NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
. Summary of Significant Accounting Policies
Markel Corporation is a diverse financial holding company serving a variety of niche markets. Markel Corporation's principal business markets and underwrites specialty insurance products. Through its wholly owned subsidiary, Markel Ventures, Inc. (Markel Ventures), Markel Corporation also owns interests in various businesses that operate outside of the specialty insurance marketplace.
a)
Basis of Presentation.
The consolidated balance sheet as of
June 30, 2019
and the related consolidated statements of
income
and comprehensive
income (loss)
and changes in equity for the quarters and
six
months ended
June 30, 2019
and
2018
, and the consolidated statements of cash flows for the
six
months ended
June 30, 2019
and
2018
are unaudited. In the opinion of management, all adjustments necessary for fair presentation of such consolidated financial statements have been included. Such adjustments consist only of normal, recurring items. Interim results are not necessarily indicative of results of operations for the entire year. The consolidated balance sheet as of
December 31, 2018
was derived from Markel Corporation's audited annual consolidated financial statements.
The accompanying consolidated financial statements have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) and include the accounts of Markel Corporation and its consolidated subsidiaries, as well as any variable interest entities (VIEs) that meet the requirements for consolidation (the Company). All significant intercompany balances and transactions have been eliminated in consolidation. The Company consolidates the results of its Markel Ventures subsidiaries on a one-month lag, with the exception of significant transactions or events that occur during the intervening period. Certain prior year amounts have been reclassified to conform to the current presentation.
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements.
The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the Company's annual consolidated financial statements and notes. Readers are urged to review the Company's
2018
Annual Report on Form 10-K for a more complete description of the Company's business and accounting policies.
b)
Leases.
Following the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-02,
Leases (Topic 842),
effective January 1, 2019, the present value of future lease payments for the Company’s leases with terms greater than 12 months are included in the consolidated balance sheet as lease liabilities and right-of-use lease assets.
The Company’s lease portfolio primarily consists of operating leases for real estate. Total expected lease payments are based on the lease payments specified in the contract and the stated term, including any options to extend or terminate that the Company is reasonably certain to exercise. The Company has elected the practical expedient to account for lease components and any associated non-lease components as a single lease component, and therefore allocates all of the expected lease payments to the lease component.
The lease liability, which represents the Company’s obligation to make lease payments arising from the lease, is calculated based on the present value of expected lease payments over the remaining lease term, discounted using the Company’s collateralized incremental borrowing rate at the commencement date. The lease liability is then adjusted for any prepaid rent, lease incentives received or capitalized initial direct costs to determine the lease asset, which represents the Company's right to use the underlying asset for the lease term. Lease liabilities and lease assets are included in other liabilities and other assets, respectively, in the consolidated balance sheet.
Total lease costs are primarily comprised of rental expense for operating leases. Rental expense is recognized on a straight line basis over the lease term and includes amortization of the right-of-use lease asset and imputed interest on the lease liability. Rental expense attributable to the Company's underwriting operations is included in underwriting, acquisition and insurance expenses and rental expense attributable to the Company's other operations is included in products expenses and services and other expenses in the consolidated statements of income and comprehensive income.
2
. Recent Accounting Pronouncements
Effective January 1, 2019, the Company adopted FASB ASU No. 2016-02,
Leases (Topic 842)
and several other ASUs that were issued as amendments to ASU No. 2016-02, which require lessees to record most leases in their balance sheets as a lease liability with a corresponding right-of-use asset, but continue to recognize the related rent expense within net income. The Company elected to apply the optional transition method, under which an entity initially applies the new lease standard to existing leases at the beginning of the period of adoption. The Company continues to apply the previous guidance to 2018 and prior periods. The Company also elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed companies to carry forward their historical lease classification. As a result of adopting ASU No. 2016-02, the Company recorded a right-of-use lease asset and a lease liability of
$243.7 million
and
$264.6 million
, respectively as of January 1, 2019. ASU No. 2016-02 also requires expanded lease disclosures, which are included in note
12
. Adoption of this standard did not have a material impact on the Company’s results of operations or cash flows.
