Newswires
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 2022 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. This section is divided into the following sections: •Our Business •Results of Operations •Financial Condition
•Critical Accounting Estimates
•Safe Harbor and Cautionary Statement
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 in a variety of
industries.
Our financial goals are to earn consistent underwriting and operating profits and superior investment returns to build shareholder value. To mitigate effects of short-term volatility and align with the long-term perspective that we apply to operating our businesses, we generally use five-year time periods to measure our performance. We measure financial success by our ability to grow the market price per common share of our stock, or total shareholder return, at high rates of return over a long period of time. Over the five-year period endedMarch 31, 2023 , our common share price increased at a compound annual rate of 2%. While this measure, considered independently of other factors, falls below our internal targets, we believe the operating performance at all three of our engines positions us well to achieve our targets over the long-term. We also consider the performance of book value per common share over the long-term, although we believe that as our business has evolved, this measure has become less reflective of shareholder value because a significant portion of our operations is not recorded at fair value. Over the five-year period endedMarch 31, 2023 , the compound annual growth in book value per common share was 8%. 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 provide investment management services for 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. 26 -------------------------------------------------------------------------------- Table of Contents 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 insurance 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, through our program services platform, we have programs through which we write insurance policies on behalf of our ILS operations that are supported by third-party capital. Additionally, we 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 corporate tolerance. Our ability to access multiple insurance platforms allows us to achieve income streams from our insurance operations beyond the traditional underwriting model. We believe this multi-platform approach provides us with a unique advantage through which we have the ability to unlock additional value for our customers and business partners, which we refer to as "the power of the platform." 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 are typically 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 through our platforms inthe United States andBermuda , as well as theUnited Kingdom (U.K.) andEuropean Union .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, credit and surety, marine and energy and workers' compensation.Insurance-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 ) provides investment and insurance management services through which we offer alternative capital to the reinsurance market while providing investors with investment strategies that typically are uncorrelated with traditional asset classes. OurNephila fund management operations provide insurance and investment management for a broad range of investment products for insurance and reinsurance companies, government entities, banks, hedge funds, pension funds and institutional investors, including insurance-linked securities, catastrophe bonds, insurance swaps and weather derivatives. We receive management fees for investment and insurance management services provided through these operations primarily based on the net asset value of the accounts managed, and for certain funds, incentive fees based on their annual performance. 27 -------------------------------------------------------------------------------- Table of ContentsNephila serves as the investment manager to severalBermuda -based private funds (the Nephila Funds). To provide access for the Nephila Funds to a variety of insurance-linked securities in the property catastrophe, climate and specialty markets,Nephila acts as an insurance manager to certain Bermuda Class 3 and 3A reinsurance companies, Lloyd's Syndicate 2357 and Lloyd's Syndicate 2358 (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 and program services platforms. See note 12 of the notes to consolidated financial statements for further details regarding transactions with entities managed through ourNephila operations.
Velocity managing general agent operations in
managing general agent operations in
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. Following the completion of the buy-out transaction, we consolidate Markel CATCo Re as its primary beneficiary. Results attributable to the run-off of Markel CATCo Re are included with our other Markel CATCo operations within services and other expenses, and for the three months endedMarch 31, 2023 , these results were entirely attributable to noncontrolling interest holders inMarkel CATCo Re. In connection with the buy-out transaction, we entered into a tail risk cover with Markel CATCo Re through which we have uncollateralized exposure to adverse development on loss reserves held by Markel CATCo Re for loss exposures in excess of limits that we believe are unlikely to be exceeded. See note 11 of the notes to consolidated financial statements for further details regarding our Markel CATCo operations and the consolidation ofMarkel CATCo Re.
Program Services and Other Fronting
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 the 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 fronting business is conducted separately from our program services business and consists of catastrophe-exposed property insurance and reinsurance business and specialty reinsurance business. 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. 28 -------------------------------------------------------------------------------- Table of Contents Investments The majority of our investable assets come from premiums paid by policyholders. We rely on sound underwriting practices to produce investable funds. Policyholder funds are invested predominantly in high-quality government and municipal bonds and mortgage-backed securities that generally match the duration and currency of our loss reserves. We typically hold these fixed maturity investments until maturity. As a result, unrealized holding gains and losses on these securities are generally expected to reverse as the securities mature. Premiums collected through our underwriting operations may also be held as short-term investments or cash and cash equivalents to provide short-term liquidity for projected claims payments, reinsurance costs and operating expenses. The balance of our investable assets, 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 and short-term 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 equity investments over the long-term. Substantially all of our investment portfolio is managed by company employees.Markel Ventures Through our wholly owned subsidiary,Markel Ventures, Inc. (Markel Ventures ), we own controlling interests in various high-quality businesses that operate in a variety of different industries with the shared goal of positively contributing to the long-term financial performance ofMarkel Corporation . 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 corporate management team is responsible for decisions regarding allocation of capital for acquisitions and new investments. Our strategy in making these acquisitions 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. TheMarkel Ventures 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, consulting services and equipment manufacturing products. All of our businesses in this segment are headquartered in theU.S. , with subsidiaries of certain businesses located outside of theU.S.
