%
964)%
2,774)%
9,819)%
5-Year
CAGR(3)
10-Year
CAGR(3)
8%
6%
22%
32%
10%
9%
4%
34%
91%
13%
2%
7%
7%
11%
13%
10%
6%
15%
3)%
11)%
$ 561.23)% $ 543.96%
14%
14%
$ 883.35)% $ 682.84%
15%
18)%
$ 477.16%
18%
17%
$ 580.35%
14%
15)%
9)%
$ 403.85)% $ 352.10)% $ 326.36%
16%
13%
$ 378.13%
4%
8)%
9)%
$ 433.42)% $ 414.67%)
(3)%
(2)%
$ 282.55)%
27%)
11%)
$ 340.00%)
(1)%
7%
11%
12%
13%
89)%
2)%
(1)%
2.3)%
22)%
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%
(5) The U.S. GAAP combined ratio measures the relationship of incurred losses, loss adjustment expenses and underwriting,
acquisition and insurance expenses to earned premiums.
(6) Investment yield reflects net investment income as a percentage of monthly average invested assets at amortized cost.
(7) 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.
(8) Investment leverage represents total invested assets divided by shareholders’ equity.
53
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, 2018, 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, 2018.
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, 2018, which is included herein.
Thomas S. Gayner
Co-Chief Executive Officer
(Co-Principal Executive Officer)
Richard R. Whitt, III
Co-Chief Executive Officer
(Co-Principal Executive Officer)
Jeremy A. Noble
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
February 28, 2019
54
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 and subsidiaries' (the Company) internal control over financial reporting as of
December 31, 2018, 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, 2018, 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, 2018 and 2017, and the
related consolidated statements of income (loss) and comprehensive income (loss), changes in equity, and cash flows
for each of the years in the three-year period ended December 31, 2018, and related notes (collectively, the
consolidated financial statements), and our report dated February 28, 2019 expressed an unqualified opinion on those
consolidated financial statements.
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 28, 2019
55
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, 2018 and 2017, the related consolidated statements of income (loss) and
comprehensive income (loss), changes in equity, and cash flows for each of the years in the three-year period
ended December 31, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2018, 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, 2018, 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 28, 2019 expressed an unqualified
opinion on the effectiveness of the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company adopted Accounting Standards
Update No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities on January 1, 2018.
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 28, 2019
56
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, at estimated fair value:
Fixed maturities, available-for-sale (amortized cost
of $9,950,773 in 2018 and $9,551,153 in 2017)
Equity securities, available-for-sale (cost of $2,667,661 in 2017)
Equity securities (cost of $2,971,856 in 2018)
Short-term investments, available-for-sale
(estimated fair value approximates cost)
Total Investments
Cash and cash equivalents
Restricted cash and cash equivalents
Receivables
Reinsurance recoverables
Deferred policy acquisition costs
Prepaid reinsurance premiums
Goodwill
Intangible assets
Other assets
TOTAL ASSETS
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
$3,030,000 in 2018 and $3,351,000 in 2017)
Other liabilities
Total Liabilities
Redeemable noncontrolling interests
Commitments and contingencies
Shareholders’ equity:
Common stock
Retained earnings
Accumulated other comprehensive income (loss)
Total Shareholders’ Equity
Noncontrolling interests
Total Equity
TOTAL LIABILITIES AND EQUITY
See accompanying notes to consolidated financial statements.
December 31,
2018
2017
(dollars in thousands)
$ 10,043,188
—
5,720,945
$ 9,940,670
5,967,847
—
1,077,696
16,841,829
2,014,168
382,264
1,692,526
5,221,947
474,513
1,331,022
2,237,975
1,726,196
1,383,823
2,160,974
18,069,491
2,198,459
302,387
1,567,453
4,745,390
465,569
1,099,757
1,777,464
1,355,681
1,223,365
$ 33,306,263
$ 32,805,016
$ 14,276,479
1,001,453
3,611,028
337,326
3,009,577
1,796,036
24,031,899
174,062
3,392,993
5,782,310
(94,650)
9,080,653
19,649
9,100,302
$ 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
$ 33,306,263
$ 32,805,016
57
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 ( L O S S ) A N D C O M P R E H E N S I V E I N C O M E ( L O S S )
O P E R AT I N G R E V E N U E S
Earned premiums
Net investment income
Net investment gains (losses):
Other-than-temporary impairment losses
Net realized investment gains (losses), excluding
other-than-temporary impairment losses
Change in fair value of equity securities
Net investment gains (losses)
Products revenues
Services and 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
Products expenses
Services and other expenses
Amortization of intangible assets
Impairment of goodwill and intangible assets
Total Operating Expenses
Operating Income
Interest expense
Net foreign exchange losses (gains)
Loss on early extinguishment of debt
Income (Loss) Before Income Taxes
Income tax expense (benefit)
Net Income (Loss)
Net income (loss) attributable to noncontrolling interests
N E T I N C O M E (L O S S) T O S H A R E H O L D E R S
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 available-for-sale 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 (losses)
included in net income (loss)
Change in net unrealized gains on available-for-sale 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 (Loss)
Comprehensive income (loss) attributable to noncontrolling interests
Years Ended December 31,
2018
2017
2016
(dollars in thousands, except per share data)
$ 4,712,060
434,215
$ 4,247,978
405,709
$ 3,865,870
373,230
—
(7,589)
(18,355)
(11,974)
(425,622)
(437,596)
1,497,523
635,083
47,174
(44,888)
(5,303)
951,012
462,263
66,711
16,791
65,147
885,473
422,306
6,841,285
6,061,659
5,612,026
2,820,715
1,777,511
1,413,248
474,924
115,930
199,198
2,865,761
1,589,464
850,449
458,621
80,758
—
2,050,744
1,497,125
755,591
416,141
68,533
18,723
6,801,526
5,845,053
4,806,857
39,759
154,212
(106,598)
—
(7,855)
122,498
$ (130,353)
(2,173)
$ (128,180)
$
$
216,606
132,451
(3,140)
—
87,295
(313,463)
400,758
5,489
395,269
805,169
129,896
1,253
44,100
629,920
169,477
460,443
4,754
455,689
$
$
$ (241,325)
$
787,339
$
275,661
—
35
(24,296)
(33,528)
—
7,849
(233,476)
(16,495)
2,341
(247,630)
763,043
10,449
6,259
779,751
$ (377,983)
(2,213)
$ 1,180,509
5,535
242,168
(11,704)
(19,100)
211,364
671,807
4,760
667,047
31.41
31.27
$
$
$
$
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
$ (375,770)
$ 1,174,974
N E T I N C O M E (L O S S) P E R S H A R E
Basic
Diluted
58
See accompanying notes to consolidated financial statements.
$
$
(9.55)
(9.55)
$
$
25.89
25.81
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
Common
Shares
Common
Stock
Retained
Earnings
Accumulated
Other
Total
Comprehensive Shareholders’ Noncontrolling
Equity
Income (Loss)
Interests
Total
Equity
Redeemable
Noncontrolling
Interests
13,959 $3,342,357 $3,137,285 $1,354,508 $7,834,150
455,689
211,358
––
211,358
455,689
––
(in thousands)
December 31, 2015
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)
––
––
––
––
––
––
––
$ 6,459
99
––
$7,840,609 $ 62,958
4,655
6
455,788
211,358
99
––
––
––
––
––
(74)
6,484
(895)
––
(895)
––
––
––
––
667,146
4,623
(51,142)
21,336
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
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
––
(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
Cumulative effect of adoption of
ASU No. 2014-09, net of taxes
Cumulative effect of adoption of
ASU No. 2016-01, net of taxes
Cumulative effect of adoption of
ASU No. 2018-02
January 1, 2018
13,904
3,381,834
325
––
325
2,595,484 (2,595,484)
(402,853)
402,853
––
––
5,969,699
(128,180)
––
152,940
––
(247,590)
9,504,473
(128,180)
(247,590)
Net loss
Other comprehensive loss
Comprehensive Loss
Issuance of common stock
Repurchase of common stock
Restricted stock awards expensed
Acquisition of Brahmin
Acquisition of Nephila
Adjustment of redeemable
noncontrolling interests
Purchase of noncontrolling
interest
Other
32
(48)
––
––
––
––
––
––
2
––
16,191
––
––
––
(54,007)
––
––
––
––
(4,828)
(4,986)
(48)
––
(374)
(375,770)
2
(54,007)
16,191
––
––
(4,828)
(4,986)
(422)
––
––
––
––
––
––
––
––
––
––
––
(2,567)
(1,175)
––
(1,175)
––
––
––
––
23,392
325
––
––
––
––
––
9,501,906
(129,355)
(247,590)
166,269
(998)
(40)
(376,945)
2
(54,007)
16,191
––
23,392
(1,038)
––
––
––
19,670
––
––
––
(1)
(4,828)
4,828
(4,986)
(423)
(7,104)
(8,563)
DECEMBER 31, 2018
13,888 $3,392,993 $5,782,310 $ (94,650) $9,080,653
$ 19,649
$9,100,302 $174,062
See accompanying notes to consolidated financial statements.
59
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 (loss)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Years Ended December 31,
2018
2017
2016
(dollars in thousands)
$ (130,353)
$ 400,758
$ 460,443
Deferred income tax expense (benefit)
Depreciation and amortization
Net investment losses (gains)
Loss on early extinguishment of debt
Net foreign exchange losses (gains)
Impairment of goodwill and intangible assets
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 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
2,729
227,846
437,596
—
(106,598)
199,198
(27,961)
(15,585)
298,796
(50,541)
62,879
(4,313)
53,730
(23,756)
(5,637)
(25,173)
(324,090)
203,871
5,303
—
(3,140)
—
(38,259)
(67,923)
619,305
(55,647)
197,706
(40,761)
(35,968)
(71,669)
45,051
23,992
63,358
194,147
(65,147)
44,100
1,253
18,723
(163,123)
(41,619)
(9,429)
(54,580)
134,593
11,582
(16,484)
67,994
(90,571)
(20,617)
Net Cash Provided By Operating Activities
892,857
858,529
534,623
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
Additions to property and equipment
Acquisitions, net of cash acquired
Other
419,199
551,808
(1,545,913)
1,101,636
(106,593)
(1,175,211)
(42,165)
577,650
1,129,895
(1,176,281)
234,743
(74,652)
(1,431,712)
(4,100)
365,822
963,165
(2,205,939)
(689,194)
(63,674)
(7,527)
(1,134)
Net Cash Used By Investing Activities
(797,239)
(744,457)
(1,638,481)
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
Payment of contingent consideration
Purchase of noncontrolling interests
Distributions to noncontrolling interests
Other
206,949
(289,199)
—
(54,007)
(15,914)
(13,523)
(9,164)
(4,127)
664,657
(259,972)
—
(110,838)
(5,018)
(18,334)
(7,899)
(6,281)
559,300
(278,363)
(43,691)
(51,142)
(14,219)
(3,167)
(5,949)
(10,750)
Net Cash Provided (Used) By Financing Activities
(178,985)
256,315
152,019
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.
(21,047)
45,295
(33,138)
(104,414)
415,682
(984,977)
2,500,846
2,085,164
3,070,141
$ 2,396,432
$ 2,500,846
$ 2,085,164
60
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 United
States (U.S.) generally accepted accounting principles (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, with the exception of significant transactions or
events that occur during the intervening period. 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
and litigation contingencies. 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 and equity securities are recorded at estimated fair value. Unrealized gains and
losses on available-for-sale 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 available-for-sale 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 available-for-sale investments are derived using the first-in,
first-out method on the trade date.
Effective January 1, 2018, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update
(ASU) No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial
Liabilities. Upon adoption of the ASU, equity securities are no longer classified as available-for-sale and unrealized gains and
losses on equity securities, net of income taxes, are included in earnings. In accordance with the provisions of the ASU, prior
periods have not been restated to conform to the new presentation. See note 1(w) for further discussion of the impact of
prospectively adopting this standard.
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. The
Company records its proportionate share of other comprehensive income or loss of the investee as a component of other
comprehensive income. Dividends or other equity distributions in excess of the Company’s cumulative equity in earnings of
the investee are recorded 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 approximates fair value.
61
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) 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. Receivables also include amounts receivable from contracts with customers, which represent the
Company’s unconditional right to consideration for satisfying the performance obligations outlined in the contract.
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 2023.
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.
62
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 has a run-off block of life and annuity reinsurance contracts that 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 services and other revenues and services and other expenses in the Company’s consolidated
statements of income and comprehensive income.
o) Revenue Recognition.
Property and Casualty Premiums
Insurance premiums written are generally recorded at the inception of a policy and 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. For multi-year contracts where insurance premiums are payable in annual installments, written
premiums are recorded at the inception of the contract based on management’s best estimate of total premiums to be received.
For contracts where the cedent has the ability to unilaterally commute or cancel coverage within the term of the policy,
premiums are generally recorded on an annual basis or up to the contract cancellation point. The remaining premiums are
estimated and included as written at each successive anniversary date within the multi-year term.
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 U.S. reinsurers.
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)
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 generally earned on a pro rata
basis over the coverage period.
Products, Services and Other Revenues
Effective January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606),
and related amendments, which created a new comprehensive revenue recognition standard, FASB Accounting Standards
Codification (ASC) 606, Revenue from Contracts with Customers, that serves as a single source of revenue guidance for all
contracts with customers to transfer goods or services or contracts for the transfer of nonfinancial assets, unless those contracts
are within the scope of other standards, such as insurance contracts. ASC 606 is not applicable to the Company’s insurance
premium revenues or revenues from its investment portfolio but is applicable to most of the Company’s other revenues, as
described below. See note 1(w) for further discussion of the impact of adopting this standard.
Other revenues primarily relate to the Company’s Markel Ventures operations and consist of revenues from the sale of products
and services. Revenues are recognized when, or as, control of the promised goods or services is transferred to the Company’s
customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or
services. All contracts with customers either have an original expected length of one year or less or the Company recognizes
revenue at the amount for which it has a right to invoice for the products delivered or services performed. Certain customers
may receive volume rebates or credits for products and services, which are accounted for as variable consideration. The
Company estimates these amounts based on the expected amount to be provided to the customer and reduces revenues
recognized by a corresponding amount. The Company does not expect significant changes to its estimates of variable
consideration over the term of the contracts.
Payment terms for products and services vary by the type of product or service offered and the location of the customer, and
payment is typically received at or shortly after the point of sale. For certain products, the Company requires partial payment in
the form of a deposit before the products are delivered to the customer, which is included in other liabilities on the Company’s
consolidated balance sheet.
Products revenues are primarily generated from the sale of equipment used in baking systems, portable dredges, over-the-road
transportation equipment, flooring for the trucking industry, ornamental plants and residential homes. Most of the Company’s
product revenues are recognized when the products are shipped to the customer or the products arrive at the agreed upon
destination with the end customer. Some of the Company’s contracts include multiple performance obligations. For such
arrangements, revenues are allocated to each performance obligation based on the relative standalone selling price, which is
derived from amounts stated in the contract.
Services revenues are primarily generated by delivering healthcare services, retail intelligence, consulting services and
investment management services. Service revenues are generally recognized over the term of the contracts based on hours
incurred or as services are provided.
Investment management fee income is recognized over the period in which investment management services are provided and
is calculated and recognized monthly based on the net asset value of the accounts managed. For certain accounts, the Company
is also entitled 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 incentive fees are payable annually. Incentive fee income is recognized at the conclusion of the contractual
performance period, when the uncertainty related to performance has been resolved.
64
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 its program services business, the Company enters into contractual agreements with
both producing general agents and 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 $13.0 million in
2018, $11.9 million in 2017 and $14.3 million in 2016. See note 12.
r) Foreign Currency Transactions. The U.S. Dollar is the Company’s reporting currency and the primary functional currency of
its foreign underwriting operations. The functional currencies of the Company’s other foreign operations are the currencies of
the primary economic environments in which the majority of their business is transacted.
Foreign currency transaction gains and losses are the result of exchange rate changes on transactions denominated in currencies
other than the functional currency at each foreign entity. Monetary assets and liabilities are remeasured to the functional
currency at current exchange rates, with resulting gains and losses included in net foreign exchange losses (gains) within net
income. Non-monetary assets and liabilities are remeasured to the functional currency at historic exchange rates.
Available-for-sale securities are recorded at fair value with resulting gains and losses, including the portion attributable to
movements in exchange rates, included in the change in net unrealized gains on available-for-sale investments, net of taxes
within other comprehensive income. While we attempt to naturally hedge our exposure to foreign currency fluctuations by
matching assets and liabilities in the same currencies, there is a financial statement mismatch between the gains or losses
recorded in net income related to insurance reserves denominated in non-functional currencies and the gains or losses recorded
in other comprehensive income related to the available-for-sale securities held in non-functional currencies supporting the
reserves.
Assets and liabilities of foreign operations denominated in a functional currency other than the U.S. Dollar are translated into
the U.S. Dollar at current exchange rates, with resulting gains or losses included, net of taxes, in the change in foreign currency
translation adjustments within other comprehensive income.
Historically, the Company also designated certain additional currencies, including the British Pound Sterling, the Euro, and the
Canadian Dollar, as functional currencies within its foreign underwriting operations that were deemed to contain distinct and
separable operations in those foreign economic environments. However, over time the Company’s foreign underwriting
operations have evolved and are now managed on a global basis. Effective January 1, 2018, management reassessed its functional
currency determination as required by ASC 830, Foreign Currency Matters, and concluded that its foreign underwriting
operations have evolved to function as an extension, or integral component, of the Company’s global underwriting operations,
and are no longer deemed to contain distinct and separable operations. As a result, more foreign currency denominated
transactions are designated as non-functional, with related remeasurement gains and losses included in net income. The change
in the Company’s functional currency determination has been applied on a prospective basis in accordance with ASC 830.
Therefore, any translation gains and losses that were previously recorded in accumulated other comprehensive income through
December 31, 2017 remain unchanged as of December 31, 2018.
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.
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)
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
available-for-sale 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 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, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and
several other ASUs that were issued as amendments to ASU No. 2014-09, which apply to all contracts with customers to
transfer goods or services or for the transfer of nonfinancial assets, unless those contracts are within the scope of other
standards. ASU No. 2014-09’s core principle is that a company recognizes 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 adopting this standard, the Company is required to use more judgment and make more estimates than
under the previous guidance, including 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.
The Company adopted ASU No. 2014-09 using the modified retrospective method. Prior periods were not restated and the
cumulative-effect of applying the new standard to all open contracts at January 1, 2018 was $0.3 million, and is included as an
adjustment to 2018 beginning retained earnings. The Company’s other revenues for the year ended December 31, 2018 and its
receivables, other assets and other liabilities as of December 31, 2018 were not materially different from the amounts that
would have been recognized under the previous guidance. ASU No. 2014-09 also requires expanded revenue disclosures which
are included in note 21.
Effective January 1, 2018, the Company adopted ASU No. 2016-01, Financial Instruments (Topic 825): Recognition and
Measurement of Financial Assets and Financial Liabilities. As a result of adoption of this ASU, equity instruments that do not
result in consolidation and are not accounted for under the equity method are measured at fair value and any changes in fair
66
value are recognized in net income. Previously, the Company’s equity securities were classified as available-for-sale and changes
in fair value were recorded in other comprehensive income. Upon adoption of this ASU, cumulative net unrealized gains on
equity securities of $2.6 billion, net of deferred income taxes of $684.4 million, were reclassified from accumulated other
comprehensive income into retained earnings. Prior periods have not been restated to conform to the current presentation. See
note 3(f) for details regarding the change in net unrealized gains on equity securities included in net income for the year ended
December 31, 2018 and included in other comprehensive income for the years ended December 31, 2017 and 2016.
Effective January 1, 2018, the Company early adopted 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 remaining in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act
(TCJA) to retained earnings. Upon enactment of the TCJA, the U.S. corporate tax rate was reduced from 35% to 21% and the
Company’s U.S. deferred tax balances were remeasured to the lower enacted U.S. corporate tax rate. U.S. GAAP 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. As a result of
adopting the ASU, the Company reclassified $402.9 million of previously recognized deferred taxes from accumulated other
comprehensive income into retained earnings as of January 1, 2018.
The following ASUs relate to topics relevant to the Company’s operations and were adopted effective January 1, 2018. These
ASUs did not 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. 2017-09, Stock Compensation (Topic 718): Scope of Modification Accounting
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. The FASB subsequently issued ASUs with improvements to the guidance, including ASU No. 2018-11,
Leases (Topic 842): Targeted Improvements, which provides entities with an additional transition method to apply the new
standard. Under the new optional transition method, an entity initially applies ASC 842 at the adoption date and recognizes a
cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The ASUs become effective
for the Company during the first quarter of 2019 and will be applied using a modified retrospective approach. The Company
intends to elect the new transition method permitted by ASU No. 2018-11. Short-term leases will not be recorded on the
balance sheet. The Company has elected the package of practical expedients permitted under the transition guidance within the
new standard which, among other things, allows companies to carry forward their historical lease classification. The Company’s
future minimum lease payments for noncancelable operating leases, which represent minimum annual rental commitments
excluding taxes, insurance and other operating costs, and which will be subject to this new guidance, totaled $305.9 million at
December 31, 2018. The Company is finalizing its evaluation of the impacts that the adoption of this accounting guidance will
have on the consolidated financial statements. The Company estimates a right-of-use asset and a lease liability of approximately
$250 million and $275 million, respectively, will be recognized in the consolidated balance sheet upon adoption. Adoption of
this standard will not have a material impact on the Company’s results of operations and will not impact the Company’s cash
flows.
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 fixed maturities, 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
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)
loss model for measuring impairment losses will not impact the Company’s investment portfolio, none of which is measured at
amortized cost, 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 fixed maturities will be recorded as an allowance, subject
to reversal, rather than as a reduction in amortized cost.
In August 2018, the FASB issued ASU No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the
Accounting for Long-Duration Contracts. The ASU requires insurance entities with long duration contracts to: (1) review and, if
there is a change, update the assumptions used to measure cash flows at least annually, as well as update the discount rate
assumption at each reporting date; (2) measure all market risk benefits associated with deposit (or account balance) contracts at
fair value; and (3) disclose liability rollforwards and information about significant inputs, judgments, assumptions and methods
used in measurement, including changes thereto and the effect of those changes on measurement. ASU No. 2018-12 becomes
effective for the Company during the first quarter of 2021. The ASU will, among other things, impact the discount rate used in
estimating reserves for the Company’s life and annuity reinsurance portfolio, which is in runoff. Currently, the discount rate
assumption is locked-in for the life of the contracts, unless there is a loss recognition event. The Company is currently
evaluating ASU No. 2018-12 to determine the impact that adopting this standard will have on its consolidated financial
statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service
contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and
hosting arrangements that include an internal-use software license. The ASU requires an entity to expense the capitalized
implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. Currently,
such costs are generally expensed as incurred. ASU No. 2018-15 becomes effective for the Company during the first quarter
of 2020 and may be applied on a prospective or retrospective basis. Early adoption is permitted. The Company is currently
evaluating ASU No. 2018-15 to determine the impact that adopting this standard will have on its consolidated financial
statements.
The following ASUs are relevant to the Company’s operations and are not yet effective. These ASUs are not expected to have a
material impact on the Company’s financial position, results of operations or cash flows:
• ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on
Purchased Callable Debt Securities
• ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for
Fair Value Measurement
• ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure
Framework—Changes to the Disclosure Requirements for Defined Benefit Plans
• ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest
Entities
68
2. Acquisitions
Brahmin Leather Works, LLC
In October 2018, the Company acquired 90% of Brahmin Leather Works, LLC (Brahmin), a Massachusetts-based privately held
creator of fashion leather handbags. Total consideration for the acquisition was $193.8 million, which included cash
consideration of $173.3 million. Total consideration also includes the estimated fair value of contingent consideration the
Company expects to pay based on Brahmin’s earnings as defined in the purchase agreement, for the period of 2019 through 2021.
The purchase price was preliminarily allocated to the acquired assets and liabilities of Brahmin based on estimated fair values at
the acquisition date. The Company preliminarily recognized goodwill of $72.9 million, which is primarily attributable to
expected future earnings and cash flow potential of Brahmin. The majority of the goodwill recognized is expected to be
deductible for income tax purposes. The Company also preliminarily recognized other intangible assets of $81.3 million, which
includes $45.0 million of customer relationships, $35.0 million of trade names and $1.3 million of other intangible assets, which
are expected to be amortized over a weighted average period of 16 years, 16 years and 8 years, respectively. The Company also
recognized redeemable non-controlling interests of $19.6 million. Results attributable to Brahmin are included in the
Company’s Markel Ventures segment.
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.
Nephila Holdings Ltd.
In November 2018, the Company acquired all of the outstanding shares of Nephila Holdings Ltd. (Nephila), a Bermuda-based
investment fund manager offering a broad range of investment products, including insurance-linked securities, catastrophe
bonds, insurance swaps and weather derivatives. Nephila generates revenue primarily through management and incentive fees.
Total consideration for the acquisition was $972.6 million, all of which was cash consideration. The purchase price was
allocated to the acquired assets and liabilities of Nephila based on estimated fair values at the acquisition date. The Company
preliminarily recognized goodwill of $474.9 million, which is primarily attributable to expected future earnings and cash flow
potential of Nephila. None of the goodwill recognized is expected to be deductible for income tax purposes. The Company also
preliminarily recognized other intangible assets of $516.8 million, which includes $441.0 million of investment management
agreements, $31.0 million of broker relationships, $22.8 million of technology and $22.0 million of trade names, which are
expected to be amortized over a weighted average period of 16 years, 12 years, 6 years and 14 years, respectively. The Company
also recognized noncontrolling interests of $23.4 million attributable to certain consolidated subsidiaries of Nephila that are not
wholly-owned. Nephila operates as a separate business unit and its operating results are not included in a reportable segment.
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.
SureTec Financial Corp.
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
Insurance segment.
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)
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 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.
Costa Farms Companies
In August 2017, the Company acquired 81% of the holding company for the Costa Farms companies (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 included $29.3 million of contingent consideration, which
represented the Company’s initial estimate of the fair value of the contingent consideration the Company expected to pay based
on Costa Farms’ earnings, as defined in the purchase agreement, annually through 2021. Subsequent changes in the Company’s
expectation of the contingent consideration obligation are recorded as operating expenses in the consolidated statement of
income and comprehensive income. Operating expenses for the year ended December 31, 2017 included $19.0 million related to
an increase in the Company’s estimate of the contingent consideration obligation, which now reflects the maximum amount of
contingent consideration payable under the purchase agreement. 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 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 in the Company’s Markel
Ventures segment.
State National Companies, Inc.
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 Insurance segment. Results attributable to State National’s program services
business 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.
