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MARKEL CORP – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included under Item 1 Financial Statements and our 2021 Annual Report on Form 10-K. 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. See note 1(b) of the notes to consolidated financial statements for details of recently issued accounting pronouncements that we have not yet adopted and the expected effects on our consolidated financial position, results of operations and cash flows. This section is divided into the following sections: •Our Business •Results of Operations •Financial Condition
•Critical Accounting Estimates
•Safe Harbor and Cautionary Statement
InFebruary 2022 , military conflict escalated betweenRussia andUkraine followingRussia's invasion ofUkraine . The ongoing conflict that has followed, and related financial and economic sanctions imposed by governments in theU.S. ,United Kingdom andEuropean Union , among others, in response, have caused disruption in the global economy and have increased global economic and political uncertainty. Our underwriting results for the quarter included$35.0 million of net losses and loss adjustment expenses and$12.3 million of additional reinsurance costs attributed to theRussia -Ukraine conflict. Assumptions used to develop our loss estimate are inherently uncertain and subject to a wide range of variability. See "Results of Operations - Underwriting Results" for further details regarding our underwriting exposures and loss estimates related to this ongoing conflict. For further discussion regarding theRussia -Ukraine conflict and risks related to our businesses, see Item 1A Risk Factors. Our Business We are a diverse financial holding company serving a variety of niche markets. We aspire to build one of the world's great companies and deploy three financial engines in pursuit of this goal.
Insurance - Our principal business markets and underwrites specialty insurance
products using multiple platforms that enable us to best match risk and capital.
Investments - Our investing activities are primarily related to our underwriting operations. The majority of our investable assets come from premiums paid by policyholders and the remainder is comprised of shareholder funds.
interests in a diverse portfolio of businesses that operate outside of the
specialty insurance marketplace.
Our financial goals are to earn consistent underwriting and operating profits and superior investment returns to build shareholder value. We measure financial success by our ability to grow book value per common share and the market price per common share of our stock, or total shareholder return, at high rates of return over a long period of time. To mitigate effects of short-term volatility and align with the longer-term perspective we apply to operating our businesses, we generally use five-year time periods to measure our performance. Growth in book value per common share is an important measure of our success because it includes all underwriting, operating and investing results. Over the five-year period endedMarch 31, 2022 , the compound annual growth in book value per common share was 10%. Growth in total shareholder value is also an important measure of our success, as a significant portion of our operations are not recorded at fair value or otherwise captured in book value. Over the five-year period endedMarch 31, 2022 , our common share price increased at a compound annual rate of 9%. 27 -------------------------------------------------------------------------------- Table of Contents Insurance
Our insurance engine is comprised of the following types of operations:
•Underwriting - Our underwriting operations are comprised of our risk-bearing
insurance and reinsurance operations.
•Insurance-linked securities - Our insurance-linked securities (ILS) operations include investment fund managers that offer a variety of investment products, including insurance-linked securities, catastrophe bonds, insurance swaps and weather derivatives. •Program services - Our program services business serves as a fronting platform that provides other insurance entities access to theU.S. property and casualty insurance market. Through our underwriting, ILS and program services operations, we have a suite of capabilities through which we can access capital to support our customers' risks, which includes our own capital through our underwriting operations, as well as third-party capital through our ILS and program services operations. Within each of these platforms, we believe that our specialty product focus and niche market strategy enable us to develop expertise and specialized market knowledge. We seek to differentiate ourselves from competitors by our expertise, service, continuity and other value-based considerations, including the multiple platforms through which we can manage risk and deploy capital. For example, we may leverage the strength of our underwriting platform to write certain risks on behalf of our ILS operations in accordance with their desired return objectives. We may also cede certain risks written through our underwriting operations to our ILS operations to the extent those risks are more aligned with the risk profile of our ILS investors than our own capital risk tolerance. Our ability to access multiple insurance platforms allows us to achieve income streams from our insurance operations beyond the traditional underwriting model.
