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MARKEL CORP – 10-K – MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis includes discussion of changes in our results of operations and financial condition from 2020 to 2021 and should be read in conjunction with the consolidated financial statements and related notes included under Item 8, Item 1 Business, Item 1A Risk Factors and "Safe Harbor and Cautionary Statement" under Item 7. The accompanying consolidated financial statements and related notes have been prepared in accordance withUnited States (U.S. ) generally accepted accounting principles (GAAP) and include the accounts ofMarkel Corporation and its consolidated subsidiaries, as well as any variable interest entities that meet the requirements for consolidation (the Company). A discussion of changes in our results of operations and financial condition from 2019 to 2020 may be found in Part II Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Annual Report on Form 10-K, which was filed with theU.S. Securities and Exchange Commission onFebruary 19, 2021 .
Item 7 is divided into the following sections:
•Results of Operations
•Liquidity and Capital Resources
•Critical Accounting Estimates
•Safe Harbor and Cautionary Statement
InMarch 2020 , COVID-19, a novel coronavirus outbreak, was declared a pandemic by theWorld Health Organization causing unprecedented social and economic disruption, increased volatility of capital markets and intervention by various governments and central banks around the world. Details regarding the impacts of the pandemic on our results of operations, financial condition and liquidity in 2020, and certain actions we took in response, are included in the following discussion and analysis. The most significant impacts included losses incurred in our underwriting operations, decreased demand for certain products and services within ourMarkel Ventures operations and volatility within our investment portfolio. For a discussion of our significant accounting policies, as well as recently issued accounting pronouncements that we have not yet adopted and their expected effects on our consolidated financial position, results of operations and cash flows, see note 1 of the notes to consolidated financial statements included under Item 8. 10K - 38 --------------------------------------------------------------------------------
Results of Operations
The following table presents the components of net income to shareholders, net
income to common shareholders and comprehensive income to shareholders.
Years Ended December 31,
(dollars in thousands) 2021 2020
Insurance segment profit $ 696,413 $ 169,001
Reinsurance segment loss (55,129) (75,470)
Investing segment profit (1) 2,353,124
989,564
Markel Ventures segment profit (2) 272,552 254,078 Other operations (3) (23,459) (63,289) Interest expense (183,579) (177,582) Net foreign exchange gains (losses) 72,271
(95,853)
Income tax expense (684,458)
(168,682)
Net income attributable to noncontrolling interests (22,732)
(15,737) Net income to shareholders 2,425,003 816,030 Preferred stock dividends (36,000) (18,400) Net income to common shareholders 2,389,003
797,630
Other comprehensive income (loss) to shareholders (346,759)
375,604
Comprehensive income to shareholders$ 2,078,244 $
1,191,634
(1) Net investment income and net investment gains, if any, attributable toMarkel Ventures are included in segment profit forMarkel Ventures . All other net investment income and net investment gains are included in Investing segment profit.
(2) Segment profit for the
intangible assets attributable to
(3) Other operations include the results attributable to our 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. Amortization of intangible assets attributable to our underwriting segments was$41.2 million and$41.9 million for the years endedDecember 31, 2021 and 2020, respectively; however, we do not allocate amortization of intangible assets between the Insurance and Reinsurance segments. The increase in comprehensive income to shareholders in 2021 compared to 2020 was primarily due to an increase in pre-tax net investment gains from$618.0 million in 2020 to$2.0 billion in 2021, as well as a meaningful increase in underwriting profits in 2021 compared to 2020, which included$358.3 million of pre-tax net losses and loss adjustment expenses attributed to COVID-19. Partially offsetting these increases to comprehensive income to shareholders, other comprehensive income reflected a decrease in net unrealized gains on our fixed maturity investment portfolio in 2021 compared to an increase in 2020. The components of net income to shareholders and comprehensive income to shareholders are discussed in further detail under "Underwriting Results," "Investing Results," "Markel Ventures ," "Other Operations," "Interest Expense and Income Taxes" and "Comprehensive Income to Shareholders and Book Value per Common Share." 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. TheU.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. The combined ratio is the sum of the loss ratio and the expense ratio. 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. A combined ratio less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. Segment profit for our underwriting segments may also include other revenues and expenses that are attributable to our underwriting operations that are not captured in underwriting profit. 10K - 39 -------------------------------------------------------------------------------- In addition to theU.S. GAAP combined ratio, loss ratio and expense ratio, we also evaluate our underwriting performance using measures that exclude the impacts of certain items on these ratios. We believe these adjusted measures, which are non-GAAP measures, provide financial statement users with a better understanding of the significant factors that comprise our underwriting results and how management evaluates underwriting performance. When analyzing our combined ratio, we exclude current accident year losses and loss adjustment expenses attributed to natural catastrophes. We also exclude losses and loss adjustment expenses attributed to certain significant, infrequent loss events, for example, the COVID-19 pandemic. Due to the unique characteristics of a catastrophe loss, there is inherent variability as to the timing or loss amount, which cannot be predicted in advance. The same is true for the COVID-19 pandemic, as there are no events in recent history with similar characteristics. We believe measures that exclude the effects of catastrophe events and COVID-19 are meaningful to understand the underlying trends and variability in our underwriting results that may be obscured by these items. When analyzing our loss ratio, we evaluate losses and loss adjustment expenses attributable to the current accident year separate from losses and loss adjustment expenses attributable to prior accident years. Prior accident year reserve development, which can either be favorable or unfavorable, represents changes in our estimates of losses and loss adjustment expenses related to loss events that occurred in prior years. We believe a discussion of current accident year loss ratios, which exclude prior accident year reserve development, is helpful since it provides more insight into estimates of current underwriting performance and excludes changes in estimates related to prior year loss reserves. We also analyze our current accident year loss ratio excluding losses and loss adjustment expenses attributable to catastrophes and, in 2020, the COVID-19 pandemic, for the reasons previously discussed. The current accident year loss ratio excluding the impact of catastrophes and significant, infrequent loss events is also commonly referred to as an attritional loss ratio within the property and casualty insurance industry. Consolidated Years Ended December 31, (dollars in thousands) 2021 2020 % Change Gross premium volume (1)$ 8,480,494 $ 7,154,628 19 % Net written premiums$ 7,119,731 $ 5,932,238 20 % Earned premiums$ 6,503,029 $ 5,612,205 16 % Underwriting profit$ 628,085 $ 127,617 392 % Disposal loss$ 109 $ (41,461) NM (2) Underwriting Ratios (3) Point Change Loss ratio Current accident year loss ratio 62.4 % 72.6 % (10.2) Prior accident years loss ratio (7.4) % (10.8) % 3.4 Loss ratio 55.1 % 61.8 % (6.7) Expense ratio 35.3 % 36.0 % (0.7) Combined ratio 90.3 % 97.7 % (7.4)
Current accident year loss ratio catastrophe impact
(4)
3.0 % 3.1 % (0.1) Current accident year loss ratio COVID-19 impact (4) - % 6.4 % (6.4) Prior accident years loss ratio COVID-19 impact (4) 0.2 % - % 0.2
Current accident year loss ratio, excluding COVID-19
and catastrophes
59.4 % 63.1 % (3.7)
Combined ratio, excluding COVID-19 and current year
catastrophes
87.1 % 88.3 % (1.2) (1) Gross premium volume excludes$3.0 billion and$2.1 billion for the years endedDecember 31, 2021 and 2020, respectively, of written premiums attributable to our program services business and other fronting arrangements that were ceded. (2) NM - Ratio is not meaningful (3) Amounts may not reconcile due to rounding.
(4) The point impact of catastrophes and COVID-19 is calculated as the
associated net losses and loss adjustment expenses divided by total earned
premiums.
10K - 40 --------------------------------------------------------------------------------
Premiums
The increase in gross premium volume in our underwriting operations in 2021 was driven by new business and more favorable rates within our professional liability and general liability product lines across both of our underwriting segments. Net retention of gross premium volume for our underwriting operations was 84% in 2021 compared to 83% in 2020. Within our underwriting operations, we purchase reinsurance and retrocessional reinsurance to manage our net retention on individual risks and overall exposure to losses and to enable us to write policies with sufficient limits to meet policyholder needs. The increase in earned premiums in our underwriting operations in 2021 was primarily attributable to higher gross premium volume within our professional liability and general liability product lines. Since 2018, we have seen favorable rates across most product lines, which further strengthened in 2020 and 2021 following continued high levels of natural catastrophes and significant losses attributed to the COVID-19 pandemic. In 2020 and 2021, the favorable rate environment was most prominent within our professional liability and general liability product lines, based on general market conditions, the impacts of social inflation, including increased litigation, as well as an increase in the severity of losses in these product lines. Additionally, recent increases in economic inflation, and an expectation that this trend will continue, have created more uncertainty around the ultimate losses that will be incurred to settle claims on these longer-tail product lines. These factors, as well as the current and expected impacts of the sustained low interest rate environment on net investment income, have resulted in higher rates. The primary exception to the favorable rate environment is workers' compensation, where we continue to see low single digit rate decreases given generally favorable loss experience in recent years. 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.