As of December 31, 2017, the purchase price was preliminarily allocated to the acquired assets and liabilities of State National
based on estimated fair value at the acquisition date. During the first quarter of 2018, the Company completed the process of
determining the fair value of the assets and liabilities acquired with State National. The Company recognized goodwill of
$379.2 million, none of which is 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.
70
Goodwill is also attributable to State National’s assembled workforce and synergies associated with the integration of State
National into the Company’s insurance operations and investing activities. The Company also recognized indefinite lived
intangible assets of $32.0 million and other intangible assets of $338.5 million, which are being amortized over a weighted
average period of 13 years.
The following table summarizes the 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 recoverables
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
365,826
169,150
379,150
370,500
$ 918,800
Other liabilities included an 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. As of December 31, 2018 and 2017, the amount of the unamortized fair value adjustment included in other liabilities was
$35.3 million and $57.7 million, respectively.
Other liabilities also included a 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 was amortized to service and other expenses over the life
of the underlying business, which was a weighted average period of one year. As of December 31, 2017, the amount of the
unamortized fair value adjustment included in other liabilities was $19.3 million. As of December 31, 2018, this fair value
adjustment was fully amortized.
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)
The following table summarizes the intangible assets recorded in connection with the acquisition, and as of December 31, 2018.
(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, 2018)
Net intangible assets as of December 31, 2018
Economic
Useful Life
13 years
13 years
Nine years
Indefinite
Amount
$ 289,000
22,500
27,000
32,000
370,500
32,336
$ 338,164
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.
72
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
Short-term investments
December 31, 2018
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Estimated
Fair
Value
Amortized
Cost
$
248,286
357,765
$ 308
5,671
$
(1,952)
(4,114)
$
246,642
359,322
4,285,068
1,482,826
1,691,572
886,501
19,614
979,141
9,950,773
1,080,027
96,730
98,356
3,154
6,170
7
13,234
223,630
443
(28,868)
(21,578)
(44,527)
(12,499)
(213)
(17,464)
(131,215)
(2,774)
4,352,930
1,559,604
1,650,199
880,172
19,408
974,911
10,043,188
1,077,696
INVESTMENTS, AVAILABLE-FOR-SALE
$ 11,030,800
$ 224,073
$ (133,989)
$ 11,120,884
(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: (1)
Insurance, banks and other
financial institutions
Industrial, consumer and all other
Total equity securities
Short-term investments
December 31, 2017
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Estimated
Fair
Value
Amortized
Cost
$
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
(1) Effective January 1, 2018, the Company adopted ASU No. 2016-01 and equity securities are no longer classified as available-for-sale.
Prior periods have not been restated to conform to the current presentation. See note 1.
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)
b) The following tables summarize gross unrealized investment losses on available-for-sale investments by the length of time
that securities have continuously been in an unrealized loss position.
December 31, 2018
Less than 12 months
12 months or longer
Total
Estimated
Fair
Value
Gross
Unrealized
Holding
Losses
Estimated
Fair
Value
Gross
Unrealized
Holding
Losses
Estimated
Fair
Value
Gross
Unrealized
Holding
Losses
$
2,922
$
(83)
$ 156,352
$ (1,869)
$ 159,274
$ (1,952)
(dollars in thousands)
Fixed maturities:
U.S. Treasury securities
U.S. government-sponsored
enterprises
88,854
(1,923)
96,337
(2,191)
185,191
(4,114)
Obligations of states, municipalities
and political subdivisions
Foreign governments
Commercial mortgage-backed
656,573
419,764
(12,455)
(14,461)
453,736
84,776
(16,413)
(7,117)
1,110,309
504,540
(28,868)
(21,578)
securities
653,410
(10,128)
709,971
(34,399)
1,363,381
(44,527)
Residential mortgage-backed
securities
Asset-backed securities
Corporate bonds
Total fixed maturities
Short-term investments
276,777
1,645
313,164
2,413,109
197,643
(3,685)
(11)
(10,965)
(53,711)
(2,774)
242,949
17,030
222,761
1,983,912
––
(8,814)
(202)
(6,499)
(77,504)
––
519,726
18,675
535,925
4,397,021
197,643
(12,499)
(213)
(17,464)
(131,215)
(2,774)
TOTAL
$ 2,610,752
$ (56,485)
$ 1,983,912
$ (77,504)
$ 4,594,664
$ (133,989)
At December 31, 2018, the Company held 1,005 available-for-sale securities with a total estimated fair value of $4.6 billion and
gross unrealized losses of $134.0 million. Of these 1,005 securities, 541 securities had been in a continuous unrealized loss
position for one year or longer and had a total estimated fair value of $2.0 billion and gross unrealized losses of $77.5 million.
The Company does not intend to sell or believe it will be required to sell these available-for-sale securities before recovery of
their amortized cost.
74
December 31, 2017
Less than 12 months
12 months or longer
Total
Estimated
Fair
Value
Gross
Unrealized
Holding
Losses
Estimated
Fair
Value
Gross
Unrealized
Holding
Losses
Estimated
Fair
Value
Gross
Unrealized
Holding
Losses
$
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:(1)
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)
(1) Effective January 1, 2018, the Company adopted ASU No. 2016-01 and equity securities are no longer classified as available-for-sale.
Prior periods have not been restated to conform to the current presentation. See note 1.
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 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 available-for-sale 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.
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)
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 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 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.
Prior to the adoption of ASU No. 2016-01, equity securities were considered available-for-sale and were included in the
analysis of other than temporary impairments. For equity securities, the ability and intent to hold the security for a period of
time sufficient to allow for anticipated recovery was considered. A decline in fair value of equity securities that was considered
to be other-than-temporary was 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.
c) The amortized cost and estimated fair value of fixed maturities at December 31, 2018 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
$ 377,745
1,293,384
2,103,596
3,578,361
7,353,086
1,691,572
886,501
19,614
$ 376,564
1,298,995
2,137,866
3,679,984
7,493,409
1,650,199
880,172
19,408
$ 9,950,773
$ 10,043,188
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, 2018 was 6.1 years.
76
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,
2018
2017
2016
$ 80,016
73,058
159,329
$ 87,768
70,771
145,085
$ 88,654
65,749
144,752
48,765
90,840
(1,924)
881
450,965
(16,750)
26,772
82,096
11,076
(828)
422,740
(17,031)
11,177
70,577
6,852
2,676
390,437
(17,207)
$ 434,215
$ 405,709
$ 373,230
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 were
$10.7 million for the year ended December 31, 2016. There were no such losses included in other comprehensive income
(loss) for the years ended December 31, 2018 and 2017.
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)
f) The following table presents net investment gains (losses) and the change in net unrealized gains on available-for-sale
investments.
(dollars in thousands)
Realized gains:
Sales and maturities of fixed maturities
Sales of equity securities (1)
Sales and maturities of short-term investments
Other
Total realized gains
Realized losses:
Sales and maturities of fixed maturities
Sales of equity securities (1)
Sales and maturities of short-term investments
Other-than-temporary impairments
Other
Total realized losses
NET REALIZED INVESTMENT GAINS (LOSSES)
Change in fair value of equity securities:(1)
Change in fair value of equity securities sold during the period
Change in fair value of equity securities held at the end of the period
Change in fair value of equity securities(1)
Years Ended December 31,
2018
2017
2016
$
4,221
—
1,604
1,281
7,106
(5,768)
—
(10,545)
—
(2,767)
(19,080)
(11,974)
20,177
(445,799)
(425,622)
$
5,525
40,113
—
6,644
52,282
(1,983)
(1,830)
(699)
(7,589)
(596)
(12,697)
39,585
6,989
(51,877)
(44,888)
$ 5,160
70,177
—
1,415
76,752
(704)
(6,988)
(522)
(18,355)
(1,827)
(28,396)
48,356
(3,990)
20,781
16,791
Net investment gains (losses)
$ (437,596)
$ (5,303)
$ 65,147
Change in net unrealized gains on available-for-sale investments
included in other comprehensive income (loss):
Fixed maturities
Equity securities (1)
Short-term investments
NET INCREASE (DECREASE)
$ (297,158)
—
(2,288)
$ 89,741
1,035,793
(94)
$ (56,534)
398,752
(107)
$ (299,446)
$ 1,125,440
$ 342,111
(1) Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, equity securities are no longer classified as available-for-sale
with unrealized gains and losses recognized in other comprehensive income; rather, all changes in the fair value of equity securities are now
recognized in net income. Prior periods have not been restated to conform to the current presentation. See note 1. Prior to adopting ASU
No. 2016-01, the Company recorded certain investments in equity securities at estimated fair value with changes in fair value recorded in
net income.
g) Total restricted assets are included on the Company’s consolidated balance sheets as follows.
(dollars in thousands)
Investments
Restricted cash and cash equivalents
TOTAL
78
December 31,
2018
2017
$ 4,781,566
382,264
$ 4,672,073
302,387
$ 5,163,830
$ 4,974,460
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
December 31,
2018
2017
$ 4,780,613
383,217
$ 4,624,998
349,462
$ 5,163,830
$ 4,974,460
h) At December 31, 2018 and 2017, 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, 2018, the Company’s ten largest equity holdings represented $2.3 billion, or 41%, of the equity portfolio.
Investments in the property and casualty insurance industry represented $1.0 billion, or 18%, of the equity portfolio at
December 31, 2018. Investments in the property and casualty insurance industry included a $645.9 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
Notes receivable
Program services fees receivable
Employee stock loans receivable (see note 12(c))
Investment management and incentive fees receivable
Insurance proceeds receivable
Other
Allowance for doubtful receivables
RECEIVABLES
December 31,
2018
2017
$ 1,327,549
226,282
40,375
24,787
19,227
16,744
––
53,140
$ 1,281,366
181,666
528
22,767
18,499
5,796
39,196
31,410
1,708,104
(15,578)
1,581,228
(13,775)
$ 1,692,526
$ 1,567,453
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)
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,
2018
2017
2016
$ 465,569
1,024,888
(1,009,303)
(6,641)
$ 392,410
964,755
(894,353)
2,757
$ 352,756
823,840
(782,221)
(1,965)
DEFERRED POLICY ACQUISITION COSTS
$ 474,513
$ 465,569
$ 392,410
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,
2018
2017
2016
$ 1,009,303
768,208
$ 894,353
695,111
$ 782,221
714,904
UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES
$ 1,777,511
$ 1,589,464
$ 1,497,125
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,
$
2018
72,011
137,095
108,973
93,545
392,060
227,356
1,031,040
(479,498)
2017
$ 66,885
119,729
98,246
89,444
341,450
196,465
912,219
(410,602)
$ 551,542
$ 501,617
Depreciation and amortization expense of property and equipment was $80.9 million, $71.6 million and $64.8 million for the
years ended December 31, 2018, 2017 and 2016, respectively.
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
Insurance segment in Glen Allen, Virginia, London, England and in 63 other locations. The Company leases offices for the
80
Reinsurance segment primarily in Summit, New Jersey and Hamilton, Bermuda. The Company either owns or leases office,
clinic, manufacturing, warehouse and distribution facilities for the Markel Ventures segment in 96 locations, primarily in the
U.S. The Company also leases offices for its other operations in Hamilton, Bermuda, London, England and in 13 other locations.
The Company believes its 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. Prior year amounts have been recast for
consistency with the current year presentation.
(dollars in thousands)
Insurance
Reinsurance
January 1, 2017
Acquisitions (see note 2)
Foreign currency movements
and other adjustments
December 31, 2017 (2)
Acquisitions (see note 2)
Impairment of goodwill
Foreign currency movements
and other adjustments
Markel
Ventures
$ 237,767
186,194
Other (1)
$ 108,973
347,418
Total
$ 1,142,248
626,735
$ 122,745
––
––
1,020
1,526
8,481
$ 122,745
––
––
$ 424,981
73,174
––
$ 457,917
474,901
(91,910)
$ 1,777,464
548,075
(91,910)
$ 672,763
93,123
5,935
$ 771,821
––
––
(1,637)
––
(817)
6,800
4,346
DECEMBER 31, 2018 (2)
$ 770,184
$ 122,745
$ 497,338
$ 847,708
$ 2,237,975
(1) Amounts included in Other reflect the Company’s operations that are not included in a reportable segment.
(2) As of December 31, 2018, goodwill was net of accumulated impairment losses of $139.2 million, of which $91.9 million was in Other and
$47.3 million was in Markel Ventures. As of December 31, 2017, goodwill was net of accumulated impairment losses of $47.3 million, all of
which was included in Markel Ventures.
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. Total impairment of
goodwill for the years ended December 31, 2018 and 2016 was $91.9 million and $18.7 million, respectively. There was no
impairment of goodwill during 2017.
During the fourth quarter of 2018, the Company recorded a goodwill and intangible asset impairment charge at Markel CATCo
Investment Management Ltd. (MCIM) totaling $179.0 million. In light of governmental inquiries into loss reserves recorded in
late 2017 and early 2018 at Markel CATCo Re Ltd. (Markel CATCo Re), an unconsolidated subsidiary managed by MCIM, and
taking into consideration the departure of two senior MCIM executives and special redemption rights that are now being offered
to investors in the Markel CATCo Funds, as defined in note 16 and all of which is further described in note 18, the Company
concluded MCIM’s ability to maintain or raise capital has been adversely impacted. As a result, the Company performed an
assessment of the recoverability of goodwill and intangible assets at the MCIM reporting unit as of December 31, 2018. As a
result of the assessment, the Company reduced the carrying value of the goodwill and intangible assets of the MCIM reporting
unit to zero, which resulted in a goodwill impairment charge of $91.9 million and an intangible asset impairment charge of
$87.1 million, both of which were recorded to impairment of goodwill and intangible assets in the consolidated statement of
loss and comprehensive loss for the year ended December 31, 2018.
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 Company estimated the fair value of the reporting unit, and resulting goodwill impairment loss, primarily using an income
approach based on a discounted cash flow model. 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 the projected
cash flows. The cash flow projections used in the discounted cash flow model include management’s best estimate of future
growth and margins. Significant assumptions in the discounted cash flow model used to determine the fair value of the MCIM
reporting unit included the amount and timing of new investor capital being introduced, anticipated redemptions during 2019
in light of special redemption rights now being offered to investors in the Markel CATCo Funds, and other assumptions
impacting the expected level of management fees to be earned by MCIM.
The MCIM intangible asset impairment of $87.1 million primarily related to intangible assets associated with MCIM’s
investment management agreements with the Markel CATCo Funds. After determining that the intangible assets of MCIM
were unrecoverable, the Company estimated the fair value of the intangible assets using an income approach based on an excess
earnings model. In light of the special redemption rights that are now being offered to investors in the Markel CATCo Funds,
the cash flows supporting the intangible assets have been adversely impacted.
During the fourth quarter of 2016, the Company recorded a goodwill impairment charge of $18.7 million to impairment of
goodwill and intangible assets for one of Markel Ventures’ industrial products 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 the cash flow projections, at that time, yielded positive cash flows and earnings
in the long-term, they were insufficient to support the carrying value of the reporting unit due to the unfavorable impact of
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 was reduced to zero.
The following table presents the components of intangible assets.
(dollars in thousands)
Customer relationships
Investment management agreements
Broker relationships
Trade names
Technology
Agent relationships
Insurance licenses
Renewal rights
Other
December 31,
2018
2017
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
$ 953,739
441,000
204,367
193,154
109,208
92,000
74,635
21,053
107,441
$ (204,261)
––
(78,559)
(62,827)
(47,090)
(10,175)
––
(18,272)
(49,217)
$ 941,477
98,000
184,959
164,335
94,712
92,000
70,385
19,514
111,633
$ (161,797)
(14,000)
(69,677)
(59,660)
(44,489)
(4,042)
––
(17,681)
(49,988)
TOTAL
$ 2,196,597
$ (470,401)
$ 1,777,015
$ (421,334)
During 2018, the Company recorded intangible asset impairment charges of $107.3 million, including $87.1 million related to
MCIM, as described above, and $14.9 million related to one of the Markel Ventures industrial products businesses. See note 18.
82
Amortization of intangible assets was $115.9 million, $80.8 million and $68.5 million for the years ended December 31, 2018,
2017 and 2016, respectively. Amortization of intangible assets is estimated to be $140.3 million for 2019, $137.2 million for
2020, $133.5 million for 2021, $130.1 million for 2022 and $128.4 million for 2023. Indefinite-lived intangible assets were
$92.4 million at December 31, 2018 and $88.2 million at December 31, 2017.
For the year ended December 31, 2018, the Company acquired $608.3 million of intangible assets, of which $604.1 million is
amortizable. The definite-lived intangible assets acquired are expected to be amortized over a weighted average period of
15 years. The definite-lived intangible assets acquired during 2018 include investment management relationships, customer
relationships, trade names, broker relationships, technology and other intangible assets, which are expected to be amortized
over a weighted average period of 16, 16, 15, 12, 6 and 5 years, respectively.
8. Income Taxes
Income (loss) before income taxes includes the following components.
(dollars in thousands)
Domestic operations
Foreign operations
Years Ended December 31,
2018
2017
2016
$ 99,373
(107,228)
$ 337,704
(250,409)
$ 288,905
341,015
INCOME (LOSS) BEFORE INCOME TAXES
$
(7,855)
$ 87,295
$ 629,920
Income tax expense (benefit) includes the following components.
(dollars in thousands)
Current:
Domestic
Foreign
Years Ended December 31,
2018
2017
2016
$ 77,936
41,833
$ (19,255)
29,882
$ 57,916
48,203
Total current tax expense
119,769
10,627
106,119
Deferred:
Domestic
Foreign
Total deferred tax expense (benefit)
INCOME TAX EXPENSE (BENEFIT)
(77,255)
79,984
2,729
(222,427)
(101,663)
(324,090)
19,991
43,367
63,358
$ 122,498
$ (313,463)
$ 169,477
Foreign income tax expense includes U.S. income tax expense on foreign operations, which includes U.S. income tax on the
Company’s United Kingdom (U.K.) and 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.
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)
The Company made income tax payments of $63.1 million, $70.2 million and $142.2 million in 2018, 2017 and 2016,
respectively. Income taxes payable were $83.7 million and $51.3 million at December 31, 2018 and 2017, respectively, and were
included in other liabilities on the consolidated balance sheets. Income taxes receivable were $49.3 million and $64.3 million at
December 31, 2018 and 2017, 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.
income tax law, most of which were effective January 1, 2018. 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 was considered provisional at December 31, 2017. The one-time
benefit from the TCJA was 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. corporation tax rate, partially offset by the tax on the deemed repatriation of foreign earnings. In 2018,
the Company completed its determination of the accounting for the TCJA, which resulted in an additional tax benefit of
$5.7 million.
After extensive discussions and analysis of the Company’s overall capital and tax profile resulting from the enactment of the
TCJA, in 2018 the Company decided to elect to treat its most significant U.K. subsidiaries as domestic corporations for U.S. tax
purposes. As a result, the earnings and profits of those subsidiaries are no longer considered to be indefinitely reinvested and the
Company recorded a one-time deferred tax charge of $103.3 million related to the book and tax basis differences attributable to
those subsidiaries. The Company continues to be indefinitely reinvested in its other foreign subsidiaries, with the exception of
certain Bermuda-based subsidiaries. As of December 31, 2018, the cumulative earnings of the Company’s foreign subsidiaries
that are considered indefinitely reinvested, and have not previously been subject to tax in the U.S., are not material.
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)
2018
2017
2016
Income taxes at U.S. corporate tax rate
Increase (decrease) resulting from:
Change in tax status of U.K. subsidiaries
Nondeductible loss on investments managed by MCIM
Foreign operations
Tax-exempt investment income
TCJA
Tax credits
Stock based compensation
Other
$ (1,650)
$ 30,553
$ 220,472
103,281
26,552
4,951
(18,927)
(5,699)
(3,617)
(2,635)
20,242
—
16,231
37,207
(41,565)
(339,899)
(10,236)
(9,001)
3,247
—
—
4,672
(39,710)
—
(13,294)
(5,411)
2,748
INCOME TAX EXPENSE (BENEFIT)
$ 122,498
$ (313,463)
$ 169,477
84
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
Unearned premiums recognized for income tax purposes
Life and annuity benefits
Net operating loss carryforwards
Tax credit 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
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,
2018
2017
$ 164,497
85,952
78,370
46,662
39,877
30,308
39,763
485,429
(36,286)
449,143
590,250
124,953
89,716
90,269
895,188
$ 144,761
74,282
77,945
29,252
48,938
23,167
60,995
459,340
(25,225)
434,115
603,523
171,681
90,826
73,664
939,694
$ 446,045
$ 505,579
The net deferred tax liability at December 31, 2018 and 2017 was included in other liabilities on the consolidated balance
sheets.
At December 31, 2018, the Company had tax credit carryforwards of $39.9 million. The earliest any of these credits will expire
is 2028.
At December 31, 2018, the Company also had net operating losses of $40.7 million that can be used to offset future taxable
income in the U.S. The Company’s ability to use the majority of these losses expires between the years 2028 and 2037. At
December 31, 2018, certain branch operations in Europe and a wholly owned subsidiary in Brazil had net operating losses of
$121.7 million that can be used to offset future income in their local jurisdictions. The Company’s ability to use $31.4 million of
these losses expires between the years 2020 and 2027. The remaining losses are not subject to expiration. As discussed below,
the deferred tax assets related to losses at the Company’s European branches, its Brazilian subsidiary and certain U.S.
subsidiaries are offset by valuation allowances.
The Company believes that it is more likely than not that it will realize $449.1 million of gross deferred tax assets, including net
operating losses at December 31, 2018, 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 $36.3 million at December 31, 2018 that offsets the deferred tax assets primarily related
to losses incurred at European branches of one of the Company’s U.K. subsidiaries, at one of the Company’s Brazilian
subsidiaries and at certain U.S. subsidiaries.
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)
At December 31, 2018, the Company did not have any material unrecognized tax benefits. The Company does not anticipate
any changes in unrecognized tax benefits during 2019 that would have a material impact on the Company’s income tax
provision.
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, 2015.
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,
2018
2017
2016
$ 8,964,945
(69,119)
$ 8,108,717
110,079
$ 8,235,288
(129,692)
8,895,826
8,218,796
8,105,596
3,371,699
(551,040)
3,367,223
(497,627)
2,555,902
(493,495)
Total incurred losses and loss adjustment expenses
2,820,659
2,869,596
2,062,407
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
Net reserves for losses and loss adjustment expenses, end of year
Reinsurance recoverable on unpaid losses
666,515
1,835,027
2,501,542
(500)
––
671,112
1,513,580
532,140
1,529,206
2,184,692
2,061,346
3,752
2,060
57,493
––
9,214,443
5,062,036
8,964,945
8,108,717
4,619,336
2,006,945
GROSS RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES, END OF YEAR
$ 14,276,479
$ 13,584,281
$ 10,115,662
In 2018, underwriting results included $287.3 million of underwriting loss from Hurricanes Florence and Michael, Typhoon Jebi
and wildfires in California (2018 Catastrophes). The underwriting loss on the 2018 Catastrophes was comprised of $292.8
million of estimated net losses and loss adjustment expenses partially offset by $5.4 million of net assumed reinstatement
premiums. The estimated net losses and loss adjustment expenses on the 2018 Catastrophes were net of estimated ceded losses
of $244.1 million.
Incurred losses and loss adjustment expenses in 2018 included $551.0 million of favorable development on prior years’ loss
reserves, which included $424.1 million of favorable development on the Company’s general liability, workers’ compensation,
professional liability and marine and energy product lines within the Insurance segment and surety and marine and energy
product lines within the Reinsurance segment.
86
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 year
ended December 31, 2017 were net of estimated ceded losses of $490.3 million.
Incurred losses and loss adjustment expenses in 2017 included $497.6 million of favorable development on prior years’ loss
reserves, which included $422.9 million of favorable development on the Company’s general liability, marine and energy
product lines, professional liability, and workers’ compensation product lines as well as personal lines business within the
Insurance segment and property product lines within the Reinsurance segment. Favorable development in 2017 was partially
offset by $85.0 million of adverse development on our auto product line resulting from a decrease in the discount rate, known as
the Ogden Rate, used to calculate lump sum awards in U.K. bodily injury cases.
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, 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 and comprehensive income. 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 2016, incurred losses and loss adjustment expenses included $493.5 million of favorable development on prior years’ loss
reserves, which included $418.0 million of favorable development on the Company’s general liability, property and marine and
energy product lines within the Insurance segment and property product lines in the Reinsurance segment, as actual claims
reporting and 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 Insurance segment.
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 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.
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 held for a runoff book of U.K. motor business. Additionally, reserves assumed in connection with an
acquisition are recorded at fair value at the acquisition date. 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.
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)
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 both December 31, 2018 and 2017.
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 estimate for each line of business represents the starting point 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.
88
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 undiscounted loss development information, by accident year, for the Company’s 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, 2018. 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 2017 is presented as supplementary information.
Incurred losses in both our Insurance and Reinsurance segments generally remain outstanding more than seven 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.
Additionally, reserves for the Company’s international operations 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 U.S. Dollars using the exchange rates in effect at December 31, 2018.
The difference between the segment loss development implied by the tables for the year ended December 31, 2018 and actual
losses and loss adjustment expenses on prior accident years for the Insurance and Reinsurance segments for the year ended
December 31, 2018 is primarily attributed to the fact that amounts presented in these tables exclude amounts attributed to the
2011 and prior accident years, exclude unallocated loss adjustment expenses and exclude amounts attributable to reserve
discounting and fair value adjustments recorded in conjunction with acquisitions, as well as differences in the presentation of
foreign currency movements, as described above.
The Insurance segment table below also includes claim frequency information, by accident year. 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.
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.
In 2013, the Company completed the acquisition of Alterra Capital Holdings Limited (Alterra), the results of which are included
in both of the Company’s reportable segments. Ultimate incurred losses and loss adjustment expenses, net of reinsurance as of
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 due in part to
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. Following the
acquisition, ongoing business attributable to Alterra was integrated with the Company’s other insurance operations and is not
separately tracked.