Results of Operations
The following table presents the components of operating revenues.
Three Months Ended
March 31,
(dollars in thousands) 2023 2022
Insurance segment $ 1,710,924 $ 1,477,148
Reinsurance segment 257,234 283,967
Insurance-linked securities, program services and other insurance
41,774 180,401 Insurance operations 2,009,932 1,941,516 Net investment income 158,594 92,297 Net investment gains (losses) 372,563 (358,399) Other (2,380) (19,570) Investing segment 528,777 (285,672) Markel Ventures segment 1,104,680 950,392 Total operating revenues$ 3,643,389 $ 2,606,236 29
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The following table presents the components of comprehensive income (loss) to
shareholders.
Three Months Ended
March 31,
(dollars in thousands) 2023 2022
Insurance segment profit $ 96,504 $ 187,494
Reinsurance segment profit 24,234 13,283
Insurance-linked securities, program services and other insurance
56,602 20,014 Amortization of intangible assets (1) (24,848) (25,116) Insurance operations 152,492 195,675 Investing segment profit (loss) 528,777 (285,672) Markel Ventures segment profit (2) 72,627 49,737 Interest expense (49,438) (49,692) Net foreign exchange gains (losses) (32,928) 23,004 Income tax (expense) benefit (133,731) 18,136 Net income attributable to noncontrolling interests (49,147) (2,929) Net income (loss) to shareholders 488,652 (51,741) Net income (loss) to common shareholders 488,652 (51,741) Other comprehensive income (loss) to shareholders 157,713 (460,173) Comprehensive income (loss) to shareholders$ 646,365 $ (511,914) (1) Amortization of intangible assets includes all amortization attributable to our insurance operations. Amortization of intangible assets attributable to our underwriting segments was$9.6 million and$9.8 million for the three months endedMarch 31, 2023 and 2022, respectively; however, we do not allocate amortization of intangible assets between the Insurance and Reinsurance segments. Amortization of intangible assets attributable to our insurance-linked securities, program services and other insurance operations was$15.3 million and$15.4 million for the three months endedMarch 31, 2023 and 2022, respectively.
(2) Segment profit for the
intangible assets attributable to
The change in comprehensive income (loss) to shareholders for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 was primarily due to pre-tax net investment gains on our equity securities of$375.8 million in 2023 compared to pre-tax net investment losses on our equity securities of$364.6 million in 2022, as well as pre-tax net unrealized gains on our fixed maturity securities of$209.2 million in 2023 compared to pre-tax net unrealized losses on our fixed maturity securities of$665.8 million in 2022. The components of net income (loss) to shareholders and comprehensive income (loss) to shareholders are discussed in further detail under "Insurance Results," "Investing Results," "Markel Ventures Results," "Interest Expense, Net Foreign Exchange Gains (Losses) and Income Taxes" and "Comprehensive Income (Loss) to Shareholders and Book Value per Common Share."
Insurance Results
Our Insurance engine includes our underwriting, insurance-linked securities,
program services and other fronting 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 and third-party
capital through our ILS and program services operations. Our underwriting
operations, which are primarily comprised of our Insurance and Reinsurance
segments, produce revenues primarily by underwriting insurance contracts and
earning premiums in the specialty insurance market. Our insurance-linked
securities and program services operations produce revenues primarily through
fees earned for investment management services and fronting services,
respectively. Our insurance operations also include the underwriting results of
run-off lines of business that were discontinued prior to, or in conjunction
with, insurance acquisitions, and the results of our run-off life and annuity
reinsurance business.
30
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The following table presents the components of our Insurance engine gross
premium volume and operating revenues.