Combined Ratio
In 2021, underwriting results included$195.0 million of net losses and loss adjustment expenses attributed to natural catastrophes, including Winter Storm Uri, the floods inEurope and Hurricane Ida (2021 Catastrophes), as well as$15.7 million of net losses and loss adjustment expenses resulting from an increase in our estimate of our ultimate losses and loss adjustment expenses attributed to COVID-19. The net losses and loss adjustment expenses from the 2021 Catastrophes were net of ceded losses of$221.7 million . In 2020, underwriting results included$358.3 million of net losses and loss adjustment expenses attributed to COVID-19 and$172.2 million of net losses and loss adjustment expenses from natural catastrophes, including Hurricanes Laura, Sally and Isaias, as well as the derecho inIowa and wildfires in the westernU.S. (2020 Catastrophes). The net losses and loss adjustment expenses from COVID-19 and the 2020 Catastrophes were net of ceded losses of$106.2 million and$125.7 million , respectively. Excluding losses attributed to catastrophes and COVID-19, the decrease in our consolidated combined ratio in 2021 compared to 2020 was driven by a lower current accident year loss ratio within our Insurance segment, partially offset by the impact of less favorable development on prior accident years loss reserves in 2021 compared to 2020. Higher earned premiums in 2021 compared to 2020 had a favorable impact on our expense ratio and an unfavorable impact on the prior accident years loss ratio. The gross and net losses and loss adjustment expenses attributed to the 2021 Catastrophes as ofDecember 31, 2021 represent our best estimates based upon information currently available. Our estimates for these losses are based on claims received to date, detailed policy and reinsurance contract level reviews, preliminary industry loss estimates and output from both industry and proprietary models, as well as analysis of our ceded reinsurance contracts. These estimates are based on various assumptions about coverage, liability and reinsurance and are subject to change. While we believe our reserves for the 2021 Catastrophes as ofDecember 31, 2021 are adequate, we continue to closely monitor reported claims and may adjust our estimates of gross and net losses as new information becomes available. Our losses from COVID-19 were primarily attributed to business written within our international insurance operations and were primarily associated with coverages for event cancellation and business interruption losses on policies where no specific pandemic exclusions existed. Our estimate of ultimate gross and net losses and loss adjustment expenses attributed to COVID-19 is based on assumptions about coverage, liability and ceded reinsurance contract attachment, for which significant uncertainty still exists, and represents our best estimate as ofDecember 31, 2021 based upon information currently available. We continue to closely monitor reported claims, ceded reinsurance contract attachment, government actions, judicial decisions and changes in the levels of worldwide social disruption and economic activity arising from the pandemic and may adjust our estimates of gross and net losses as new information becomes available. Such adjustments to our reserves for COVID-19 losses and loss adjustment expenses may be material to our results of operations, financial condition and cash flows. See note 9 of the notes to consolidated financial statements included under Item 8 for further details on our estimate of ultimate gross and net losses and loss adjustment expenses attributed to COVID-19. 10K - 41 --------------------------------------------------------------------------------
Insurance Segment
Years Ended December 31,
(dollars in thousands) 2021 2020 % Change
Gross premium volume $ 7,239,676 $ 6,029,024 20 %
Net written premiums $ 5,998,890 $ 4,977,662 21 %
Earned premiums $ 5,465,284 $ 4,688,448 17 %
Underwriting profit $ 696,413 $ 169,001 312 %
Underwriting Ratios (1) Point Change
Loss ratio
Current accident year loss ratio 60.6 % 71.9 % (11.3)
Prior accident years loss ratio (9.3) % (11.8) % 2.5
Loss ratio 51.3 % 60.1 % (8.8)
Expense ratio 35.9 % 36.3 % (0.4)
Combined ratio 87.3 % 96.4 % (9.1)
Current accident year loss ratio catastrophe impact
(2)
1.7 % 2.7 % (1.0) Current accident year loss ratio COVID-19 impact (2) - % 6.3 % (6.3) Prior accident years loss ratio COVID-19 impact (2) (0.1) % - % (0.1)
Current accident year loss ratio, excluding COVID-19
and catastrophes
58.9 % 63.0 % (4.1)
Combined ratio, excluding COVID-19 and current year
catastrophes
85.6 % 87.4 % (1.8) (1) Amounts may not reconcile due to rounding.
(2) The point impact of catastrophes and COVID-19 is calculated as the
associated net losses and loss adjustment expenses divided by total earned
premiums.
Premiums
The increase in gross premium volume in our Insurance segment in 2021 was driven by growth across all of our product lines, most notably within our professional liability and general liability product lines, which experienced higher new business volume and benefited from more favorable rates and higher retention of renewals. Additionally, our personal lines product lines experienced significant growth in 2021, primarily attributable to the continued expansion of our classic cars business. Net retention of gross premium volume was 83% in both 2021 and 2020. The increase in earned premiums in 2021 was primarily due to the higher gross premium volume. Combined Ratio The Insurance segment's current accident year losses and loss adjustment expenses in 2021 included$94.7 million of net losses and loss adjustment expenses from the 2021 Catastrophes. Current accident year losses in 2020 included$296.4 million and$124.4 million of net losses and loss adjustment expenses attributed to COVID-19 and the 2020 Catastrophes, respectively. Excluding losses attributed to catastrophes and COVID-19, the decrease in the current accident year loss ratio in 2021 compared to 2020 was primarily attributable to lower attritional loss ratios within our professional liability, general liability and property product lines, primarily due to the benefit of achieving higher premium rates. The Insurance segment's 2021 combined ratio included$506.3 million of favorable development on prior accident years loss reserves compared to$554.6 million in 2020. The decrease in favorable development was primarily due to less favorable development on our professional liability product lines in 2021 compared to 2020, partially offset by more favorable development on our property product lines in 2021 compared to 2020. Additionally, higher earned premiums in 2021 compared to 2020 had an unfavorable impact on the prior accident years loss ratio. In 2021 and 2020, favorable development was most significant on our general liability, workers' compensation, marine and energy and professional liability product lines. In 2021, we also had significant favorable development on our property product lines. See note 9 of the notes to consolidated financial statements included under Item 8 for more information on the Insurance segment's prior year loss reserve development. 10K - 42 --------------------------------------------------------------------------------
The modest decrease in the Insurance segment's expense ratio in 2021 was
primarily due to the favorable impact of higher earned premiums, partially
offset by higher profit sharing expenses in 2021 compared to 2020 as a result of
improved profitability.
Reinsurance Segment
Years Ended December 31,
(dollars in thousands) 2021 2020 % Change
Gross premium volume $ 1,246,143 $ 1,130,923 10 %
Net written premiums $ 1,126,167 $ 960,123 17 %
Earned premiums $ 1,042,048 $ 929,348 12 %
Underwriting loss $ (55,238) $ (34,009) (62) %
Disposal loss $ 109 $ (41,461) NM (1)
Underwriting Ratios (2) Point Change
Current accident year loss ratio 72.0 % 75.3 % (3.3)
Prior accident years loss ratio 1.9 % (5.6) % 7.5
Loss ratio 73.9 % 69.8 % 4.1
Expense ratio 31.4 % 33.9 % (2.5)
Combined ratio 105.3 % 103.7 % 1.6
Current accident year loss ratio catastrophe impact
(3) (4)
9.6 % 5.1 % 4.5 Current accident year loss ratio COVID-19 impact (3) - % 6.7 % (6.7) Prior accident years loss ratio COVID-19 impact (3) 2.1 % - % 2.1
Current accident year loss ratio, excluding COVID-19
and catastrophes
62.3 % 63.5 % (1.2)
Combined ratio, excluding COVID-19 and current year
catastrophes
93.6 % 91.9 % 1.7 (1) NM - Ratio is not meaningful
(2) The point impact of catastrophes and COVID-19 is calculated as the
associated net losses and loss adjustment expenses divided by total earned
premiums.
(3) Amounts may not reconcile due to rounding.
(4) The point impact of catastrophes does not include the favorable impact of assumed reinstatement premiums associated with the 2021 Catastrophes of$21.7 million for the year endedDecember 31, 2021 . Reinstatement premiums were not significant for the year endedDecember 31, 2020 .