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)
Insurance Segment
Ultimate Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
(in thousands)
Accident
Unaudited
As of December 31,
Total of
Incurred-but-
Not-Reported
Liabilities, Net of
Reinsurance
Cumulative
Number of
Reported Claims
As of
December 31,
Year
2012
2013
2014
2015
2016
2017
2018
December 31, 2018
1,735,667
2012 $1,369,219 $1,609,802 $1,489,026 $1,427,255 $1,395,103 $1,361,513 $ 1,348,062 $ 119,585
200,744
2013
213,237
2014
291,364
2015
378,681
2016
691,736
2017
1,466,264
2018
1,387,804
1,522,132
1,530,354
1,686,374
2,160,771
2,452,747
1,428,733
1,570,428
1,585,447
1,786,959
2,326,966
1,462,652
1,627,960
1,710,271
1,871,455
1,525,750
1,695,698
1,783,064
1,694,879
1,862,947
127
87
78
84
89
116
147
Total
$ 12,088,244
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Unaudited
Accident
As of December 31,
As of
December 31,
Year
2012
2013
2014
2015
2016
2017
2018
$ 567,450
271,439
$ 780,067
571,548
331,626
2012 $ 233,371
2013
2014
2015
2016
2017
2018
Total
779,023
657,742
322,633
$ 937,643 $1,052,859 $1,117,221 $ 1,150,793
1,099,985
1,167,598
1,040,377
981,920
990,931
496,812
1,037,635
1,062,211
876,509
752,606
438,289
949,370
894,470
665,112
372,182
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
$ 6,928,416
605,610
$ 5,765,438
Ultimate incurred losses and allocated loss adjustment expenses as of December 31, 2013 for the Insurance segment include
$256.4 million and $313.3 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 as of December 31, 2013 include
$36.8 million and $29.5 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.
Variability in claim counts is primarily attributable to claim counts associated with a personal lines product with high claim
frequency and low claim severity. Cumulative reported claims for the 2012, 2013, 2017 and 2018 accident years include
66 thousand, 17 thousand, 24 thousand and 46 thousand, respectively, of claim counts associated with this product. 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 Insurance segment.
90
Reinsurance Segment
Ultimate Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
(in thousands)
Accident
Unaudited
As of December 31,
Total of
Incurred-but-
Not-Reported
Liabilities, Net of
Reinsurance
As of
December 31,
Year
2012
2013
2014
2015
2016
2017
2018
Total
2012
2013
2014
2015
2016
2017
2018
December 31, 2018
$ 72,903
$ 550,343
586,074
$ 507,023
578,994
577,123
$ 485,374
547,828
564,720
528,076
$ 457,038
534,148
536,247
514,050
523,958
$ 454,839
543,963
578,688
531,854
533,526
906,216
$ 446,722
506,609
556,775
522,783
531,769
939,604
760,161
$ 4,264,423
$ 62,700
78,266
121,489
197,446
199,881
403,107
543,670
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Unaudited
Accident
As of December 31,
As of
December 31,
2012
2013
2014
2015
2016
2017
2018
$ 4,049
$ 64,460
71,503
$ 128,769
155,515
97,918
$ 183,943
209,893
158,105
63,924
$ 231,541
268,761
226,883
133,932
79,383
$ 263,811
301,714
275,278
207,985
169,877
158,049
Year
2012
2013
2014
2015
2016
2017
2018
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
$ 288,772
331,630
312,296
259,366
241,072
359,659
87,614
$ 1,880,409
650,117
$ 3,034,131
Ultimate incurred losses and allocated loss adjustment expenses as of December 31, 2013 for the Reinsurance segment include
$474.2 million and $536.2 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 as of December 31, 2013 include
$52.6 million and $68.9 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.
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)
The following table presents supplementary information about average historical claims duration as of December 31, 2018
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
Insurance
Reinsurance
1
20.3%
12.6%
2
23.1%
15.5%
3
14.7%
13.0%
4
11.4%
10.6%
5
7.3%
7.9%
6
4.6%
6.6%
7
2.5%
5.6%
The following table reconciles the net incurred and paid loss development tables to the liability for losses and loss adjustment
expenses in the consolidated balance sheet.
(dollars in thousands)
Net outstanding liabilities
Insurance segment
Reinsurance segment
Other
Program services
Liabilities for unpaid losses and loss adjustment expenses, net of reinsurance
Reinsurance recoverable on unpaid losses
Insurance segment
Reinsurance segment
Other
Program services
Total reinsurance recoverable on unpaid losses
Unallocated loss adjustment expenses
Unamortized discount, net of acquisition fair value adjustments, included
in unpaid losses and loss adjustment expenses
TOTAL GROSS LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
December 31, 2018
$ 5,765,438
3,034,131
204,069
2,561
9,006,199
1,965,565
415,900
166,505
2,514,066
5,062,036
239,753
(31,509)
208,244
$ 14,276,479
c) The Company’s exposure to asbestos and environmental (A&E) claims primarily 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 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.
Development on asbestos and environmental loss reserves is monitored separately from the Company’s ongoing underwriting
operations and are not included in a reportable segment.
92
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
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,
2018
2017
2016
$ 104,661
(305)
$ 111,604
6,827
$ 132,869
––
104,356
––
(21,308)
83,048
164,663
118,431
659
(14,429)
104,661
169,866
132,869
(5,277)
(15,988)
111,604
212,300
END OF YEAR
$ 247,711
$ 274,527
$ 323,904
At December 31, 2018, asbestos-related reserves were $188.3 million and $63.4 million on a gross and net basis, respectively.
Net reserves for reported claims for A&E exposures were $74.4 million at December 31, 2018. Net incurred but not reported
reserves for A&E exposures were $8.7 million at December 31, 2018. Inception-to-date net paid losses and loss adjustment
expenses for A&E related exposures totaled $647.7 million at December 31, 2018.
The Company’s reserves for losses and loss adjustment expenses related to A&E exposures represent management’s best
estimate of ultimate settlement values based on the Company’s statistical analysis of these reserves, which 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, 2018 are adequate.
10. Life and Annuity Benefits
The following table presents life and annuity benefits.
(dollars in thousands)
Life
Annuities
Accident and health
TOTAL
December 31,
2018
$ 122,798
827,773
50,882
$ 1,001,453
2017
$ 127,208
885,984
58,920
$ 1,072,112
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
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)
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, 2018.
As of December 31, 2018, the largest life and annuity benefits reserve for a single contract was 33.1% of the total.
No annuities included in life and annuity benefits in the consolidated balance sheet are subject to discretionary withdrawal.
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,
2018
2017
7.125% unsecured senior notes, due September 30, 2019, interest payable semi-annually,
net of unamortized discount of $142 in 2018 and $332 in 2017
$ 234,640
$ 234,411
6.25% unsecured senior notes, due September 30, 2020, interest payable semi-annually,
net of unamortized premium of $17,213 in 2018 and $26,618 in 2017
367,213
376,616
5.35% unsecured senior notes, due June 1, 2021, interest payable semi-annually,
net of unamortized discount of $499 in 2018 and $706 in 2017
249,417
249,176
4.90% unsecured senior notes, due July 1, 2022, interest payable semi-annually,
net of unamortized discount of $978 in 2018 and $1,257 in 2017
348,864
348,540
3.625% unsecured senior notes, due March 30, 2023, interest payable semi-annually,
net of unamortized discount of $855 in 2018 and $1,056 in 2017
248,988
248,749
3.50% unsecured senior notes, due November 1, 2027, interest payable semi-annually,
net of unamortized discount of $2,298 in 2018 and $2,558 in 2017
297,035
296,728
7.35% unsecured senior notes, due August 15, 2034, interest payable semi-annually,
net of unamortized discount of $1,074 in 2018 and $1,143 in 2017
128,715
128,642
5.0% unsecured senior notes, due March 30, 2043, interest payable semi-annually,
net of unamortized discount of $5,431 in 2018 and $5,655 in 2017
244,269
244,033
5.0% unsecured senior notes, due April 5, 2046, interest payable semi-annually,
net of unamortized discount of $6,664 in 2018 and $6,909 in 2017
492,486
492,219
4.30% unsecured senior notes, due November 1, 2047, interest payable semi-annually,
net of unamortized discount of $4,278 in 2018 and $4,451 in 2017
Other debt, at various interest rates ranging from 1.7% to 6.3%
SENIOR LONG-TERM DEBT AND OTHER DEBT
294,975
102,975
294,834
185,282
$ 3,009,577
$ 3,099,230
The Company’s 6.25% unsecured senior notes were issued by Alterra Finance LLC, which is a wholly owned indirect subsidiary
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). In 2018 and 2017, the Company repaid $44.5 million and $84.3 million,
respectively, of debt assumed in connection with acquisitions.
94
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 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 for 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.
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 $78.1 million and $78.3 million associated
with its Markel Ventures subsidiaries as of December 31, 2018 and 2017, respectively. 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 note payable of $24.9 million and $62.5 million at December 31, 2018 and 2017, respectively,
that was delivered as part of the consideration provided for the investment held by the Markel Diversified Fund, as discussed
in note 16.
The estimated fair value of the Company’s senior long-term debt and other debt was $3.0 billion and $3.4 billion at
December 31, 2018 and 2017, respectively.
The following table summarizes the future principal payments due at maturity on senior long-term debt and other debt as
of December 31, 2018.
Years Ending December 31,
(dollars in thousands)
2019
2020
2021
2022
2023
2024 and thereafter
Total principal payments
Net unamortized discount
Net unamortized debt issuance costs
SENIOR LONG-TERM DEBT AND OTHER DEBT
$ 288,538
356,585
281,287
356,315
250,671
1,484,896
$ 3,018,292
(5,005)
(3,710)
$ 3,009,577
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,
2018) on the unused portion of the facility based on the Company’s debt to equity leverage ratio as calculated under the credit
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)
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, 2018 and 2017, the Company had no borrowings outstanding under this revolving credit facility.
This facility expires in August 2019.
On February 5, 2019, the Company amended the revolving credit facility to increase its leverage ratio covenant from
“0.375 to 1.00” to “0.40 to 1.00” effective on and after December 31, 2018. This change addresses the impact to the
consolidated net worth calculation under the facility from the purchase of Nephila in November 2018 and 2018 Catastrophe
and investment losses that occurred in the fourth quarter of 2018. Under the facility, consolidated net worth serves as the
denominator for the leverage ratio and excludes, among other things, the net worth associated with the Nephila acquisition.
The change also provides additional flexibility through the maturity date of the facility on August 1, 2019 for unanticipated
future developments, including additional catastrophe events, or greater than anticipated effects from known events.
At December 31, 2018, the Company was in compliance with all covenants contained in its revolving credit facility as
amended. 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 $155.4 million, $141.3 million and $135.4 million in interest on its senior long-term debt and other debt
during the years ended December 31, 2018, 2017 and 2016, respectively.
12. Shareholders’ Equity
a) The Company had 50,000,000 shares of no par value common stock authorized of which 13,887,711 shares and 13,903,526
shares were issued and outstanding at December 31, 2018 and 2017, 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, 2018 or 2017.
In May 2018, the Company’s Board of Directors approved a new share repurchase program (the 2018 Program) to replace the
previous share repurchase program that was approved by the Board of Directors in November 2013 (the 2013 Program). The
2018 Program provides for the repurchase of up to $300 million of common stock and has no expiration date but may be
terminated by the Board of Directors at any time.
During the year ended December 31, 2018, the Company repurchased an aggregate of 35,174 shares of common stock at a cost
of $39.0 million, including 15,509 shares repurchased under the 2013 Program at a cost of $17.6 million, and 19,665 shares
repurchased under the 2018 Program at a cost of $21.4 million. In total, the Company repurchased 199,244 shares of common
stock under the 2013 Program at a cost of $175.6 million.
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.
96
(in thousands, except per share amounts)
2018
2017
2016
Net income (loss) to shareholders (1)
Adjustment of redeemable noncontrolling interests
$ (128,180)
(4,828)
$ 395,269)
(33,738)
$ 455,689)
(15,472)
Adjusted net income (loss) to shareholders
$ (133,008)
$ 361,531)
$ 440,217)
Years Ended December 31,
Basic common shares outstanding
Dilutive potential common shares from options
Dilutive potential common shares from restricted stock units and
restricted stock
Diluted shares outstanding
Basic net income (loss) per share
Diluted net income (loss) per share (2)
13,923)
––)
––)
13,923)
$ (9.55)
$ (9.55)
13,964)
1)
14,013)
4)
41)
61)
14,006)
14,078)
$ 25.89)
$ 31.41)
$ 25.81)
$ 31.27)
(1) Effective January 1, 2018, the Company adopted ASU No. 2016-01 and equity securities are no longer classified as available-for-sale with
unrealized gains and losses recognized in other comprehensive income, rather, changes in the fair value of equity securities are now
recognized in net income. Prior periods have not been restated to conform to the current presentation. See note 1.
(2) The impact of restricted stock units and restricted stock of 25 thousand shares was excluded from the computation of diluted earnings
per share for the year ended December 31, 2018 because the effect would have been anti-dilutive.
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 105,283 and 113,690 shares were
available for purchase as of December 31, 2018 and 2017, respectively. At December 31, 2018 and 2017, loans outstanding under
the plans, which are included in receivables on the consolidated balance sheets, totaled $19.2 million and $18.5 million,
respectively.
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, 2018, there were 220,831 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
2018, the Company awarded 11,214 restricted stock units to associates and executive officers based on performance conditions
being met.
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)
Restricted stock units also are awarded to associates to assist the Company in securing or retaining the services of key
employees. During 2018, the Company awarded 2,102 restricted stock units to associates as a hiring or retention incentive.
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 2018, the Company awarded 990 shares of restricted stock to its non-employee directors. The shares awarded to
non-employee directors will vest in 2019.
The following table summarizes nonvested share-based awards.
Nonvested awards at January 1, 2018
Granted
Vested
Forfeited
Nonvested awards at December 31, 2018
Number
of Awards
Weighted Average
Grant-Date
Fair Value
31,518
14,306
(24,535)
(416)
20,873
$ 808.63
1,121.68
779.65
914.94
$ 1,042.83
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 2018, 2017 and 2016 was $1,121.68, $979.23 and $878.03,
respectively. As of December 31, 2018, unrecognized compensation cost related to nonvested share-based awards was $8.8
million, which is expected to be recognized over a weighted average period of 1.8 years. The fair value of the Company’s share-
based awards that vested during 2018, 2017 and 2016 was $19.1 million, $28.8 million and $29.8 million, respectively.
98
13. Other Comprehensive Income
Other comprehensive income includes net holding gains 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 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 (loss) by component, net of taxes and
noncontrolling interests.
(dollars in thousands)
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
$ 1,472,762
$ (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
Cumulative effect of adoption of ASU No. 2016-01
Cumulative effect of adoption of ASU No. 2018-02
January 1, 2018
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other
comprehensive income (1)
(2,597,976)
401,539
281,536
(241,325)
2,492
1,314
(70,197)
(16,455)
7,849
—
Total other comprehensive income (loss)
(233,476)
(16,455)
—
—
(58,399)
—
2,341
2,341
(2,595,484)
402,853
152,940
(257,780)
10,190
(247,590)
December 31, 2018
$ 48,060
$ (86,652)
$ (56,058)
$ (94,650)
(1) Effective January 1, 2018, the Company adopted ASU No. 2016-01 and equity securities are no longer classified as available-for-sale with
unrealized gains and losses recognized in other comprehensive income, rather, changes in the fair value of equity securities are now
recognized in net income. Prior periods have not been restated to conform to the current presentation. See note 1.
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)
The following table summarizes the tax expense (benefit) associated with each component of other comprehensive
income (loss).
Years Ended December 31,
(dollars in thousands)
2018
2017
2016
Change in net unrealized gains on available-for-sale investments: (1)
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 (losses)
included in net income (loss)
Change in net unrealized gains on available-for-sale investments
Change in foreign currency translation adjustments
Change in net actuarial pension loss
TOTAL
$ (68,056)
$ 372,469
$ 112,399
––
––
6
2,086
(65,970)
1,523
622
(10,072)
362,397
28
1,284
(12,462)
99,943
1,037
(4,192)
$ (63,825)
$ 363,709
$ 96,788
(1) Effective January 1, 2018, the Company adopted ASU No. 2016-01 and equity securities are no longer classified as available-for-sale with
unrealized gains and losses recognized in other comprehensive income, rather, changes in the fair value of equity securities are now
recognized in net income. Prior periods have not been restated to conform to the current presentation. See note 1.
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:(1)
Other-than-temporary impairment losses
Net realized investment gains (losses), excluding other-than-temporary
impairment losses
Total before income taxes
Income taxes
Years Ended December 31,
2018
2017
2016
$
––
$ (7,589)
$ (18,355)
(9,935)
(9,935)
2,086
41,957
34,368
(10,072)
64,345
45,990
(12,462)
Reclassification of unrealized holding gains, net of taxes
$ (7,849)
$ 24,296
$ 33,528
Net actuarial pension loss:
Underwriting, acquisition and insurance expenses
Income taxes
$ (2,963)
622
$ (3,815)
648
$ (1,951)
351
Reclassification of net actuarial pension loss, net of taxes
$ (2,341)
$ (3,167)
$ (1,600)
(1) Effective January 1, 2018, the Company adopted ASU No. 2016-01 and equity securities are no longer classified as available-for-sale with
unrealized gains and losses recognized in other comprehensive income, rather, changes in the fair value of equity securities are now
recognized in net income. Prior periods have not been restated to conform to the current presentation. See note 1.
14. Fair Value Measurements
ASC 820, 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.
100
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 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.
Investments available-for-sale and equity securities. Equity securities and available-for-sale investments are recorded at fair
value on a recurring basis. Available-for-sale investments include fixed maturities 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 and equity securities are 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 certain insurance-linked securities funds managed by MCIM that are not traded on an active
exchange, as further described and defined in note 16 (the Markel CATCo Funds), and are valued using unobservable inputs.
Fair value for investments available-for-sale and equity securities 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.
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)
Due to the significance of unobservable inputs required in measuring the fair value of the Company’s investments in the Markel
CATCo Funds, these investments are classified as Level 3 within the fair value hierarchy. 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 Markel CATCo 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 Markel CATCo Funds in exchange for notes
receivable, rather than cash, which is excluded from NAV. The determination of fair value of the securities also considers
external market data, including the trading price relative to its NAV of CATCo Reinsurance Opportunities Fund Ltd. (CROF), a
comparable security traded on a market operated by the London Stock Exchange and on the Bermuda Stock Exchange further
described in note 16. Generally, the Company’s investments in the Markel CATCo Funds are redeemable annually as of January
1st of each calendar year. However, in years with significant loss events on the underlying securitized reinsurance contracts, as
was the case in 2018 and 2017, certain investments may be restricted from redemption for up to three years.
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.
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
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:
Fixed maturities, available-for-sale:
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, available-for-sale
Equity securities:
Insurance, banks and other financial institutions
Industrial, consumer and all other
Total equity securities
Short-term investments, available-for-sale
December 31, 2018
Level 1
Level 2
Level 3
Total
$ —
—
$ 246,642
359,322
$ — $ 246,642
359,322
—
—
—
—
—
—
—
—
1,876,811
3,790,406
5,667,217
981,616
4,352,930
1,559,604
1,650,199
880,172
19,408
974,911
10,043,188
—
—
—
96,080
—
—
—
—
—
—
—
53,728
—
53,728
—
4,352,930
1,559,604
1,650,199
880,172
19,408
974,911
10,043,188
1,930,539
3,790,406
5,720,945
1,077,696
Total investments
$ 6,648,833
$ 10,139,268
$ 53,728
$ 16,841,829
102
(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: (1)
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 (1)
$ 7,864,787
$ 10,035,895
$ 168,809
$ 18,069,491
(1) Effective January 1, 2018, the Company adopted ASU No. 2016-01 and equity securities are no longer classified as available-for-sale.
Prior periods have not been restated to conform to the current presentation. See note 1.
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
Net investment losses on Level 3 investments (1)
Transfers into Level 3
Transfers out of Level 3
Equity securities, end of period
2018
2017
$ 168,809
28,900
(35,335)
(108,646)
—
—
$ 191,203
56,250
(26,674)
(51,970)
—
—
$ 53,728
$ 168,809
(1) Included in change in fair value of equity securities in the consolidated statements of income (loss) and comprehensive income (loss) for the
years ended December 31, 2018 and 2017.
Net investment losses related to the Company’s investments in Markel CATCo Funds primarily resulted from decreases in the
NAV of these funds in both 2018 and 2017.
The Company also holds an investment in CROF which is a Level 1 investment included in equity securities on the Company’s
consolidated balance sheets. CROF is managed by MCIM and invests substantially all of its assets in one of the unconsolidated
Markel CATCo Funds. Net investment losses in 2018 also included a loss of $16.0 million related to the Company’s investment
in CROF. In 2017, the Company’s investment in CROF was considered an available-for-sale security, with changes in fair value
included in other comprehensive income. Other comprehensive income for 2017 included a loss of $5.8 million attributable to
the Company’s investment in CROF. At December 31, 2018 and 2017, the fair value of the Company’s investment in CROF
was $4.5 million and $20.5 million, respectively.
There were no transfers into or out of Level 1 and Level 2 during 2018 or 2017.
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, 2018 and 2017.
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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)
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 both December 31, 2018 and 2017, balances recoverable from the ten largest
reinsurers, by group, represented 61% of the reinsurance recoverable on paid and unpaid losses, before considering reinsurance
allowances and collateral. At December 31, 2018, the largest reinsurance balance was due from Fairfax Financial Group and
represented 9% of the reinsurance recoverable on paid and unpaid losses, before considering reinsurance allowances and collateral.
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 general agent.
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, 2018 and 2017, balances recoverable from the ten largest
reinsurers, by group, represented 75% and 79%, respectively, of the reinsurance recoverable on paid and unpaid losses, before
considering reinsurance allowances and collateral. At December 31, 2018, the largest reinsurance balance was due from Fosun
International Holdings Ltd. and represented 24% of the reinsurance recoverable on paid and unpaid losses, before considering
reinsurance allowances and collateral.
The following tables summarize the effect of reinsurance and retrocessional reinsurance on premiums written and earned.
(dollars in thousands)
Direct
Assumed
Ceded
Net Premiums
Years Ended December 31,
2018
Underwriting:
Written
Earned
Program services:
Written
Earned
Consolidated:
Written
Earned
104
$ 4,562,256
$ 4,384,562
$ 1,236,740
$ 1,291,032
$ (1,013,406)
$ (964,549)
$ 4,785,590
$ 4,711,045
2,022,548
1,850,656
42,925
28,581
(2,063,485)
(1,878,222)
1,988
1,015
$ 6,584,804
$ 1,279,665
$ (3,076,891)
$ 4,787,578
$ 6,235,218
$ 1,319,613
$ (2,842,771)
$ 4,712,060
(dollars in thousands)
Direct
Assumed
Ceded
Net Premiums
Years Ended December 31,
2017
Underwriting:
Written
Earned
Program services:
Written
Earned
Consolidated:
Written
Earned
$ 3,919,602
$ 3,777,335
$ 1,333,505
$ 1,286,043
$ (835,320)
$ (815,400)
$ 4,417,787
$ 4,247,978
252,865
291,287
988
1,352
(253,853)
(292,639)
—
—
$ 4,172,467
$ 1,334,493
$ (1,089,173)
$ 4,417,787
$ 4,068,622
$ 1,287,395
$ (1,108,039)
$ 4,247,978
Years Ended December 31,
2016
(dollars in thousands)
Direct
Assumed
Ceded
Net Premiums
Underwriting:
Written
Earned
Program services:
Written
Earned
Consolidated:
Written
Earned
$ 3,560,635
$ 3,506,687
$ 1,236,010
$ 1,176,205
$ (795,625)
$ (817,022)
$ 4,001,020
$ 3,865,870
—
—
—
—
—
—
—
—
$ 3,560,635
$ 1,236,010
$ (795,625)
$ 4,001,020
$ 3,506,687
$ 1,176,205
$ (817,022)
$ 3,865,870
Substantially all of the premium written and earned in the Company’s program services business for the year ended December 31,
2018 and 2017 was ceded. The percentage of consolidated ceded earned premiums to gross earned premiums was 38%, 21% and
17% for the years ended December 31, 2018, 2017 and 2016, respectively. The percentage of consolidated assumed earned
premiums to net earned premiums was 28%, 30% and 30% for the years ended December 31, 2018, 2017 and 2016, respectively.
Substantially all of the incurred losses and loss adjustment expenses in the Company’s program services business, which totaled
$1.3 billion, were ceded. Incurred losses and loss adjustment expenses for the Company’s underwriting operations were net of ceded
incurred losses and loss adjustment expenses of $710.5 million, $856.8 million and $362.0 million for the years ended December 31,
2018, 2017 and 2016, respectively. The estimated net losses and loss adjustment expenses on the 2018 and 2017 Catastrophes were
net of estimated ceded losses of $244.1 million and $490.3 million, respectively.
16. Variable Interest Entities
MCIM, a wholly-owned consolidated subsidiary of the Company, is an insurance-linked securities investment fund manager
and reinsurance manager headquartered in Bermuda. Results attributable to MCIM are not included in a reportable segment.
MCIM serves as the insurance manager for Markel CATCo Re, a Bermuda Class 3 reinsurance company, and as the investment
manager for Markel CATCo Reinsurance Fund Ltd., a Bermuda exempted mutual fund company comprised of multiple
segregated accounts (Markel CATCo Funds). MCIM also serves as the investment manager to CATCo Reinsurance
Opportunities Fund Ltd. (CROF), a limited liability closed-end Bermuda exempted mutual fund company which invests
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substantially all of its assets in Markel CATCo Reinsurance Fund Ltd. The Markel CATCo Funds issue multiple classes of
nonvoting, redeemable preference shares to investors and the Markel CATCo Funds are primarily invested in nonvoting
preference shares of Markel CATCo Re. The underwriting results of Markel CATCo Re are attributed to the Markel CATCo
Funds through those nonvoting preference shares.
The Markel CATCo Funds and Markel CATCo Re 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 Markel CATCo Funds or Markel CATCo Re, and therefore does not consolidate these entities, 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 and incentive fees earned by the Company from
unconsolidated Markel CATCo Funds were $66.2 million, $28.7 million and $56.5 million for the years ended December 31,
2018, 2017 and 2016, respectively. The Company is the sole investor in one of the Markel CATCo Funds, the Markel Diversified
Fund, and consolidates that fund as its primary beneficiary.
The following table presents the assets and liabilities of the Markel Diversified Fund, which are included in the Company’s
consolidated balance sheet.
(dollars in thousands)
ASSETS
Equity securities: Investment in unconsolidated Markel CATCo Fund
Other
Total Assets
LIABILITIES
Note payable
Other
Total Liabilities
December 31,
2018
2017
$ 27,547
1,082
$ 28,629
$ 24,875
200
$ 25,075
$ 168,192
2,059
$ 170,251
$ 62,500
168
$ 62,668
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. Equity securities for the Markel Diversified Fund represent an investment in one of the unconsolidated
Markel CATCo Funds, and represents 2% of the outstanding preference shares of that fund as of December 31, 2018 and 7% as
of December 31, 2017. The note payable was delivered as part of the consideration provided for the Markel Diversified Fund’s
investment in the unconsolidated Fund. This note payable is included in senior long-term debt and other debt on the
Company’s consolidated balance sheets. Other than the note payable, any liabilities held by the Markel Diversified Fund have
no recourse to the Company’s general credit.
During 2018, the Company also made an investment in another one of the Markel CATCo Funds ($26.2 million as of December
31, 2018) but does not have the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be
significant to the VIE, and therefore does not consolidate that fund.