The following ASU issued by the FASB is relevant to the Company's operations and was adopted effective January 1, 2019. This ASU did not have a material impact on the Company's financial position, results of operations or cash flows:
|
|
•
|
ASU No. 2017-08,
Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
|
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
The FASB subsequently issued several ASUs as amendments to ASU No. 2016-13. The standard replaces the current incurred loss model used to measure impairment losses with a current expected credit loss (CECL) model for financial instruments measured at amortized cost, including reinsurance recoverables and trade receivables. For available-for-sale fixed maturities, which are measured at fair value, the ASU requires entities to record impairments as an allowance, rather than a reduction of the amortized cost, as is currently required under the other-than-temporary impairment model. ASU No. 2016-13 becomes effective for the Company during the first quarter of 2020 and will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of January 1, 2020. The Company is currently evaluating ASU No. 2016-13 to determine the potential impact that adopting this standard will have on its consolidated financial statements. Application of the new CECL model will not impact the Company's investment portfolio, none of which is measured at amortized cost, but will impact certain of the Company's other financial assets, including its reinsurance recoverables and receivables. Upon adoption of this ASU, any impairment losses on the Company's available-for-sale fixed maturities will be recorded as an allowance, subject to reversal, rather than as a reduction in amortized cost.
In August 2018, the FASB issued ASU No. 2018-12,
Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts.
The ASU requires insurance entities with long duration contracts to: (1) review and, if there is a change, update the assumptions used to measure cash flows at least annually, as well as update the discount rate assumption at each reporting date; (2) measure all market risk benefits associated with deposit (or account balance) contracts at fair value; and (3) disclose liability rollforwards and information about significant inputs, judgments, assumptions and methods used in measurement, including changes thereto and the effect of those changes on measurement. ASU No. 2018-12 becomes effective for the Company during the first quarter of 2021. The ASU will, among other things, impact the discount rate used in estimating reserves for the Company’s life and annuity reinsurance portfolio, which is in runoff. Currently, the discount rate assumption is locked-in for the life of the contracts, unless there is a loss recognition event. The Company is currently evaluating ASU No. 2018-12 to determine the impact that adopting this standard will have on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15,
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The ASU requires an entity to expense the implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. Currently, such costs are generally expensed as incurred. ASU No. 2018-15 becomes effective for the Company during the first quarter of 2020 and may be applied on a prospective or retrospective basis. Early adoption is permitted. The Company is currently evaluating its information technology projects to determine the impact that adopting ASU No. 2018-15 will have on its consolidated financial statements.
The following ASUs issued by the FASB are relevant to the Company's operations and are not yet effective. These ASUs are not expected to have a material impact on the Company's financial position, results of operations or cash flows:
|
|
•
|
ASU No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
|
|
|
•
|
ASU No. 2018-14,
Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans
|
|
|
•
|
ASU No. 2018-17,
Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest
|
Entities
3
. Acquisitions
The Hagerty Group, LLC
In June 2019, the Company acquired a minority ownership interest in The Hagerty Group, LLC (Hagerty Group), a company that primarily operates as a managing general agent under the names Hagerty Insurance Agency and Hagerty Classic Marine Insurance Agency (collectively, Hagerty). Hagerty Group also includes Hagerty Re, a Bermuda Class 3 reinsurance company. Hagerty Group is a leading automotive lifestyle brand and provider of specialty insurance to automobile enthusiasts. Total consideration for the Company’s investment was
$212.5 million
. Essentia Insurance Company, one of the Company’s insurance subsidiaries, is the exclusive insurance underwriter for Hagerty in the U.S., and a portion of this insurance is ceded to Hagerty Re. The Company's investment in Hagerty Group is accounted for under the equity method and is included in other assets on the Company’s consolidated balance sheet.
Brahmin Leather Works, LLC
In October 2018, the Company acquired
90%
of Brahmin Leather Works, LLC (Brahmin), a Massachusetts-based privately held creator of fashion leather handbags. Total consideration for the acquisition was
$192.9 million
, which included cash consideration of
$172.3 million
. Total consideration also includes the estimated fair value of contingent consideration the Company expects to pay based on Brahmin’s earnings as defined in the purchase agreement, for the period of 2019 through 2021.