Premiums
The increase in gross premium volume in our Reinsurance segment in 2021 was primarily attributable to new business and increases on renewals within our professional liability and general liability product lines, including favorable premium adjustments within our professional liability product lines, partially offset by lower gross premiums within our property product lines. The increases on renewals and favorable premium adjustments were primarily due to increased exposures arising from growth in underlying portfolios and more favorable rates. Significant variability in gross premium volume can be expected in our Reinsurance segment due to individually significant contracts and multi-year contracts. Lower gross premiums within our property product lines in 2021 were primarily attributable to non-renewals following our decision to discontinue writing property reinsurance business on a risk-bearing basis effectiveJanuary 1, 2021 . We continued to have property loss exposure throughout 2021, including catastrophe exposure, on property treaties written in prior years with contract terms that extended beyondJanuary 1, 2021 and on our retrocessional reinsurance property business, which we discontinued writing effectiveJanuary 1, 2022 . With few exceptions, effectiveJanuary 1, 2022 , we no longer have exposure to reinsurance and retrocessional reinsurance property risks within our Reinsurance segment. 10K - 43 -------------------------------------------------------------------------------- Net retention of gross premium volume was 90% in 2021 compared to 85% in 2020. The increase in net retention was driven by changes in mix of business. Our growing professional liability and general liability product lines are fully retained while the non-renewed property business had a lower retention rate than the rest of the segment. The increase in earned premiums in 2021 was primarily attributable to growth in gross premium volume within our general liability and professional liability product lines in recent years, partially offset by the impact of lower gross premiums within our property product lines as a result of our decision to discontinue writing property reinsurance business, as previously discussed.
Combined Ratio
The Reinsurance segment's current accident year losses and loss adjustment expenses in 2021 included$100.3 million of net losses and loss adjustment expenses attributed to the 2021 Catastrophes. Partially offsetting the impact of losses attributed to the 2021 Catastrophes was$21.7 million of favorable reinstatement premiums in 2021 attributed to these events. Current accident year losses in 2020 included$61.9 million and$47.8 million of net losses and loss adjustment expenses attributed to COVID-19 and the 2020 Catastrophes, respectively. Catastrophe losses and reinstatement premiums in 2021 were primarily attributed to our retrocessional reinsurance property business, a portion of which was ceded toLodgepine Reinsurance Limited effectiveJuly 1, 2021 , and our property reinsurance product lines, both of which we have discontinued writing on a risk-bearing basis, as previously discussed. Catastrophe losses in 2020, and a portion of our 2020 COVID-19 losses, were also attributed to our property reinsurance product lines. Excluding the impact of catastrophes and COVID-19, the decrease in the current accident year loss ratio was driven by our professional liability and general liability product lines. These product lines benefited from higher premium rates and an increase in the proportion of quota share contract structures within our portfolio, which generally have lower loss ratios than excess of loss contracts. The favorable impact of changes in these product lines on the current accident year loss ratio was partially offset by an unfavorable impact from the change in mix of business within the segment as the non-renewed property business had a lower attritional loss ratio than the rest of the segment. The Reinsurance segment's 2021 combined ratio included$19.9 million of adverse development on prior accident years loss reserves, which was primarily attributable to our property product lines, as well as additional exposures recognized on prior accident years related to net favorable premium adjustments on our professional liability product lines. Adverse development on our property product lines was primarily attributable to an increase in reserves attributed to COVID-19, reflecting changes in our net estimates resulting from updated and new loss information from cedents. We also had net adverse development within our property product lines on natural catastrophes that occurred in recent years, however, this adverse development was largely offset by favorable development on natural catastrophes within other product lines in the Reinsurance segment. In 2021, the increase in prior years loss reserves on our property and professional liability product lines was also partially offset by favorable development on our general liability and credit and surety product lines. In 2020, the combined ratio included$51.8 million of favorable development on prior accident years loss reserves, which reflected favorable development on our property product lines, partially offset by adverse development on our public entity and professional liability product lines and additional exposures recognized on prior accident years related to net favorable premium adjustments on our professional liability product lines. See note 9 of the notes to consolidated financial statements included under Item 8 for more information on the Reinsurance segment's prior year loss reserve development. The decrease in the Reinsurance segment's expense ratio in 2021 was primarily attributable to lower compensation and general expenses due to the discontinuation of our property reinsurance business as well as the favorable impact of higher earned premiums in 2021 compared to 2020.
Disposal Loss
Results attributable to our Reinsurance segment for the year endedDecember 31, 2020 included a disposal loss of$41.5 million related to the planned disposition of our reinsurance operations inLatin America , which was included in services and other expenses and was not included in the segment's underwriting loss. This disposal loss was primarily attributable to foreign currency translation adjustments for these operations, which were previously included in accumulated other comprehensive income. The transaction was completed in 2021. 10K - 44 --------------------------------------------------------------------------------
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. We measure investing results by our net investment income, net investment gains and the change in net unrealized gains on available-for-sale investments, as well as investment yield and taxable equivalent total investment return. Based on the potential for volatility in the financial markets, we believe investment performance is best analyzed over several years.
The following table summarizes our investment performance.
Years Ended December 31,
(dollars in thousands) 2021 2020 2019 2018 2017
Net investment income $ 374,601 $ 371,830
Net investment gains (losses) (1)
Change in net unrealized gains on
available-for-sale investments (2)
$ 381,890 $ (299,446) $ 1,125,440 Investment Ratios Investment yield (3) 2.0 % 2.4 % 3.0 % 2.7 % 2.6 % Taxable equivalent total investment return 8.8 % 9.4 % 14.6 % (1.0) % 10.2 % (1) EffectiveJanuary 1, 2018 , we adoptedFinancial Accounting Standards Board Accounting Standards Update 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. (2) The change in net unrealized gains on available-for-sale investments included an increase related to an adjustment to our life and annuity benefit reserves of$63.0 million for the year endedDecember 31, 2021 and a decrease related to an adjustment to our life and annuity benefit reserves of$68.2 million and$51.4 million for the years endedDecember 31, 2020 and 2019, respectively. See note 11 of the notes to consolidated financial statements included under Item 8 for details on our life and annuity benefit reserve adjustments.
(3) Investment yield reflects net investment income as a percentage of monthly
average invested assets at amortized cost.
The increase in net investment income in 2021 was driven by higher dividend income in 2021 and income on our equity method investments in 2021 compared to losses in 2020. This increase was partially offset by lower interest income on our short-term investments due to lower short-term interest rates in 2021 compared to 2020. Net investment income on our fixed maturity securities in 2021 was consistent with 2020, as the lower yield in 2021 was largely offset by the impact of higher average holdings of fixed maturity securities during 2021 compared to 2020. See note 4(d) of the notes to consolidated financial statements included under Item 8 for further details regarding the components of net investment income. Net investment gains in both 2021 and 2020 were primarily attributable to an increase in the fair value of our equity securities driven by favorable market value movements. Net investment gains in 2020 reflected significant market volatility experienced during the year. The impact of significant declines in the fair value of our equity securities in the first quarter of 2020, driven by unfavorable market value movements resulting from the onset of the COVID-19 pandemic, were more than offset by increases in the fair value of our equity securities over the subsequent three quarters of 2020. See note 4(e) of the notes to consolidated financial statements included under Item 8 for further details on the components of net investment gains (losses). The decrease in net unrealized gains on available-for-sale investments in 2021 was attributable to decreases in the fair value of our fixed maturity securities as a result of an increase in interest rates during 2021. The increase in net unrealized gains on available-for-sale investments in 2020 was attributable to increases in the fair value of our fixed maturity securities as a result of a decrease in interest rates during 2020. Taxable equivalent total investment return is a non-GAAP financial measure. Taxable equivalent total investment return includes items that impact net income, such as coupon interest on fixed maturity securities, changes in fair value of equity securities, dividends on equity securities and realized investment gains or losses on available-for-sale securities, 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 inU.S. taxable income. We believe the taxable equivalent total 10K - 45 -------------------------------------------------------------------------------- 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 investment gains or losses may vary from one period to the next. 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. Years Ended December 31, Five-Year Annual Ten-Year Annual Twenty-Year Annual 2021 2020 2019 2018 2017 Return Return Return Equities 29.6 % 15.2 % 30.0 % (3.5) % 25.5 % 18.6 % 17.3 % 11.5 % Fixed maturity securities, cash and short-term investments (1) (0.7) % 5.7 % 6.5 % 1.3 % 3.4 % 3.2 % 3.1 % 4.4 % Total portfolio, before foreign currency effect 9.0 % 8.6 % 14.4 % (0.7) % 9.2 % 8.0 % 7.0 % 6.3 % Total portfolio 8.8 % 9.4 % 14.6 % (1.0) % 10.2 % 8.3 % 6.8 % 6.4 %
(1) Includes cash and cash equivalents and restricted cash and cash
equivalents.
The following table reconciles investment yield to taxable equivalent total
investment return.