Underwriting
Our chief operating decision maker reviews our ongoing underwriting operations on a global basis in the following two segments: Insurance and Reinsurance. In determining how to allocate resources and assess the performance of our underwriting results, we consider many factors, including the nature of the insurance product sold, the type of account written and the type of customer served. The Insurance segment includes all direct business and facultative placements written on a risk-bearing basis within our underwriting operations. The Reinsurance segment includes all treaty reinsurance written on a risk-bearing basis within our underwriting operations. Our Insurance segment includes both hard-to-place risks written outside of the standard market on an excess and surplus lines basis and unique and hard-to-place risks that must be written on an admitted basis due to marketing and regulatory reasons. Risks written in our Insurance segment are written on either a direct basis or a subscription basis, the latter of which means that the loss exposures brought into the market are typically insured by more than one insurance company orLloyd's of London (Lloyd's) syndicate. When we write business in the subscription market, we prefer to participate as lead underwriter in order to control underwriting terms, policy conditions and claims handling. The following products are included in this segment: professional liability, general liability, personal lines, marine and energy, primary and excess of loss property, workers' compensation, credit and surety coverages, specialty program insurance for well-defined niche markets and liability and other coverages tailored for unique exposures. Business in this segment is primarily written through ourMarkel Specialty and Markel International divisions. The Markel Specialty division writes business on both an excess and surplus lines and admitted basis, primarily based inthe United States , as well asBermuda ,London , andEurope .The Markel International division writes business worldwide from ourLondon andMunich -based platforms, which include branch offices around the world. The Insurance segment also includes collateral protection insurance written on an admitted basis through our State National division. Our Reinsurance segment includes casualty and specialty treaty reinsurance products offered to other insurance and reinsurance companies globally through the broker market. Our treaty reinsurance offerings include both quota share and excess of loss reinsurance and are typically written on a participation basis, which means each reinsurer shares proportionally in the business ceded under the reinsurance treaty written. Business in this segment is primarily written by our Global Reinsurance division. Principal lines of business include: professional liability, general liability, workers' compensation and credit and surety. Previously, we also wrote property reinsurance and retrocessional reinsurance business, however, effectiveJanuary 1, 2022 , we were off-risk for substantially all property loss exposures, including catastrophe exposures, previously written within our Reinsurance segment. 28 -------------------------------------------------------------------------------- Table of ContentsInsurance-Linked Securities Our insurance-linked securities operations are primarily comprised of ourNephila operations and are not included in a reportable segment.Nephila Holdings Ltd. (together with its subsidiaries,Nephila ) serves as an insurance and investment fund manager and managing general agent that offers a broad range of investment products, including insurance-linked securities, catastrophe bonds, insurance swaps and weather derivatives.Nephila serves as the investment manager to severalBermuda ,Ireland andU.S. based private funds (theNephila Funds). To provide access for the Nephila Funds to the insurance, reinsurance and weather markets,Nephila acts as an insurance manager to certainBermuda Class 3 and 3A reinsurance companies and Lloyd's Syndicate 2357 (Syndicate 2357) (collectively, the Nephila Reinsurers). The results of the Nephila Reinsurers are attributed to the Nephila Funds primarily through derivative transactions between these entities. Neither the Nephila Funds nor the Nephila Reinsurers are subsidiaries ofMarkel Corporation , and as such, these entities are not included in our consolidated financial statements. The Nephila Reinsurers subscribe to various reinsurance contracts based on their investors' risk profiles, including property reinsurance business fronted through our underwriting platform.Nephila also serves as a managing general agent that underwrites and administers property insurance policies and provides delegated underwriting services to providers of insurance capital. In the first quarter of 2022, we completed the sale of our Velocity managing general agent operations, and we have entered into an agreement to to sell our remaining managing general agent operations later in 2022. See "Results of Operations - Other Operations" for further details regarding these transactions. See note 12 of the notes to consolidated financial statements for further details regarding ourNephila operations. Our insurance-linked securities operations also include our run-offMarkel CATCo operations, the results of which are reported separately from our ongoing insurance-linked securities operations. OurMarkel CATCo operations are conducted throughMarkel CATCo Investment Management Ltd. (MCIM), an ILS investment fund manager headquartered inBermuda . MCIM serves as the insurance manager forMarkel CATCo Re Ltd. (Markel CATCo Re), a Bermuda Class 3 reinsurance company, and as the investment manager forMarkel CATCo Reinsurance Fund Ltd. , aBermuda exempted mutual fund company comprised of multiple segregated accounts (Markel CATCo Funds). InJuly 2019 , these operations were placed into run-off. InMarch 2022 , we completed a buy-out transaction that provided for an accelerated return of all remaining capital to investors in the Markel CATCo Funds. See note 11 of the notes to consolidated financial statements for further details regarding our Markel CATCo operations and the buy-out transaction. Program Services Our program services business generates fee income in the form of ceding fees in exchange for fronting insurance business to other insurance carriers (capacity providers). In general, fronting refers to business in which we write insurance on behalf of a general agent or capacity provider and then cede all, or substantially all, of the risk under these policies to the capacity provider in exchange for ceding fees. The results of our program services operations are not included in a reportable segment. Our program services business, which is provided through our State National division, offers issuing carrier capacity to both specialty managing general agents and other producers who sell, control and administer books of insurance business that are supported by third parties that assume reinsurance risk, including Syndicate 2357 and other Nephila Reinsurers. These reinsurers are domestic and foreign insurers and institutional risk investors that want to access specific lines ofU.S. property and casualty insurance business but may not have the required licenses and filings to do so. Through our program services business, we write a wide variety of insurance products, principally including general liability, commercial liability, commercial multi-peril, property and workers' compensation. Program services business written through our State National division is separately managed from our underwriting divisions, which write similar products, in order to protect our program services customers. In certain instances, we also leverage the strength of our underwriting platform to write business on behalf of our ILS operations in exchange for ceding fees to support their business plans and assist in meeting their desired return objectives. This business is conducted separately from our program services business and primarily consists of catastrophe-exposed property reinsurance business, which we no longer write on a risk-bearing basis. Although we reinsure substantially all of the risks inherent in our program services business and ILS fronting arrangements, we have certain programs that contain limits on our reinsurers' obligations to us that expose us to underwriting risk, including loss ratio caps, aggregate reinsurance limits or exclusion of the credit risk of producers. Under certain programs, including programs and contracts with Nephila Reinsurers, we also bear underwriting risk for annual aggregate agreement year losses in excess of a limit that we believe is unlikely to be exceeded. See note 12 of the notes to consolidated financial statements for further details regarding our programs with Nephila Reinsurers. 29 -------------------------------------------------------------------------------- Table of Contents Investments 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. The majority of our investable assets come from premiums paid by policyholders. Policyholder funds are invested predominantly in high-quality government, municipal and corporate bonds that generally match the duration and currency of our loss reserves. The balance, comprised of shareholder funds, is available to be invested in equity securities, which over the long run, have produced higher returns relative to fixed maturity investments. When purchasing equity securities, we seek to invest in profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline, at reasonable prices. We intend to hold these investments over the long-term. Substantially all of our investment portfolio is managed by company employees.