The Company also holds an investment in CROF, which is not a VIE. See note 14.
As of December 31, 2018, the Company’s exposure to risk from the unconsolidated Markel CATCo Funds and Markel CATCo
Re is generally limited to its investment and any earned but uncollected fees. See note 17 for details regarding reinsurance
contracts entered into in 2019 by the Company on behalf of Markel CATCo Re. The Company has not issued any investment
performance guarantees to these VIEs or their investors. As of December 31, 2018, net assets under management of MCIM for
unconsolidated VIEs were $3.4 billion.
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17. Related Party Transactions
The Company engages in certain related party transactions in the normal course of business at arm’s length. Details of the
Company’s transactions with related parties in its investment management operations are included below.
Nephila
In November 2018, the Company expanded its investment management operations through the acquisition of Nephila, which
serves as the investment manager to several Bermuda, Ireland and U.S. based private funds (the Nephila Funds). To provide
access for the Nephila Funds to the insurance, reinsurance and weather markets, Nephila also acts as an insurance manager to
certain Bermuda Class 3 and 3A reinsurance companies and as both a service company coverholder and agent with binding
authority for Lloyd’s Syndicate 2357 (Syndicate 2357) (collectively, the Nephila Reinsurers). Nephila receives management fees
for its investment and insurance management services from these unconsolidated affiliates based on the net asset value of the
accounts managed, and for certain funds, incentive fees based on the annual performance of the funds it manages. Total
revenues attributed to the management contracts with the Nephila Funds and the Nephila Reinsurers from the acquisition date
to December 31, 2018 were $24.4 million.
Within the Company’s program services business, the Company has a program with Nephila and Lloyd’s Syndicate 2357
(Syndicate 2357), one of its unconsolidated affiliates, through which the Company writes insurance policies that are ceded to
Syndicate 2357. Through this arrangement, Nephila has the exclusive right, through 2019, to utilize certain of the Company’s
licensed insurance companies to write U.S. catastrophe exposed property risk that will then be ceded to Syndicate 2357. For the
year ended December 31, 2018, gross premiums written on the Company’s program with Nephila were $322.1 million, all of
which was ceded to Syndicate 2357. As of December 31, 2018, reinsurance recoverables on the consolidated balance sheet
included $179.8 million due from Syndicate 2357.
Under this program, the Company also bears underwriting risk for annual aggregate agreement year losses in excess of a limit
the Company believes is highly unlikely to be exceeded. To the extent losses under this program exceed the prescribed limit, the
Company is obligated to pay such losses to the cedents without recourse to Syndicate 2357. While the Company believes losses
under this program are highly unlikely, those losses, if incurred, could be material to the Company’s consolidated results of
operations and financial condition.
Markel CATCo
Within the Company’s reinsurance operations, the Company enters into reinsurance contracts that are ceded to Markel CATCo
Re, an unconsolidated subsidiary. Under this program, the Company retains underwriting risk for annual aggregate agreement
year losses in excess of a limit the Company believes is highly unlikely to be exceeded. To the extent losses under this program
exceed the prescribed limit, the Company is obligated to pay such losses to the cedents without recourse to Markel CATCo Re.
For the years ended December 31, 2018, 2017 and 2016, gross premiums written on behalf of Markel CATCo Re were $10.9
million, $9.7 million and $6.7 million, respectively.
In early 2019, the Company committed to enter into various reinsurance contracts with third parties on behalf of Markel
CATCo Re. These reinsurance contracts will primarily cover losses for events that may occur during 2019, however, in some
instances, coverage will also provide for adverse development on 2018 and prior accident years’ loss events. Incurred losses on
these contracts will be fully ceded to Markel CATCo Re. The loss exposures on these contracts will be fully collateralized by
Markel CATCo Re up to an amount that the Company believes is highly unlikely to be exceeded. The Company will have
credit risk from Markel CATCo Re for any uncollateralized amounts. Markel CATCo Re’s ability to pay losses in excess of the
collateralized amounts will depend on the availability of funds that are not otherwise needed to pay losses on other contracts.
The Company’s maximum exposure to loss on these contracts, representing the net uncollateralized risks, is not expected to
exceed $250 million in 2019.
See note 16 for details of the Company’s other transactions with Markel CATCo Re and the Markel CATCo Funds.
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18. 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 16 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, 2018.
Years Ending December 31,
(dollars in thousands)
2019
2020
2021
2022
2023
2024 and thereafter
TOTAL
$ 48,853
41,630
37,602
31,898
28,261
117,663
$ 305,907
Rental expense was $52.9 million, $44.6 million and $40.2 million for the years ended December 31, 2018, 2017 and 2016,
respectively.
b) Late in the fourth quarter of 2018, the Company was contacted by and received inquiries from the U.S. Department of
Justice, U.S. Securities and Exchange Commission and Bermuda Monetary Authority (BMA) into loss reserves recorded in late
2017 and early 2018 at Markel CATCo Re (the Markel CATCo Inquiries), an unconsolidated subsidiary managed by MCIM. As a
result, the Company engaged outside counsel to conduct an internal review, through which the Company discovered violations
of Markel policies by two senior executives of MCIM that existed as of December 31, 2018. As a result, these two executives are
no longer with the Company (the MCIM Executive Departures).
As of December 31, 2017, the Company had accrued incentive and retention compensation for the two executives totaling
$34.9 million which remained unpaid as of December 31, 2018. This amount was reversed in the fourth quarter of 2018 and
reflected as a reduction to services and other expenses. All accruals for retention and incentive compensation recorded earlier in
2018 for the two executives were also reversed in the fourth quarter of 2018. In conjunction with the Markel CATCo acquisition
in December 2015, certain incentive and retention compensation arrangements were established for employees of MCIM, a
portion of which was based on expected management fees over the three year period following the acquisition. The Company’s
initial estimate of the amounts payable under the incentive and retention compensation arrangements totaled $100 million,
portions of which were paid in 2016, 2017 and 2018. After considering the reversal of accruals described above, the Company’s
total expected payments under these arrangements across all years is $52.9 million. As of December 31, 2018, accrued and
unpaid incentive and retention expense for other employees of MCIM totaled $19.2 million, of which $12.3 million was
expensed during the year ended December 31, 2018. Compensation expense for the years ended December 31, 2017 and 2016
included $38.1 million and $33.2 million, respectively, for these incentive and retention compensation arrangements.
In light of the governmental inquiries into loss reserves at Markel CATCo Re, and taking into consideration the departure of
two senior MCIM executives and special redemption rights that are now being offered to investors in the Markel CATCo Funds,
as described below, management concluded MCIM’s ability to maintain or raise capital has been adversely impacted. Following
an assessment of the recoverability of goodwill and intangible assets at the MCIM reporting unit as of December 31, 2018, the
Company reduced the carrying value of the goodwill and intangible assets of the MCIM reporting unit to zero, which resulted in
a goodwill impairment charge of $91.9 million and an intangible asset impairment charge of $87.1 million. See note 7 for further
details around these impairment charges.
In December 2018, investors in the Markel CATCo Funds were offered an additional redemption opportunity (the Special
Redemption). Under the Special Redemption, investors in the Markel CATCo Funds may elect to redeem any or all shares held
as of June 30, 2019, with the exception of (1) shares that have been restricted following the occurrence of catastrophic loss
events for which uncertainty still exists around the ultimate incurred losses on the underlying reinsurance contracts at Markel
108
CATCo Re and (2) shares that support insurance contracts that are still exposed to future underwriting risk. Investors may elect
to redeem these restricted shares, however, such amounts will not be paid until all remaining exposures are fully settled or
released by cedents, which could take up to four years. Payment for the redemptions of shares is an obligation of the Markel
CATCo Funds, not Markel Corporation or its subsidiaries.
On January 11, 2019, a putative class action lawsuit captioned Bergen v. Markel Corporation, et al., was filed naming Markel
Corporation and certain present or former officers as defendants (the Bergen Suit). The lawsuit alleges violations of the federal
securities laws relating to the pending governmental inquiries into Markel CATCo Re loss reserves. The plaintiff in this matter
seeks to represent a class of persons or entities that purchased Markel Corporation securities between July 26, 2017 and
December 6, 2018. The Company believes that the claims against it are without merit. The Company further believes any
material loss resulting from the suit to be remote.
On February 21, 2019, Anthony Belisle and Alissa Fredricks, the two senior executives who are no longer with MCIM, each
separately filed suit against MCIM and Markel Corporation, alleging, among other claims, breach of contract, defamation and
invasion of privacy (the MCIM Executive Suits). Mr. Belisle's complaint seeks relief including payment of $66.0 million in
incentive compensation and Ms. Fredricks's complaint seeks relief including payment of $7.5 million in incentive
compensation. In addition, both seek consequential damages, damages for emotional distress and injury to reputation, statutory
interest and attorneys’ fees. Mr. Belisle's complaint further seeks enhanced compensatory damages. The Company believes that
all claims are without merit. The Company further believes any material loss resulting from the suits to be remote.
The Company’s internal review relating to the governmental inquiries is ongoing with no conclusions reached at this time. The
Markel CATCo Inquiries, Bergen Suit, MCIM Executive Departures and MCIM Executive Suits, as well as other related matters
of which the Company is currently unaware, could result in additional claims, litigation, investigations, enforcement actions or
proceedings. For example, additional litigation may be filed by investors in the Markel CATCo Funds. The Company also could
become subject to increased regulatory scrutiny, investigations or proceedings in any of the jurisdictions where it operates. If
any regulatory authority takes action against the Company or the Company enters into an agreement to settle a matter, the
Company may incur sanctions or be required to pay substantial fines or implement remedial measures that could prove costly
or disruptive to its businesses and operations.
An unfavorable outcome in one or more of these matters, and others the Company cannot anticipate, could have a material
adverse effect on the Company’s results of operations and financial condition. In addition, the Company may take further steps
to support the Markel CATCo operations, including steps to mitigate potential risks or liabilities that may arise from the
Markel CATCo Inquiries and related developments, and some of those steps may have a material impact on the Company’s
results of operations or financial condition. Even if an unfavorable outcome does not materialize, these matters, and actions the
Company may take in response, could have an adverse impact on the Company’s reputation and result in substantial expense
and disruption.
Additionally, revenues for MCIM for 2019 and beyond will be adversely impacted by its inability to maintain or raise new
capital. Costs associated with the Company’s internal review, including legal and investigation costs, as well as legal costs
incurred in connection with any existing or future litigation, will be expensed as incurred.
c) The Company has reviewed events at one of its Markel Ventures products businesses. Since becoming aware of a matter in
the first quarter of 2018 related to the business’s manufacture of products, the Company has conducted an investigation,
reviewed the business’s operations and developed remediation plans. Upon completion of its review during the second quarter of
2018, the Company recorded an expense of $33.5 million in its results of operations. This amount represented management’s
best estimate of amounts considered probable including: remediation costs associated with the manufacture of products, costs
associated with the investigation of this matter, a write down of inventory on hand and settlement costs related to pre-existing
litigation. The Company also recorded an impairment charge of $14.9 million during 2018 which reduced the carrying value of
intangible assets at this reporting unit to zero.
Final resolution of this matter could ultimately result in additional remediation and other costs, the amount of which cannot be
estimated at this time, but which could have a material impact on the Company’s income before income taxes. However,
management does not expect this matter ultimately will have a material adverse effect on the Company’s results of operations
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or financial condition. If a determination is made that additional costs associated with this matter are considered probable, these
additional costs will be recognized as an expense in the Company’s results of operations. As of December 31, 2018, $33.5
million remained accrued for remediation efforts which are continuing into 2019.
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.
19. Statutory Financial Information
a) Statutory capital and surplus and statutory net income (loss) for the Company’s insurance subsidiaries as of December 31,
2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016, respectively, is summarized below.
(dollars in thousands)
United States
United Kingdom
Bermuda
Other
Statutory Capital and Surplus
2018
$ 3,158,828
$ 621,802
$ 1,495,563
74,704
$
2017
$ 3,424,330
$ 642,418
$ 1,779,387
34,002
$
As of December 31, 2018, the Company’s actual statutory capital and surplus significantly exceeded the regulatory
requirements. As a result, 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,
2018
2017
2016
$ 414,957
$ 40,203
$ (131,411)
$ (5,193)
$ 312,828
$ (25,785)
$ (78,070)
$ (4,812)
$ 249,176
$ 78,033
$ 132,442
$ (965)
The Solvency II Directive that governs the calculation of statutory capital and surplus for the Company’s U.K. and German
insurance subsidiaries does not provide requirements for the calculation of net income. Amounts presented in the table above
for the Company’s U.K. and German insurance subsidiaries, in which the amount attributable to Germany is included in Other,
have been calculated in accordance with U.K. and German GAAP, respectively.
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, 2018, the Company’s U.S.
insurance subsidiaries could pay up to $466.0 million to the Company during the following 12 months under the ordinary
dividend regulations.
110
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.
United Kingdom
The Company’s U.K. 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 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 U.K. 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, 2018, earnings of the Company’s U.K.
insurance subsidiaries are no longer considered indefinitely reinvested for U.S. income tax purposes and, as a result, are available
for distribution to the holding company to the extent not otherwise restricted. Amounts available for distribution to the holding
company will be determined during 2019.
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, 2018, 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 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, 2018, Markel Bermuda could pay up to $373.9 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, 2018, earnings of the Company’s other
foreign subsidiaries, to the extent not previously taxed in the U.S., are considered reinvested indefinitely for U.S. income tax
purposes and will not be made available for distributions to the holding company.
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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, among others, 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, 2018 was $864.3 million. Of this amount, $311.6 million was provided by the
holding company and is not available for general use by the Company. The remaining amount, provided by the Company’s
insurance subsidiaries, is not available for distribution to the holding company. The Company’s corporate member may also
be required to maintain funds under the control of Lloyd’s in excess of its capital requirements and such funds also may not be
available for distribution to the holding company.
20. Segment Reporting Disclosures
Through December 31, 2017, the Company monitored and reported its ongoing underwriting operations in the following three
segments: U.S. Insurance, International Insurance and Reinsurance. In conjunction with the Company’s continued growth and
diversification, beginning in the first quarter of 2018 the Company’s chief operating decision maker changed the way it reviews
the Company’s ongoing underwriting results. Effective January 1, 2018, the chief operating decision maker reviews the
Company’s ongoing underwriting operations on a global basis in the following two segments: Insurance and Reinsurance. In
determining how to allocate resources and assess the performance of its underwriting results, management considers many
factors, including the nature of the insurance product sold, the type of account written and the type of customer served. The
Insurance segment includes all direct business and facultative placements written across the Company. The Reinsurance
segment includes all treaty reinsurance written across the Company. All investing activities related to the Company’s insurance
operations are included in the Investing segment.
Also during the first quarter of 2018, the Company’s chief operating decision maker changed the way it assesses the
performance of and allocates resources to its Markel Ventures operations. Historically, the Company’s chief operating decision
maker reviewed 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 January 1,
2018, the chief operating decision maker reviews and assesses Markel Ventures’ performance in the aggregate, as a single
operating segment. The Markel Ventures segment primarily consists of controlling interests in a diverse portfolio of businesses
that operate in various industries. Prior period amounts in the tables below have been recast for consistency with the current
segment presentation.
The Company’s other operations include the results of the Company’s legal and professional consulting services and the results
of the Company’s investment management services attributable to MCIM and, beginning November 2018, Nephila. The
Company’s other operations also include results for lines of business discontinued prior to, or in conjunction with, acquisitions,
including development on asbestos and environmental loss reserves and results attributable to the run-off of life and annuity
reinsurance business, which are monitored separately from the Company’s ongoing underwriting operations. Beginning
November 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, none of these other operations are considered to be
reportable segments.
Segment profit for each of the Company’s underwriting segments is measured by underwriting profit. The property and casualty
insurance industry commonly defines underwriting profit as earned premiums net of losses and loss adjustment expenses and
underwriting, acquisition and insurance expenses. Underwriting profit 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 for the Investing segment is measured by
net investment income and net investment gains. Segment profit for the Markel Ventures segment is measured by operating
income.
112
For management reporting purposes, the Company allocates assets to its underwriting, investing, Markel Ventures, and other
operations. Underwriting assets are all assets not specifically allocated to the Investing or Markel Ventures segments, or to the
Company’s other operations. Underwriting and investing assets are not allocated to the Insurance and Reinsurance segments
since the Company does not manage its assets by underwriting segment. The Company does not allocate capital expenditures
for long-lived assets to either of its underwriting segments for management reporting purposes.
a) The following tables summarize the Company’s segment disclosures.
(dollars in thousands)
Gross premium volume
Net written premiums
Insurance
Reinsurance
Investing
Markel
Ventures
Other (1)
Consolidated
$ 4,749,166
3,904,773
$ 1,050,870
882,285
$ — $
—
— $ 2,064,433
520
—
$ 7,864,469
4,787,578
Year Ended December 31, 2018
Earned premiums
Losses and loss adjustment expenses:
3,783,939
928,574
Current accident year
Prior accident years
Amortization of policy
acquisition costs
Other operating expenses
Underwriting profit (loss)
Net investment income
Net investment losses (2)
Products revenues
Services and other revenues
Products expenses (3)
Services and other expenses (3)
Amortization of intangible assets (4)
Impairment of goodwill and
intangible assets
(2,596,057)
502,260
(770,183)
(691,186)
228,773
(775,642)
42,982
(239,120)
(75,081)
(118,287)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
513
433,702
—
(437,596)
—
1,497,523
—
414,542
— (1,413,248)
(366,739)
—
—
(40,208)
(453)
4,712,060
—
5,742
—
(1,941)
3,348
—
—
—
220,541
—
(108,185)
(75,722)
(3,371,699)
550,984
(1,009,303)
(768,208)
113,834
434,215
(437,596)
1,497,523
635,083
(1,413,248)
(474,924)
(115,930)
—
(14,904)
(184,294)
(199,198)
Segment profit (loss)
$ 228,773
$ (118,287)
$ (3,894)
$ 77,479
$ (144,312)
$
39,759
Interest expense
Net foreign exchange gains
Loss before income taxes
(154,212)
106,598
$ (7,855)
U.S. GAAP COMBINED RATIO (5)
94%
113%
NM(6)
98%
(1) Other represents the total profit (loss) attributable to the Company’s operations that are not included in a reportable segment as well as any
amortization of intangible assets and impairment of goodwill and intangible assets that are not allocated to a reportable segment.
(2) Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, the change in fair value of equity securities is no longer
recognized in other comprehensive income; rather, all changes in the fair value of equity securities are now recognized in net investment
losses within net income. Prior periods have not been restated to conform to the current presentation. See note 1.
(3) Products expenses and services and other expenses for the Markel Ventures segment include depreciation expense of $52.2 million for the
year ended December 31, 2018.
(4) Segment profit for the Markel Ventures segment includes amortization of intangible assets attributable to Markel Ventures. Amortization of
intangible assets is not allocated to any other reportable segments.
(5) 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.
(6) NM - Ratio is not meaningful
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)
Year Ended December 31, 2017
(dollars in thousands)
Gross premium volume
Net written premiums
Insurance
Reinsurance
Investing
$ 4,141,201
3,439,796
$ 1,112,101
978,160
$
— $
—
Earned premiums
Losses and loss adjustment expenses:
3,314,033
934,114
Markel
Ventures
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Other (1)
Consolidated
$ 253,658
(169)
$ 5,506,960
4,417,787
(169)
4,247,978
—
8,638
—
(795)
7,674
—
—
—
79,995
—
(122,137)
(49,329)
(3,367,223)
501,462
(894,353)
(695,111)
(207,247)
405,709
(5,303)
951,012
462,263
(850,449)
(458,621)
(80,758)
(2,442,344)
500,627
(675,470)
(611,749)
85,097
(924,879)
(7,803)
(218,883)
(82,567)
(300,018)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
405,377
(5,303)
—
—
—
—
—
332
—
951,012
382,268
(850,449)
(336,484)
(31,429)
Current accident year
Prior accident years
Amortization of policy
acquisition costs
Other operating expenses
Underwriting profit (loss)
Net investment income
Net investment losses (2)
Products revenues
Services and other revenues
Products expenses (3)
Services and other expenses (3)
Amortization of intangible assets (4)
Segment profit (loss)
$ 85,097
$ (300,018)
$ 400,074
$ 115,250
$ (83,797)
$
216,606
Interest expense
Net foreign exchange gains
Income before income taxes
(132,451)
3,140
$ 87,295
U.S. GAAP COMBINED RATIO (5)
97%
132%
NM(6)
105%
(1) Other represents the total profit (loss) attributable to the Company’s operations that are not included in a reportable segment as well as any
amortization of intangible assets that is not allocated to a reportable segment.
(2) Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, the change in fair value of equity securities is no longer
recognized in other comprehensive income; rather, all changes in the fair value of equity securities are now recognized in net investment
losses within net income. Prior periods have not been restated to conform to the current presentation. See note 1.
(3) Products expenses and services and other expenses for the Markel Ventures segment include depreciation expense of $41.7 million for the
year ended December 31, 2017.
(4) Segment profit for the Markel Ventures segment includes amortization of intangible assets attributable to Markel Ventures. Amortization of
intangible assets is not allocated to any other reportable segments.
(5) 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.
(6) NM - Ratio is not meaningful
114
(dollars in thousands)
Gross premium volume
Net written premiums
Insurance
Reinsurance
Investing
$ 3,755,081
3,101,657
$ 1,041,055
898,728
$
— $
—
Earned premiums
Losses and loss adjustment expenses:
3,028,844
836,264
Current accident year
Prior accident years
Amortization of policy
acquisition costs
Other operating expenses
Underwriting profit
Net investment income
Net investment gains(2)
Products revenues
Services and other revenues
Products expenses (3)
Services and other expenses (3)
Amortization of intangible assets (4)
Impairment of goodwill and
intangible assets
(2,009,426)
369,594
(592,766)
(597,201)
199,045
(546,476)
125,514
(189,455)
(116,642)
109,205
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Year Ended December 31, 2016
Markel
Ventures
—
—
—
—
—
—
—
—
—
—
—
—
—
—
373,121
65,147
—
—
—
—
—
109
—
885,473
328,976
(755,591)
(297,841)
(29,105)
Other (1)
Consolidated
$ 509
635
$ 4,796,645
4,001,020
762
3,865,870
—
10,050
(2,555,902)
505,158
—
(1,061)
9,751
—
—
—
93,330
—
(118,300)
(39,428)
(782,221)
(714,904)
318,001
373,230
65,147
885,473
422,306
(755,591)
(416,141)
(68,533)
—
(18,723)
—
(18,723)
Segment profit (loss)
$ 199,045
$ 109,205
$ 438,268
$ 113,298
$ (54,647)
$
805,169
Interest expense
Loss on early extinguishment of debt
Net foreign exchange losses
Income before income taxes
(129,896)
(44,100)
(1,253)
$ 629,920
U.S. GAAP COMBINED RATIO (5)
93%
87%
NM(6)
92%
(1) Other represents the total profit (loss) attributable to the Company’s operations that are not included in a reportable segment as well as any
amortization of intangible assets and impairment of goodwill and intangible assets that are not allocated to a reportable segment.
(2) Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, the change in fair value of equity securities is no longer
recognized in other comprehensive income; rather, all changes in the fair value of equity securities are now recognized in net investment
gains within net income. Prior periods have not been restated to conform to the current presentation. See note 1.
(3) Products expenses and services and other expenses for the Markel Ventures segment include depreciation expense of $35.5 million for the
year ended December 31, 2016.
(4) Segment profit for the Markel Ventures segment includes amortization of intangible assets attributable to Markel Ventures. Amortization of
intangible assets is not allocated to any other reportable segments.
(5) 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.
(6) NM - Ratio is not meaningful
115
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.
(dollars in thousands)
December 31, 2018
Insurance segment
Reinsurance segment
Other
Total Underwriting
Program services
TOTAL
December 31, 2017
Insurance segment
Reinsurance segment
Other
Total Underwriting
Program services
TOTAL
Deferred Policy
Acquisition Costs
Unearned
Premiums
Unpaid Losses and
Loss Adjustment Expenses
$ 315,363
159,150
—
474,513
—
$ 2,031,140
630,435
—
2,661,575
949,453
$ 7,947,772
3,425,751
386,329
11,759,852
2,516,627
$ 474,513
$ 3,611,028
$ 14,276,479
$ 286,780
178,789
—
465,569
—
$ 1,855,331
690,565
—
2,545,896
762,883
$ 7,711,510
3,248,070
429,270
11,388,850
2,195,431
$ 465,569
$ 3,308,779
$ 13,584,281
c) The following table summarizes earned premiums by major product grouping.
(dollars in thousands)
Insurance segment:
General liability
Professional liability
Property
Marine and energy
Personal lines
Programs
Workers compensation
Other products
Total Insurance
Reinsurance segment:
Property
Casualty
Auto
Other products
Total Reinsurance
Other
Years Ended December 31,
2018
2017
2016
$ 889,543
701,867
369,116
376,747
374,543
288,398
329,690
454,035
$ 764,956
628,878
365,513
312,282
382,761
273,954
319,679
266,010
$ 675,199
600,607
357,320
277,608
374,175
263,783
301,126
179,026
3,783,939
3,314,033
3,028,844
233,195
417,601
12,422
265,356
928,574
(453)
321,178
351,457
28,700
232,779
934,114
(169)
288,771
327,383
65,363
154,747
836,264
762
TOTAL EARNED PREMIUMS
$ 4,712,060
$ 4,247,978
$ 3,865,870
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.
116
d) 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%
8
2
11
100%
2018
$ 4,587,486
471,818
127,546
612,146
5,798,996
2,065,473
$ 7,864,469
Years Ended December 31,
% 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
% of
Total
77%
7
3
13
100%
2016
$ 3,691,840
358,348
125,444
621,013
4,796,645
—
$ 4,796,645
Most of the Company’s gross written premiums are placed through insurance and reinsurance brokers. During the years ended
December 31, 2018, 2017 and 2016, the top three independent brokers accounted for 25%, 27% and 28% of gross premiums
written in the Company’s underwriting segments. During the years ended December 31, 2018, 2017 and 2016, the top three
independent brokers accounted for 13%, 14% and 15%, respectively, of gross premiums written in the Insurance segment and
76%, 78% and 75%, respectively, of gross premiums written in the Reinsurance segment.
e) During the years ended December 31, 2018, 2017 and 2016, Markel Ventures segment revenues attributable to U.S.
operations were 88%, 85%, and 84%, respectively, of total Markel Ventures segment revenues.
f) The following table reconciles segment assets to the Company’s consolidated balance sheets.