Years Ended
2021 2020 2019 2018 2017
Investment yield (1) 2.0 % 2.4 % 3.0 % 2.7 % 2.6 %
Adjustment of investment yield from amortized cost
to fair value
(0.6) % (0.5) % (0.7) % (0.6) % (0.5) % Net amortization of net premium on fixed maturity securities 0.4 % 0.4 % 0.4 % 0.4 % 0.4 % Net investment gains (losses) and change in net unrealized investment gains on available-for-sale securities (2) 5.9 % 5.8 % 10.3 % (3.8) % 5.9 %
Taxable equivalent effect for interest and dividends
(3)
0.1 % 0.1 % 0.2 % 0.1 % 0.4 % Other (4) 1.0 % 1.2 % 1.4 % 0.2 % 1.4 % Taxable equivalent total investment return 8.8 % 9.4 % 14.6 % (1.0) % 10.2 %
(1) Investment yield reflects net investment income as a percentage of monthly
average invested assets at amortized cost.
(2) Adjustment includes the impact of changes in foreign currency exchange
rates beginning in 2018.
(3) Adjustment to tax-exempt interest and dividend income to reflect a taxable
equivalent basis.
(4) Adjustment to reflect the impact of time-weighting the inputs to the
calculation of taxable equivalent total investment return and the impact of
changes in foreign currency exchange rates prior to 2018.
OurMarkel Ventures segment includes a diverse portfolio of businesses from different industries that offer various types of products and services to businesses and consumers, predominantly inthe United States . We measureMarkel 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 ourMarkel Ventures subsidiaries on a one-month lag, with the exception of significant transactions or events that occur during the intervening period. During the 2021 and 2020, ourMarkel Ventures operations expanded through acquisitions of majority interests in three businesses. InDecember 2021 , we acquired a controlling interest inMetromont LLC (Metromont ), a precast concrete manufacturer and concrete building solutions provider for commercial projects. Due to the one month lag in consolidating the results of ourMarkel Ventures operations, the financial results forMetromont will be included in our consolidated statements of income and comprehensive income beginning inJanuary 2022 . InAugust 2021 , we acquired a controlling interest inBuckner HeavyLift Cranes (Buckner), a provider of crane rental services for large commercial contractors. InApril 2020 , we acquired a controlling interest inLansing Building Products, LLC , a supplier of exterior building products and materials to professional contractors throughout theU.S. , which simultaneously acquired the distribution business ofHarvey Building Products to enhance its geographic reach and scale (together, Lansing). See note 3 of the notes to consolidated financial statements included under Item 8 for additional details related to these acquisitions. 10K - 46 --------------------------------------------------------------------------------
The following table summarizes the amounts recognized on the consolidated
balance sheets related to
December 31,
(dollars in thousands) 2021 2020
ASSETS
Cash and cash equivalents $ 321,473 $
363,532
Receivables 501,349 299,051
Goodwill 1,196,590 901,045
Intangible assets 766,179 623,120
Other assets:
Inventory 529,250 412,554
Property, plant and equipment, net 948,971
492,477
Right-of-use lease assets 393,551
368,126
Other 300,916 176,155
Total Other assets 2,172,688 1,449,312
Total Assets $ 4,958,279 $ 3,636,060
LIABILITIES AND EQUITY
Accounts payable and accrued liabilities
Senior long-term debt and other debt (1) 1,140,559 775,650
Other liabilities:
Lease liabilities 445,683 374,667
Other 544,718 380,190
Total Other liabilities 990,401
754,857
Total Liabilities 2,451,335
1,800,868
Redeemable noncontrolling interests 461,378
245,642
Shareholders' equity (2) 2,050,675
1,599,466
Noncontrolling interests (5,109)
(9,916)
Total Equity 2,045,566
1,589,550
Total Liabilities and Equity $ 4,958,279 $
3,636,060
(1) Debt as ofDecember 31, 2021 and 2020 included$853.0 million and$733.0 million , respectively, of debt due to other subsidiaries ofMarkel Corporation , which was eliminated in consolidation.
(2) Shareholders' equity as of
billion
Corporation's
consolidation.
10K - 47 --------------------------------------------------------------------------------
The following table summarizes the amounts recognized on the consolidated
statements of income related to
Years ended December 31,
(dollars in thousands) 2021 2020 % Change
OPERATING REVENUES
Products revenues $ 1,712,120 $ 1,439,515
Services and other revenues 1,931,696 1,355,199
Net investment income 11 245
Total Operating Revenues 3,643,827 2,794,959 30 %
OPERATING EXPENSES
Products expenses 1,544,506 1,256,159
Services and other expenses 1,769,201
1,232,150
Amortization of intangible assets 57,568 52,572 Total Operating Expenses 3,371,275 2,540,881 Operating Income 272,552 254,078 7 % Net foreign exchange gains (losses) 1,119 (1,092) Interest expense (1) (35,031) (46,664) Income Before Income Taxes 238,640 206,322 Income tax expense (43,626) (45,815) Net Income 195,014 160,507 Net income attributable to noncontrolling interests (20,607) (15,058) Net Income to Shareholders$ 174,407 $ 145,449 20 % EBITDA$ 402,700 $ 366,934 10 % (1) Interest expense for the years endedDecember 31, 2021 and 2020 included intercompany interest expense of$25.8 million and$32.0 million , respectively, which was eliminated in consolidation. The increase in operating revenues in 2021 was driven by an increase of$638.9 million from our construction services businesses, primarily due to an increased contribution from Lansing and the contribution from Buckner in the fourth quarter of 2021, as well as improved pricing and increased demand in 2021 compared to 2020. Additionally, operating revenues in 2021 increased across our transportation-related and equipment manufacturing businesses, due in part to lower sales volumes at most of these businesses in 2020 as a result of the economic and social disruption caused by the COVID-19 pandemic. In 2020, following the onset of the COVID-19 pandemic, these businesses were impacted by decreased demand for their products and also saw orders and contracts postponed. Sales volumes began to recover in late 2020 before fully recovering in 2021. The increase in operating revenues in 2021 also reflected higher revenues in our consumer and building products businesses, given increased demand reflecting increases in consumer spending in 2021. These increases in operating revenues were partially offset by lower operating revenues from our healthcare businesses due to the sale of certain subsidiaries of one of these businesses inJanuary 2021 . The benefit of increases in operating revenues to operating income, EBITDA and net income to shareholders in 2021 was reduced by increased costs of materials and labor across many of our businesses, which are reflective of current economic conditions. The higher cost of materials is due in part to a shortage in the availability of certain products, the higher cost of shipping and inflation. We try to mitigate the impact of these cost increases through a variety of actions, such as increasing the prices of our products and services, pre-purchasing materials, locking in prices in advance or utilizing alternate sources of materials. However, we may not be successful at these efforts and even when we are successful, there may be a time lag before the impacts of these changes are reflected in our margins. 10K - 48 -------------------------------------------------------------------------------- The increase in operating income, EBITDA and net income to shareholders in 2021 was driven by higher revenues at our construction services businesses, as previously discussed. The increase was also attributable to a pre-tax transaction gain of$22.0 million , which was included in services and other expenses and recognized in connection with the sale of certain subsidiaries at one of our healthcare businesses, as previously discussed, as well as other associated changes in this business. These increases were partially offset by the impact of lower revenues and operating margins at one of our consulting services businesses in 2021 as well as a$17.2 million pre-tax increase in our estimate of the contingent consideration obligations related to better than expected financial performance of certain of our recent acquisitions. Markel Ventures EBITDA is a non-GAAP financial measure. We useMarkel Ventures EBITDA as an operating performance measure in conjunction withU.S. GAAP measures, including operating revenues, operating income and net income to shareholders, to monitor and evaluate the performance of ourMarkel Ventures segment. Because EBITDA excludes interest, income taxes, depreciation and amortization, it provides an indicator of economic performance that is useful to both management and investors in evaluating ourMarkel Ventures businesses as it is not affected by levels of debt, interest rates, effective tax rates or levels of depreciation or amortization resulting from purchase accounting.
The following table reconciles
Ventures EBITDA.
Years ended December 31 ,
(dollars in thousands) 2021
2020
Markel Ventures operating income$ 272,552 $
254,078
Depreciation expense 72,580
60,284
Amortization of intangible assets 57,568
52,572
Markel Ventures EBITDA$ 402,700 $
366,934
The following table summarizes the cash flows attributable toMarkel Ventures . Years ended December 31, (dollars in thousands) 2021 2020
Cash, cash equivalents, restricted cash and restricted cash
equivalents, beginning of year
$ 363,532 $ 256,758 Net cash provided by operating activities 187,180 357,675 Net cash used by investing activities (585,971) (607,641) Net cash provided by financing activities (1) (2) 356,562 356,542
Effect of foreign currency rate changes on cash, cash
equivalents, restricted cash and restricted cash equivalents
170 198
Increase (decrease) in cash, cash equivalents, restricted cash
and restricted cash equivalents
(42,059) 106,774
Cash, cash equivalents, restricted cash and restricted cash
equivalents, end of year
$ 321,473 $ 363,532 (1) Net cash provided by financing activities for the years endedDecember 31, 2021 andDecember 31, 2020 included a capital contribution from our holding company,Markel Corporation , of$250.0 million and$535.0 million , respectively, which was eliminated in consolidation. (2) Net cash provided by financing activities for the year endedDecember 31, 2021 included net additions to intercompany debt of$120.0 million , which were eliminated in consolidation. Net cash provided by financing activities for the year endedDecember 31, 2020 included net repayments of intercompany debt of$125.9 million , which were eliminated in consolidation. 10K - 49 --------------------------------------------------------------------------------
Other Operations
The following table presents the components of operating revenues and operating
expenses that are not included in a reportable segment.