Three Months Ended March
31,
(dollars in thousands) 2023 2022 % Change
Gross premium volume:
Underwriting $ 2,658,258 $ 2,519,615 6 %
Program services and other fronting (1) 777,754 878,672 (11) %
Insurance operations $ 3,436,012 $ 3,398,287 1 %
Operating revenues:
Insurance segment $ 1,710,924 $ 1,477,148 16 %
Reinsurance segment 257,234 283,967 (9) %
Insurance-linked securities, program services and other insurance
41,774 180,401 (77) % Insurance operations$ 2,009,932 $ 1,941,516 4 % (1) Substantially all gross premiums from our program services business and other fronting arrangements were ceded to third parties for the three months endedMarch 31, 2023 and 2022.
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. When analyzing our combined ratio, we exclude current accident year losses and loss adjustment expenses attributed to natural catastrophes and certain significant, infrequent loss events, for example, the military conflict betweenRussia andUkraine that began followingRussia's invasion ofUkraine inFebruary 2022 . 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 such events 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. 31 -------------------------------------------------------------------------------- Table of Contents The following table presents summary data for our consolidated underwriting operations, which are comprised predominantly of our Insurance and Reinsurance segments. Our consolidated underwriting results also include results from discontinued lines of business and the retained portion of our program services operations. Three Months Ended March 31, (dollars in thousands) 2023 2022 % Change Gross premium volume$ 2,657,807 $ 2,518,116 6 % Net written premiums$ 2,217,778 $ 2,164,734 2 % Earned premiums$ 1,967,704 $ 1,759,770 12 % Underwriting profit$ 118,985 $ 197,033 (40) % Underwriting Ratios (1) Point Change Loss ratio Current accident year loss ratio 63.2 % 60.7 % 2.5 Prior accident years loss ratio (3.6) % (5.5) % 1.9 Loss ratio 59.6 % 55.3 % 4.3 Expense ratio 34.3 % 33.5 % 0.8 Combined ratio 94.0 % 88.8 % 5.2
Current accident year loss ratio
impact (2)
- % 2.0 % (2.0)
Current accident year loss ratio, excluding
conflict impact
63.2 % 58.7 % 4.5
Combined ratio, excluding current year
impact
94.0 % 86.8 % 7.2 (1) Amounts may not reconcile due to rounding.
(2) The point impact of 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 endedMarch 31, 2023 was driven by growth within our Insurance segment. Net retention of gross premium in our underwriting operations for the three months endedMarch 31, 2023 was 83% compared to 86% for the same period of 2022. The decrease in net retention for the three months endedMarch 31, 2023 was driven by lower retention across both of our underwriting segments. 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, 2023 was primarily attributable to higher gross premium volume in recent periods. After several years of significant rate increases across most of our product lines, we began to see rate increases slow on many of our product lines in the latter half of 2022. The level of rate increases achieved in the first quarter of 2023 were broadly consistent with the latter half of 2022, with a few exceptions, and the current rate environment varies by product line. In certain product lines, such as property coverages, and marine and energy, we have continued to realize significant rate increases in the early part of 2023 due to recent industry loss experience and the rising cost of reinsurance within those product lines. We continue to see low single-digit rate decreases within our workers' compensation product line. In most of our casualty and professional liability product classes we continue to realize rate increases, with exceptions being in the large account directors and officers and excess casualty products. As a result of our underwriting discipline, gross premium volume is being impacted in certain product lines where we are concerned around the level of price adequacy and are allowing business to lapse to improve underwriting profitability. When we believe the prevailing market price will not support our underwriting profit targets, the business is not written. 32 -------------------------------------------------------------------------------- Table of Contents Combined Ratio Underwriting results for the three months endedMarch 31, 2022 included$35.0 million of net losses and loss adjustment expenses attributed to theRussia -Ukraine conflict. Excluding these losses, the increase in our consolidated combined ratio for the three months endedMarch 31, 2023 compared to the same period of 2022 was primarily driven by a higher attritional loss ratio and the impact of less favorable development on prior accident years loss reserves in 2023 compared to 2022 within our Insurance segment. Insurance Segment Three Months Ended March 31, (dollars in thousands) 2023 2022 % Change Gross premium volume$ 2,097,938 $ 1,943,306 8 % Net written premiums$ 1,702,141 $ 1,611,020 6 % Earned premiums$ 1,710,924 $ 1,477,148 16 % Underwriting profit$ 96,504 $ 187,494 (49) % Underwriting Ratios (1) Point Change Loss ratio Current accident year loss ratio 63.0 % 60.0 % 3.0 Prior accident years loss ratio (3.7) % (6.7) % 3.0 Loss ratio 59.3 % 53.3 % 6.0 Expense ratio 35.0 % 34.0 % 1.0 Combined ratio 94.4 % 87.3 % 7.1
Current accident year loss ratio
impact (2)
- % 1.4 % (1.4)
Current accident year loss ratio, excluding
conflict impact
63.0 % 58.6 % 4.4
Combined ratio, excluding current year
impact
94.4 % 86.0 % 8.4 (1) Amounts may not reconcile due to rounding.