Through our wholly owned subsidiary,Markel Ventures, Inc. (Markel Ventures ), we own controlling interests in various high-quality businesses that operate outside of the specialty insurance marketplace but have the shared goal of positively contributing to the long-term financial performance ofMarkel Corporation . Management views these businesses as separate and distinct from our insurance operations. Management teams for each business operate autonomously and are responsible for developing strategic initiatives, managing day-to-day operations and making investment and capital allocation decisions for their respective companies. Our senior management team is responsible for decisions regarding allocation of capital for acquisitions and new investments. Our strategy in making these investments is similar to our strategy for purchasing equity securities. We seek to invest in profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline, at reasonable prices. We intend to own the businesses acquired for a long period of time. Our chief operating decision maker allocates resources to and assesses the performance of these various businesses in the aggregate as theMarkel Ventures segment. This segment includes a diverse portfolio of specialized businesses from different industries that offer various types of products and services to businesses and consumers across many markets. The following types of businesses are included in this segment: construction services, consumer and building products, transportation-related products, equipment manufacturing products and consulting services. InDecember 2021 , we acquired a controlling interest inMetromont LLC (Metromont ), a precast concrete manufacturer and concrete building solutions provider for commercial projects. InAugust 2021 , we acquired a controlling interest inBuckner HeavyLift Cranes (Buckner), a provider of crane rental services for large commercial contractors. See note 3 of the notes to consolidated financial statements for additional details related to these acquisitions. 30 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table presents the components of net income (loss) to shareholders, net income (loss) to common shareholders and comprehensive income (loss) to shareholders. Three Months Ended March 31, (dollars in thousands) 2022 2021 Insurance segment profit$ 187,494 $ 116,948 Reinsurance segment profit (loss) 13,283 (23,218) Investing segment profit (loss) (1) (285,672) 623,438 Markel Ventures segment profit (2) 49,737 51,463 Other operations (3) (6,987) (23,274) Interest expense (49,692) (42,389) Net foreign exchange gains 23,494 25,084 Income tax (expense) benefit 18,429 (148,371) Net income attributable to noncontrolling interests (2,929) (5,987) Net income (loss) to shareholders (52,843) 573,694 Net income (loss) to common shareholders (52,843) 573,694 Other comprehensive loss to shareholders (476,184) (214,697) Comprehensive income (loss) to shareholders
(1) Net investment income and net investment gains (losses), if any,
attributable to
Ventures
included in Investing segment profit (loss).
(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$9.8 million and$10.4 million for the three months endedMarch 31, 2022 and 2021, respectively; however, we do not allocate amortization of intangible assets between the Insurance and Reinsurance segments. The change in comprehensive income (loss) to shareholders for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 was primarily due to pre-tax net investment losses of$358.4 million in 2022 compared to pre-tax net investment gains of$526.9 million in 2021, as well as pre-tax net unrealized losses on our fixed maturity securities of$665.8 million in 2022 compared to$321.2 million in 2021. The components of net income (loss) to shareholders and comprehensive income (loss) to shareholders are discussed in further detail under "Underwriting Results," "Investing Results," "Markel Ventures ," "Other Operations," "Interest Expense and Income Taxes" and "Comprehensive Income (Loss) 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. 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. 31
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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 and theRussia -Ukraine conflict. Due to the unique characteristics of a catastrophe loss and other significant, infrequent events, there is inherent variability as to the timing or loss amount, which cannot be predicted in advance. We believe measures that exclude the effects of catastrophe events, theRussia -Ukraine conflict 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 2022, theRussia -Ukraine conflict. The current accident year loss ratio excluding the impact of catastrophes and other significant, infrequent loss events is also commonly referred to as an attritional loss ratio within the property and casualty insurance industry. Consolidated Three Months Ended March 31, (dollars in thousands) 2022 2021 % Change Gross premium volume (1)$ 2,518,116 $ 2,170,383 16 % Net written premiums$ 2,164,734 $ 1,881,070 15 % Earned premiums$ 1,759,770 $ 1,497,695 17 % Underwriting profit$ 197,033 $ 91,034 116 % Underwriting Ratios (2) Point Change Loss ratio Current accident year loss ratio 60.7 % 64.8 % (4.1) Prior accident years loss ratio (5.5) % (6.1) % 0.6 Loss ratio 55.3 % 58.8 % (3.5) Expense ratio 33.5 % 35.2 % (1.7) Combined ratio 88.8 % 93.9 % (5.1) Current accident year loss ratio catastrophe impact (3) - % 4.3 % (4.3)
Current accident year loss ratio
(3)
2.0 % - % 2.0 Prior accident years loss ratio COVID-19 impact (3) - % 1.2 % (1.2)
Current accident year loss ratio, excluding catastrophes and
58.7 % 60.5 % (1.8)
Combined ratio, excluding current year catastrophes,
86.8 % 88.4 % (1.6) (1) Gross premium volume excludes$880.2 million and$634.5 million for the three months endedMarch 31, 2022 and 2021, respectively, of written premiums attributable to our program services business and other fronting arrangements that were ceded.