Years Ended December 31,
2021 2020
Services and Services and Amortization of Services and Services and Amortization of
(dollars in thousands) other revenues other expenses intangible assets other revenues other expenses intangible assets
Other operations:
Insurance-linked securities $ 202,019 $ 186,510 $ 38,448 $ 200,928 $ 168,118 $ 38,447
Program services and other
fronting 125,716 20,132 20,938 104,171 20,427 20,937
Life and annuity 1,515 16,667 - 1,233 17,713 -
Other (1) 17,195 30,534 2,403 32,006 81,251 5,453
346,445 253,843 61,789 338,338 287,509 64,837
Underwriting operations (2) 41,182 41,906
Total $ 346,445 $ 253,843 $ 102,971 $ 338,338 $ 287,509 $ 106,743
(1) Other includes the results of our run-off Lodgepine and
services and other expenses included a legal settlement at our
(2) Amortization of intangible assets attributable to our underwriting
operations is not allocated between the Insurance and Reinsurance segments.
The increase in operating revenues in ourNephila insurance-linked securities (ILS) operations in 2021 was driven by growth in our managing general agent operations, partially offset by lower investment management fees. The decrease in investment management fees was primarily due to higher management fees in 2020 attributable to releases of capital from side pocket reserves, which were more significant in 2020 than 2021, as well as lower average assets under management during 2021.Nephila's net assets under management were$8.8 billion and$9.6 billion as ofDecember 31, 2021 and 2020, respectively. Investment performance atNephila , as well as the broader ILS market, has been adversely impacted by consecutive years of elevated catastrophe losses, as well as by COVID-19 in 2020. These events, as well as volatility in the capital markets, also have impacted investor decisions around allocation of capital to ILS. Such decisions have impacted, and may continue to impact, our capital raises and redemptions within the funds we manage, as well as new funds, resulting in a decline in assets under management. See "Critical Accounting Estimates -Goodwill and Intangible Assets" for discussion and considerations of these impacts on the valuation of goodwill and intangible assets attributed to our Nephila ILS operations. InFebruary 2022 , we completed the sale of our Velocity managing general agent operations, which provide risk origination services for ourNephila fund management operations, as well as for third parties. Velocity has been a source of growth within our ILS operations since we acquiredNephila in 2018. We continue to have a minority interest in Velocity after the sale, and Velocity will continue to be a source for risk origination for ourNephila fund management operations. Estimated consideration for the portion of our interest that was sold was$180 million .
Program Services and Other Fronting
The increase in operating revenues and operating income in our program services and other fronting operations in 2021 were primarily due to higher gross premium volume at our program services operations driven by the expansion of existing programs, as well as growth from new programs. Gross written premiums in our program services operations were$2.7 billion and$2.1 billion for the years endedDecember 31, 2021 and 2020, respectively.
Interest Expense and Income Taxes
Interest Expense
Interest expense was$183.6 million in 2021 compared to$177.6 million in 2020. The increase in interest expense in 2021 was primarily attributable to interest expense associated with our 3.45% unsecured senior notes issued inMay 2021 . 10K - 50 --------------------------------------------------------------------------------
Income Taxes
The effective tax rate was 22% in 2021 compared to 17% in 2020. The effective tax rate for 2020 differs from the effective tax rate for 2021, and the statutory rate of 21%, primarily due to a tax benefit that was recognized in 2020 for accumulated losses on certain investments we sold that were not previously deductible. See note 13 of the notes to consolidated financial statements included under Item 8 for further discussion of our income taxes.
Comprehensive Income to Shareholders and Book Value per Common Share
The following table summarizes the components of comprehensive income to
shareholders.
Years Ended December 31,
(dollars in thousands) 2021 2020
Net income to shareholders $ 2,425,003 $ 816,030
Other comprehensive income (loss)
Change in net unrealized gains on available-for-sale investments, net
of taxes (354,938) 352,773
Other, net of taxes 8,177 22,849
Other comprehensive (income) loss attributable to noncontrolling
interest
2 (18) Other comprehensive income (loss) to shareholders (346,759) 375,604 Comprehensive income to shareholders $
2,078,244
Book value per common share increased 17% from$885.72 atDecember 31, 2020 to$1,034.56 as ofDecember 31, 2021 , primarily due to net income to shareholders in 2021.
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 consolidated debt to capital ratio was 23% atDecember 31, 2021 and 21% atDecember 31, 2020 . The increase reflects an increase in senior long-term debt and other debt, primarily attributable to senior notes issued inMay 2021 . InMay 2021 , we issued$600 million of 3.45% unsecured senior notes dueMay 2052 with net proceeds of$591.4 million , before expenses. See note 12 of the notes to consolidated financial statements included under Item 8 for further information regarding ourMay 2021 senior notes offering. Our holding company had$5.3 billion and$4.1 billion of investments, cash and cash equivalents and restricted cash and cash equivalents (invested assets) atDecember 31, 2021 andDecember 31, 2020 , respectively. The increase in holding company invested assets was primarily due to dividends received from our subsidiaries, net proceeds from ourMay 2021 senior notes offering and an increase in the fair value of equity securities, partially offset by cash used in connection with the acquisition ofMetromont and to repurchase outstanding shares of our common stock. The following table presents the composition of our holding company's invested assets. December 31, 2021 2020 Fixed maturity securities 4 % 7 % Equity securities 53 % 45 % Short-term investments, cash and cash equivalents and restricted cash and cash equivalents 43 % 48 % Total 100 % 100 % After satisfying our interest and principal obligations on our senior long-term debt and notes payable to subsidiaries, as well as any other holding company obligations, excess liquidity atMarkel Corporation is available to, among other things, allocate capital to our existing businesses, complete acquisitions, build our portfolio of equity securities or repurchase shares of our common stock. 10K - 51 -------------------------------------------------------------------------------- InFebruary 2022 , our Board of Directors approved a new share repurchase program that replaced the previous share repurchase program. The program provides for the repurchase of up to$750 million of common stock and has no expiration date but may be terminated by the Board of Directors at any time. Our underwriting operations collect premiums and pay claims, reinsurance costs and operating expenses. Premiums collected from our underwriting operations are invested primarily in short-term investments and fixed maturity securities. Short-term investments held by our insurance subsidiaries provide liquidity for projected claims, reinsurance costs and operating expenses. Fixed maturity securities are held by our insurance subsidiaries to support our loss reserves and the eventual payment of claims, and therefore have maturities that generally match the duration of the underlying net loss reserves. 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 and pay dividends on our preferred stock. 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 their respective jurisdictions. AtDecember 31, 2021 , our domestic insurance subsidiaries andMarkel Bermuda Limited could pay ordinary dividends of$1.3 billion during the following twelve months under these laws. We maintain a revolving credit facility, which provides up to$300 million of capacity for future acquisitions, investments and stock repurchases and for other working capital and general corporate purposes. At our discretion, up to$200 million of the total capacity may be used for letters of credit. We may increase the capacity of the facility by up to$200 million subject to obtaining commitments for the increase and satisfying certain other terms and conditions. This facility expires inApril 2024 . See note 12 of the notes to consolidated financial statements included under Item 8 for further discussion of our revolving credit facility. As ofDecember 31, 2021 and 2020, there were no borrowings outstanding on our revolving credit facility. We were in compliance with all covenants contained in our revolving credit facility atDecember 31, 2021 . 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. We have access to various capital sources, including dividends from certain of our subsidiaries, holding company invested assets, undrawn capacity under our revolving credit facility and access to the debt and equity capital markets. We believe we have adequate liquidity to meet our capital and operating needs, including that which may be required to support the operating needs of our subsidiaries. However, the availability of these sources of capital and the availability and terms of future financings will depend on a variety of factors. See the "Access to Capital" risk factors under Item 1A Risk Factors for more discussion regarding our access to capital sources.