(2) The point impact of 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, 2023 was driven by more favorable rates, as well as new business growth, within our personal lines, property and marine and energy product lines, partially offset by lower premium volume within our professional liability product lines, where we are adjusting our writings in response to changes in market conditions and downward pressure on rates. We continue to focus on rate adequacy, particularly within certain classes within our casualty and professional liability product lines, and will not write business that does not meet our underwriting profit targets. Net retention of gross premium volume was 81% for the three months endedMarch 31, 2023 compared to 83% for the same period of 2022. The decrease in net retention was primarily due to higher cession rates on our professional liability and personal lines product lines in 2023 compared to 2022. The increase in earned premiums for the three months endedMarch 31, 2023 was primarily due to higher gross premium volume across most product lines in recent periods.
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. Excluding these losses, the increase in the current accident year loss ratio for the three months endedMarch 31, 2023 compared to the same period of 2022 was primarily attributable to higher attritional loss ratios within our professional liability and general liability product lines in 2023 compared to 2022. We have been increasing our attritional loss ratios on these lines since the latter half of 2022 due to the impacts of recent claims trend, including impacts from economic and social inflation. We also increased our attritional loss ratios within our professional liability product lines in the first quarter of 2023 related to exposures arising from recent bank failures. 33 -------------------------------------------------------------------------------- Table of Contents The Insurance segment's combined ratio for the three months endedMarch 31, 2023 included$62.6 million of favorable development on prior accident years loss reserves compared to$98.6 million for the same period of 2022. The decrease in favorable development was primarily due to favorable development on our general liability and professional liability product lines in 2022 compared to minimal development on these lines in 2023. We remain cautious in our approach to reducing prior year loss reserves on our longer tail general liability and professional liability lines in the prevailing economic environment. For the three months endedMarch 31, 2023 , favorable development was most significant on our marine and energy, property, workers' compensation and programs product lines in the more recent accident years. The favorable development on prior years loss reserves in 2022 was most significant on our general liability, marine and energy, workers' compensation and property product lines. The increase in the Insurance segment's expense ratio for the three months endedMarch 31, 2023 compared to the same period of 2022 was primarily due to a higher policy acquisition cost ratio, due to changes in mix of business, as well as higher general and administrative expenses, which were largely offset by the favorable impact of higher earned premiums. Reinsurance Segment Three Months Ended March 31, (dollars in thousands) 2023 2022 % Change Gross premium volume$ 552,061 $ 576,316 (4) % Net written premiums$ 516,091 $ 555,220 (7) % Earned premiums$ 257,234 $ 283,967 (9) % Underwriting profit (loss)$ 24,234 $ 13,283 82 % Underwriting Ratios (1) Point Change Loss ratio Current accident year loss ratio 64.8 % 64.3 % 0.5 Prior accident years loss ratio (3.4) % 0.7 % (4.1) Loss ratio 61.5 % 65.0 % (3.5) Expense ratio 29.1 % 30.3 % (1.2) Combined ratio 90.6 % 95.3 % (4.7)
Current accident year loss ratio
(2)
- % 5.3 % (5.3)
Current accident year loss ratio, excluding
conflict impact
64.8 % 59.0 % 5.8
Combined ratio, excluding current year
impact
90.6 % 90.0 % 0.6 (1) Amounts may not reconcile due to rounding.
(2) The point impact of the
associated net losses and loss adjustment expenses divided by total earned
premiums.