(2) Amounts may not reconcile due to rounding.
(3) The point impact of catastrophes, theRussia -Ukraine conflict 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 underwriting operations for the
three months ended
liability and general liability product lines across both of our underwriting
segments.
32 -------------------------------------------------------------------------------- Table of Contents We continue to see more favorable rates across most of our product lines, particularly within our professional liability and general liability product lines, based on general market conditions and the impacts of economic and social inflation, including increased litigation, on claims costs. 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 impacts of the sustained low interest rate environment on net investment income, have resulted in higher rates. Additionally, following the high level of catastrophes that have occurred in recent years, we are also seeing more favorable rates on catastrophe-exposed lines of business. 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. Net retention of gross premium volume in our underwriting operations for the three months endedMarch 31, 2022 was 86% compared to 87% for the same period of 2021. The decrease in net retention was driven by lower retention within our Insurance segment, partially offset by higher retention in our Reinsurance segment. 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 for the three months endedMarch 31, 2022 was primarily attributable to continued growth in gross premium volume within our professional liability and general liability product lines across both our underwriting segments.
Combined Ratio
Underwriting results for the three months endedMarch 31, 2022 included$35.0 million of net losses and loss adjustment expenses attributed to theRussia -Ukraine conflict. Underwriting results for the three months endedMarch 31, 2021 included$64.3 million of net losses and loss adjustment expenses from Winter Storm Uri as well as$18.6 million of net losses and loss adjustment expenses resulting from an increase in our estimate of ultimate losses and loss adjustment expenses attributed to COVID-19. Excluding these losses from the respective periods, the decrease in our consolidated combined ratio for the three months endedMarch 31, 2022 compared to the same period of 2021 was driven by a lower current accident year loss ratio within our Insurance segment. Higher earned premiums in 2022 compared to 2021 had a favorable impact on our expense ratio and an unfavorable impact on the prior accident years loss ratio.
Russia-Ukraine Conflict
Our losses and loss adjustment expenses from theRussia -Ukraine conflict are primarily attributed to business written within our international insurance and reinsurance operations and are primarily associated with war and terrorism coverages within our marine and energy product lines, as well as our trade credit and surety product lines. Although premiums written in the impacted regions were not significant, many of our impacted policies have high exposure limits. Additionally, our marine war and trade credit products provide coverage for vessels and cargo that travel worldwide, including areas impacted by the conflict. We purchase significant excess of loss reinsurance on the impacted product lines to reduce our net exposures, resulting in significant ceded losses.
The following table summarizes the losses and loss adjustment expenses and
related reinstatement premiums attributed to the
Quarter Ended March 31, 2022
(dollars in thousands)
Gross losses and loss adjustment expenses $ 105,000
Ceded losses and loss adjustment expenses (70,000)
Net losses and loss adjustment expenses $ 35,000
Net ceded reinstatement premiums $ 12,253
Underwriting loss $ 47,253
33
-------------------------------------------------------------------------------- Table of Contents Both the gross and net loss estimates for incurred losses attributed to theRussia -Ukraine conflict represent our best estimates as ofMarch 31, 2022 based upon information currently available. Our estimates for these losses are based on reported claims, detailed underwriting, actuarial and claims reviews of policies and in-force assumed reinsurance contracts for potential exposures, as well as analysis of our ceded reinsurance contracts and analysis provided by our brokers and claims counsel. These estimates include various assumptions about what areas within the affected regions have incurred losses, the nature and extent of such losses, which is currently difficult to verify, as well as assumptions about coverage, liability and reinsurance. Due to the inherent uncertainty associated with the assumptions surrounding theRussia -Ukraine conflict, these estimates are subject to a wide range of variability. Additionally, as theRussia -Ukraine conflict is ongoing, we believe it is likely that additional losses will be incurred in subsequent periods. Given the significant levels of ceded reinsurance on certain of our impacted policies, a significant portion of any additional incurred losses may be ceded. Additionally, increases in ceded losses may require payment of additional reinstatement premiums. Further, if coverage under our existing ceded reinsurance contracts is exhausted, we may need to purchase additional reinsurance to ensure that our net retained risks on the impacted product lines are within our corporate risk tolerances. While we believe our gross and net reserves for losses and loss adjustment expenses for theRussia -Ukraine conflict as ofMarch 31, 2022 are adequate based on information currently available, we continue to closely monitor reported claims, ceded reinsurance contract attachment, government actions and areas impacted by the conflict and may adjust our estimates of gross and net losses as new information becomes available. Any such adjustments or additional incurred losses may be material to our results of operations, financial condition and cash flows. Insurance Segment
Three Months Ended March
31,
(dollars in thousands) 2022 2021 % Change Gross premium volume$ 1,943,306 $ 1,638,327 19 % Net written premiums$ 1,611,020 $ 1,387,430 16 % Earned premiums$ 1,477,148 $ 1,244,027 19 % Underwriting profit$ 187,494 $ 116,948 60 % Underwriting Ratios (1) Point Change Loss ratio Current accident year loss ratio 60.0 % 64.2 % (4.2) Prior accident years loss ratio (6.7) % (9.6) % 2.9 Loss ratio 53.3 % 54.6 % (1.3) Expense ratio 34.0 % 36.0 % (2.0) Combined ratio 87.3 % 90.6 % (3.3) Current accident year loss ratio catastrophe impact (2) - % 3.2 % (3.2)
Current accident year loss ratio
(2)
1.4 % - % 1.4
Current accident year loss ratio, excluding catastrophes and
58.6 % 61.0 % (2.4)
Combined ratio, excluding current year catastrophes and
86.0 % 87.4 % (1.4) (1) Amounts may not reconcile due to rounding.