Cash Flows and Invested Assets
Net cash provided by operating activities was$2.3 billion in 2021 compared to$1.7 billion in 2020. The increase in net cash flows from operating activities for the year endedDecember 31, 2021 was primarily due to higher net premium collections, partially offset by higher claims settlement activity, as a result of continued growth in premium volume within our Insurance segment. Net cash used by investing activities was$2.9 billion in 2021 compared to$511.7 million in 2020. In 2021, net cash used by investing activities included purchases of fixed maturity securities, net of maturities and sales, of$2.5 billion . Net cash used by investing activities in 2021 also included$510.9 million of net cash used for the acquisitions of Buckner andMetromont . In 2020, net cash used by investing activities included$829.5 million of net purchases of short-term investments and$550.8 million of net cash used for the acquisition of Lansing. Net cash used by investing activities in 2020 was net of$1.2 billion of proceeds from sales of equity securities, net of purchases equity securities. In 2020, given the dislocation in the financial markets and related uncertainty around the global credit markets resulting from the onset of the COVID-19 pandemic, we increased our allocation to cash and short-term investments by retaining cash proceeds from maturities of fixed maturity securities, pausing our purchases of equity securities and, in some instances, selling certain equity securities based on our views of the underlying fundamentals of these positions and where pricing was deemed appropriate. In 2021, as global markets stabilized, we reallocated cash to purchase fixed maturity securities, to support our growing underwriting business, as well as equity securities. Cash flow from investing activities is also affected by various 10K - 52 --------------------------------------------------------------------------------
other 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 were$28.3 billion atDecember 31, 2021 compared to$24.9 billion atDecember 31, 2020 , reflecting an increase of 14% in 2021 attributable to cash flows from operations of$2.3 billion and increases in the fair value of our equity securities, driven by favorable market value movements. The following table presents the composition of our invested assets. December 31, 2021 2020 Fixed maturity securities 44 % 43 % Equity securities 32 % 28 % Short-term investments, cash and cash equivalents and restricted cash and cash equivalents 24 % 29 % Total 100 % 100 % The change in the composition of the investment portfolio fromDecember 31, 2020 toDecember 31, 2021 was primarily driven by increases in the fair value of our equity portfolio, cash flows from operating activities and net purchases of fixed maturity securities, as previously discussed. Net cash provided by financing activities was$369.8 million in 2021, which included net proceeds of$591.4 million from ourMay 2021 senior notes offering, as previously discussed. Net cash provided by financing activities was$434.6 million in 2020, which included net proceeds of$591.9 million from ourMay 2020 preferred shares offering. We paid dividends of$36.0 million and$18.4 million on our preferred shares during 2021 and 2020, respectively. Cash of$206.5 million and$26.8 million was used to repurchase shares of our common stock during 2021 and 2020, respectively. InMarch 2020 , following the onset of the COVID-19 pandemic, we suspended repurchases of our common shares, but subsequently recommenced our share repurchase program inFebruary 2021 .
Cash Obligations and Commitments
As ofDecember 31, 2021 , our primary cash obligations were unpaid losses and loss adjustment expenses, senior long-term debt and other debt and related interest expense, life and annuity benefits and lease liabilities. These cash obligations, as presented in the following table, represent our estimate of total future cash payments and may differ from the corresponding liabilities on our consolidated balance sheet due to present value discounts and other adjustments required for presentation in accordance withU.S. GAAP. The following table summarizes our estimated contractual cash obligations atDecember 31, 2021 and the estimated amount expected to be paid in 2022. Total cash Cash obligations obligations as of due in less than 1 (dollars in thousands) December 31, 2021 year Unpaid losses and loss adjustment expenses (1)$ 18,236,370 $ 4,125,494 Senior long-term debt and other debt (2)$ 4,407,971 $ 499,043 Interest payments on senior long-term debt and other debt$ 3,558,176 $ 177,308 (3) Life and annuity benefits (4)$ 1,127,977 $ 66,565 Lease liabilities (5)$ 673,653 $ 103,358 (1) The actual cash payments for settled claims will vary, possibly significantly, from these estimates. As ofDecember 31, 2021 , the average duration of our reserves for unpaid losses and loss adjustment expenses was 3.8 years. See note 9 of the notes to consolidated financial statements included under Item 8 for further details on our loss reserve estimates.
(2) See note 12 of the notes to consolidated financial statements included
under Item 8 for further details on the scheduled maturity of principal payments
on our senior long-term debt and other debt.
(3) Interest expense is accrued in the period incurred and therefore, only a
portion of the future interest payments presented in this table represent a
liability on our consolidated balance sheet as of
(4) There is inherent uncertainty in the process of estimating the timing of payments for life and annuity benefits and actual cash payments for settled contracts could vary significantly from these estimates. We expect$818.4 million of our cash obligation for life and annuity benefits to be paid beyond five years. See note 11 of the notes to consolidated financial statements included under Item 8 for further details on our estimates for life and annuity benefit reserves. (5) See note 7 of the notes to consolidated financial statements included under Item 8 for further details on our lease obligations and the expected timing of future payments. 10K - 53 -------------------------------------------------------------------------------- In September andOctober 2021 , andFebruary 2022 , terms were announced of a proposed transaction that would allow the acceleration of a full return of remaining capital to ourMarkel CATCo investors. Under the terms of the proposed transaction, we would provide cash funding that is not expected to exceed$175 million and estimated tail risk cover of$145 million . We would also make$120 million in estimated cash payments to or for the benefit of investors. See note 19 of the notes to consolidated financial statements included under Item 8 for further details about the proposed transaction.
Restricted Assets and Capital
AtDecember 31, 2021 , we had$4.9 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$410.2 million atDecember 31, 2021 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 in our consolidated balance sheet. See note 4(f) of the notes to consolidated financial statements included under Item 8 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. TheNational 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 theUnited Kingdom ,Bermuda and other jurisdictions, includingGermany . AtDecember 31, 2021 , the capital and surplus of each of our insurance subsidiaries significantly exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements.
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 withU.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. These estimates, by necessity, are based on assumptions about numerous factors. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements. Our accounts with accounting policies that involve critical accounting estimates are unpaid losses and loss adjustment expenses and goodwill and intangible assets.
Unpaid Losses and Loss Adjustment Expenses
Our consolidated balance sheets included estimated unpaid losses and loss adjustment expenses of$18.2 billion and reinsurance recoverables on unpaid losses of$6.9 billion atDecember 31, 2021 compared to$16.2 billion and$5.7 billion , respectively, atDecember 31, 2020 . Included in these balances were unpaid losses and loss adjustment expenses and reinsurance recoverables on unpaid losses attributable to our program services business and other fronting arrangements totaling$4.2 billion for the year endedDecember 31, 2021 and$3.3 billion for the year endedDecember 31, 2020 . 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 insurance-linked securities operations. We accrue liabilities for unpaid losses and loss adjustment expenses based upon estimates of the ultimate amounts payable. We maintain reserves for specific claims incurred and reported (case reserves) and reserves for claims incurred but not reported (IBNR reserves). Reported claims are in various stages of the settlement process, and the corresponding reserves for reported claims are based upon all information available to us. Case reserves consider our estimate of the ultimate cost to settle the claims, including investigation and defense of lawsuits resulting from the claims, and may be subject to adjustment for differences between costs originally estimated and costs subsequently re-estimated or incurred. Claims are settled based upon their merits, and some claims may take years to settle, especially if legal action is involved. As of any balance sheet date, all claims have not yet been reported, and some claims may not be reported for many years. As a result, the liability for unpaid losses and loss adjustment expenses includes significant estimates for incurred but not reported claims. There is normally a time lag between when a loss event occurs and when it is actually reported to us. The actuarial methods that we use to estimate losses have been designed to address the lag in loss reporting as well as the delay in obtaining 10K - 54 -------------------------------------------------------------------------------- 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 and, in some instances, loss estimates 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 loss adjustment expenses and case reserves from estimated ultimate losses and loss adjustment expenses. IBNR reserves were 67% of total unpaid losses and loss adjustment expenses atDecember 31, 2021 compared to 66% atDecember 31, 2020 .
The following table summarizes case reserves and IBNR reserves. The amounts in
the following table exclude 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.
Program Services
and other
(dollars in thousands) Insurance Reinsurance Other underwriting fronting Consolidated
December 31, 2021
Case reserves $ 3,093,576 $ 1,334,444 $ 53,317 $ 1,485,857 $ 5,967,194
IBNR reserves 6,951,347 2,369,313 218,039 2,730,477 12,269,176
Total $ 10,044,923 $ 3,703,757 $ 271,356 $ 4,216,334 (1) $ 18,236,370
December 31, 2020
Case reserves $ 2,917,179 $ 1,386,976 $ 51,591 $ 1,155,540 $ 5,511,286
IBNR reserves 6,311,344 2,101,169 224,499 2,130,821 10,767,833
Total $ 9,228,523 $ 3,488,145 $ 276,090 $ 3,286,361 (1) $ 16,279,119
(1) Substantially all of the premium written in our program services and other
fronting business is ceded, resulting in reinsurance recoverables on unpaid
losses of
respectively.