(dollars in thousands)
Segment assets:
Investing
Underwriting
Markel Ventures
Total segment assets
Other operations
TOTAL ASSETS
December 31,
2018
2017
2016
$ 19,100,790
6,451,984
2,124,506
$ 20,317,160
6,828,048
1,900,728
$ 19,029,584
5,397,696
1,206,223
27,677,280
29,045,936
25,633,503
5,628,983
3,759,080
241,796
$ 33,306,263
$ 32,805,016
$ 25,875,299
117
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)
21. Products, Services and Other Revenues
The amount of revenues from contracts with customers included for the years ended December 31, 2018, 2017 and 2016 was
$1.9 billion, $1.3 billion and $1.2 billion, respectively.
The following table disaggregates revenues from contracts with customers by type, all of which are included in products
revenues and services and other revenues on the consolidated statements of income (loss) and comprehensive income (loss).
Years Ended December 31,
2018
2017
2016
Markel
Ventures
Other
Total
Markel
Ventures
Other
Total
Markel
Ventures
Other
Total
$1,452,332
$ —
$1,452,332
$ 902,739
$ — $ 902,739
$ 843,140
$ — $ 843,140
367,572
33,236
400,808
339,430
34,746
374,176
288,726
34,984
323,710
—
91,527
91,527
—
28,740
28,740
—
56,455
56,455
1,819,904
124,763
1,944,667
1,242,169
63,486
1,305,655
1,131,866
91,439
1,223,305
—
92,161
94,118
1,660
94,118
93,821
—
91,111
14,487
2,022
14,487
93,133
—
—
—
82,583
1,891
84,474
$1,912,065
$220,541
$2,132,606
$1,333,280
$ 79,995
$1,413,275
$1,214,449
$ 93,330 $1,307,779
(dollars in
thousands)
Products
Services
Investment
management
Total revenues
from contracts
with customers
Program
services
Other
TOTAL
The following table presents receivables and customer deposits related to our contracts with customers.
(dollars in thousands)
Receivables
Customer deposits
22. Employee Benefit Plans
December 31, 2018
December 31, 2017
$ 247,532
$ 48,238
$ 176,865
$ 61,546
a) The Company maintains defined contribution plans for employees of its U.S. 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 were $41.8 million, $36.7 million and
$30.1 million in 2018, 2017 and 2016, 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. Employees have not accrued benefits for future service in the
Terra Nova Pension Plan since April 2012. The Company uses December 31 as the measurement date for the Terra Nova
Pension Plan.
118
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 gain (loss)
Effect of foreign currency rate changes
Projected benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of period
Actual gain (loss) 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
Years Ended December 31,
2018
2017
$ 199,117
4,815
(8,045)
(15,853)
(8,537)
$ 178,618
5,016
(5,644)
4,985
16,142
$ 171,497
$ 199,117
$ 206,570
(5,683)
3,368
(8,045)
(9,246)
$
175,644
16,902
3,393
(5,644)
16,275
$ 186,964
$ 206,570
$ 15,467
$
74,604
$
$
7,453
77,567
Net actuarial pension loss is recognized as a component of accumulated other comprehensive income, net of taxes. The asset
for pension benefits, also referred to as the funded status of the plan, at December 31, 2018 and 2017 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)
Amortization of net actuarial loss
Tax benefit (expense)
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
Years Ended December 31,
2018
$ —
2,963
(622)
$ 2,341
2017
$ 3,728
3,815
(1,284)
$ 6,259
2016
$ (25,243)
1,951
4,192
$ (19,100)
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
Years Ended December 31,
2018
2017
2016
$ 4,815
(8,782)
2,963
$ 5,016
(8,189)
3,815
$ 6,113
(9,124)
1,951
NET PERIODIC BENEFIT INCOME (LOSS)
$ (1,004)
$ 642
$ (1,060)
Weighted average assumptions as of December 31:
Discount rate
Expected return on plan assets
Rate of compensation increase
3.0%
4.5%
3.0%
2.6%
4.5%
3.0%
2.7%
4.5%
3.0%
119
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 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 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
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, 2018 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, 2017 were used to calculate the net periodic benefit income for 2018. The Company
estimates that net periodic benefit cost in 2019 will include an expense of $2.7 million resulting from the amortization of the net
actuarial pension loss included as a component of accumulated other comprehensive loss at December 31, 2018.
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 ASC 820. The following table summarizes the fair value of
plan assets as of December 31, 2018 and 2017.
(dollars in thousands)
Plan assets:
Fixed maturity index funds
Equity security index funds
Cash and cash equivalents
TOTAL
December 31,
2018
2017
$ 102,047
84,909
8
$ 110,936
95,452
182
$ 186,964
$ 206,570
The Company’s target asset allocation for the plan is 47% equity securities and 53% fixed maturities. At December 31, 2018,
the actual allocation of assets in the plan was 45% equity securities and 55% fixed maturities. At December 31, 2017, the
actual allocation of assets in the plan was 46% equity securities and 54% fixed maturities.
Investments are managed by a third party investment manager. Equity securities are invested in an index fund where 30% is
indexed to U.K. 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 U.K. government securities, one index fund that includes securities issued by other foreign governments, one
mutual fund that includes investment grade corporate bonds from the U.K. and foreign markets and one index fund that
includes U.K. 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, 2018 and 2017, the fair value of plan assets exceeded the plan’s accumulated benefit obligation of
$168.1 million and $195.1 million, respectively. The Company expects to make plan contributions of $3.4 million in 2019.
The benefits expected to be paid in each year from 2019 to 2023 are $3.8 million, $3.8 million, $3.9 million, $4.0 million and
$4.1 million, respectively. The aggregate benefits expected to be paid in the five years from 2024 to 2028 are $22.0 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, 2018.
120
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, at estimated fair value:
Fixed maturities, available-for-sale (amortized cost of $717,666 in 2018 and
$533,183 in 2017)
Equity securities, available-for-sale (cost of $402,694 in 2017)
Equity securities (cost of $1,117,363 in 2018) (1)
Short-term investments, available-for-sale (estimated fair value approximates cost)
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 (2)
Net deferred tax liability
Other liabilities
Total Liabilities
Total Shareholders’ Equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
December 31,
2018
2017
(dollars in thousands)
$ 717,681
—
1,175,120
451,499
$ 532,438
646,060
—
1,159,323
2,344,300
2,337,821
263,043
3,177
19,295
10,697,605
160,111
21,174
135,722
349,347
1,419
18,684
9,510,215
140,110
5,704
121,233
$ 13,644,427
$ 12,484,533
$ 2,539,389
1,895,000
64,564
64,820
$ 2,537,331
285,000
84,507
73,547
4,563,773
9,080,654
2,980,385
9,504,148
$ 13,644,427
$ 12,484,533
(1) Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, equity securities are no longer classified as available-for-sale
with unrealized gains and losses recognized in other comprehensive income; rather, all changes in the fair value of equity securities are now
recognized in net income. Prior periods have not been restated to conform to the current presentation. See note 1.
(2) In December 2018, Markel Corporation purchased Markel Global Reinsurance Company, an indirectly owned subsidiary of Markel
Corporation, from Alterra USA Holdings Limited, another indirectly owned subsidiary of Markel Corporation, by issuing a $1.4 billion
note payable to subsidiary.
121
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 ( L O S S ) A N D C O M P R E H E N S I V E I N C O M E ( L O S S )
R E V E N U E S
Net investment income
Dividends on common stock of consolidated subsidiaries
Net investment gains (losses):
Net realized investment gains (losses), including
other-than-temporary impairment losses
Change in fair value of equity securities (1)
Net investment gains (losses)
TOTAL REVENUES
E X P E N S E S
Services and other expenses
Interest expense
Net foreign exchange gains
Loss on early extinguishment of debt
TOTAL EXPENSES
Income Before Equity in Undistributed Earnings of
Consolidated Subsidiaries and Income Taxes
Equity in undistributed earnings of consolidated subsidiaries
Income tax benefit
Years Ended December 31,
2018
2017
2016
(dollars in thousands)
$ 32,631
749,171
$ 21,076
895,920
$ 9,561
349,622
(3,341)
(110,356)
(113,697)
668,105
6,532
145,681
(3,391)
—
148,822
519,283
(696,045)
(48,582)
3,383
—
3,383
1,068
—
1,068
920,379
360,251
11,708
122,151
—
—
133,859
786,520
(469,365)
(78,114)
13,076
116,013
—
44,100
173,189
187,062
196,615
(72,012)
N E T I N C O M E (L O S S) T O S H A R E H O L D E R S
$ (128,180)
$ 395,269
$ 455,689
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 available-for-sale investments,
net of taxes:
Net holding gains (losses) arising during the period
Consolidated subsidiaries’ net holding gains (losses) arising
$ (1,492)
$ 52,277
$ 37,045
during the period
(239,833)
735,062
238,616
Reclassification adjustments for net gains (losses)
included in net income (loss) to shareholders
Consolidated subsidiaries’ reclassification adjustments for
net gains included in net income (loss) to shareholders
Change in net unrealized gains on available-for-sale
investments, net of taxes
Change in foreign currency translation adjustments, net of taxes
Consolidated subsidiaries’ change in foreign currency
2,564
5,285
(1,513)
(523)
(22,783)
(32,970)
(233,476)
—
763,043
(2,260)
242,168
(1,326)
translation adjustments, net of taxes
(16,455)
12,663
(10,384)
Consolidated subsidiaries’ change in net actuarial pension loss,
net of taxes
Total Other Comprehensive Income (Loss) to Shareholders
2,341
(247,590)
6,259
779,705
(19,100)
211,358
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
$ (375,770)
$ 1,174,974
$ 667,047
(1) Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, equity securities are no longer classified as available-for-sale
with unrealized gains and losses recognized in other comprehensive income; rather, all changes in the fair value of equity securities are now
recognized in net income. Prior periods have not been restated to conform to the current presentation. See note 1.
122
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 (loss) to shareholders
Adjustments to reconcile net income (loss) to shareholders
to net cash provided (used) by operating activities
Years Ended December 31,
2018
2017
2016
(dollars in thousands)
$
(128,180)
$ 395,269
$ 455,689
3,637
(166,132)
(120,564)
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES
(124,543)
229,137
335,125
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
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
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES
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
Other
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
Decrease in cash, cash equivalents, restricted cash
and restricted cash equivalents
Cash, cash equivalents, restricted cash and restricted cash
204,478
20,562
1,831
34,560
(26,336)
930,876
12,712
(20,000)
(103,133)
(972,619)
(5,117)
(3,191)
(5,261)
46,969
—
47,105
—
—
(54,007)
(70)
(6,972)
64,705
(72,910)
649,181
45,225
(58)
(270,623)
(1,153,683)
(10,633)
—
6,972
(721,262)
592,923
—
—
—
(110,838)
(9,848)
472,237
11,960
(29,110)
(731,389)
21,021
92,530
—
—
(3,100)
(584)
(3,207)
(640,048)
493,149
—
(183,343)
(43,691)
(51,142)
(337)
214,636
(84,546)
(19,888)
(90,287)
equivalents at beginning of year
350,766
370,654
460,941
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND
RESTRICTED CASH EQUIVALENTS AT END OF YEAR
$ 266,220
$ 350,766
$ 370,654
123
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 2018, 2017 and 2016.
(dollars in thousands, except per share amounts)
Mar. 31
June 30
Sept. 30
Dec. 31
Quarters Ended
Operating revenues
Net income (loss) (1)
Net income (loss) to shareholders(1)
Comprehensive income (loss) to shareholders
Net income (loss) per share:
$ 1,575,471
(65,594)
(64,306)
(174,839)
$ 1,987,013
279,587
278,231
164,336
$ 2,235,949
409,028
409,438
315,106
$ 1,042,852
(753,374)
(751,543)
(680,373)
Basic
Diluted
$
(4.25)
(4.25)
$
20.01
19.97
$
28.56
28.50
$
(53.88)
(53.88)
Operating revenues
Net income (loss) (1)
Net income (loss) to shareholders(1)
Comprehensive income (loss) to shareholders
Net income (loss) per share:
$ 1,411,751
71,040
69,869
223,239
$ 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
Basic
Diluted
$
3.91
3.90
$
10.34
10.31
$
(18.82)
(18.82)
$
30.48
30.39
2018
2017
2016
Operating revenues
Net income (1)
Net income to shareholders(1)
Comprehensive income (loss) to shareholders
Net income per share:
$ 1,376,182
163,646
160,370
396,994
$ 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)
Basic
Diluted
$
11.21
11.15
$
5.44
5.41
$
5.62
5.60
$
9.14
9.11
(1) Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, the change in fair value of equity securities is no longer
recognized in other comprehensive income; rather, all changes in the fair value of equity securities are now recognized in net income. Prior
periods have not been restated to conform to the current presentation. See note 1.
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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)
The accompanying consolidated financial statements and related notes have been prepared in accordance with United States
(U.S.) generally accepted accounting principles (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 and reinsurance operations
• Investing - our investing activities are primarily related to our underwriting operations
• Markel Ventures - our Markel Ventures operations include our controlling interests in a diverse portfolio of businesses that
operate outside of the specialty insurance marketplace
• Investment management - our investment management operations include investment fund managers that offer a variety of
investment products, including insurance-linked securities, catastrophe bonds, insurance swaps and weather derivatives
• 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
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 conjunction with the continued growth and diversification of our
business, beginning the first quarter of 2018 we changed the way we review our ongoing underwriting operations. Effective
January 1, 2018, our chief operating decision maker allocates resources to and assesses the performance of our ongoing
underwriting operations on a global basis in the following two segments: Insurance and Reinsurance. In determining how to
monitor our underwriting results, we consider many factors, including the nature of the insurance product sold, the type of
account written and the type of customer served. The Insurance segment includes all direct business and facultative placements
written across the Company. 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 development on asbestos and
environmental loss reserves and the results attributable to the run-off of life and annuity reinsurance business, are monitored
separately and are not included in a reportable segment. All investing activities related to our underwriting operations are
included in the Investing segment.
Our 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.
Risks written in our Insurance segment are written on either a direct basis or a subscription basis, the latter of which means
that the 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. The following products are included in this segment: general
liability, professional liability, primary and excess of loss property, including catastrophe-exposed property, personal property,
workers’ compensation, marine and energy liability coverages, specialty program insurance for well-defined niche markets, and
liability and other coverages tailored for unique exposures. Business in this segment is written through our Markel Assurance,
Markel Specialty and Markel International divisions. The Markel Assurance division writes commercial and Fortune 1000
accounts on an E&S as well as admitted basis. The Markel Specialty division writes program insurance and other specialty
coverages for well-defined niche markets, primarily on an admitted basis. The Markel International division writes business
worldwide, primarily from our London-based platform, which includes our syndicate at Lloyd’s.
125
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)
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 Insurance 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
Insurance segment. Results attributable to the program services operations are not included in a reportable 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.
Through our wholly-owned subsidiary Markel Ventures, Inc. (Markel Ventures), we own interests in various businesses that,
effective January 1, 2018, we monitor and report in the Markel Ventures segment. These businesses are viewed by management
as separate and distinct from our insurance operations and are comprised of a diverse portfolio of businesses from different
industries that offer various types of products and services to businesses and consumers, predominately in the United States.
Our products group manufactures, builds or produces consumer and industrial products, such as equipment used in baking
systems and food processing, portable dredges, over-the-road car haulers and equipment, laminated oak and composite wood
flooring used in the trucking industry, dormitory furniture, wall systems, medical casework and marine panels, storage and
transportation equipment for specialty gas, ornamental plants, fashion handbags and residential homes. The services group
offers consumer and business services, such as leasing and management of manufactured housing communities, behavioral
healthcare, concierge health programs, retail intelligence and management and technology consulting.
In October 2018, we acquired 90% of Brahmin Leather Works (Brahmin), a Massachusetts-based privately held creator of fashion
leather handbags. Results attributable to Brahmin are included in our Markel Ventures segment.
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 in our Markel Ventures segment.
Our investment management operations are comprised of our Markel CATCo operations, and effective November 2018, the
operations of Nephila Holdings Ltd.
Our Markel CATCo operations are conducted through Markel CATCo Investment Management Ltd. (MCIM). MCIM is an
insurance-linked securities investment fund manager headquartered in Bermuda focused on building and managing highly
diversified, collateralized retrocession and reinsurance portfolios covering global property catastrophe risks. MCIM serves as
the insurance manager for Markel CATCo Re Ltd. (Markel CATCo Re), a Bermuda Class 3 reinsurance company, and as the
investment manager for Markel CATCo Reinsurance Fund Ltd., a Bermuda exempted mutual fund company comprised of
multiple segregated accounts (Markel CATCo Funds). MCIM also serves as the investment manager to CATCo Reinsurance
Opportunities Fund Ltd. (CROF), a limited liability closed-end Bermuda exempted mutual fund company listed on a market
operated by the London Stock Exchange and on the Bermuda Stock Exchange. CROF invests substantially all of its assets in
Markel CATCo Reinsurance Fund Ltd. Both Markel CATCo Re and the Markel CATCo Funds are unconsolidated subsidiaries of
Markel Corporation. As of December 31, 2018, MCIM’s net assets under management were $3.4 billion. See note 18 of the notes
to consolidated financial statements for further details regarding recent developments within our Markel CATCo operations.
In November 2018, we completed the acquisition of all of the outstanding shares of Nephila Holdings Ltd. (together with its
subsidiaries, Nephila). Through its subsidiaries, Nephila primarily serves as an insurance and investment fund manager
headquartered in Bermuda that offers a broad range of investment products, including insurance-linked securities, catastrophe
bonds, insurance swaps and weather derivatives.
126
Nephila serves as the investment manager to several Bermuda, Ireland and U.S. based private funds (the Nephila Funds). To
provide access for the Nephila Funds to the insurance, reinsurance and weather markets, Nephila also acts as an insurance
manager to certain Bermuda Class 3 and 3A reinsurance companies and as both a service company coverholder and agent with
binding authority for Lloyd’s Syndicate 2357 (Syndicate 2357) (collectively, the Nephila Reinsurers). The results of the Nephila
Reinsurers are attributed to the Nephila Funds primarily through derivative transactions between these entities. Neither the
Nephila Funds nor the Nephila Reinsurers are subsidiaries of Markel Corporation, and as such, these entities are not included
in our consolidated financial statements. As of December 31, 2018, Nephila’s net assets under management were $11.6 billion.
Our program services business is conducted through our State National division and is separately managed from our
underwriting operations. 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 who sell, control, and administer books of
insurance business that are supported by third parties that assume reinsurance risk, including Syndicate 2357. 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,
substantially all of which is ceded to third parties.
For further discussion of our underwriting, investing, Markel Ventures, investment management and program services
operations, see the respective sections 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 and life and annuity reinsurance benefit reserves. 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 sheets included estimated unpaid losses and loss adjustment expenses of $14.3 billion and reinsurance
recoverables on unpaid losses of $5.1 billion at December 31, 2018 compared to $13.6 billion and $4.6 billion, respectively, at
December 31, 2017. Included in the December 31, 2018 and 2017 balances for both unpaid losses and loss adjustment expenses
and reinsurance recoverable on unpaid losses were $2.5 billion and $2.2 billion, respectively, attributable to our program
services business. Our consolidated balance sheets do not include reserves for losses and loss adjustment expenses attributed to
unconsolidated subsidiaries or affiliates that we manage through our investment management operations, including Markel
CATCo Re and the Nephila Reinsurers.
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.
127
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)
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 both December 31,
2018 and December 31, 2017.
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 case loss reserve data received for sufficiency, consistency with
historical data and for consistency with other programs we write that have similar characteristics. IBNR reserves are calculated
using either our program experience or, where the program data is not credible, industry experience for similar products or lines
of business. Substantially 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, 2018 and December 31, 2017 were $2.6 million and $2.4 million, respectively.
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
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.
128
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.
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:
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.
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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)
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 March 2017, we signed an agreement with a managing general agent and program administrator focused on
meeting the needs of schools and colleges. This education insurance program in our specialty programs group features a
comprehensive suite of property and casualty coverages and related services for K-12 private independent schools, public
schools, and accredited colleges and universities. Because our existing schools program is substantially smaller and emphasizes
a different type of educational entity, we supplement our limited data and loss experience with third party data. We receive
regular updates of data from the managing general agent’s prior carrier that enable us to compile loss development triangles and
study trends by state and segment. We now aggregate that data with our own data for use in the pricing of and reserving for this
managing general agent’s 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.
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.
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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 workers’ compensation product lines 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. 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 $578.1 million, or 6.7%, at December 31, 2018, compared to
$576.9 million, or 6.9%, at December 31, 2017.
The difference between management’s best estimate and the actuarially calculated point estimate in both 2018 and 2017 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.
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.
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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 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, 2018. 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)
Insurance
Reinsurance
Other
Net Loss
Reserves Held
$ 5,957.0
2,994.0
222.6
Low End of
Actuarial
Range(1)
$ 5,081.6
2,139.4
177.4
High End of
Actuarial
Range(1)
$ 6,487.4
3,411.5
254.4
(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.
Life and Annuity Benefits
We have a run-off 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, 2018 and 2017 included reserves for life and annuity benefits of
$1.0 billion and $1.1 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, 2018. The accretion of this discount is recognized in the
statement of income and comprehensive income within services and other expenses. Invested assets and the related investment
income that support the life and annuity reinsurance contracts are reported in the Investing segment. We expect the results
from 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. Services and other revenues attributable
to the life and annuity business represent ongoing premium adjustments on existing contracts.
Goodwill and Intangible Assets
Our consolidated balance sheet as of December 31, 2018 included goodwill and intangible assets of $4.0 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.
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Intangible assets with definite lives are reviewed for impairment when events or circumstances indicate that their carrying
value may not be recoverable. Goodwill and indefinite-lived intangible assets are tested for impairment at least annually. A
significant amount of judgment is required in performing the annual impairment test, including whether to assess 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 a quantitative impairment test.
We completed our annual test for impairment as of October 1, 2018 based upon results of operations through September 30,
2018 and elected to perform a qualitative assessment for all of our reporting units. When performing the assessment, 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
assessment 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
acquisition. There were no events since acquisition that had a significant impact on the fair value of these reporting units as
of the assessment date.
We also assess goodwill and indefinite-lived intangible assets for impairment when events or circumstances indicate that their
carrying value may not be recoverable. In light of governmental inquiries into loss reserves recorded in late 2017 and early 2018
at Markel CATCo Re, an entity managed by MCIM, and taking into consideration the departure of two senior MCIM
executives and special redemption rights that are now being offered to investors in the Markel CATCo Funds, management
concluded MCIM’s ability to maintain or raise capital has been adversely impacted. As a result, we performed an assessment of
the recoverability of goodwill and intangible assets at the MCIM reporting unit as of December 31, 2018. As a result of the
assessment, we reduced the carrying value of the goodwill and intangible assets of the MCIM reporting unit to zero, which
resulted in a goodwill impairment charge of $91.9 million and an intangible asset impairment charge of $87.1 million, both of
which were recorded to impairment of goodwill and intangible assets in the consolidated statement of loss and comprehensive
loss for the year ended December 31, 2018. See note 7 and note 18 of the notes to consolidated financial statements for further
details around these impairment charges and recent developments in our Markel CATCo operations.
Except as discussed above, based on the results of our qualitative assessment, and because there were no other indicators of
impairment between the assessment date and December 31, 2018, we believe the fair value of each of our other reporting units
exceeded its respective carrying amount as of the assessment date and December 31, 2018.
Recent Changes to Significant Accounting Policies
Effective January 1, 2018, as a result of recent significant changes in economic facts and circumstances, management reassessed
its functional currency determination as required by FASB Accounting Standards Codification (ASC) 830, Foreign Currency
Matters. As a result of the reassessment, the U.S. Dollar is the only functional currency for most of our foreign underwriting
operations. Consequently, more foreign currency denominated transactions are designated as non-functional, with related
remeasurement gains and losses included in net foreign exchange gains within net income. However, available-for-sale
securities denominated in non-functional currencies are recorded at fair value with resulting gains and losses, including the
portion attributable to movements in exchange rates, included in the change in net unrealized gains on available-for-sale
investments, net of taxes, within other comprehensive income. As a result, while we attempt to naturally hedge our exposure
to foreign currency fluctuations by matching assets and liabilities in the same currencies, there is a financial statement
mismatch between the gains or losses recorded in net income related to insurance reserves denominated in non-functional
currencies and the gains or losses recorded in other comprehensive income related to the available-for-sale securities held in
non-functional currencies supporting the insurance reserves. The change in our functional currency determination has been
applied on a prospective basis in accordance with ASC 830. Therefore, any translation gains and losses that were previously
recorded in accumulated other comprehensive income remain unchanged through December 31, 2017. The year ended
December 31, 2018 included a pre-tax foreign exchange gain of $106.6 million ($84.2 million, net of taxes) compared to a pre-tax
foreign exchange gain of $3.1 million ($2.0 million, net of taxes) for the year ended December 31, 2017. See further details of our
change in functional currency determination in note 1(r) of the notes to consolidated financial statements.
Recent Accounting Pronouncements
Beginning January 1, 2019, upon adoption of ASU No. 2016-02, Leases (Topic 842) and ASU No. 2018-11, Leases (Topic 842):
Targeted Improvements, most leases are required to be recorded on our balance sheet as a lease liability with a corresponding
right-of-use asset. We will continue to recognize the related leasing expense within net income. Short term leases will not be
recorded on the balance sheet. Our future minimum lease payments for noncancelable operating leases, which represent
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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)
minimum annual rental commitments excluding taxes, insurance and other operating costs, and which will be subject to this
new guidance, totaled $305.9 million at December 31, 2018. We are currently finalizing our evaluation of the impacts that the
adoption of this accounting guidance will have on the consolidated financial statements. We estimate a right-of-use asset and a
lease liability of approximately $250.0 million and $275.0 million, respectively, will be recognized in the consolidated balance
sheet upon adoption. Adoption of this standard will not have a material impact on our results of operations and will not impact
our cash flows.
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. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments
• ASU No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration
Contracts
• ASU No. 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40): Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
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.
Results of Operations
The following table presents the components of net income to shareholders.
(dollars in thousands)
Insurance segment underwriting profit
Reinsurance segment underwriting profit (loss)
Net investment income
Net investment gains (losses) (1)
Markel Ventures segment profit (2)
Other (3)
Interest expense
Net foreign exchange gains (losses)
Loss on early extinguishment of debt
Income tax benefit (expense)
Net loss (income) attributable to noncontrolling interests
Years Ended December 31,
2018
2017
2016
$ 228,773
(118,287)
433,702
(437,596)
77,479
(144,312)
(154,212)
106,598
—
(122,498)
2,173
$ 85,097
(300,018)
405,377
(5,303)
115,250
(83,797)
(132,451)
3,140
—
313,463
(5,489)
$ 199,045
109,205
373,121
65,147
113,298
(54,647)
(129,896)
(1,253)
(44,100)
(169,477)
(4,754)
NET INCOME (LOSS) TO SHAREHOLDERS
$ (128,180)
$ 395,269
$ 455,689
(1) Effective January 1, 2018, we adopted ASU No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial
Assets and Financial Liabilities, and equity securities are no longer classified as available-for-sale with unrealized gains and losses recognized
in other comprehensive income, rather, changes in the fair value of equity securities are now recognized in net income. Prior periods have not
been restated to conform to the current presentation. See note 1 of the notes to consolidated financial statements.