(2) The point impact of catastrophes and the
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 for the three months endedMarch 31, 2022 was driven by new business volume, more favorable rates and expanded product offerings, resulting in growth across all of our product lines, most notably our professional liability and general liability product lines. Net retention of gross premium volume was 83% for the three months endedMarch 31, 2022 and 85% for the three months endedMarch 31, 2021 . The decrease in net retention was primarily due to higher cession rates on certain product lines, as well as the impact of ceded reinstatement premiums within our marine and energy product lines associated with theRussia -Ukraine conflict. The increase in earned premiums for the three months endedMarch 31, 2022 was primarily due to higher gross premium volume. 34
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Combined Ratio
The Insurance segment's current accident year losses and loss adjustment expenses for the three months endedMarch 31, 2022 included$20.0 million of net losses and loss adjustment expenses attributed to theRussia -Ukraine conflict. Current accident year losses for the three months endedMarch 31, 2021 included$39.3 million of net losses and loss adjustment expenses attributed to Winter Storm Uri. Excluding these losses from the respective periods, the decrease in the current accident year loss ratio for the three months endedMarch 31, 2022 compared to the same period of 2021 was primarily attributable to lower attritional loss ratios within our professional liability and general liability product lines, primarily due to the benefit of achieving higher premium rates. The Insurance segment's combined ratio for the three months endedMarch 31, 2022 included$98.6 million of favorable development on prior accident years loss reserves compared to$119.1 million for the same period of 2021. The decrease in favorable development was primarily due to less favorable development on multiple product lines in 2022 compared to 2021. Additionally, higher earned premiums in 2022 compared to 2021 had an unfavorable impact on the prior accident years loss ratio. For the three months endedMarch 31, 2022 , favorable development was most significant on our general liability and marine and energy product lines across several accident years, workers' compensation product lines, primarily on the 2019 and 2020 accident years, and property product lines, primarily on the 2020 and 2021 accident years. The favorable development on prior years loss reserves in 2021 was most significant on our marine and energy, general liability, workers' compensation and property product lines.
The decrease in the Insurance segment's expense ratio for the three months ended
favorable impact of higher earned premiums.
Reinsurance Segment
Three Months Ended March
31,
(dollars in thousands) 2022 2021 % Change
Gross premium volume $ 576,316 $ 532,518 8 %
Net written premiums $ 555,220 $ 494,085 12 %
Earned premiums $ 283,967 $ 254,087 12 %
Underwriting profit (loss) $ 13,283 $ (23,218) NM (1)
Underwriting Ratios (2) Point Change
Loss ratio
Current accident year loss ratio 64.3 % 67.9 % (3.6)
Prior accident years loss ratio 0.7 % 11.3 % (10.6)
Loss ratio 65.0 % 79.2 % (14.2)
Expense ratio 30.3 % 30.0 % 0.3
Combined ratio 95.3 % 109.1 % (13.8)
Current accident year loss ratio catastrophe impact (3) - % 9.8 % (9.8)
Current accident year loss ratio
(3)
5.3 % - % 5.3 Prior accident years loss ratio COVID-19 impact (3) - % 7.3 % (7.3)
Current accident year loss ratio, excluding catastrophes and
59.0 % 58.1 % 0.9
Combined ratio, excluding current year catastrophes,
90.0 % 92.0 % (2.0) (1) NM - Ratio is not meaningful (2) Amounts may not reconcile due to rounding. (3) The point impact of catastrophes, theRussia -Ukraine conflict and COVID-19 is calculated as the associated net losses and loss adjustment expenses divided by total earned premiums. 35 -------------------------------------------------------------------------------- Table of Contents Premiums The increase in gross premium volume in our Reinsurance segment for the three months endedMarch 31, 2022 was primarily attributable to increases on renewals and new business within our professional liability and general liability product lines, as well as more favorable premium adjustments within our credit and surety, professional liability and general liability product lines, partially offset by lower gross premiums within our workers' compensation and 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. Lower gross premiums within our workers' compensation and property product lines were primarily attributable to non-renewals, as we did not renew a large treaty within our workers' compensation product line and have discontinued writing property reinsurance and retrocessional reinsurance business on a risk-bearing basis. Significant variability in gross premium volume can be expected in our Reinsurance segment due to individually significant contracts and multi-year contracts. Net retention of gross premium volume for the three months endedMarch 31, 2022 was 96% compared to 93% for the same period of 2021. The increase in net retention for the three months endedMarch 31, 2022 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 for the three months ended
primarily attributable to changes in gross premium volume, as previously
discussed.