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 ofDecember 31, 2021 andDecember 31, 2020 were$11.6 million and$8.3 million , respectively. 10K - 55 --------------------------------------------------------------------------------
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. 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 time 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. 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 personnel. 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 and economic 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. 10K - 56 --------------------------------------------------------------------------------Incurred Loss Development - This method uses historical loss reporting patterns to estimate future loss reporting patterns. Our actuaries use the historical loss patterns to develop factors that are applied to current reported losses to calculate expected ultimate losses.Bornhuetter-Ferguson Paid Loss Development - This method divides the projection of ultimate losses into the portion that has already been paid and the portion that has yet to be paid. The portion that has yet to be paid is estimated as the product of three amounts: the premium earned for the exposure period, the expected loss ratio and the percentage of ultimate losses that are still unpaid. The expected loss ratio is selected by considering historical loss ratios, adjusted for any known changes in pricing, loss trends, adequacy of case reserves, changes in administrative practices and other relevant factors.
Bornhuetter-Ferguson 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.
Other Methods - We cannot estimate losses from widespread catastrophic events,
such as hurricanes and earthquakes, as well as pandemics, using the traditional
actuarial methods previously described. In the initial months after a
catastrophic event occurs, our actuaries estimate losses and loss adjustment
expenses based on claims received to date, detailed policy and reinsurance
contract level reviews, industry loss estimates and output from both industry
and proprietary models, as well as analysis of our ceded reinsurance contracts.
The availability of data from these procedures varies depending on the timing of
the event relative to the point at which we develop our estimate. We also
consider loss experience on historical events that may have similar
characteristics to the underlying event. Due to the inherent uncertainty in
estimating such losses, these estimates are subject to variability, which
increases with the severity and complexity of the underlying event. As
additional claims are reported and paid, and industry loss estimates are
revised, we incorporate this new information into our analysis and adjust our
estimate of ultimate losses and loss adjustment expenses as appropriate.
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 estimates 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. 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.
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.
Loss reserves are established at management's best estimate, which is developed
using the actuarially calculated point estimate as the starting point. The
actuarial point estimate represents our actuaries' estimate of the most likely
amount that will ultimately be paid to settle the losses that have occurred 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
influencing the development of management's best estimate include: the
credibility and timeliness of claims and loss information received from cedents
and other 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.
10K - 57
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In developing its best estimate of loss reserves, management's philosophy is to
establish loss reserves that are more likely to be redundant rather than
deficient, and therefore, will ultimately prove to be adequate. Management's
approach to establishing loss reserves typically results in loss reserves that
exceed the calculated actuarial point estimate. 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 losses that have occurred at
particular point in time. The range determinations are based on estimates and
actuarial judgements 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 underwriting segments.
Additionally, following an acquisition of insurance operations, acquired
reserves initially are recorded at fair value, and therefore our recorded loss
reserves may be closer to the actuarial point estimate 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 $638.3 million , or 6.0%,
at December 31, 2021 , compared to $587.4 million , or 5.9%, at December 31, 2020 .
The difference between management's best estimate and the actuarially calculated
point estimate in both 2021 and 2020 is primarily associated with our long-tail
business due to the subjective factors previously described that affect the
development of losses. Certain subjective factors, particularly the credibility
and timeliness of claims information, are more pronounced within our reinsurance
operations, as previously discussed, and therefore, the percentage difference
between management's best estimate and the actuarially calculated point estimate
is more significant in our Reinsurance segment than our Insurance segment.
Management has attributed less credibility than our actuaries to favorable
trends experienced on our long-tail business and has not incorporated these
favorable trends into its best estimate of ultimate losses to the same extent as
the actuaries.
Loss frequency and loss severity are two key measures of loss activity that
often result in adjustments to actuarial assumptions relative to ultimate loss
reserve estimates. Loss frequency measures the number of claims per unit of
insured exposure. When the number of newly reported claims is higher than
anticipated, generally speaking, loss reserves are increased. Conversely, loss
reserves are generally decreased when fewer claims are reported than expected.
Loss severity measures the average size of a claim. When the average severity of
reported claims is higher than originally estimated, loss reserves are typically
increased. When the average claim size is lower than anticipated, loss reserves
are typically decreased.
Our underwriting results in 2021 included $479.8 million of favorable
development on prior years loss reserves compared to $606.4 million in 2020. In
connection with our quarterly reviews of loss reserves, the actuarial methods we
used have exhibited a favorable trend on prior accident years during 2021. This
trend was observed using statistical analysis of actual loss experience for
prior years, particularly with regard to most of our long-tail books of business
within the Insurance segment. Additionally, as loss reserves are recorded at
management's best estimate, which is generally higher than the corresponding
actuarially calculated point estimate, the initial reserves established by
management are more likely to be redundant than deficient. As actual losses
continue to be lower than anticipated, it has become more likely that the
underwriting results will prove to be better than originally estimated.
Additionally, as most actuarial methods rely upon historical reporting patterns,
the favorable trends experienced on earlier accident years have resulted in a
re-estimation of our ultimate incurred losses on more recent accident years.
When we experience loss frequency or loss severity trends that are more
favorable than we initially anticipated, we often evaluate the loss experience
over a period of several years in order to assess the relative credibility of
loss development trends. In both 2021 and 2020, based upon our evaluations of
claims development patterns in our long-tail, and often volatile, lines of
business, our actuaries reduced their estimates of ultimate losses. Management
also gave greater credibility to the favorable trends experienced on earlier
accident years and upon incorporating these favorable trends into its best
estimate, we reduced prior years loss reserves on more recent accident years
accordingly. While we believe it is likely that there will be additional
favorable development on prior years loss reserves in 2022, we caution readers
not to place undue reliance on this favorable trend.
Changes in prior years loss reserves, including the trends and factors that
impacted loss reserve development in 2021 and 2020, as well as 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 expense are discussed in further detail in
note 9 of the notes to consolidated financial statements included under Item 8.
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, 2021 . As described in note 9 of
the notes to consolidated financial statements included under Item 8, 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
10K - 58
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estimated future payments for losses and loss adjustment expenses, whereas the
reserves for unpaid losses and loss adjustment expenses included on the
consolidated balance sheet include the unamortized portion of fair value
adjustments recorded in conjunction with an acquisition.
Low End of High End of
Net Loss Actuarial Actuarial
(dollars in millions) Reserves Held Range(1) Range(1)
Insurance $ 7,858.0 $ 6,763.1 $ 8,573.6
Reinsurance 3,283.1 2,600.1 3,733.9
Other underwriting 148.6 121.7 208.6
(1) Due to the actuarial methods used to determine the separate ranges for each
component 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. Similar to the
development of our estimate of ultimate losses, actuarial ranges are developed
based on known events as of the valuation date, while ultimate paid losses are
subject to events and circumstances that are unknown as of the valuation date.
During the years ended December 31, 2021 and 2020, we experienced favorable
development on prior years loss reserves of 5% and 6%, respectively, 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. Within
our general liability and professional liability product lines, the level of
favorable development on prior years loss reserves in 2021 was impacted by
broader conditions impacting these product lines, including the effects of
social inflation, including increased litigation, as well as an increase in the
severity of losses in certain of these product lines in 2021. While overall loss
severity continues to be lower than our previous estimates, management has given
less credibility to the favorable trend based on this recent experience.
Additionally, recent increases in economic inflation, and an expectation that
this trend will continue, have created more uncertainty around the ultimate
losses that will be incurred to settle claims on these longer-tail product
lines. In assessing the likelihood of whether the favorable trends previously
discussed will continue and whether other trends may develop, we believe that a
reasonably likely movement in prior years loss reserves during 2022 would range
from favorable development of 2%, or $200 million , to favorable development of
7%, or $750 million , of December 31, 2021 net loss reserves.
Our consolidated balance sheet as of
intangible assets of
December 31, 2021
(dollars in millions) Underwriting Markel Ventures Other (1) Total
Goodwill $ 897.4 $ 1,196.6 $ 805.1 $ 2,899.1
Intangible assets 401.3 766.2 655.0 1,822.5
Total $ 1,298.7 $ 1,962.8 $ 1,460.1 $ 4,721.6
(1) Amounts included in Other reflect our operations that are not included in a
reportable segment, including our insurance-linked securities operations and our
program services operations.
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, including goodwill and intangible assets, and
liabilities assumed involves significant judgment and the use of valuation
models and other estimates, which require assumptions that are inherently
subjective. During the years ended December 31, 2021 and 2020, we recorded
$497.7 million and $497.1 million , respectively, of goodwill and intangible
assets in connection with acquisitions.
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
annually, or when events or circumstances indicate that their carrying value may
not be recoverable. A significant amount of judgment is required in performing
impairment tests, including the optional assessment of qualitative factors for
the annual impairment
10K - 59
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test, which is used 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 tests for impairment as of October 1, 2021 based upon
results of operations through September 30, 2021 . We elected to perform a
qualitative assessment for all of our reporting units, with the exception of our
Nephila reporting unit, for which we performed a quantitative assessment.