As of December 31, 2018, the purchase price was preliminarily allocated to the acquired assets and liabilities of Brahmin based on estimated fair value at the acquisition date. During the second quarter of 2019, the Company completed the process of determining the fair value of the assets and liabilities acquired with Brahmin. The Company recognized goodwill of
$63.8 million
, which is primarily attributable to expected future earnings and cash flow potential of Brahmin. The majority of the goodwill recognized is deductible for income tax purposes. The Company also recognized other intangible assets of
$93.3 million
, which includes
$57.0 million
of customer relationships,
$35.0 million
of trade names and
$1.3 million
of other intangible assets, which are being amortized over a weighted average period of
16 years
,
16 years
and
8 years
, respectively. The Company also recognized redeemable non-controlling interests of
$19.6 million
. Results attributable to Brahmin are included in the Company’s Markel Ventures segment.
Nephila Holdings Ltd.
In November 2018, the Company acquired all of the outstanding shares of Nephila Holdings Ltd. (Nephila), a Bermuda-based investment fund manager offering a broad range of investment products, including insurance-linked securities, catastrophe bonds, insurance swaps and weather derivatives. Nephila generates revenue primarily through management and incentive fees.
Total consideration for the acquisition was
$974.4 million
, all of which was cash consideration. The purchase price has been preliminarily allocated to the acquired assets and liabilities of Nephila based on estimated fair values at the acquisition date. The Company has preliminarily recognized goodwill of
$434.2 million
, which is primarily attributable to expected future earnings and cash flow potential of Nephila.
None
of the goodwill recognized is expected to be deductible for income tax purposes. The Company also has preliminarily recognized other intangible assets of
$551.0 million
, which includes
$468.0 million
of investment management agreements,
$32.0 million
of broker relationships,
$27.0 million
of technology and
$24.0 million
of trade names, which are expected to be amortized over a weighted average period of
17 years
,
12 years
,
6 years
and
14 years
, respectively. The Company also has recognized noncontrolling interests of
$15.1 million
attributable to certain consolidated subsidiaries of Nephila that are not wholly-owned. Nephila operates as a separate business unit and its operating results are not included in a reportable segment.
The Company has not completed the process of determining the fair value of the assets acquired and liabilities assumed. These valuations will be completed within the measurement period, which cannot exceed 12 months from the acquisition date. As a result, the fair value recorded for these items is a provisional estimate and may be subject to further adjustment. Any adjustments resulting from the valuations may impact the individual amounts recorded for assets acquired and liabilities assumed, as well as the residual goodwill.
4
. Investments
a)
The following tables summarize the Company's available-for-sale investments. Commercial and residential mortgage-backed securities include securities issued by U.S. government-sponsored enterprises and U.S. government agencies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
(dollars in thousands)
|
Amortized
Cost
|
|
Gross
Unrealized
Holding
Gains
|
|
Gross
Unrealized
Holding
Losses
|
|
Estimated
Fair
Value
|
Fixed maturities:
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