Combined Ratio
The Reinsurance segment's current accident year losses and loss adjustment expenses for the three months endedMarch 31, 2022 included$15.0 million of net losses and loss adjustment expenses attributed to theRussia -Ukraine conflict. Current accident year losses for the three months endedMarch 31, 2021 included$25.0 million of net losses and loss adjustment expenses attributed to Winter Storm Uri. Excluding these losses from the respective periods, the increase in the current accident year loss ratio was driven 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 unfavorable impact from the change in mix of business was largely offset by lower attritional loss ratios within our professional liability, general liability and credit and surety product lines in 2022 compared to 2021, primarily due to more favorable premium adjustments in 2022 compared to 2021. Additionally, the attritional loss ratios within our professional liability and general liability 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 Reinsurance segment's combined ratio for the three months endedMarch 31, 2022 included$2.1 million of adverse development on prior accident years loss reserves, which was primarily attributable to additional exposures recognized on prior accident years related to net favorable premium adjustments on our general liability, credit and surety and professional liability product lines. This increase in prior years loss reserves was largely offset by modest favorable development across several of our other product lines, including our property product lines. For the three months endedMarch 31, 2021 , the combined ratio included$28.7 million of adverse development on prior accident years loss reserves, of which$18.6 million , or seven points on the segment combined ratio, was attributed to COVID-19. 36 -------------------------------------------------------------------------------- Table of Contents 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.
The following table summarizes our investment performance.
Three Months Ended March 31,
(dollars in thousands) 2022 2021 Change
Net investment income $ 72,734 $ 96,570 (25) %
Net investment gains (losses)
Change in net unrealized gains (losses) on
available-for-sale investments (1)
$ (603,388) $ (271,215) $ (332,173) Investment Ratios Investment yield (2) 0.4 % 0.5 % (0.1) Taxable equivalent total investment return (3.5) % 1.4 % (4.9) (1) The change in net unrealized gains (losses) on available-for-sale investments included an increase related to an adjustment to our life and annuity benefit reserves of$56.6 million and$49.3 million for the three months endedMarch 31, 2022 and 2021, respectively. See note 9 of the notes to consolidated financial statements for details on our life and annuity benefit reserve adjustments.
(2) Investment yield reflects net investment income as a percentage of monthly
average invested assets at amortized cost.
The decrease in net investment income for the three months endedMarch 31, 2022 compared to the same period of 2021 was driven by losses on our equity method investments in 2022 compared to income in 2021. Net investment income on our fixed maturity securities in 2022 was consistent with 2021, as the impact of higher average holdings of fixed maturity securities during the three months endedMarch 31, 2022 compared to the same period of 2021 was largely offset by lower yields in 2022 compared to 2021. See note 4(d) of the notes to consolidated financial statements for details regarding the components of net investment income. Net investment losses for the three months endedMarch 31, 2022 were primarily attributable to a decrease in the fair value of our equity portfolio driven by unfavorable market value movements. Net investment gains for the three months endedMarch 31, 2021 were primarily attributable to an increase in the fair value of our equity portfolio driven by favorable market value movements. See note 4(e) of the notes to consolidated financial statements for further details on the components of net investment gains (losses). The decrease in net unrealized gains (losses) on available-for-sale investments for both the three months endedMarch 31, 2022 and 2021 was primarily attributable to decreases in the fair value of our fixed maturity investment portfolio as a result of increases in interest rates during both periods. We also evaluate our investment performance by analyzing taxable equivalent total investment return, which is a non-GAAP financial measure. Taxable equivalent total investment return includes items that impact net income, such as coupon interest on fixed 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 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. 37
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The following table reconciles investment yield to taxable equivalent total
investment return.
Three Months Ended March 31,
2022 2021
Investment yield (1) 0.4 % 0.5 %
Adjustment of investment yield from amortized cost to fair value (0.1) % (0.1) %
Net amortization of net premium on fixed maturity securities 0.1 % 0.1 %
Net investment gains (losses) and change in net unrealized investment
gains (losses) on available-for-sale securities
(3.9) % 0.9 % Taxable equivalent effect for interest and dividends (2) - % - % Taxable equivalent total investment return (3.5) % 1.4 %
(1) Investment yield reflects net investment income as a percentage of monthly
average invested assets at amortized cost.
(2) Adjustment to tax-exempt interest and dividend income to reflect a taxable
equivalent basis.
Markel Ventures 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.
The following table summarizes the operating revenues, operating income, EBITDA
and net income to shareholders from our
Three Months Ended March 31,
(dollars in thousands) 2022 2021 % Change
Operating revenues $ 950,392 $ 706,602 35 %
Operating income $ 49,737 $ 51,463 (3) %
EBITDA $ 95,705 $ 81,178 18 %
Net income to shareholders $
25,779
The increase in operating revenues for the three months endedMarch 31, 2022 compared to the same period of 2021 was driven by a$108.9 million contribution fromMetromont and Buckner, which were acquired inDecember 2021 andAugust 2021 , respectively, and the impact of increased demand and higher prices at many of our other businesses. The benefit of increases in operating revenues to operating income, EBITDA and net income to shareholders 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 costs 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 alternative 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. The increase in EBITDA for the three months endedMarch 31, 2022 compared to the same period of 2021 was driven by the impact of higher revenues and improved operating results at our construction services businesses and consulting services businesses, as well as the contribution ofMetromont . These increases in EBITDA were partially offset by the impact of a pre-tax disposition gain of$22.0 million in the first quarter of 2021, which was included in services and other expenses. The decrease in operating income and net income to shareholders was primarily attributable to depreciation and amortization related to our recent acquisitions, which more than offset the impact of higher revenues and improved operating results at our construction services businesses and consulting services businesses, as previously discussed. 38 -------------------------------------------------------------------------------- Table of Contents 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 reconcilesMarkel Ventures operating income toMarkel Ventures EBITDA. Three Months Ended March 31, (dollars in thousands) 2022 2021
Markel Ventures operating income $
49,737
Depreciation expense
25,035 16,010
Amortization of intangible assets
20,933 13,705
Markel Ventures EBITDA $ 95,705 $ 81,178
Other Operations
The following table presents the components of operating revenues and operating
expenses that are not included in a reportable segment.