(2) Segment profit for the Markel Ventures segment includes amortization of intangible assets attributable to Markel Ventures. Amortization of
intangible assets is not allocated to any other reportable segments.
(3) Other represents the total profit (loss) attributable to the Company’s operations that are not included in a reportable segment as well as any
amortization of intangible assets and impairment of goodwill and intangible assets that is not allocated to a reportable segment.
Net loss to shareholders was $128.2 million in 2018, compared to net income to shareholders of $395.3 million in 2017. The
decrease was primarily due to the impact of a one-time tax benefit in 2017 and an increase in net investment losses in 2018
compared to 2017. Partially offsetting these unfavorable movements was underwriting profit of $113.8 million in 2018 compared
to an underwriting loss of $207.2 million in 2017. The income tax benefit in 2017 was primarily a result of the enactment of the
Tax Cuts and Jobs Act (TCJA) in 2017. The TCJA made significant modifications to U.S. income tax law, most of which became
134
effective January 1, 2018. As a result, we recorded a one-time tax benefit of $339.9 million in 2017 primarily related to the
remeasurement of our U.S. net deferred tax liability at the lower enacted U.S. corporate tax rate. See further discussion of the
impact of the TCJA in note 8 of the notes to consolidated financial statements. The increase in net foreign exchange gains
(losses) in 2018 compared to 2017 is primarily attributable to the change in our functional currency determination, which was
effective January 1, 2018. See further discussion of our change in functional currency determination in note 1 of the notes to
consolidated financial statements. 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 the one-time tax benefit in 2017 described above. The components of net income to
shareholders are discussed in further detail under “Underwriting Results,” “Life and Annuity Benefits,” “Investing Results,”
“Markel Ventures” and “Interest Expense, Loss on Early Extinguishment of Debt and Income Taxes.”
Underwriting Results
Underwriting profits are a key component of our strategy to build shareholder value. 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 and the combined ratio 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
Insurance
Reinsurance
Markel Corporation (Consolidated)
Years Ended December 31,
2018
2017
2016
$ 5,798,996
$ 4,785,590
$ 5,253,107
$ 4,417,787
$ 4,796,645
$ 4,001,020
83%
84%
83%
$ 4,712,060
$ 2,820,715
$ 1,777,511
$ 113,834
$ 4,247,978
$ 2,865,761
$ 1,589,464
$ (207,247)
$ 3,865,870
$ 2,050,744
$ 1,497,125
$ 318,001
94%
113%
98%
97%
132%
105%
93%
87%
92%
(1) Gross premium volume and net retention for the years ended December 31, 2018 and December 31, 2017 exclude $2.1 billion and $253.9
million, respectively of gross written premiums attributable to our program services business, substantially all of which was ceded.
Underwriting results in 2018 included $287.3 million, or six points, of underwriting loss from Hurricanes Florence and Michael,
Typhoon Jebi and wildfires in California (2018 Catastrophes). 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). Underwriting results in 2016 included $68.7 million, or two points, of underwriting loss from
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 2018 and 2017
Catastrophes.
Years Ended December 31,
2018
2018 Catastrophes
2017
2017 Catastrophes
(dollars in thousands)
Insurance Reinsurance Consolidated
Insurance
Reinsurance Consolidated
Losses and loss adjustment expenses
Ceded (assumed) reinstatement
premiums
Underwriting loss
$ 105,265
$ 187,490
$ 292,755
$ 254,976
$ 330,384
$ 585,360
5,142
(10,583)
(5,441)
12,391
(32,465)
(20,074)
$ 110,407
$ 176,907
$ 287,314
$ 267,367
$ 297,919
$ 565,286
Impact on combined ratio
3%
19%
6%
8%
32%
13%
The estimated net losses and loss adjustment expenses on the 2018 and 2017 Catastrophes were net of estimated ceded losses of
$244.1 million and $490.3 million, respectively. Both the gross and net loss estimates on the 2018 and 2017 Catastrophes as of
December 31, 2018 represent our best estimate of losses based upon information currently available. Our estimate for these
losses is based on claims received to date, detailed policy level reviews, industry loss estimates, output from both industry and
proprietary models as well as a review of in-force contracts. The estimates are dependent on broad assumptions about coverage,
liability and reinsurance. While we believe our reserves for the 2018 and 2017 Catastrophes as of December 31, 2018 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 and loss adjustment expenses for the 2018 and 2017 Catastrophes were within
our risk tolerance for events of this magnitude.
The decrease in the consolidated combined ratio for 2018 compared to 2017 was primarily attributable to lower catastrophe
losses in 2018 compared to 2017. Excluding the impact of underwriting losses related to the 2018 Catastrophes and 2017
Catastrophes described above, the combined ratio was flat compared to 2017. The increase in the consolidated combined ratio
in 2017 compared to 2016 was driven by the impact of the 2017 Catastrophes. Excluding the impact of underwriting losses
related to the 2017 Catastrophes and 2016 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 2018, 2017 and 2016 combined ratio included $551.0 million, $501.5 million and $505.2 million, respectively, of favorable
development on prior years’ loss reserves. Although favorable development on prior years’ loss reserves increased in 2018
compared to 2017, development on prior years’ loss reserves had a less favorable impact on the combined ratio in 2018 due to
higher earned premium volume in 2018 compared to 2017. Favorable development on prior years’ loss reserves in 2017 was
comparable to 2016, however 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 on the consolidated combined ratio, 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 United Kingdom (U.K.) bodily injury cases. In 2017, the Ogden Rate decreased from plus 2.5% to minus 0.75%, which
represented the first rate change since 2001. The effect of the rate change was 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. There was no significant development on our auto product lines in 2018. 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 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 or 2018.
In connection with our quarterly reviews of loss reserves, the actuarial methods we used have exhibited a favorable trend for the
2010 to 2017 accident years during 2018. 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 Insurance segment, which developed more
favorably than we had expected. 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.
136
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 2019, we
caution readers not to place undue reliance on this favorable trend.
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.
Insurance Segment
The combined ratio for the Insurance segment for 2018 was 94% (including three points for the underwriting loss on the 2018
Catastrophes) compared to 97% (including eight points for the underwriting loss on the 2017 Catastrophes) in 2017 and 93%
(including one point for the underwriting loss on the 2016 Catastrophes) in 2016. The decrease in the 2018 combined ratio was
driven by lower catastrophe losses, partially offset by a less favorable prior accident years’ loss ratio compared to 2017. Although
favorable development on prior years’ loss reserves in 2018 was comparable to 2017, the benefit to our prior years’ loss ratio was
reduced given the impact of higher earned premiums in 2018 compared to 2017. 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 in 2017
compared to 2016.
The Insurance segment’s 2018 combined ratio included $502.3 million of favorable development on prior years’ loss reserves
compared to $500.6 million in 2017 and $369.6 million in 2016. In 2018, more favorable development on our workers’
compensation and marine and energy product lines was offset by less favorable development on our professional liability and
property product lines compared to 2017. The increase in favorable development on the marine and energy product lines was
largely attributable to favorable development in 2018 related to the 2017 Catastrophes.
The increase in favorable development on prior years’ loss reserves in 2017 compared to 2016 was primarily due to adverse
development on our medical malpractice and specified medical product lines in 2016, which totaled $71.2 million or two points
on the segment combined ratio. There was no significant development on these product lines in 2017 or 2018. 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 following is a discussion of the product lines with the most significant development on prior years’ loss reserves in the
Insurance segment during the last three years.
In 2018, 2017 and 2016, we experienced $143.0 million, $144.1 million and $127.1 million, respectively, of favorable
development on various long-tail general and excess liability lines. The favorable development in 2018 occurred across several
accident years, but was most significant on the 2012 to 2017 accident years. The favorable development in 2017 occurred across
several accident years, but was most significant on the 2011 to 2016 accident years. The favorable development in 2016 occurred
across several accident years, but was most significant on the 2013 to 2015 accident years. In 2018, the favorable development
was due in part to lower than expected claim frequency. 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 in other general liability product lines. In 2016, the favorable development was due in part to lower loss severity than
originally anticipated. Our casualty business includes product lines that are long-tail and volatile in nature. For example, during
2018, 2017 and 2016, actual incurred losses and loss adjustment expenses on prior accident years for reported claims on certain
of our casualty lines were $81.3 million, $52.3 million and $51.8 million, respectively, less than we anticipated in our actuarial
analyses. As a result, our actuaries reduced their estimates of ultimate losses in 2018, 2017 and 2016, and management assigned
greater credibility to this favorable experience and reduced prior years’ loss reserves accordingly.
137
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 favorable development on prior years’ loss reserves in the Insurance segment in 2018, 2017 and 2016 also included
$100.1 million, $65.6 million and $41.1 million, respectively, of favorable development in our workers’ compensation product
line. In 2018, the favorable development was most significant on the 2013 to 2017 accident years. In 2017, the favorable
development was most significant on the 2012 to 2016 accident years. In 2016, the favorable development was most significant
on the 2012 to 2015 accident years. In all three years, actual incurred losses and loss adjustment expenses on prior accident years
for reported claims on our workers’ compensation product lines were less than we anticipated in our actuarial analyses 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 and management assigned greater credibility to this favorable experience and reduced
prior years’ loss reserves accordingly.
In 2018, 2017 and 2016, we also experienced favorable development in certain of our professional liability product lines. In 2018,
we experienced $68.5 million of favorable development on our professional liability product lines. The favorable development
occurred across several accident years, but was most significant on the 2016 and 2017 accident years. In 2017, we experienced
$100.4 million of favorable development on our professional liability product lines, primarily on the 2013 to 2016 accident
years. In 2018 and 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
$104.6 million of favorable development on our other professional liability product lines 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.
In 2018, 2017 and 2016, we also experienced favorable development on our marine and energy product lines of $70.7 million,
$42.5 million and $50.2 million, respectively. In 2018, the favorable development was driven primarily by favorable
development related to the 2017 Catastrophes and lower than expected development on known claims. In 2017 and 2016, the
favorable development was driven primarily by lower than expected claims activity on prior accident years and favorable claims
settlements. In 2018, the favorable development on prior years’ loss reserves was most significant on the 2013 to 2017 accident
years. In 2017, the favorable development on prior years’ loss reserves was most significant on the 2014 and 2015 accident years.
In 2016, the favorable development on prior year loss reserves was most significant on the 2013 to 2015 accident years.
In 2017 we experienced $29.1 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 2016, we experienced favorable development on prior years’ loss reserves on our property product lines, primarily our inland
marine and commercial property lines. Favorable development on our inland marine business totaled $20.1 million in 2016,
primarily on the 2014 and 2015 accident years and was attributable to lower than expected frequency of large loss events.
Favorable development on our commercial property product lines totaled $35.3 million in 2016 and was due to lower than
expected losses and development on known claims, primarily on the 2012 to 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.
138
Reinsurance Segment
The combined ratio for the Reinsurance segment for 2018 was 113% (including 19 points for the underwriting loss on the 2018
Catastrophes) compared to 132% (including 32 points for the underwriting loss on the 2017 Catastrophes) for 2017 and 87%
(including four points for the underwriting loss on the 2016 Catastrophes) for 2016. The decrease in the 2018 combined ratio
was driven by lower catastrophe losses in 2018 compared to 2017 and favorable development on prior accident years’ loss
reserves in 2018 compared to adverse development in 2017. These decreases were partially offset by a higher expense ratio in
2018 compared to 2017. Excluding the impact of underwriting losses related to the 2018 and 2017 Catastrophes described above,
the current accident year loss ratio decreased, primarily due to net favorable premium adjustments in 2018 compared to net
unfavorable premium adjustments in 2017. The increase in the expense ratio was driven by the impact of lower net assumed
reinstatement premiums related to the 2018 Catastrophes compared to the 2017 Catastrophes and a lower benefit from ceding
commissions in 2018, partially offset by lower profit sharing expenses in 2018 compared to 2017.
The increase in the 2017 combined ratio compared to 2016 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 2017
Catastrophes and 2016 Catastrophes described above, the current accident year loss ratio increased, primarily due to higher
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 in 2017, including
reinstatement premiums related to the 2017 Catastrophes. These decreases in the expense ratio were partially offset by the
impact of higher earned premiums on our quota share business in 2017 compared to 2016, which carries a higher commission
rate than other business in the Reinsurance segment.
The Reinsurance segment’s 2018 combined ratio included $43.0 million of favorable development on prior years’ loss reserves
compared to $7.8 million of adverse development in 2017 and $125.5 million of favorable development in 2016. In 2017, prior
years’ loss reserves included $85.0 million of adverse development, or nine points on the 2017 Reinsurance segment combined
ratio, related to the decrease in the Ogden Rate. Excluding the impact of the 2017 change in the Ogden Rate, favorable
development on prior years’ loss reserves decreased in 2018 compared to 2017 due to less favorable development on our
property product lines in 2018, including adverse development related to the 2017 Catastrophes. Favorable development in 2018
was most significant on our marine and energy and surety product lines. Partially offsetting this favorable development was
adverse development on our professional liability product lines in 2018. In 2017, adverse development resulting from the Ogden
Rate change described above and on our professional liability product lines was largely offset by favorable development on our
property product lines. In 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.
The favorable development on prior years’ loss reserves in the Reinsurance segment in 2018 included $23.9 million of favorable
development on our surety product lines, across several accident years. The favorable development in 2018 was driven primarily
by lower than expected development on known claims. 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 2018, we also experienced $18.0 million of favorable development on our marine and energy product lines, primarily driven
by lower loss severity and lower claims frequency. 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.
The favorable development occurred across several accident years, but was most significant on the 2012 to 2016 accident years.
Prior years’ loss reserves in the Reinsurance segment in 2018 also included $16.2 million of adverse development on our
professional liability product lines. In 2018, we experienced adverse claims activity on certain of our professional liability
product lines and recognized $35.7 million of adverse development. Partially offsetting the adverse development on certain of
our professional liability product lines, was $19.6 million of favorable development on our medical product lines during 2018,
primarily on the 2009 to 2013 accident years. The favorable development was driven by a combination of factors, including
lower loss severity than was originally anticipated and a decrease in the frequency of claims. 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.
139
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)
Favorable development on prior years’ loss reserves on our property lines of business in 2017 and 2016 were $41.2 million and
$67.6 million, respectively. In both years, the favorable development on prior years’ loss reserves was most significant on the
2013 to 2015 accident years and 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.
The following tables summarize the increases (decreases) in prior years’ loss reserves, as discussed above.
(dollars in millions)
Insurance segment:
General liability
Workers’ compensation
Professional liability
Marine and energy
Reinsurance segment:
Surety
Marine and energy
Professional liability
Net other prior years’ redundancy
Decrease
(dollars in millions)
Insurance segment:
General liability
Workers’ compensation
Professional liability
Marine and energy
Personal lines
Reinsurance segment:
Ogden rate decrease
Property
Net other prior years’ redundancy
Increase (decrease)
Year Ended December 31, 2018
Insurance
Segment
Reinsurance
Segment
Other
Total
$ (143.0)
(100.1)
(68.5)
(70.7)
(120.0)
$ (502.3)
$ (143.0)
(100.1)
(68.5)
(70.7)
(23.9)
(18.0)
16.2
(143.0)
$ (551.0)
$ (23.9)
(18.0)
16.2
(17.3)
$ (43.0)
$
$
(5.7)
(5.7)
Year Ended December 31, 2017
Insurance
Segment
Reinsurance
Segment
Other
Total
$ (144.1)
(65.6)
(100.4)
(42.5)
(29.1)
(118.9)
$ (500.6)
$ (144.1)
(65.6)
(100.4)
(42.5)
(29.1)
85.0
(41.2)
(163.6)
$ (501.5)
$ 85.0
(41.2)
(36.0)
$ 7.8
$
$
(8.7)
(8.7)
140
(dollars in millions)
Insurance segment:
General liability
Workers’ compensation
Property:
Commercial property
Inland marine
Professional liability:
Medical malpractice and
specified medical
All others
Marine and energy
Reinsurance segment:
Property
Net other prior years’ redundancy
Decrease
Year Ended December 31, 2016
Insurance
Segment
Reinsurance
Segment
Other
Total
$ (127.1)
(41.1)
(35.3)
(20.1)
71.2
(104.6)
(50.2)
(62.4)
$ (369.6)
$ (127.1)
(41.1)
(35.3)
(20.1)
71.2
(104.6)
(50.2)
(67.6)
(130.4)
$ (505.2)
$ (67.6)
(57.9)
$ (125.5)
$
$
(10.1)
(10.1)
Over the past three years, we have experienced favorable development on prior years’ loss reserves of 6% of beginning of year
net loss reserves. 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 2019
would range from favorable development of less than 1%, or $50 million, to favorable development of approximately 7%, or
$650 million, of December 31, 2018 net loss reserves.
Premiums
The following table summarizes gross premium volume.
GROSS PREMIUM VOLUME
Years Ended December 31,
(dollars in thousands)
Insurance segment
Reinsurance segment
Other
TOTAL UNDERWRITING
Other - Program services
TOTAL
2018
2017
2016
$ 4,749,166
1,050,870
(1,040)
$ 4,141,201
1,112,101
(195)
$ 3,755,081
1,041,055
509
5,798,996
2,065,473
5,253,107
4,796,645
253,853
—
$ 7,864,469
$ 5,506,960
$ 4,796,645
141
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 in our underwriting segments increased 10% in 2018 compared to 2017. The increase in gross premium
volume was attributable to an increase in gross premium volume in our Insurance segment, partially offset by a decrease in
gross premium volume in our Reinsurance segment. Also impacting consolidated gross premium volume in 2018 was
$2.1 billion 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. Substantially all gross premium written in our program services business
was ceded in 2018 and 2017.
Gross premium volume in our Insurance segment increased 15% in 2018 compared to 2017 driven by increased premiums from
our surety and collateral protection businesses, both of which were acquired in 2017, as well as growth within our general and
professional liability product lines and personal lines business.
Gross premium volume in our Reinsurance segment decreased 6% in 2018 compared to 2017, primarily due to a large specialty
quota share treaty entered into in the first quarter of 2017 that did not renew in 2018, as well as lower gross premium volume in
our property product lines, primarily due to contracts that did not renew. These decreases were partially offset by growth in
2018 in our surety product lines as well as higher gross premium volume in our general liability, professional liability and
worker’s compensation product lines resulting from favorable premium adjustments and timing of renewals. Significant
variability in gross premium volume can be expected in our Reinsurance segment due to the timing of individually significant
contracts and multi-year contracts.
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 both of our underwriting segments. Also impacting
consolidated gross premium volume in 2017 was $253.9 million of gross premium written through our program services
business.
Gross premium volume in our Insurance segment increased 10% in 2017 compared to 2016 driven by growth within our marine
and energy and general liability product lines, personal lines and specialty programs business as well the contribution of
premiums from our surety and collateral protection product lines, both of which were acquired in 2017.
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.
We experienced soft insurance market conditions across most of our property product lines, as well as on our marine and energy
line beginning in 2013 and continuing through 2017. 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, in 2018, we experienced slightly more favorable rates, particularly on our catastrophe exposed
and loss affected product lines. However, we also experienced rate decreases on other product lines and the market remains
competitive. 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
Years Ended December 31,
(dollars in thousands)
Insurance segment
Reinsurance segment
Other
TOTAL UNDERWRITING
Other - Program services
TOTAL
142
2018
2017
2016
$ 3,904,773
882,285
(1,468)
$ 3,439,796
978,160
(169)
$ 3,101,657
898,728
635
4,785,590
4,417,787
4,001,020
1,988
—
—
$ 4,787,578
$ 4,417,787
$ 4,001,020
Substantially all gross premium written in our program services business was ceded in 2018, resulting in $2.0 million of net
written premiums. All gross premium written in our program services business was ceded 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 83% in 2018, 84% in 2017 and 83% in 2016. The
decrease in net retention in 2018 was primarily driven by lower retention on our personal lines business within the Insurance
segment and an increase in catastrophe reinsurance coverage purchases in 2018 compared to 2017.
In 2017, the increase in net retention was driven by higher retention in our Reinsurance segment compared to 2016, primarily
due to changes in the mix of business. Net retention in the Insurance segment was flat in 2017 compared to 2016 due to lower
retention on our specialty programs and personal lines business, offset by higher retention on our casualty and professional
liability product lines.
The following table summarizes earned premiums.
EARNED PREMIUMS
(dollars in thousands)
Insurance segment
Reinsurance segment
Other
TOTAL UNDERWRITING
Other - Program services
TOTAL
Years Ended December 31,
2018
2017
2016
$ 3,783,939
928,574
(1,468)
$ 3,314,033
934,114
(169)
$ 3,028,844
836,264
762
4,711,045
4,247,978
3,865,870
1,015
—
—
$ 4,712,060
$ 4,247,978
$ 3,865,870
Earned premiums in our underwriting operations increased 11% in 2018 compared to 2017. The increase in earned premiums
was attributable to higher earned premiums in our Insurance segment, primarily driven by growth in gross premium volume
in our general liability, professional liability and marine and energy product lines. The increase was also attributable to earned
premiums within our new surety and collateral protection product lines acquired in 2017. These increases were partially
offset by the impact of lower net assumed reinstatement premiums related to the 2018 Catastrophes compared to the
2017 Catastrophes.
Earned premiums in our underwriting operations increased 10% in 2017 compared to 2016. The increase in earned premiums
was attributable to higher earned premiums across both of our underwriting segments and the favorable impact of net assumed
reinstatement premiums in 2017 compared to 2016. The increase in earned premiums in our Insurance segment was primarily
due to an increase in gross premium volume in our marine and energy and general liability product lines as well as 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 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 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.
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. We measure investing results by our net investment income and net investment gains as well as our taxable
equivalent total investment return.
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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 our investment performance.
(dollars in thousands)
Net investment income
Net investment gains (losses) (1)
Change in net unrealized investment gains
on available-for-sale securities (1)
Investment yield (2)
Taxable equivalent total investment return,
before foreign currency effect
Taxable equivalent total investment return
Invested assets, end of year
Years Ended December 31,
2018
2017
2016
434,215)% $
(437,596)% $
405,709)% $
373,230%
(5,303)% $ 65,147%
(299,446)% $ 1,125,440)% $ 342,111%
2.4%
2.6%)
2.7%)
$
$
$
9.2%)
10.2%)
$ 19,238,261)% $ 20,570,337%)
(0.7)%
(1.0)%
5.0%
4.4%
$ 19,058,666%
(1) Effective January 1, 2018, we adopted ASU No. 2016-01 and equity securities are no longer classified as available-for-sale with unrealized
gains and losses recognized in other comprehensive income, rather, changes in the fair value of equity securities are now recognized in net
income. Prior periods have not been restated to conform to the current presentation. See note 1 of the notes to consolidated financial
statements.
(2) 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) decreased 6% in 2018.
The decrease in the investment portfolio in 2018 was attributable to a decrease in short-term investments of $1.1 billion and
decreases in the fair value of equity securities of $425.6 million, offset by cash flows from operations of $892.9 million. Invested
assets increased 8% in 2017 compared to 2016. The increase in the investment portfolio in 2017 was attributable to an
increase in the fair value of the investment portfolio 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.
During 2018, 2017 and 2016, we increased our holdings of equity securities in order to achieve higher long-term investment
returns. The net increase in our holdings of equity securities in 2018 was more than offset by declines in the fair value of the
securities. During 2018, we also used cash and cash equivalents and short-term investments to purchase fixed maturities. In
2017, 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. In 2017 and 2018, we
also decreased our holdings of short-term investments to fund acquisitions. In 2016, we also increased our holdings of fixed
maturities and decreased our holdings of cash and cash equivalents and short-term investments to more closely match the
duration of our fixed maturity portfolio with our insurance liabilities. Short-term investments, cash and cash equivalents
and restricted cash and cash equivalents represented 18% of our invested assets at December 31, 2018 compared to 23%
at December 31, 2017. Fixed maturities represented 52% of our invested assets at December 31, 2018 compared to 48% at
December 31, 2017. Equity securities at December 31, 2018 represented 30% of our invested assets compared to 29% at
December 31, 2017.
Net investment income increased 7% in 2018 compared to 2017. The increase in 2018 was driven by an increase in short-term
investment income, primarily due to higher short-term interest rates, and higher dividend income due to increased equity
holdings. 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. See note 3(d) of the notes to consolidated financial statements for further details on the components
of net investment income.
Net investment losses were $437.6 million in 2018 compared $5.3 million in 2017 and net investment gains of $65.1 million in
2016. See note 3(f) of the notes to consolidated financial statements for further details on the components of net investment
gains (losses). Net investment losses in 2018 were primarily attributable to a decrease in the fair value of equity securities of
$425.6 million in 2018, which was driven by unfavorable market value movements and a decline in the fair value of our
investments in the Markel CATCo Funds. Net investment losses in 2018 and 2017 included losses of $108.6 million and $52.0
million, respectively, attributable to the decline in fair value of our investments in the Markel CATCo Funds compared to net
144
investment gains of $21.0 million on our investments in the Markel CATCo Funds in 2016. The decrease in fair value in 2018
and 2017 primarily resulted from decreases in the net asset value of the Markel CATCo Funds, which were driven by the impact
of losses from Hurricanes Harvey, Irma and Maria and the 2017 wildfires in California on the underlying reinsurance contracts
in which the Markel CATCo Funds are invested. Net investment losses in 2018 also included a loss of $16.0 million related to
our investment in CROF. In 2017, the Company’s investment in CROF was considered an available-for-sale security, with
changes in fair value included in other comprehensive income. Other comprehensive income for 2017 included a loss of $5.8
million attributable to our investment in CROF. At December 31, 2018 and 2017, the fair value of our investments in the
Markel CATCo Funds and CROF totaled $58.2 million and $189.3 million, respectively, which is included in equity securities
on our consolidated balance sheets. These investments remain exposed to adverse development on loss events that occurred in
2018 and 2017, which may result in further declines in fair value.
Net realized investment gains (losses) in 2018, 2017 and 2016 included $16.3 million, $4.5 million and $8.2 million,
respectively, of realized losses from sales of available-for-sale securities. Proceeds received on available-for-sale securities sold at
a loss were $88.7 million in 2018, $306.1 million in 2017 and $138.3 million in 2016. See note 3(b) of the notes to consolidated
financial statements for further discussion of unrealized losses on available-for-sale securities.