Premiums
The decrease in gross premium volume in our Reinsurance segment for the three months endedMarch 31, 2023 was primarily attributable to lower gross premiums with our professional liability and credit and surety product lines, partially offset by higher gross premiums within our general liability and marine and energy product lines. Lower gross premiums within our professional liability and credit and surety product lines was primarily attributable to unfavorable premium adjustments in 2023 compared to significant favorable premium adjustments in 2022. Higher gross premiums within our general liability and marine and energy product lines was primarily attributable to favorable timing differences and increases on renewals, due to increased exposures 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. Net retention of gross premium volume for the three months endedMarch 31, 2023 was 93% compared to 96% for the same period of 2022. The decrease in net retention was driven by changes in mix of business, as we are writing less of our highly retained professional liability and credit and surety business, and higher cession rates on our marine and energy product lines in 2023 compared to 2022. 34 -------------------------------------------------------------------------------- Table of Contents The decrease in earned premiums for the three months endedMarch 31, 2023 was primarily attributable to our credit and surety product lines, which had less favorable premium adjustments in 2023 compared to 2022.
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. Excluding these losses, the increase in the current accident year loss ratio for the three months endedMarch 31, 2023 compared to the same period of 2022 was primarily due to less favorable premium adjustments in 2023 compared to 2022, primarily on our professional liability and credit and surety product lines. The decrease in favorable prior period adjustments had an offsetting benefit in the segment prior accident year loss ratio. The Reinsurance segment's combined ratio for the three months endedMarch 31, 2023 included$8.7 million of favorable development on prior accident years loss reserves, which was primarily attributable to modest favorable development on our professional liability and property product lines across several accident years. This favorable development was partially offset by additional exposures recognized on prior accident years related to net favorable premium adjustments on our general liability product lines. For the three months endedMarch 31, 2022 , the combined ratio included a$2.1 million increase in 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 credit and surety, professional liability and general liability product lines. This increase in prior years loss reserves for the three months endedMarch 31, 2022 was largely offset by modest favorable development across several of our other product lines, including our property product lines. The decrease in the Reinsurance segment's expense ratio for the three months endedMarch 31, 2023 compared to the same period of 2022 was primarily due to the favorable impact of a change in mix of business within the segment as certain contracts with higher commission rates were not renewed in 2023.
The following table presents the components of operating revenues and operating
expenses attributable to our insurance-linked securities, program services and
other insurance operations, including our run-off block of life and annuity
reinsurance contracts, none of which are included in a reportable segment.
Underwriting results attributable to these operations include results from
discontinued lines of business, which are reported separate from our Insurance
and Reinsurance segments, and the retained portion of our program services
operations. Investment income earned on the investments that support life and
annuity policy benefit reserves are included in our Investing segment.
Three Months Ended March 31,
2023 2022
Operating Operating Operating Operating
(dollars in thousands) revenues expenses Net revenues expenses Net
Services and other:
Program services and other
fronting $ 29,190 $ 7,287 $ 21,903 $ 34,071 $ 7,383 $ 26,688
Insurance-linked securities 9,778 14,401 (4,623) 37,009 37,746 (737)
Insurance-linked securities
- disposition gain - - - 107,293 - 107,293
Life and annuity 25 3,206 (3,181) 325 3,396 (3,071)
Markel CATCo buy-out - - - - 101,904 (101,904)
Markel CATCo Re - (44,792) 44,792 - - -
Other 3,235 3,771 (536) 3,048 7,559 (4,511)
42,228 (16,127) 58,355 181,746 157,988 23,758
Underwriting (454) 1,299 (1,753) (1,345) 2,399 (3,744)
41,774 (14,828) 56,602 180,401 160,387 20,014
Amortization of intangible
assets 15,281 (15,281) 15,365 (15,365)
$ 41,774 $ 453 $ 41,321 $ 180,401 $ 175,752 $ 4,649
35
-------------------------------------------------------------------------------- Table of Contents Program Services and Other Fronting For the three months endedMarch 31, 2023 , the decrease in operating revenues in our program services and other fronting operations was primarily due to lower gross written premiums within our program services operations driven by the non-renewal and termination of certain programs, partially offset by growth from new programs. Gross written premiums in our program services operations were$619.4 million and$705.6 million for the three months endedMarch 31, 2023 and 2022, respectively. Gross written premiums from our other fronting operations, which consist of business written by our underwriting platform on behalf of our ILS operations, were$158.4 million and$173.1 million for the three months endedMarch 31, 2023 and 2022, respectively.