Three Months Ended March 31,
2022 2021
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 $ 37,009 $ 37,746 $ 9,545 $ 36,987 $ 44,627 $ 9,612
Insurance-linked securities
- disposition gain 107,293 - - - - -
Program services and other
fronting 34,071 7,383 5,234 28,163 6,328 5,234
Life and annuity 325 5,281 - 526 6,414 -
Markel CATCo buy-out - 101,904 - - - -
Other (1) 3,048 7,559 586 6,783 9,820 599
181,746 159,873 15,365 72,459 67,189 15,445
Underwriting operations (2) 9,751 10,403
Total $ 181,746 $ 159,873 $ 25,116 $ 72,459 $ 67,189 $ 25,848
(1) Other includes the results of our run-off Lodgepine and Markel CATCo
operations for both periods presented.
(2) Amortization of intangible assets attributable to our underwriting
operations is not allocated between the Insurance and Reinsurance segments.
Operating revenues in our Nephila ILS operations for the three months endedMarch 31, 2021 were consistent with operating revenues for the same period of 2021. Higher operating revenues at our Volante managing general agent operations were offset by lower operating revenues at our Velocity managing general agent operations due to its disposition inFebruary 2022 . InFebruary 2022 , we sold the majority of our controlling interest in our Velocity managing general agent operations for total cash consideration of$181.3 million , which resulted in a gain of$107.3 million . Velocity provides risk origination services for ourNephila fund management operations, as well as for third parties, and was 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. 39 -------------------------------------------------------------------------------- Table of Contents InMarch 2022 , we entered into a definitive agreement to sell our controlling interest in our Volante managing general agent operations, which underwrite and administer specialty insurance and reinsurance policies and provide delegated underwriting services to third-party providers of insurance capital. Volante has also been a source of growth within our ILS operations since we acquiredNephila in 2018. Estimated consideration from the sale is expected to be$155 million . The transaction is expected to close in the third quarter of 2022 and is subject to regulatory approvals and customary closing conditions. Following the disposition of our Volante managing general agent operations, our Nephila ILS operations will be solely comprised of its fund management operations. As ofMarch 31, 2022 ,Nephila's net assets under management were$8.6 billion .
Program Services and Other Fronting
For the three months endedMarch 31, 2022 , the increase in operating revenues in our program services and other fronting operations was primarily due to higher gross premium volume at our program services operations driven by the expansion of existing programs. Gross written premiums in our program services operations were$705.6 million and$611.8 million for the three months endedMarch 31, 2022 and 2021, respectively. Additionally, gross written premiums from our other fronting operations, which consist of business written by our underwriting platform on behalf of our ILS operations, were$173.1 million and$22.2 million for the three months endedMarch 31, 2022 and 2021, respectively.
InMarch 2022 , we completed a buy-out transaction with Markel CATCo Re and the Markel CATCo Funds that provided for an accelerated return of all remaining capital to investors in the Markel CATCo Funds. Under the terms of the transaction, we provided cash funding of$45.1 million to purchase substantially all of the Markel CATCo Funds' investments in Markel CATCo Re and also provided tail risk cover of$142.7 million to Markel CATCo Re to allow for the release of collateral to investors. In order to complete the transaction, we also made$101.9 million in additional payments, net of insurance proceeds, to or for the benefit of investors, which were recognized as an expense during the first quarter of 2022. See note 11 of the notes to consolidated financial statements for further details regarding the buy-out transaction.