In 2018, the decrease in net unrealized gains on available-for-sale investments was $299.4 million, which was attributable to a
decrease in the estimated fair value of our fixed maturity portfolio in 2018 as a result of an increase in interest rates. In 2017, net
unrealized gains on available-for-sale 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 available-for-sale
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.
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 investment gains or losses, as well as changes in unrealized gains or
losses on available-for-sale securities, 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 U.S. 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 investment gains (losses) and change in net unrealized
investment gains on available-for-sale securities
Taxable equivalent effect for interest and dividends (2)
Other (3)
Taxable equivalent total investment return
Years Ended December 31,
2018
2.7%
(0.6)%
0.4%
(3.4)%
0.1%
(0.2)%
(1.0)%
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%
(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.
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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)
Markel Ventures
We report the results of our Markel Ventures operations in our Markel Ventures segment. This segment includes a diverse
portfolio of businesses from different industries that offer various types of products and services to businesses and consumers,
predominately in the United States. Our products group manufactures, builds or produces consumer and industrial products,
such as equipment used in baking systems and food processing, portable dredges, over-the-road car haulers and equipment,
laminated oak and composite wood flooring used in the trucking industry, dormitory furniture, wall systems, medical casework
and marine panels, storage and transportation equipment for specialty gas, ornamental plants, fashion handbags and residential
homes. The services group offers consumer and business services, such as leasing and management of manufactured housing
communities, behavioral healthcare, concierge health programs, retail intelligence and management and technology consulting.
We measure Markel Ventures’ results, by its operating income and net income, as well as earnings before interest, income taxes,
depreciation and amortization (EBITDA). We consolidate the results of our Markel Ventures subsidiaries on a one-month lag,
with the exception of significant transactions or events that occur during the intervening period.
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:
Inventory
Property, plant and equipment, net
Other
Total Other assets
TOTAL ASSETS
LIABILITIES AND EQUITY
Accounts payable and accrued liabilities
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,
2018
2017
$ 164,336
188,048
497,338
431,457
$ 165,172
190,208
424,982
400,589
298,729
407,834
136,764
843,327
227,773
369,433
122,571
719,777
$ 2,124,506
$ 1,900,728
$ 149,907
684,099
258,843
$ 101,526
554,282
244,082
1,092,849
174,062
860,931
(3,336)
857,595
899,890
166,270
837,060
(2,492)
834,568
$ 2,124,506
$ 1,900,728
(1) Senior long-term debt and other debt as of December 31, 2018 and 2017 included $606.0 million and $476.0 million, respectively, of debt due
to other subsidiaries of Markel Corporation, which was eliminated in consolidation.
(2) Shareholders’ equity as of December 31, 2018 and 2017 included $658.6 million and $663.6 million, respectively, of common stock, which
represents Markel Corporation’s investment in Markel Ventures, which was eliminated in consolidation.
146
(dollars in thousands)
OPERATING REVENUES
Net investment income
Products revenues
Services and other revenues (1)
Total Operating Revenues
OPERATING EXPENSES
Products expenses
Services and other expenses
Amortization of intangible assets
Impairment of goodwill and intangible assets
Total Operating Expenses
Operating Income
Net foreign exchange gains
Interest expense(2)
Income Before Income Taxes
Income tax expense (benefit)
Net Income
Net income (loss) attributable to noncontrolling interests
Years Ended December 31,
2018
2017
2016
$
513
1,497,523
417,461
$
332
951,012
385,808
$ 109
885,473
328,976
1,915,497
1,337,152
1,214,558
1,413,248
366,739
40,208
14,904
1,835,099
80,398
(21)
28,423
51,996
18,579
33,417
(1,841)
850,449
336,484
31,429
—
755,591
297,841
29,105
18,723
1,218,362
1,101,260
118,790
113,298
(1,090)
20,009
99,871
(9,303)
109,174
5,615
(212)
15,718
97,792
36,005
61,787
5,615
NET INCOME TO SHAREHOLDERS
$ 35,258
$ 103,559
$ 56,172
(1) Services and other revenues for the years ended December 31, 2018 and 2017 included intercompany revenues of $2.9 million and
$3.5 million, respectively, which were eliminated in consolidation. There were no intercompany revenues in 2016.
(2) Interest expense for the years ended December 31, 2018, 2017 and 2016 included intercompany interest expense of $18.1 million,
$12.3 million and $9.7 million, respectively, which was eliminated in consolidation.
Revenues from our Markel Ventures segment increased in 2018 compared to 2017, primarily due to the acquisition of Costa
Farms in the third quarter of 2017 and Brahmin in the fourth quarter of 2018. The increase was also attributable to higher sales
volumes from certain of our equipment-manufacturing and transportation-related businesses as well as one of our consulting
services businesses.
The increase in revenues in 2017 compared to 2016 was partially attributable to the acquisition of Costa Farms. In 2017, we
also experienced higher sales volumes from certain of our consulting services and healthcare businesses as well as one of our
consumer and building products businesses, partially offset by lower sales volumes at one of our transportation-related
businesses.
For the year ended December 31, 2018, operating expenses for Markel Ventures included a $33.5 million accrual related to the
internal investigation and remediation associated with the manufacture of products at one of our businesses and a $14.9 million
impairment charge related to intangible assets at this business. The amount accrued related to this matter represented
management’s best estimate of amounts considered probable including: remediation costs associated with the manufacture of
products, costs associated with the investigation of this matter, a write down of inventory on hand and settlement costs related
to pre-existing litigation. As of December 31, 2018, $33.5 million remained accrued for remediation efforts which are
continuing into 2019. Final resolution of this matter could ultimately result in additional remediation and other costs, the
amount of which cannot be estimated at this time, but which could have a material impact on our net income to shareholders.
However, management does not expect this matter ultimately will have a material adverse effect on our results of operations or
financial condition. If a determination is made that additional costs associated with this matter are considered probable, these
additional costs will be recognized as an expense in our results of operations.
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)
For the year ended December 31, 2017, operating expenses included $64.0 million of insurance recoveries, net of $19.6 million
of storm losses, at one of our consumer and building products businesses attributable to Hurricane Irma. Insurance recoveries
included 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 also included
$19.0 million of expense attributable to an increase in our estimate of the contingent consideration obligation related to our
acquisition of Costa Farms, which is further described below.
Operating expenses in 2016 included $18.7 million of goodwill impairment charges related to one of our industrial
manufacturing reporting units and $10.3 million of expense attributable to an increase in our estimate of the contingent
consideration obligation related to our 2015 acquisition of CapTech, which is further described below.
A portion of the purchase consideration for the Costa Farms and CapTech 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 respective acquisition dates. Subsequent increases in our expectation of
the contingent consideration obligation resulted in charges to operating expenses. As of December 31, 2018, the fair value of our
outstanding contingent consideration obligation for Costa Farms and CapTech was $39.0 million and $9.4 million, respectively,
which reflects the maximum amount remaining unpaid under the respective purchase agreements. Contingent consideration
for CapTech of $5.0 million was paid in both 2018 and 2017. Contingent consideration for Costa Farms of $15.2 million was
paid in 2018. Contingent consideration for Cottrell of $44.7 million was paid in 2016.
Net income to shareholders in 2017 included a one-time tax benefit of $37.1 million 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.
After considering the impact of the amounts quantified and discussed above, operating income and net income to shareholders
increased from 2017 to 2018 and decreased from 2016 to 2017. The increase in net income to shareholders in 2018 was due to
having a full year of Costa Farms operations and higher sales volumes from certain of our businesses in 2018 compared to 2017,
as described above. The decrease in 2017 compared to 2016 was primarily due to higher materials costs and lower sales volumes
at one of our transportation-related businesses, partially offset by higher sales volumes in both our products and services groups,
as discussed above.
The following table summarizes the cash flows attributable to Markel Ventures for the years ended December 31, 2018, 2017,
and 2016.
(dollars in thousands)
Cash, cash equivalents, restricted cash and restricted
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)
Increase (decrease) in cash, cash equivalents, restricted
cash and restricted cash equivalents
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND
RESTRICTED CASH EQUIVALENTS, END OF YEAR
Years Ended December 31,
2018
2017
2016
$ 165,172
163,572
(256,533)
92,125
$ 105,316
195,054
(456,586)
321,388
$ 120,889
100,105
(55,293)
(60,385)
(836)
59,856
(15,573)
$ 164,336
$ 165,172
$ 105,316
(1) Net cash provided (used) by financing activities for the years ended December 31, 2017 included capital contributions from our holding
company (Markel Corporation) of $145.0 million, which were eliminated in consolidation. There were no capital contributions from our
holding company for the years ended December 31, 2018 and 2016.
(2) Net cash provided (used) by financing activities for the year and ended December 31, 2018 and 2017 included net additions to debt of
$130.0 million and $265.0 million, respectively, which were eliminated in consolidation. Net cash provided (used) by financing activities
for the year ended December 31, 2016 includes net repayments of debt of $5.9 million, which were eliminated in consolidation.
148
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, operating income and net income, to monitor and evaluate the performance of our Markel Ventures
segment. 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 or amortization resulting from purchase accounting.
The following table reconciles Markel Ventures operating income to Markel Ventures EBITDA.
(dollars in thousands)
Markel Ventures operating income (1)
Depreciation expense
Amortization of intangible assets
Markel Ventures EBITDA
Years Ended December 31,
2018
2017
2016
$ 77,479
52,207
40,208
$ 169,894
$ 115,250
41,704
31,429
$ 113,298
35,498
29,105
$ 188,383
$ 177,901
(1) Operating income for the years ended December 31, 2018 and 2017 excluded intercompany revenues of $2.9 million and $3.5 million,
respectively. There were no intercompany revenues in 2016.
For the years ended December 31, 2018, 2017 and 2016, Markel Ventures EBITDA was impacted by the significant operating
expense items previously discussed. Excluding the impact of the significant operating expense items in all three years, EBITDA
increased from 2017 to 2018 and decreased from 2016 to 2017. The increase in 2018 was a result of having a full year of Costa
Farms operations and higher sales volumes at certain businesses in our products group, partially offset by higher sales volumes
in both our products and services groups, as discussed above.
Other Operations
The following table presents the components of operating revenues and operating expenses that are not included in a reportable
segment.
(dollars in thousands)
Service and other revenues
and expenses
Investment management
Program services
Life and annuity
Other
Amortization of intangible assets (1)
Impairment of goodwill and
intangible assets(2)
TOTAL
Years Ended December 31,
2018
2017
2016
Operating
Revenues
Operating
Expenses
Operating
Revenues
Operating
Expenses
Operating
Revenues
Operating
Expenses
$ 91,527
95,688
1,660
31,666
220,541
$ 21,417
24,298
27,855
34,615
108,185
75,722
184,294
$ 28,740
15,328
2,022
33,905
79,995
$ 52,636
6,508
28,218
34,775
122,137
49,329
—
$ 56,455
—
1,891
34,984
93,330
$ 46,190
—
26,504
45,606
118,300
39,428
—
$ 220,541
$ 368,201
$ 79,995
$ 171,466
$ 93,330
$ 157,728
(1) Excludes amortization of intangible assets attributable to Markel Ventures, which is included in the Markel Ventures segment.
Amortization of intangible assets is not allocated to any other reportable segments.
(2) Excludes impairment of goodwill and intangible assets attributable to Markel Ventures, which is included in the Markel Ventures segment.
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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)
Markel CATCo
Late in the fourth quarter of 2018, we were contacted by and received inquiries from the U.S. Department of Justice, U.S.
Securities and Exchange Commission and Bermuda Monetary Authority into loss reserves recorded in late 2017 and early 2018
at Markel CATCo Re (the Markel CATCo Inquiries), an unconsolidated subsidiary managed by MCIM. As a result, we engaged
outside counsel to conduct an internal review, through which we discovered violations of Markel policies for two senior
executives of MCIM that existed as of December 31, 2018. As a result, these two executives are no longer with the Company
(the MCIM Executive Departures).
As of December 31, 2017, we had accrued incentive and retention compensation for the two executives totaling $34.9 million
which remained unpaid as of December 31, 2018. This amount was reversed in the fourth quarter of 2018 and reflected as a
reduction to services and other expenses. All accruals for retention and incentive compensation recorded earlier in 2018 for the
two executives were also reversed in the fourth quarter of 2018. In conjunction with the Markel CATCo acquisition in
December 2015, certain incentive and retention compensation arrangements were established for employees of MCIM, a
portion of which was based on expected management fees over the three year period following the acquisition. Our initial
estimate of the amounts payable under the incentive and retention compensation arrangements totaled $100 million, portions
of which were paid in 2018, 2017 and 2016. After considering the reversal of accruals discussed above, our total expected
payments under these arrangements across all years is $52.9 million. As of December 31, 2018, accrued and unpaid incentive
and retention expense for other employees of MCIM totaled $19.2 million, of which $12.3 million was expensed during the year
ended December 31, 2018. Compensation expense for the years ended December 31, 2017 and 2016 included $38.1 million
and $33.2 million, respectively, for these incentive and retention compensation arrangements.
As a result of the governmental inquiries into loss reserves at Markel CATCo Re, and taking into consideration the departure of
two senior MCIM executives and special redemption rights that are now being offered to investors in the Markel CATCo Funds
management concluded MCIM’s ability to maintain or raise capital has been adversely impacted. Therefore, we performed an
assessment of the recoverability of goodwill and intangible assets at the MCIM reporting unit as of December 31, 2018. As a
result of the assessment, we reduced the carrying value of the goodwill and intangible assets of the MCIM reporting unit to zero,
which resulted in a goodwill impairment charge of $91.9 million and an intangible asset impairment charge of $87.1 million,
both of which were recorded to impairment of goodwill and intangible assets in the consolidated statement of loss and
comprehensive loss for the year ended December 31, 2018. See note 7 of the notes to consolidated financial statements for
further details around these impairment charges.
See note 18 of the notes to consolidated financial statements for further details around recent developments in our Markel
CATCo operations.
Interest Expense, Loss on Early Extinguishment of Debt and Income Taxes
Interest Expense and Loss on Early Extinguishment of Debt
Interest expense was $154.2 million in 2018 compared to $132.5 million in 2017 and $129.9 million in 2016. The increase in
interest expense in 2018 compared to 2017 was primarily due to interest associated with our 4.30% unsecured senior notes and
our 3.50% unsecured senior notes issued in the fourth quarter of 2017, partially offset by the repayment of our 7.20% unsecured
notes in the second quarter of 2017. 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.
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.
150
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
The effective tax rate for 2018 and 2017 is not meaningful due to large non-recurring items in both periods and the small pretax
income in 2018.
Income tax expense was $122.5 million in 2018 compared to an income tax benefit of $313.5 million in 2017. In 2017, as a
result of the enactment of the TCJA, we recorded a one-time tax benefit of $339.9 million (the TCJA Benefit). The TCJA Benefit
was attributable to the remeasurement of our 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, offset in part by the tax on the deemed repatriation of foreign earnings. After extensive discussions and analysis of our
capital and tax profile resulting from the enactment of the TCJA, in 2018 we decided to elect to treat our most significant U.K.
subsidiaries as domestic corporations for U.S. tax purposes. Therefore, the earnings and profits from those subsidiaries are no
longer considered to be indefinitely reinvested and we recorded a one-time deferred tax charge of $103.3 million related to the
book and tax basis differences attributable to those subsidiaries.
In addition to the large non-recurring item mentioned above, our income tax expense in 2018 differs from the tax benefit
calculated at the statutory rate of 21% primarily as a result of nondeductible losses of $124.6 million on our investments in the
Markel CATCo Funds and CROF in 2018, partially offset by the impact of tax-exempt investment income. The increase in our
tax expense in 2018 compared to our tax benefit in 2017 was primarily due to the large non-recurring item in each year.
In 2017, our income tax benefit differs significantly from tax expense calculated at the statutory rate of 35% primarily due to
the TCJA Benefit as well as the impact of tax benefits provided by 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 than the U.S.
statutory rate. In 2016, our income tax expense was lower than the tax expense calculated at the statutory rate of 35%
primarily as a result of tax exempt investment income. Excluding the impact of the TCJA Benefit, the decrease in tax expense
in 2017 compared to 2016 was primarily due to lower earnings in 2017, offset in part by the impact of losses attributable to our
foreign operations.
Comprehensive Income (Loss) to Shareholders
Comprehensive loss to shareholders was $375.8 million in 2018 compared to comprehensive income of $1.2 billion and
$667.0 million in 2017 and 2016, respectively. Comprehensive loss to shareholders for 2018 included a decrease in net
unrealized gains on available-for-sale investments, net of taxes, of $233.5 million and net loss to shareholders of $128.2 million.
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.
Effective January 1, 2018, we adopted ASU No. 2016-01 and as a result, equity securities are no longer classified as available-
for-sale with unrealized gains and losses recognized in other comprehensive income. Rather, all changes in fair value of equity
securities are now recognized in net income. For the year ended December 31, 2018, the change in fair value of equity securities
was a loss of $425.6 million included in net loss compared to a gain of $1.1 billion for the year ended December 31, 2017, of
which, $1.0 billion was included in other comprehensive income. This change in presentation has no impact on comprehensive
income to shareholders, however, will result in more volatility in net income.
Book value per share decreased 4% for the year ended December 31, 2018 and increased 13% for the year ended December 31,
2017, primarily due to changes in comprehensive income to shareholders, as described above.
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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)
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.
e
r
a
h
s
r
e
p
e
u
l
a
v
k
o
o
B
$700
$600
$500
14%
$400
$300
$200
$100
$0
11%
11%
11%
543.96
561.23
606.30
683.55
653.85
7%
2014 2015 2016 2017 2018
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
Holding Company
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 both December 31, 2018 and December 31, 2017.
At December 31, 2018, our holding company (Markel Corporation) held $2.6 billion of invested assets compared to $2.7 billion
at December 31, 2017. The decrease in holding company invested assets was primarily due to cash used for acquisitions, interest
payments associated with our unsecured senior notes and loans and capital contributions made to our subsidiaries, partially
offset by dividends received from our subsidiaries. At December 31, 2018, invested assets approximated 18 times annual interest
expense of the holding company. Excess liquidity at Markel Corporation is available, among other things, to increase capital at
our insurance subsidiaries, complete acquisitions, repurchase shares of our common stock or retire debt.
Our Board of Directors approved a new share repurchase program (the 2018 Program) to replace the previous share repurchase
program. The 2018 Program provides for the repurchase of up to $300 million of common stock and has no expiration date but
may be terminated by the Board of Directors at any time. As of December 31, 2018, we had repurchased 19,665 shares of
common stock under the 2018 Program at a cost of $21.4 million.
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 relies on dividends from its 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. There are also regulatory restrictions on the amount of dividends
that certain of our foreign subsidiaries may pay based on applicable laws in Bermuda and the U.K. At December 31, 2018, our
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domestic insurance subsidiaries and Markel Bermuda Limited could pay ordinary dividends of $839.9 million during the
following twelve months under these laws. Dividends available for distribution from our U.K. insurance subsidiaries to the
holding company will be determined during 2019.
At December 31, 2018, certain of our foreign subsidiaries are considered reinvested indefinitely and no provision for deferred
U.S. income taxes has been recorded. At December 31, 2018, cash and cash equivalents, restricted cash and cash equivalents
and short-term investments of $139.7 million were held by these 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 these foreign
subsidiaries and are not available for distributions to the holding company, to have a material effect on our liquidity or
capital resources.
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, 2018 and 2017, there were no borrowings outstanding
under our revolving credit facility.
On February 5, 2019, we amended our revolving credit facility to increase its leverage ratio covenant from “0.375 to 1.00” to
“0.40 to 1.00” effective on and after December 31, 2018. This change addresses the impact to the consolidated net worth
calculation under the facility from the purchase of Nephila in November 2018 and 2018 Catastrophe and investment losses
that occurred in the fourth quarter of 2018. Under the facility, consolidated net worth serves as the denominator for the
leverage ratio and excludes, among other things, the net worth associated with the Nephila acquisition. The change also
provides additional flexibility through the maturity date of the facility on August 1, 2019 for unanticipated future
developments, including additional catastrophe events, or greater than anticipated effects from known events.
We were in compliance with all covenants contained in our revolving credit facility, as amended, at December 31, 2018. 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.
We have access to various capital sources, including dividends from certain of our insurance and Markel Ventures 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. However, the availability and terms of future
financings will depend on a variety of factors, and could be adversely affected by, among other things, risks and uncertainties
related to recent developments at our Markel CATCo operations. For example, we may not be able to refinance our 7.125%
unsecured senior notes that come due September 30, 2019, if we choose to do so, or renew our revolving credit facility, which
matures on August 1, 2019, on terms favorable to us. See note 18 of the notes to consolidated financial statements for more
details regarding the Markel CATCo developments.
Cash Flows and Invested Assets
Net cash provided by operating activities was $892.9 million in 2018 compared to $858.5 million in 2017. Net cash flows from
operating activities for the year ended December 31, 2018 reflected higher net premium collections in the Insurance segment
and lower payments for employee profit sharing compared to 2017. Also reflected in net cash provided by operating activities for
2018 was higher claims settlement activity in both of our underwriting segments compared to 2017, due in part to the 2017
Catastrophes. As of December 31, 2017 and 2018, we had paid 27% and 65%, respectively, of our total estimated net losses on
the 2017 Catastrophes. We also experienced claims settlement activity related to the 2018 Catastrophes and as of December 31,
2018 we had paid 14% of our total estimated net losses on the 2018 Catastrophes.
Net cash used by investing activities was $797.2 million, $744.5 million and $1.6 billion in 2018, 2017 and 2016, respectively.
In 2018, net cash used for acquisitions of $1.2 billion was partially offset by reductions in our holdings of short-term
investments totaling $1.1 billion. Net cash used by investing activities in 2018 also included $574.9 million of purchases of
fixed maturities and equity securities, net of proceeds from maturities and sales of fixed maturities and sales of equity securities.
Net cash used by investing activities in 2017 included $1.4 billion of net cash used for acquisitions, offset by $531.3 million of
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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)
proceeds from maturities and sales of fixed maturities and sales of equity securities, net of purchases. In 2018 and 2017, we
reduced our holdings of short-term investments to fund acquisitions. Net cash used by investing activities in 2016 included
purchases of fixed maturities and equity securities, net of proceeds from sales, of $877.0 million. We also allocated more cash
and cash equivalents in 2016 to short-term investments to achieve higher returns while still maintaining adequate liquidity. See
“Investing Results” for further discussion of changes in our allocation of funds within the investment portfolio in 2016, 2017
and 2018. 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 decreased to $19.2 billion at December 31, 2018 from $20.6 billion at December 31, 2017. The decrease was
primarily attributable to cash used for acquisitions and a decrease in the fair value of our investment portfolio driven by
increases in interest rates and unfavorable movements in the equity markets during 2018.
Net cash used by financing activities was $179.0 million, $256.3 million and $152.0 million in 2018, 2017 and 2016,
respectively. In 2018, cash used by financing activities included $82.3 million of net repayments of debt. 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 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 2018, 2017 and 2016, cash of $54.0 million, $110.8 million and $51.1 million, respectively, was used to
repurchase shares of our common stock.
Credit Risk
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, 2018, representing 61% of the total reinsurance recoverable, 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 $401.1 million at December 31,
2018, collateralizing reinsurance recoverable balances due from these ten reinsurers.
Within our program services business, our reinsurance recoverable balance for the ten largest reinsurers was $1.9 billion at
December 31, 2018, representing 75% of the total reinsurance recoverable, before considering allowances for bad debts. Six
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 $1.6 billion at December 31, 2018,
collateralizing reinsurance recoverable balances due from these ten reinsurers. For reinsurers with a credit rating of lower than
“A” we employ a stringent collateral monitoring program under which the majority of the reinsurance recoverable balances
are fully collateralized. These collateral requirements are regularly monitored by a credit committee within our program
services operations. 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.
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Contractual Obligations
The following table summarizes our contractual cash payment obligations at December 31, 2018.
(dollars in thousands)
Unpaid losses and loss adjustment
expenses (estimated)
Life and annuity benefits (estimated)
Senior long-term debt and other debt
Operating leases
Payments Due by Period (1)
Total
Less than 1
year
1-3 years
4-5 years
$ 14,307,988
1,329,254
4,806,717
305,907
$ 4,672,613
82,439
436,557
48,853
$ 4,413,952
138,025
870,367
79,232
$ 2,295,875
128,351
768,446
60,159
More than
5 years
$ 2,925,548
980,439
2,731,347
117,663
TOTAL
$ 20,749,866
$ 5,240,462
$ 5,501,576
$ 3,252,831
$ 6,754,997
(1) See notes 9, 10, 11 and 18 of the notes to consolidated financial statements for further discussion of these obligations.
Unpaid losses and loss adjustment expenses were $14.3 billion and $13.6 billion at December 31, 2018 and 2017, respectively.
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, 2018.
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,
2018. 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 and any adjustments
to discount reserves.
The following table summarizes case reserves and IBNR reserves. 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)
Insurance
Reinsurance
Other
Program
Services
Consolidated
December 31, 2018
Case reserves
IBNR reserves
$ 2,719,038
5,204,653
$ 1,336,884
2,144,456
TOTAL
$ 7,923,691
$ 3,481,340
December 31, 2017
Case reserves
IBNR reserves
$ 2,705,663
4,976,016
$ 1,219,119
2,104,783
TOTAL
$ 7,681,679
$ 3,323,902
$ 166,844
219,485
$ 386,329
$ 188,892
240,377
$ 429,269
$ 881,847
1,634,781
$ 5,104,613
9,203,375
$ 2,516,628(1)
$ 14,307,988
$ 759,943
1,435,488
$ 4,873,617
8,756,664
$ 2,195,431(1)
$ 13,630,281
(1) Substantially all of the premium written in our program services business is ceded, resulting in reinsurance recoverables on paid and unpaid
losses of $2.5 billion and $2.2 billion as of December 31, 2018 and 2017, respectively. We are the beneficiary of letters of credit, trust
accounts and funds withheld in the aggregate amount of $2.2 billion and $1.9 billion at December 31, 2018 and 2017, respectively,
collateralizing these reinsurance recoverable balances in our program services business.
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, 2018. The assumptions used in estimating the likely payments due by period are
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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)
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, 2018. These obligations are computed on a net present value basis in the
consolidated balance sheet as of December 31, 2018, 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.
Senior long-term debt and other debt was $3.0 billion at December 31, 2018 and $3.1 billion at December 31, 2017. The
amounts in the contractual obligations table above include interest expense and exclude net unamortized premium and net
unamortized debt issuance costs.
Restricted Assets and Capital
At December 31, 2018, we had $4.8 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 $383.2 million at December 31, 2018 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(g) 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 U.K., Bermuda and other jurisdictions. At December 31, 2018, the capital and
surplus of each of our insurance subsidiaries significantly exceeded the amount of statutory capital and surplus necessary to
satisfy regulatory requirements.