When performing our qualitative assessments, we considered macroeconomic factors
such as industry conditions and market conditions. We also considered reporting
unit-specific events, actual financial performance versus expectations and
management's future business expectations, as well as the amount by which the
fair value of the reporting unit exceeded its carrying value at the date of the
last quantitative assessment. As part of our qualitative assessment of recently
acquired reporting units with material goodwill, we considered the fact that the
businesses had been acquired in orderly transactions between market
participants, and our purchase price represented fair value at acquisition. For
recent acquisitions for which we elected to perform a qualitative assessment,
there were no events since acquisition that had a significant adverse impact on
the fair value of these reporting units through the assessment date. Based on
the results of our qualitative assessments, we believe it is more likely than
not that the fair value of each of these reporting units exceeded its respective
carrying amount as of the assessment date and December 31, 2021 and none of
these reporting units are at risk of a material impairment of goodwill. We
considered similar factors to determine if there were any indicators requiring
an assessment of the recoverability of our definite lived intangible assets and
concluded there were not. However, deterioration of market conditions related to
the general economy or the specific industries in which we operate, a sustained
trend of weaker than anticipated financial performance within a reporting unit
beyond that which we considered or included in our assessments, or an increase
in the market-based weighted average cost of capital, among other factors, could
significantly impact the impairment analysis and may result in future goodwill
or intangible asset impairment charges.
We performed a quantitative assessment for our Nephila reporting unit, which is
the primary component of our Nephila operations. We acquired our Nephila
operations in late 2018 at which time they were recorded at fair value. At
December 31, 2021 , the carrying value of our Nephila reporting unit included
goodwill of $413.2 million . The Nephila reporting unit serves as an insurance
and investment fund manager that offers a broad range of investment products,
including insurance-linked securities, catastrophe bonds, insurance swaps and
weather derivatives. Nephila receives management fees for these 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 managed. This reporting unit
also includes our Velocity managing general agent operations, through which it
underwrites and administers property insurance policies and provides delegated
underwriting services to providers of insurance capital, including capital
provided through the funds it manages, as well as third-party capital.
We estimated the fair value of our Nephila reporting unit primarily using an
income approach based on a discounted cash flow model. The cash flow projections
used in the discounted cash flow model included management's best estimate of
future growth and margins. The discount rates used to determine the fair value
estimates were developed based on a capital asset pricing model using
market-based inputs as well as an assessment of the inherent risk in projected
future cash flows. Given the limited time since acquisition, the carrying value
of this reporting unit continues to closely approximate fair value, making our
impairment assessment more sensitive to changes in assumptions used to calculate
fair value. Since acquiring this business, investment performance in the broader
ILS market has been adversely impacted by consecutive years of elevated
catastrophe losses and COVID-19 in 2020. These events, as well as recent
volatility in the capital markets, also have impacted investor decisions around
allocation of capital to ILS, which in turn has impacted our assumptions for
capital raises and redemptions within the funds we manage. Our cash flow
assumptions reflect management's best estimate of the reporting unit's future
cash flows, based on information currently available, however, these assumptions
are inherently uncertain, require a high degree of estimation and judgment and
are subject to change depending on the outcome of future events. As of the
assessment date, the estimated fair value of the Nephila reporting unit exceeded
its carrying amount.
In conjunction with the planned disposition of our Velocity managing general
agent operations, we reassessed the retained portion of the Nephila reporting
unit for impairment as of December 31, 2021 based on its allocated goodwill and
associated cash flows. As of December 31, 2021 , the estimated fair value of the
retained portion of the Nephila reporting unit also exceeded its carrying
amount. However, changes to certain assumptions or an increase in the
market-based weighted average cost of capital could have an adverse impact on
the estimated fair value, which could result in an impairment of goodwill.
See the risk factor titled "Impairment in the value of our goodwill or other
intangible assets could have a material adverse effect on our operating results
and financial condition" within Item 1A Risk Factors for further discussion of
risks associated with our goodwill and intangible assets.
10K - 60
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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 Item 1 Business, Item 1A Risk Factors and Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations in this report 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 use of technology and innovation to simplify the customer experience, increase efficiencies, redesign products, alter models and effect other potentially disruptive changes in the insurance industry, and the effect of competition on market trends and pricing;
•our efforts to develop new products, expand in targeted markets or improve
business processes and workflows may not be successful and may increase or
create new risks (e.g., insufficient demand, change to risk exposures,
distribution channel conflicts, execution risk, increased expenditures);
•the frequency and severity of man-made and natural catastrophes (including earthquakes, wildfires and weather-related catastrophes) may exceed expectations, are unpredictable and, in the case of wildfires and weather-related catastrophes, may be exacerbated if, as many forecast, changing conditions in the climate, 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 industry practices and evolving legal, judicial, social and other environmental trends or conditions, can increase the scope of coverage, the frequency and severity of claims and the period over which claims may be reported; these factors, as well as 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; •inaccuracies (whether due to data error, human error or otherwise) in the various modeling techniques and data analytics (e.g., scenarios, predictive and stochastic modeling, and forecasting) we use to analyze and estimate exposures, loss trends and other risks associated with our insurance and insurance-linked securities businesses could cause us to misprice our products or fail to appropriately estimate the risks to which we are exposed; •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;
•initial estimates for catastrophe losses are often based on limited
information, are dependent on broad assumptions about the nature and extent of
losses, coverage, liability and reinsurance, and those losses may ultimately
differ materially from our expectations;
10K - 61
--------------------------------------------------------------------------------
•changes in the availability, costs, quality and providers of reinsurance
coverage, which may impact our ability to write or continue to write certain
lines of business or to mitigate the volatility of losses on our results of
operations and financial condition;
•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, if any, 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; •economic conditions, actual or potential defaults in corporate bonds, municipal bonds, mortgage-backed securities 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 securities and equity securities, as well as the carrying value of our other assets and liabilities, and this impact may be heightened by market volatility and our ability to mitigate our sensitivity to these changing conditions;
•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 significant volatility, uncertainty and disruption caused by health
epidemics and pandemics, including the COVID-19 pandemic and its variants, as
well as governmental, legislative, judicial or regulatory actions or
developments in response thereto;
•changes inU.S. tax laws, regulations or interpretations, 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 or security breach of, or cyber-attack on, enterprise information technology systems that we use or a failure to comply with data protection or privacy regulations;
•third-party providers may perform poorly, breach their obligations to us or
expose us to enhanced risks;
•our acquisitions may increase our operational and internal 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 methods we employ to manage our loss
exposures;
•the loss of services of any executive officer or other key personnel could
adversely impact one or more of our operations;
•the manner in which we manage our global operations through a network of
business entities could result in inconsistent management, governance and
oversight practices and make it difficult for us to implement strategic
decisions and coordinate procedures;
•our substantial international operations and investments expose us to increased political, civil, 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 theUnited Kingdom's withdrawal from theEuropean Union (Brexit), which could have adverse consequences for our businesses, particularly ourLondon -based international insurance operations;
•our ability to obtain additional capital for our operations on terms favorable
to us;
10K - 62 -------------------------------------------------------------------------------- •our compliance, or failure to comply, with covenants and other requirements under our revolving credit facility, senior debt and other indebtedness and our preferred shares;
•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 future
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 ofU.S. companies and their affiliates are more restrictive than, or conflict with, 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, debt or preferred share ratings or outlook 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; •changes in the amount of statutory capital our insurance subsidiaries are required to hold, which can vary significantly and is based on many factors, some of which are outside our control;
•losses from litigation and regulatory investigations and actions;
•investor litigation or disputes, as well as regulatory inquiries, investigations or proceedings, including the inquiry by theBermuda Monetary Authority , related to ourMarkel CATCo operations; delays or disruptions in the run-off of those operations; or the inability to complete, or failure to realize the benefits of, the proposed transaction that would allow the accelerated return of capital to ourMarkel CATCo investors, including due to the failure to obtain requisite approvals or satisfaction of other conditions on the proposed terms and schedule; and •a number of additional factors may adversely affect ourMarkel 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, commercial and industrial construction markets; liability for environmental matters; supply chain and shipping issues, including increases in freight costs; volatility in the market prices for their products; and volatility in commodity, wholesale and raw materials prices and interest and foreign currency exchange rates.
Results from our underwriting, investing,
have been and will continue to be potentially materially affected by these
factors.
By making forward-looking statements, we do not intend to become obligated to
publicly update or revise any such statements whether as a result of new
information, future events or other changes. Readers are cautioned not to place
undue reliance on any forward-looking statements, which speak only as at their
dates.
10K - 63
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Aon Announces Additional $7.5 Billion Share Repurchase Authorization and 10% Increase to Quarterly Cash Dividend
ARTHUR J. GALLAGHER & CO. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
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