Interest Expense and Income Taxes
Interest Expense
Interest expense was$49.7 million for the three months endedMarch 31, 2022 , compared to$42.4 million for the same period of 2021. The increase in interest expense for the three months endedMarch 31, 2022 was primarily attributable to interest expense associated with our 3.45% unsecured senior notes issued inMay 2021 . Income Taxes The effective tax rate was 27% and 20% for the three months endedMarch 31, 2022 and 2021, respectively. The effective tax rate for the three months endedMarch 31, 2022 is not meaningful due to the relatively small pre-tax loss during the period. The estimated annual effective tax rate was 21% for both the three months endedMarch 31, 2022 and 2021. We use the estimated annual effective tax rate method for calculating our tax provision in interim periods. This method applies our best estimate of the effective tax rate expected for the full year to year-to-date earnings before income taxes. Certain items, including those deemed to be unusual, infrequent or that cannot be reliably estimated (discrete items), are excluded from the estimated annual effective tax rate, and the related tax expense or benefit is reported in the same period as the related item. The difference between the estimated annual effective tax rate and the effective tax rate for both periods was attributed to discrete items during the respective periods, however, the impact of the discrete items on the effective tax rate for the three months endedMarch 31, 2022 was magnified due to the relatively small pre-tax loss during the period. 40 -------------------------------------------------------------------------------- Table of Contents Comprehensive Income (Loss) to Shareholders and Book Value per Common Share The following table summarizes the components of comprehensive income (loss) to shareholders. Three Months Ended March 31, (dollars in thousands) 2022 2021 Net income (loss) to shareholders$ (52,843) $ 573,694 Other comprehensive loss: Change in net unrealized gains (losses) on available-for-sale investments, net of taxes (476,081) (214,464) Other, net of taxes (116) (216)
Other comprehensive (income) loss attributable to noncontrolling
interest
13 (17) Other comprehensive loss to shareholders (476,184) (214,697) Comprehensive income (loss) to shareholders
Book value per common share decreased 4% from
shareholders for the three months ended
Financial Condition
Liquidity and Capital Resources
We seek to maintain prudent levels of liquidity and financial leverage for the protection of our policyholders, creditors and shareholders. Our consolidated debt to capital ratio was 24% atMarch 31, 2022 and 23% atDecember 31, 2021 . The increase reflects a decrease in shareholders' equity, primarily attributable to other comprehensive loss to shareholders for the three months endedMarch 31, 2022 . Investments, cash and cash equivalents and restricted cash and cash equivalents (invested assets) were$28.3 billion at bothMarch 31, 2022 andDecember 31, 2021 . The following table presents the composition of our invested assets. March 31, December 31, 2022 2021 Fixed maturity securities 43 % 44 % Equity securities 31 % 32 % Short-term investments, cash and cash equivalents and restricted cash and cash equivalents 26 % 24 % Total 100 % 100 % Our holding company had$5.0 billion and$5.3 billion of invested assets atMarch 31, 2022 andDecember 31, 2021 , respectively. The decrease was primarily due to cash payments for consideration in the buy-out transaction with Markel CATCo Re and the Markel CATCo Funds, profit sharing and repurchases of common stock, partially offset by cash consideration received in connection with the sale of Velocity. See note 11 of the notes to consolidated financial statements for details regarding the buy-out transaction and "Results of Operations - Other Operations" for details on the sale of Velocity. The following table presents the composition of our holding company's invested assets. March 31, December 31, 2022 2021 Fixed maturity securities 4 % 4 % Equity securities 54 % 53 % Short-term investments, cash and cash equivalents and restricted cash and cash equivalents 42 % 43 % Total 100 % 100 % 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. 41 -------------------------------------------------------------------------------- Table of Contents 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.
Cash Flows
Net cash provided by operating activities was$414.9 million for the three months endedMarch 31, 2022 compared to$318.1 million for the same period of 2021. The increase in net cash flows from operating activities for the three months endedMarch 31, 2022 was primarily driven by higher net premium volumes across both of our underwriting segments, partially offset by higher claims settlement activity in our Insurance segment and$101.9 million of payments made in connection with the Markel CATCo buy-out transaction. Net cash used by investing activities was$50.0 million for the three months endedMarch 31, 2022 compared to$1.1 billion for the same period of 2021. During the three months endedMarch 31, 2022 , net cash used by investing activities included purchases of fixed maturity securities, net of maturities and sales, of$397.9 million , as well as an increase in our holdings of short-term investments of$287.0 million . Net cash used by investing activities was net of$630.0 million of net cash acquired as part of our consolidation of Markel CATCo Re, a significant portion of which is restricted. During the three months endedMarch 31, 2021 , net cash provided by investing activities included an increase in our holdings of short-term investments of$663.1 million and purchases of fixed maturity securities, net of maturities and sales, of$452.1 million . Cash flow from investing activities is affected by various factors such as anticipated payment of claims, financing activity, acquisition opportunities and individual buy and sell decisions made in the normal course of our investment portfolio management. Net cash used by financing activities was$18.9 million for the three months endedMarch 31, 2022 compared to net cash provided by financing activities of$53.7 million for the same period of 2021. During the three months endedMarch 31, 2022 and 2021, we had net increases in borrowings, primarily on a revolving line of credit at one of ourMarkel Ventures businesses. Cash of$79.3 million and$22.0 million was used to repurchase shares of our common stock during the first three months of 2022 and 2021, respectively.
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. Our critical accounting estimates consist of estimates and assumptions used in determining the reserves for unpaid losses and loss adjustment expenses as well as estimates and assumptions used in the valuation of goodwill and intangible assets. We review the adequacy of reserves for unpaid losses and loss adjustment expenses quarterly. Estimates and assumptions for goodwill and intangible assets are reviewed in conjunction with acquisitions and impairment assessments.Goodwill and indefinite-lived intangible assets are reassessed for impairment at least annually. All intangible assets, including goodwill, are also reviewed for impairment when events or circumstances indicate that their carrying value may not be recoverable. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements.
Readers are urged to review our 2021 Annual Report on Form 10-K for a more
complete description of our critical accounting estimates.
42 -------------------------------------------------------------------------------- Table of Contents 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 "Business Overview," "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Annual Report on Form 10-K, 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 and other significant, infrequent events (such as the COVID-19 pandemic and theRussia -Ukraine conflict), 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; 43
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•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, such as the conflict betweenRussia andUkraine , 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;
•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;
44
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•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 related to our Markel CATCo operations; delays or disruptions in the run-off of those operations; or the failure to realize the benefits of the transaction that permitted the accelerated return of capital to our Markel CATCo investors; 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.
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Aflac Named to the Forbes 2022 List of America's Best Employers for Diversity
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