For the three months endedMarch 31, 2023 , the decrease in operating revenues and operating expenses in our Nephila ILS operations was primarily due to the disposition of our Velocity and Volante managing general agent operations inFebruary 2022 andOctober 2022 , respectively, as well as lower revenues in our fund management operations. The sale of the majority of our controlling interest in our Velocity managing general agent operations resulted in a gain of$107.3 million during the first quarter of 2022. Our Nephila ILS operations in 2023 are solely comprised of our fund management operations. As ofMarch 31, 2023 ,Nephila's net assets under management were$7.2 billion .
Markel CATCo
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 and resulted in the consolidation of Markel CATCo Re upon completion of the transaction. In order to complete the transaction, we made$101.9 million in payments, net of insurance proceeds, to or for the benefit of investors that were recognized as an expense during the first quarter of 2022. For the three months endedMarch 31, 2023 , results attributable to Markel CATCo Re were primarily related to favorable loss reserve development on the run-off of reinsurance contracts, all of which were attributable to noncontrolling interest holders inMarkel CATCo Re. See note 11 of the notes to consolidated financial statements for further details regarding our Markel CATCo operations, the buy-out transaction and the consolidation ofMarkel CATCo Re. 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 our investment performance by analyzing net investment income earned on our investment portfolio, as well as through net investment gains, which include unrealized gains on our equity portfolio, and the change in net unrealized gains on available-for-sale investments. Our investment performance measures also include investment yield and taxable equivalent total investment return. Other income or losses within our investing operations primarily relate to equity method investments in our investing segment, which are managed separately from the rest of our investment portfolio.
The following table summarizes our consolidated investment performance, which
consists predominantly of our Investing segment.
Three Months Ended March 31,
(dollars in thousands) 2023 2022 Change
Net investment income $ 159,335 $ 92,304 73 %
Net investment gains (losses)
Change in net unrealized gains (losses) on
available-for-sale investments
$ 208,369 $ (659,948) $ 868,317 Other$ (2,380) $ (19,570) $ 17,190 Investment Ratios Investment yield (1) 0.7 % 0.5 % 0.2 Taxable equivalent total investment return 3.0 % (3.5) % 6.5
(1) Investment yield reflects net investment income as a percentage of monthly
average invested assets at amortized cost.
36 -------------------------------------------------------------------------------- Table of Contents The increase in net investment income for the three months endedMarch 31, 2023 compared to the same period of 2022 was primarily attributable to higher interest income on short-term investments and cash equivalents due to higher short-term interest rates in 2023 compared to 2022. Additionally, interest income on our fixed maturity securities increased, primarily attributable to a higher yield and higher average holdings of fixed maturity securities during the three months endedMarch 31, 2023 compared to the same period of 2022. See note 3(d) of the notes to consolidated financial statements for details regarding the components of net investment income. Net investment gains for the three months endedMarch 31, 2023 were primarily attributable to increases in the fair value of our equity portfolio driven by favorable market value movements. Net investment losses for the three months endedMarch 31, 2022 were primarily attributable to decreases in the fair value of our equity portfolio driven by unfavorable market value movements. See note 3(e) of the notes to consolidated financial statements for further details on the components of net investment gains (losses). The change in net unrealized gains (losses) on available-for-sale investments for the three months endedMarch 31, 2023 was primarily attributable to increases in the fair value of our fixed maturity investment portfolio as a result of decreases in interest rates during the period. The change in net unrealized gains (losses) on available-for-sale investments for the three months endedMarch 31, 2022 was primarily attributable to decreases in the fair value of our fixed maturity investment portfolio as a result of increases in interest rates during the period. As ofMarch 31, 2023 , our fixed maturity portfolio had an average rating of "AAA ," with 99% rated "A" or better by at least one nationally recognized rating organization. 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 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. The following table reconciles investment yield to taxable equivalent total investment return. Three Months Ended March 31, 2023 2022 Investment yield (1) 0.7 % 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
2.3 % (4.0) % Taxable equivalent effect for interest and dividends (2) - % - % Taxable equivalent total investment return 3.0 % (3.5) %