295,201
|
|
|
$
|
2,894
|
|
|
$
|
(422
|
)
|
|
$
|
297,673
|
|
U.S. government-sponsored enterprises
|
337,100
|
|
|
19,863
|
|
|
(104
|
)
|
|
356,859
|
|
Obligations of states, municipalities and political subdivisions
|
4,140,140
|
|
|
222,904
|
|
|
(847
|
)
|
|
4,362,197
|
|
Foreign governments
|
1,478,894
|
|
|
160,709
|
|
|
(7,028
|
)
|
|
1,632,575
|
|
Commercial mortgage-backed securities
|
1,709,453
|
|
|
52,568
|
|
|
(3,999
|
)
|
|
1,758,022
|
|
Residential mortgage-backed securities
|
877,279
|
|
|
34,118
|
|
|
(1,428
|
)
|
|
909,969
|
|
Asset-backed securities
|
11,150
|
|
|
56
|
|
|
(10
|
)
|
|
11,196
|
|
Corporate bonds
|
902,466
|
|
|
30,372
|
|
|
(2,689
|
)
|
|
930,149
|
|
Total fixed maturities
|
9,751,683
|
|
|
523,484
|
|
|
(16,527
|
)
|
|
10,258,640
|
|
Short-term investments
|
1,382,042
|
|
|
1,911
|
|
|
(381
|
)
|
|
1,383,572
|
|
Investments, available-for-sale
|
$
|
11,133,725
|
|
|
$
|
525,395
|
|
|
$
|
(16,908
|
)
|
|
$
|
11,642,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
(dollars in thousands)
|
Amortized
Cost
|
|
Gross
Unrealized
Holding
Gains
|
|
Gross
Unrealized
Holding
Losses
|
|
Estimated
Fair
Value
|
Fixed maturities:
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
248,286
|
|
|
$
|
308
|
|
|
$
|
(1,952
|
)
|
|
$
|
246,642
|
|
U.S. government-sponsored enterprises
|
357,765
|
|
|
5,671
|
|
|
(4,114
|
)
|
|
359,322
|
|
Obligations of states, municipalities and political subdivisions
|
4,285,068
|
|
|
96,730
|
|
|
(28,868
|
)
|
|
4,352,930
|
|
Foreign governments
|
1,482,826
|
|
|
98,356
|
|
|
(21,578
|
)
|
|
1,559,604
|
|
Commercial mortgage-backed securities
|
1,691,572
|
|
|
3,154
|
|
|
(44,527
|
)
|
|
1,650,199
|
|
Residential mortgage-backed securities
|
886,501
|
|
|
6,170
|
|
|
(12,499
|
)
|
|
880,172
|
|
Asset-backed securities
|
19,614
|
|
|
7
|
|
|
(213
|
)
|
|
19,408
|
|
Corporate bonds
|
979,141
|
|
|
13,234
|
|
|
(17,464
|
)
|
|
974,911
|
|
Total fixed maturities
|
9,950,773
|
|
|
223,630
|
|
|
(131,215
|
)
|
|
10,043,188
|
|
Short-term investments
|
1,080,027
|
|
|
443
|
|
|
(2,774
|
)
|
|
1,077,696
|
|
Investments, available-for-sale
|
$
|
11,030,800
|
|
|
$
|
224,073
|
|
|
$
|
(133,989
|
)
|
|
$
|
11,120,884
|
|
b)
The following tables summarize gross unrealized investment losses on available-for-sale investments by the length of time that securities have continuously been in an unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
(dollars in thousands)
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Holding Losses
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Holding Losses
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Holding Losses
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
7,467
|
|
|
$
|
(15
|
)
|
|
$
|
100,175
|
|
|
$
|
(407
|
)
|
|
$
|
107,642
|
|
|
$
|
(422
|
)
|
U.S. government-sponsored enterprises
|
—
|
|
|
—
|
|
|
40,324
|
|
|
(104
|
)
|
|
40,324
|
|
|
(104
|
)
|
Obligations of states, municipalities and political subdivisions
|
3,250
|
|
|
(18
|
)
|
|
90,245
|
|
|
(829
|
)
|
|
93,495
|
|
|
(847
|
)
|
Foreign governments
|
79,769
|
|
|
(2,956
|
)
|
|
161,043
|
|
|
(4,072
|
)
|
|
240,812
|
|
|
(7,028
|
)
|
Commercial mortgage-backed securities
|
—
|
|
|
—
|
|
|
310,891
|
|
|
(3,999
|
)
|
|
310,891
|
|
|
(3,999
|
)
|
Residential mortgage-backed securities
|
2,423
|
|
|
(1
|
)
|
|
103,658
|
|
|
(1,427
|
)
|
|
106,081
|
|
|
(1,428
|
)
|
Asset-backed securities
|
—
|
|
|
—
|
|
|
4,052
|
|
|
(10
|
)
|
|
4,052
|
|
|
(10
|
)
|
Corporate bonds
|
45,258
|
|
|
(1,295
|
)
|
|
161,727
|
|
|
(1,394
|
)
|
|
206,985
|
|
|
(2,689
|