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. Some businesses within
our Markel Ventures operations are exposed to commodity price risk resulting from changes in the price of raw materials, parts
and other components necessary to manufacture products, however, this risk is not material to the Company. The operating
results of these businesses could be adversely impacted should they be unable to obtain price increases from customers in
response to significant increases in raw material, parts and other component prices.
The estimated fair value of our investment portfolio at December 31, 2018 was $19.2 billion, 70% of which was invested in
fixed maturities, short-term investments, cash and cash equivalents and restricted cash and cash equivalents and 30% of which
was invested in equity securities. At December 31, 2017, the estimated fair value of our investment portfolio 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.
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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 gains or losses on investments may fluctuate from one period to the next.
As a result of adopting ASU No. 2016-01, changes in the fair value of equity securities are now recognized in net income rather
than other comprehensive income. With this accounting change, we will experience more volatility in net income. However,
this accounting change does not impact total comprehensive income.
At December 31, 2018, 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, 2018, our ten largest equity holdings represented
$2.3 billion, or 41%, of the equity portfolio. Investments in the property and casualty insurance industry represented $1.0
billion, or 18%, of our equity portfolio at December 31, 2018. Our investments in the property and casualty insurance industry
included a $645.9 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.
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, 2018 and 2017. The selected hypothetical changes do not indicate what could be the potential best or
worst case scenarios.
(dollars in millions)
As of December 31, 2018
Equity securities
As of December 31, 2017
Equity securities
Estimated
Fair Value
Hypothetical
Price Change
Estimated
Fair Value after
Hypothetical
Change in Prices
Estimated
Hypothetical
Percentage Increase
(Decrease) in
Shareholders’ Equity
$ 5,721
$ 5,968
35% increase
35% decrease
35% increase
35% decrease
$ 7,723
3,719
$ 8,057
3,879
17.4%
(17.4)
17.1%
(17.1)
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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)
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 government, municipal and corporate 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 4.5 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.
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The following table summarizes our interest rate risk and shows the effect of hypothetical changes in interest rates as of
December 31, 2018 and 2017. 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
13.2%
6.4
(6.0)
(11.9)
13.9%
6.7
(6.3)
(12.3)
11.5%
5.6
(5.3)
(10.4)
11.3%
5.5
(5.1)
(10.0)
FIXED MATURITY
INVESTMENTS
As of December 31, 2018
Total fixed maturity
investments
$ 10,043
As of December 31, 2017
Total fixed maturity
investments
$ 9,941
LIABILITIES( 1 )
As of December 31, 2018
Borrowings
$ 3,030
As of December 31, 2017
Borrowings
$ 3,351
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
$ 11,364
10,681
9,436
8,848
$ 11,323
10,606
9,319
8,720
$ 3,555
3,270
2,826
2,652
$ 4,015
3,653
3,096
2,880
(1) Changes in estimated fair value have no impact on shareholders’ equity.
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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)
Foreign Currency Exchange Rate Risk
We have foreign currency exchange rate risk associated with certain of our assets and liabilities related to certain of our foreign
operations. We manage this risk primarily by matching assets and liabilities in each foreign currency, other than non-monetary
assets, as closely as possible. Non-monetary assets primarily consist of goodwill and intangible assets. As of December 31, 2018
and December 31, 2017, the carrying value of goodwill and intangible assets which are subject to foreign currency exchange rate
risk was $126.5 million and $225.9 million, respectively. The decrease is due to the reassessment of our functional currency
determination as of January 1, 2018, resulting in the U.S. Dollar being the only functional currency for most of our foreign
underwriting operations. Consequently, goodwill and intangible assets of certain foreign operations denominated in a currency
other than the U.S. Dollar are now remeasured into the U.S. Dollar at historic exchange rates and are no longer impacted by
changes in foreign currency exchange rates.
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. Realized and unrealized gains and losses on our forward
contracts are recorded in earnings. Our forward contracts generally have maturities of three months. At December 31, 2018 and
2017, substantially all of our monetary assets and liabilities denominated in foreign currencies were either matched or hedged.
At both December 31, 2018 and 2017, 87% of our invested assets were denominated in U.S. Dollars. At December 31, 2018 and
2017, 83% and 84%, respectively, of our reserves for unpaid losses and loss adjustment expenses and life and annuity benefits
were denominated in U.S. 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 British
Pound Sterling.
Credit Risk
Credit risk exists within our fixed maturity portfolio from the potential for 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, 2018, 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.
General concern 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.
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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 E.U. (Brexit). Unless the date is extended, the U.K. will automatically exit the E.U.
on March 29, 2019. The effects of Brexit will depend in part on agreements, if any, the U.K. makes to retain access to E.U.
markets. For almost two years the U.K. and E.U have been negotiating 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. All Brexit terms must be ratified by the U.K. Parliament and the
legislative bodies of the 27 E.U. member states. The likelihood of the U.K. Parliament ratifying an agreement in its current form
appears to be low. This significantly increases the chance that the U.K. will leave the E.U. without an agreement regarding the
U.K.’s relationship with the E.U.
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 states. In order to continue transacting E.U. business if U.K. access to E.U. markets ceases or is materially
impaired, we have established a regulated insurance carrier, Markel Insurance SE (MISE), in Munich, Germany. From its offices
in Germany, MISE can transact business in all remaining E.U. member states and throughout the European Economic Area
(EEA). MISE is also establishing branches in Ireland, the Netherlands, Spain, and the U.K. In addition, the Society of Lloyd’s has
organized a new insurance company in Brussels, Belgium, in order to maintain access to E.U. business for Lloyd’s syndicates.
We expect that the new Lloyd’s Brussels insurance company will supplement, or serve as an alternative to, MISE for access to
E.U. markets.
Without a Brexit agreement, U.K. based insurers may be prohibited from administering policies for, or paying claims to, EEA
policyholders post Brexit. In order to provide certainty for its EEA policyholders, MIICL has commenced the transfer of its
legacy EEA exposures, claims and policies to MISE. However, this transfer must be approved by the U.K. High Court. While we
expect this transfer to be approved by March 29, 2019, there is no assurance when or whether this approval will be granted or on
what terms and conditions. Lloyd’s also has commenced its transfer of legacy EEA exposures. However, there is significant
uncertainty whether this approval will be granted by March 29, 2019, and there is no assurance the approval will be granted or
on what terms and conditions. For more discussion regarding Brexit and its risks to us, see the Risk Factor titled “The exit of the
United Kingdom from the European Union could have a material adverse effect on us.”
161
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. In
January 2016, the Office of Foreign Assets Control of the U.S. Department of the Treasury (OFAC) issued General License H,
which authorized 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 met certain requirements.
On May 8, 2018, President Trump announced that the United States would no longer participate in the Joint Comprehensive
Plan of Action, which was intended to ensure that Iran’s nuclear program remains peaceful. As a result, all previously suspended
sanctions have “snapped back” into effect. On June 27, 2018, OFAC revoked General License H and, at the same time, issued
a license authorizing, through November 4, 2018, foreign entities owned or controlled by a U.S. person to engage in all
transactions and activities that are ordinarily incident and necessary to the wind-down of transactions previously authorized
under General License H (the Wind-Down License).
Section 13(r) of the Securities Exchange Act of 1934 requires reporting of certain Iran-related activities, including underwriting,
insuring and reinsuring certain activities previously permitted under General License H 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 policies
entered into before May 8, 2018. 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, 2018, we 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, 2018,
we were not 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 had exposure during the quarter
ended December 31, 2018 to the Iranian petroleum industry and its related products and service providers under reinsurance
treaties entered into before May 8, 2018.
Prior to May 8, 2018, we entered into 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 were underwritten
through our syndicate at Lloyd’s and one of our non-U.S. insurance companies. Our portion of the annual premium for these
contracts was 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 were immaterial.
Since May 8, 2018, our non-U.S. subsidiaries, including our non-U.S. insurance subsidiaries, have not entered into any new
transactions that had previously been permitted under General License H. During the quarter ended December 31, 2018, our
non-U.S. subsidiaries, including our non-U.S. insurance subsidiaries, engaged in activities, transactions or dealings with Iran
only in the manner permitted under, and in accordance with, the Wind-Down License or as otherwise permitted under other
applicable economic or trade sanctions requirements or licenses.
162
Controls and Procedures
As of December 31, 2018, 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 Co-Principal Executive Officers (Co-PEOs) and the
Principal Financial Officer (PFO).
Our management, including the Co-PEOs 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 Co-PEOs 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 Co-PEOs and the PFO, of the effectiveness of our internal control over financial
reporting as of December 31, 2018. 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.
There were no changes in our internal control over financial reporting during the fourth quarter of 2018 that materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
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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)
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, Markel Ventures 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, Markel Ventures 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;
• 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;
• 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;
• 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;
• 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;
164
• 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, regulations or interpretations, including those relating to the Tax Cuts and Jobs Act, or in the tax laws,
regulations or interpretations of other jurisdictions in which we operate and adjustments we may make in our operations or tax
strategies in response to those changes;
• a failure of our enterprise information technology systems and those maintained by 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 failure or inadequacy of any loss limitation methods we employ;
• 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 political, legal, regulatory, financial, tax and general economic impacts, and other impacts we cannot anticipate, related to
the vote by the United Kingdom to leave the European Union (Brexit), which could have adverse consequences for our
businesses, particularly our London-based international insurance operations;
• our ability to obtain additional capital for our operations on terms favorable to us;
• our compliance, or failure to comply, with covenants and other requirements under our revolving credit facility, senior debt and
other indebtedness;
• our ability to maintain or 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 and third-party capital;
• 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;
165
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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)
• changes in the amount of statutory capital our insurance subsidiaries are required to hold, which can vary significantly and is
based on many factors outside our control;
• losses from litigation and regulatory investigations and actions; 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. In addition, with respect to previously announced developments at MCIM:
• the Markel CATCo Inquiries may have an adverse impact on the operations of MCIM and may result in adverse findings,
reputational damage, the imposition of sanctions, increased costs, litigation and other negative consequences;
• management time and resources may be diverted to address the Markel CATCo Inquiries, as well as related litigation;
• the ongoing internal review related to the Markel CATCo Inquiries may result in adverse findings;
• the MCIM Executive Departures, the lawsuits brought by two former MCIM executives and the ongoing leadership
transition at MCIM, may materially and adversely impact MCIM’s business, operations and results of operations; and
• the Markel CATCo Inquiries and the MCIM Executive Departures, as well as special redemption rights that are now
being offered to investors in the Markel CATCo Funds, will adversely impact MCIM’s ability to maintain or raise capital.
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.
Legal Proceedings
Markel CATCo Inquiries
On November 30, 2018, we were notified that the U.S. Department of Justice and the U.S. Securities and Exchange Commission
are conducting inquiries into loss reserves recorded in late 2017 and early 2018 at our Markel CATCo operations. Those reserves
are held at Markel CATCo Re, an unconsolidated subsidiary of MCIM. On December 5, 2018, the Bermuda Monetary Authority
notified us that it is conducting an inquiry on the same subject. The Markel CATCo Inquiries are limited to MCIM and its
subsidiaries and do not involve other Markel subsidiaries. The Company and MCIM are cooperating fully with the Markel
CATCo Inquiries, and outside counsel has been retained to conduct an internal review of the matters. At this time, we are unable
to predict the duration, scope or outcome of the Markel CATCo Inquiries or of our internal review.
David Bergen v. Markel Corporation, et al. (U.S. District Court for the Southern District of New York)
On January 11, 2019, David Bergen filed a suit naming Markel Corporation and certain present or former officers as defendants in
a putative class action alleging violations of the federal securities laws relating to the matters that are the subject of the Markel
CATCo Inquiries. The Plaintiff seeks to represent a class of persons or entities that purchased Markel securities between July 26,
2017 and December 6, 2018. We believe that the claims are without merit.
166
Anthony Belisle v. Markel CATCo Investment Management Ltd and Markel Corp. (U.S. District Court for the District of
New Hampshire)
On February 21, 2019, Anthony Belisle filed a suit alleging, among other claims, breach of contract, defamation and invasion of
privacy. The Plaintiff's complaint seeks relief including payment of $66.0 million in incentive compensation, as well as
consequential damages, damages for emotional distress and injury to reputation, enhanced compensatory damages, statutory
interest and attorneys’ fees. We believe that the claims are without merit.
Alissa Fredricks v. Markel CATCo Investment Management Ltd. and Markel Corp. (U.S. District Court for the District
of Massachusetts)
On February 21, 2019, Alissa Fredricks filed a suit alleging, among other claims, breach of contract, defamation and invasion of
privacy. The Plaintiff's complaint seeks relief including payment of $7.5 million in incentive compensation, as well as
consequential damages, damages for emotional distress and injury to reputation, statutory interest and attorneys' fees. We believe
that the claims are without merit.
Thomas Yeransian v. Markel Corporation (U.S. District Court for the District of Delaware)
In October 2010, we completed the acquisition of Aspen Holdings, Inc. (Aspen). As part of the consideration for that acquisition,
Aspen shareholders received contingent value rights (CVRs). Based on a valuation of the CVRs as of their December 31, 2017
maturity date, we paid $9.9 million to the CVR holders on June 5, 2018, which represents 90% of the undisputed portion of the
final amount we believe we are required to pay under the CVR agreement.
Prior to the December 31, 2017 CVR maturity date, the CVR holder representative, Thomas Yeransian, had disputed our prior
estimation of the value of the CVRs. On September 15, 2016, Mr. Yeransian filed a suit alleging, among other things, that we are
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 ($14.1 million through December 31, 2018) and default interest (up to an additional $12.0 million
through December 31, 2018, 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. We 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 filed a
motion requesting that the court reconsider that order.
On September 20, 2018, a new judge was assigned to the case. On October 12, 2018, the court denied both Yeransian’s motion to
reconsider the order staying the litigation and compelling arbitration and a motion by us for sanctions against Yeransian for
violating the confidentiality of mediation proceedings. The court subsequently (1) on December 3, 2018 ordered Yeransian to
provide the court and us with the identity of an actuarial firm to participate in the selection of independent experts for the CVR
valuation procedure under the CVR agreement and (2) on December 11, 2018 denied Yeransian’s motion for judgment that we
had waived our right to require Yeransian’s participation in the arbitration.
On November 13, 2018, Yeransian filed a second suit, Thomas Yeransian v. Markel Corporation (U.S. District Court for the
District of Delaware), which also alleges that the Company is in default under the CVR agreement. The second suit also seeks:
$47.3 million in damages, which represents the unadjusted value of the CVRs; plus interest ($14.1 million through December 31,
2018) and default interest (up to an additional $12.0 million through December 31, 2018, depending on the date any default
occurred); and an unspecified amount of punitive damages, costs, and attorneys’ fees. We filed a motion to stay this suit until the
arbitration for the original suit has concluded and the CVR holders have received the remainder of the final amount due under
the CVR Agreement.
We believe the holder representative’s suits to be without merit. We further believe that any material loss resulting from the
holder representative’s suits to be remote. We do not believe the contractual contingent consideration payments related to the
CVRs will have a material impact on the Company’s liquidity.
167
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
$250
$200
$200
$150
$150
$100
$100
$50
$50
$0
$0
2013 2014 2015 2016 2017 2018
Markel Corporation
S&P 500
Dow Jones Property & Casualty Insurance
Markel Corporation
S&P 500
Dow Jones Property & Casualty Insurance
Years Ended December 31,
2013(1)
2014
2015
2016
$ 100
$ 100
$ 100
$ 118
$ 114
$ 112
$ 152
$ 115
$ 122
$ 156
$ 129
$ 143
2017
$ 196
$ 157
$ 168
2018
$ 179
$ 150
$ 162
(1) $100 invested on December 31, 2013 in our common stock or the listed index. Includes reinvestment of dividends.
Common Stock 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 5, 2019 was approximately 300. The total number of shareholders, including those holding shares in street name or in
brokerage accounts, is estimated to be in excess of 150,000. 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.
168
Common Stock Repurchases
The following table summarizes our common stock repurchases for the quarter ended December 31, 2018.
Issuer Purchases of Equity Securities
(a)
(b)
(c)
Period
October 1, 2018 through October 31, 2018
November 1, 2018 through November 30, 2018
December 1, 2018 through December 31, 2018
Total
Total
Number of
Shares
Purchased
—
2,805
7,785
10,590
Average
Price
Paid per
Share
$ —
$ 1,106.26
$ 1,042.93
$ 1,059.70
Total
Number of
Shares
Purchased as
Part
of Publicly
Announced
Plans
or Programs(1)
—
2,805
7,785
10,590
(d)
Approximate
Dollar
Value of
Shares that
May Yet Be
Purchased
Under
the Plans or
Programs
(in thousands)
$ 289,832
$ 286,729
$ 278,610
$ 278,610
(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 May 14, 2018 (the 2018 Program). The 2018 Program terminated and replaced a similar program authorized in November
2013 (the 2013 Program). Under the 2018 Program, as under the 2013 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 2018 Program has no expiration date but may be terminated by the Board of Directors at any time.
Available Information
This document represents Markel Corporation’s Annual Report and Form 10-K, which is filed with the Securities and
Exchange Commission.
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
info@astfinancial.com
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 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. ET, May 13, 2019.
Corporate Offices
Markel Corporation, 4521 Highwoods Parkway, Glen Allen, Virginia 23060-6148 (804) 747-0136 (800) 446-6671
169
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
Diane Leopold
President and Chief Executive Officer
Dominion Energy’s Gas and
Infrastructure Group
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
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 83.
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 77.
Steven A. Markel
Vice Chairman of Markel Corporation and the Board since March 1992. Director since 1978. Age 70.
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 57.
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 55.
Robert C. Cox
President and Chief Operating Officer, Insurance Operations since September 2018. Executive Vice President of Chubb Ltd.
(a public company) and Division Chairman of Chubb Ltd.’s North American Financial Lines from January 2016 until
retirement in July 2016; Executive Vice President of Chubb & Son and Chief Operating Officer of Chubb Specialty Insurance
from June 2013 to January 2016. Age 60.
Michael R. Heaton
President, Markel Ventures since January 2016; President and Chief Operating Officer, Markel Ventures, Inc., a subsidiary,
since January 2016 and September 2013, respectively. Age 42.
Bradley J. Kiscaden
President and Chief Administrative Officer, Insurance Operations since September 2018. Executive Vice President and Chief
Actuarial Officer from July 2012 to September 2018. Chief Actuarial Officer from March 1999 to September 2018. Age 56.
Jeremy A. Noble
Senior Vice President and Chief Financial Officer since September 2018. Senior Vice President, Finance from June 2018 to
September 2018. Finance Director, Markel International from July 2015 to June 2018. Managing Director, Internal Audit from
September 2011 to July 2015. Age 43.
Linda V. Schreiner
Senior Vice President, Strategic Management since January 2016. Senior Vice President, Human Resources and
Communications of MeadWestvaco Corporation (a public company) from January 2002 to July 2015. Age 59.
170
Richard R. Grinnan
General Counsel and Secretary since June 2014. Assistant General Counsel from August 2012 to June 2014. Age 50.
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, 2018 was
approximately $14,686,000,000.
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, 2018
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 every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit
such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (§229.405 of this
chapter) 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, a
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 5, 2019: 13,874,896.
Documents Incorporated By Reference
The portions of the registrant’s Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on May 13, 2019,
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 18)
3. Legal Proceedings
4. Mine Safety Disclosures
Part II
5. Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer
Purchases of Equity Securities
Page
16-51, 168-169
42
NONE
80, 108
166
NONE
6. Selected Financial Data
7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
7A. Quantitative and Qualitative Disclosures
About Market Risk
8. Financial Statements and Supplementary Data
The response to this item is submitted in Item 15.
9. Changes in and Disagreements With Accountants
168
52
125
156
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
54-55, 163
NONE
170
169
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 2019 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
55-56
Accounting Firm
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income (Loss)
and Comprehensive Income (Loss)
58
Consolidated Statements of Changes in Equity 59
60
Consolidated Statements of Cash Flows
61
Notes to Consolidated Financial Statements
57
(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 Exhibit Index for a list of Exhibits filed as part of
this report
16. Form 10-K Summary
NONE
171
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
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 and restated May 14, 2018 (incorporated by reference from Exhibit 3(ii) in the Registrant's report
on Form 10-Q filed with the Commission for the quarter ended June 30, 2018)
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)
172
Exhibit No. Document Description
4.14
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)
Third Amendment to Credit Agreement dated as of November 5, 2018, to the Wells Fargo Agreement **
Fourth Amendment to Credit Agreement dated as of February 5, 2019, 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
February 8, 2019)
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)*
Amendment, dated February 21, 2019, to Amended and Restated Employment Agreement, dated December 31, 2018,
between Markel Corporation and Alan I. Kirshner (incorporated by reference from Exhibit 10.1 in the Registrant’s
report on Form 8-K filed with the Commission February 22, 2019)*
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
(incorporated by reference from Exhibit 10.6 in the Registrant's report on Form 10-K filed with the Commission for the
year ended December 31, 2017) *
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 Anne G. Waleski (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)*
Employment Agreement, dated June 28, 2018, between Markel Corporation and Robert C. Cox (incorporated by
reference from Exhibit 10.1 in the Registrant's report on Form 8-K filed with the Commission July 12, 2018) *
Amended and Restated Form of Executive Employment Agreement (incorporated by reference from Exhibit 10.1 in the
Registrant's report on Form 8-K filed with the Commission August 21, 2018)*
Amended and Restated Executive Employment Agreement, dated as of August 15, 2018, between Markel Corporation
and Thomas S. Gayner (incorporated by reference from Exhibit 10.2 in the Registrant's report on Form 8-K filed with
the Commission August 21, 2018)*
Amended and Restated Executive Employment Agreement, dated as of August 15, 2018, between Markel Corporation
and Richard R. Whitt, III (incorporated by reference from Exhibit 10.3 in the Registrant's report on Form 8-K filed with
the Commission August 21, 2018)*
Executive Employment Agreement, dated as of August 15, 2018, between Markel Corporation and Jeremy A. Noble
(incorporated by reference from Exhibit 10.4 in the Registrant's report on Form 8-K filed with the Commission August
21, 2018)*
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18 Markel Corporation Executive Bonus Plan, as amended and restated May 14, 2018 (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, 2018)*
173
Markel Corporation & Subsidiaries
Exhibit No. Document Description
10.19 Markel Corporation Voluntary Deferral Plan (incorporated by reference from Exhibit 10.14 in the Registrant's report on
10.20
10.21
10.22
Form 10-K filed with the Commission for the year ended December 31, 2015)*
Amendment to Markel Corporation Voluntary Deferral Plan * **
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)*
10.23 Markel Corporation Omnibus Incentive Plan (incorporated by reference from Appendix B in the Registrant's Proxy
10.24
10.25
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)*
10.26 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)*
10.27 Markel Corporation 2012 Equity Incentive Compensation Plan (incorporated by reference from Appendix A in the
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
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)*
Description of Awards Under Executive Bonus Plan and 2016 Equity Incentive Compensation Plan for 2018
(incorporated by reference from Item 5.02 in the Registrant’s report on Form 8-K filed with the Commission February
23, 2018)*
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)*
174
Exhibit No. Document Description
10.39
10.40
10.41
10.42
10.43
21
23
31.1
31.2
31.3
32.1
32.2
32.3
101
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)*
Form of Performance-Based (Graded Vesting) Restricted Stock Unit Award Agreement for Executive Officers for the
2016 Equity Incentive Compensation Plan (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, 2018)*
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))*
Certain Subsidiaries of Markel Corporation**
Consent of KPMG LLP**
Certification of Co-Principal Executive Officer Pursuant to Rule 13a-14(a)/ 15d-14(a)**
Certification of Co-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 Co-Principal Executive Officer furnished Pursuant to 18 U.S.C. Section 1350**
Certification of Co-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, 2018, filed on February 28, 2019, 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
175
Markel Corporation & Subsidiaries
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.
SIGNATURES
MARKEL CORPORATION
/s/ Thomas S. Gayner
/s/ Richard R. Whitt, III
/s/ Jeremy A. Noble
Thomas S. Gayner
Co-Chief Executive Officer
(Co-Principal Executive Officer)
February 28, 2019
Richard R. Whitt, III
Co-Chief Executive Officer
(Co-Principal Executive Officer)
February 28, 2019
Jeremy A. Noble
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
February 28, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ Alan I. Kirshner
Alan I. Kirshner
/s/ Anthony F. Markel
Anthony F. Markel
/s/ Steven A. Markel
Steven A. Markel
/s/ Thomas S. Gayner
Thomas S. Gayner
/s/ Richard R. Whitt, III
Richard R. Whitt, III
/s/ Jeremy A. Noble
Jeremy A. Noble
/s/ Nora N. Crouch
Nora N. Crouch
/s/ J. Alfred Broaddus, Jr.
J. Alfred Broaddus, Jr.
/s/ K. Bruce Connell
K. Bruce Connell
/s/ Stewart M. Kasen
Stewart M. Kasen
/s/ Diane Leopold
Diane Leopold
/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/ Debora J. Wilson
Debora J. Wilson
176
Executive Chairman,
Chairman of the Board
February 28, 2019
Director, Vice Chairman
February 28, 2019
Director, Vice Chairman
February 28, 2019
Director, Co-Chief Executive Officer
(Co-Principal Executive Officer)
Director, Co-Chief Executive Officer
(Co-Principal Executive Officer)
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
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
Canada
Montreal · Toronto · Vancouver
Europe
Barcelona, Spain · Dublin, Ireland · Madrid, Spain · Munich, Germany · Pierrefitte-en-Auge, France · Rotterdam, Netherlands ·
Zurich, Switzerland
Latin America
Bogotá, Colombia · Buenos Aires, Argentina · Rio de Janeiro, Brazil · São Paulo, Brazil
United Kingdom
Birmingham, England · Brinkworth, England · Bristol, England · Leeds, England · London, England · Manchester, England ·
Reigate, England · Rugby, England · Sheffield, England
United States
Atlanta, GA · Austin, TX · Birmingham, AL · Chicago, IL · Dallas-Fort Worth, TX · Denver, CO · Geneva, IL ·
Glen Allen, VA · Hartford, CT · Hawley, PA · Houston, TX · Kansas City, MO · Las Vegas, NV · Los Angeles, CA ·
Milwaukee, WI · Nashville, TN · New York, NY · Omaha, NE · Providence, RI · Red Bank, NJ · San Antonio, TX ·
San Diego, CA · San Francisco, CA · Scottsdale, AZ · Summit, NJ · Tampa, FL · Warrenton, VA
Markel Ventures
Europe
Gorinchem, Netherlands
United States
Baltimore, MD · Bethlehem, PA · Cape Girardeau, MO · Fairfield, NJ · Fairhaven, MA · 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