(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 Results 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 . Our strategy in acquiring these businesses is to invest in profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline, at reasonable prices. 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. 37 -------------------------------------------------------------------------------- Table of Contents The following table summarizes the operating revenues, operating income, EBITDA and net income to shareholders from ourMarkel Ventures segment. Three Months Ended March 31, (dollars in thousands) 2023 2022 % Change Operating revenues$ 1,104,680 $ 950,392 16 % Operating income$ 72,627 $ 49,737 46 % EBITDA$ 119,541 $ 95,705 25 % Net income to shareholders$ 39,423 $ 25,779 53 % The increase in operating revenues for the three months endedMarch 31, 2023 compared to the same period of 2022 was driven by higher revenues across our construction services, equipment manufacturing and transportation-related businesses, primarily due to increased demand and higher prices. The increase in operating revenues was also attributable to a full quarter contribution fromMetromont in 2023, compared to a partial quarter in 2022 following its acquisition. These increases were partially offset by the impact of decreased demand at our other consumer and building products businesses and our consulting services businesses. The increases in operating income, EBITDA and net income to shareholders for the three months endedMarch 31, 2023 compared to the same period of 2022 were primarily due to the impact of higher revenues and improved operating results at our transportation-related and equipment manufacturing businesses, as well as the increased contribution ofMetromont . In 2022, the operating margins at many of our businesses were impacted by increased costs of materials and labor, which reflected the impact of broader economic conditions. We began to see conditions stabilize to varying degrees at many of our businesses toward the end of 2022, which continued into early 2023, particularly in regards to our materials costs. The increases in operating income, EBITDA and net income to shareholders for the three months endedMarch 31, 2023 at many of our businesses were partially offset by the impact of lower revenues and operating margins at our consulting services businesses. 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) 2023 2022
Markel Ventures operating income $
72,627
Depreciation expense
27,363 25,035
Amortization of intangible assets
19,551 20,933
Markel Ventures EBITDA $ 119,541 $ 95,705
Interest Expense, Net Foreign Exchange Gains (Losses) and Income Taxes
Interest Expense
Interest expense was$49.4 million for the three months endedMarch 31, 2023 , compared to$49.7 million for the same period of 2022. The modest decrease in interest expense for the three months endedMarch 31, 2023 was primarily attributable to the impact of the retirement of our 4.9% unsecured senior notes inJuly 2022 , partially offset by higherMarkel Ventures interest expense. See note 10 of the notes to consolidated financial statements for further details regarding the retirement of our senior long-term debt. 38 -------------------------------------------------------------------------------- Table of Contents Net Foreign Exchange Gains (Losses) Net foreign exchange losses included in net income were$32.9 million for the three months endedMarch 31, 2023 , compared to net foreign exchange gains of$23.0 million for the same period of 2022. Net foreign exchange gains (losses) are primarily due to the remeasurement of our foreign currency denominated insurance reserves to theU.S. Dollar. During the first quarter of 2023, theU.S. Dollar weakened against the Euro and British Pound, the predominant foreign currencies within our insurance operations, while it strengthened during the first quarter of 2022. Pre-tax net foreign exchange gains and losses attributed to changes in exchange rates on available-for-sale securities supporting our insurance reserves, which are included in the changes in net unrealized gains (losses) on available-for-sale investments in other comprehensive income (losses), were gains of$33.9 million and losses of$16.0 million for the three months endedMarch 31, 2023 and 2022, respectively.
Income Taxes
The effective tax rate was 20% and 27% for the three months endedMarch 31, 2023 and 2022, respectively. 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 estimated annual effective tax rate was 22% and 21% for the three months endedMarch 31, 2023 and 2022, respectively.
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) 2023 2022
Net income (loss) to shareholders $ 488,652 $ (51,741)
Other comprehensive income (loss):
Change in net unrealized gains (losses) on available-for-sale
investments, net of taxes 164,200 (520,763)
Change in discount rate for life and annuity benefits, net of taxes
(9,052) 60,693 Other, net of taxes 2,597 (116)
Other comprehensive (income) loss attributable to noncontrolling
interest
(32) 13 Other comprehensive income (loss) to shareholders 157,713 (460,173) Comprehensive income (loss) to shareholders
Book value per common share was
at
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 22% atMarch 31, 2023 and 24% atDecember 31, 2022 . The decrease reflects a decrease in senior long-term debt, primarily attributable to the retirement of our 3.625% unsecured senior notes dueMarch 30, 2023 , as well as an increase in shareholders' equity. 39 -------------------------------------------------------------------------------- Table of Contents Investments, cash and cash equivalents and restricted cash and cash equivalents (invested assets) were$28.0 billion and$27.4 billion atMarch 31, 2023 andDecember 31, 2022 , respectively. The following table presents the composition of our invested assets. March 31, December 31, 2023 2022 Fixed maturity securities 44 % 43 % Equity securities 29 % 28 % Short-term investments, cash and cash equivalents and restricted cash and cash equivalents 27 % 29 % Total 100 % 100 % Our holding company had$3.1 billion and$3.7 billion of invested assets atMarch 31, 2023 andDecember 31, 2022 , respectively. The decrease was due in part to the retirement of our 3.625% unsecured senior notes dueMarch 30, 2023 . The following table presents the composition of our holding company's invested assets. March 31, December 31, 2023 2022 Fixed maturity securities 6 % 4 % Equity securities 48 % 40 % Short-term investments, cash and cash equivalents and restricted cash and cash equivalents 46 % 56 % Total 100 % 100 %
We have a share repurchase program, authorized by our Board of Directors, that
provides for the repurchase of up to
program. This share repurchase program has no expiration date but may be
terminated by the Board of Directors at any time.
We may from time to time seek to prepay, retire or repurchase our outstanding senior notes or preferred shares, through open market purchases, privately negotiated transactions or otherwise. Those prepayments, retirements or repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. We maintain a corporate 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 certain other terms and conditions. AtMarch 31, 2023 andDecember 31, 2022 , there were no borrowings outstanding under this revolving credit facility. This facility expires inApril 2024 . As ofMarch 31, 2023 , we were in compliance with all covenants contained in our corporate revolving credit facility. To the extent that we are not in compliance with our covenants, 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. Various of ourMarkel Ventures subsidiaries maintain revolving credit facilities or lines of credit, which provide up to$650 million of aggregate capacity for working capital and other general operational purposes. A portion of the capacity on certain of these credit facilities may be used as security for letters of credit and other obligations. AtMarch 31, 2023 andDecember 31, 2022 , the Company had$288.9 million and$238.1 million , respectively, of borrowings outstanding under these credit facilities. As ofMarch 31, 2023 , all of our subsidiaries were in compliance with all covenants contained in their respective credit facilities. To the extent our subsidiaries are not in compliance with their respective covenants, access to their credit facilities could be restricted, which could adversely affect their operations. 40 -------------------------------------------------------------------------------- Table of Contents Cash Flows Net cash provided by operating activities was$284.2 million for the three months endedMarch 31, 2023 compared to$414.9 million for the same period of 2022. The decrease in net cash flows from operating activities for the three months endedMarch 31, 2023 was primarily due to a$125.1 million payment made to complete a retroactive reinsurance transaction to cede our portfolio of policies comprised of liabilities related to our run-off book ofU.K. motor casualty business. Net cash used by investing activities was$108.5 million for the three months endedMarch 31, 2023 compared to$50.0 million for the same period of 2022. During the three months endedMarch 31, 2023 , net cash used by investing activities included net purchases of fixed maturity securities and equity securities of$214.7 million and$65.1 million , respectively, and a net decrease in short-term investments of$210.2 million . During the three months endedMarch 31, 2022 , net cash used by investing activities included net purchases of fixed maturity securities, short-term investments and equity securities of$397.9 million ,$287.0 million and$36.0 million , respectively. Net cash used by investing activities for the three months endedMarch 31, 2022 was net of$630.0 million of net cash and restricted cash acquired as part of our consolidation ofMarkel CATCo Re. Cash flows 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$412.2 million for the three months endedMarch 31, 2023 compared to$18.9 million for the same period of 2022. During the three months endedMarch 31, 2023 , net cash used by financing activities included$250.0 million to retire our 3.625% unsecured senior notes dueMarch 30, 2023 . During the three months endedMarch 31, 2022 , we had net increases in borrowings, primarily on a revolving line of credit at one of ourMarkel Ventures businesses. Cash of$82.0 million and$79.3 million was used to repurchase shares of our common stock during the first three months of 2023 and 2022, 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 2022 Annual Report on Form 10-K for a more
complete description of our critical accounting estimates.
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," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Quantitative and Qualitative Disclosures About Market Risk" in
our 2022 Annual Report on Form 10-K, or are included in the items listed below:
41
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•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 claims and coverage 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 changes 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;
•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;
42
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Table of Contents
•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, inflation and other 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 cyberattack 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 senior executive or other key personnel of our
businesses 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;
•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 credit facilities, 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;
43
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•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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- Continental General Partners with Reframe Financial to Bring the Next Evolution of Reframe LifeStage to Market
- ASK THE LAWYER: Your beneficiary designations are probably wrong
- AM Best Affirms Credit Ratings of Cincinnati Financial Corporation and Subsidiaries
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