)
|
Total fixed maturities
|
138,167
|
|
|
(4,285
|
)
|
|
972,115
|
|
|
(12,242
|
)
|
|
1,110,282
|
|
|
(16,527
|
)
|
Short-term investments
|
17,045
|
|
|
(316
|
)
|
|
1,777
|
|
|
(65
|
)
|
|
18,822
|
|
|
(381
|
)
|
Total
|
$
|
155,212
|
|
|
$
|
(4,601
|
)
|
|
$
|
973,892
|
|
|
$
|
(12,307
|
)
|
|
$
|
1,129,104
|
|
|
$
|
(16,908
|
)
|
At
June 30, 2019
, the Company held
304
available-for-sale securities with a total estimated fair value of
$1.1 billion
and gross unrealized losses of
$16.9 million
. Of these
304
securities,
267
securities had been in a continuous unrealized loss position for
one year
or longer and had a total estimated fair value of
$973.9 million
and gross unrealized losses of
$12.3 million
. The Company does not intend to sell or believe it will be required to sell these available-for-sale securities before recovery of their amortized cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
(dollars in thousands)
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Holding Losses
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Holding Losses
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Holding Losses
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
2,922
|
|
|
$
|
(83
|
)
|
|
$
|
156,352
|
|
|
$
|
(1,869
|
)
|
|
$
|
159,274
|
|
|
$
|
(1,952
|
)
|
U.S. government-sponsored enterprises
|
88,854
|
|
|
(1,923
|
)
|
|
96,337
|
|
|
(2,191
|
)
|
|
185,191
|
|
|
(4,114
|
)
|
Obligations of states, municipalities and political subdivisions
|
656,573
|
|
|
(12,455
|
)
|
|
453,736
|
|
|
(16,413
|
)
|
|
1,110,309
|
|
|
(28,868
|
)
|
Foreign governments
|
419,764
|
|
|
(14,461
|
)
|
|
84,776
|
|
|
(7,117
|
)
|
|
504,540
|
|
|
(21,578
|
)
|
Commercial mortgage-backed securities
|
653,410
|
|
|
(10,128
|
)
|
|
709,971
|
|
|
(34,399
|
)
|
|
1,363,381
|
|
|
(44,527
|
)
|
Residential mortgage-backed securities
|
276,777
|
|
|
(3,685
|
)
|
|
242,949
|
|
|
(8,814
|
)
|
|
519,726
|
|
|
(12,499
|
)
|
Asset-backed securities
|
1,645
|
|
|
(11
|
)
|
|
17,030
|
|
|
(202
|
)
|
|
18,675
|
|
|
(213
|
)
|
Corporate bonds
|
313,164
|
|
|
(10,965
|
)
|
|
222,761
|
|
|
(6,499
|
)
|
|
535,925
|
|
|
(17,464
|
)
|
Total fixed maturities
|
2,413,109
|
|
|
(53,711
|
)
|
|
1,983,912
|
|
|
(77,504
|
)
|
|
4,397,021
|
|
|
(131,215
|
)
|
Short-term investments
|
197,643
|
|
|
(2,774
|
)
|
|
—
|
|
|
—
|
|
|
197,643
|
|
|
(2,774
|
)
|
Total
|
$
|
2,610,752
|
|
|
$
|
(56,485
|
)
|
|
$
|
1,983,912
|
|
|
$
|
(77,504
|
)
|
|
$
|
4,594,664
|
|
|
$
|
(133,989
|
)
|
At
December 31, 2018
, the Company held
1,005
securities with a total estimated fair value of
$4.6 billion
and gross unrealized losses of
$134.0 million
. Of these
1,005
securities,
541
securities had been in a continuous unrealized loss position for
one year
or longer and had a total estimated fair value of
$2.0 billion
and gross unrealized losses of
$77.5 million
.
The Company completes a detailed analysis each quarter to assess whether the decline in the fair value of any investment below its cost basis is deemed other-than-temporary. All available-for-sale securities with unrealized losses are reviewed. The Company considers many factors in completing its quarterly review of securities with unrealized losses for other-than-temporary impairment, including the length of time and the extent to which fair value has been below cost and the financial condition and near-term prospects of the issuer.
For fixed maturities, the Company considers whether it intends to sell the security or if it is more likely than not that it will be required to sell the security before recovery, the implied yield-to-maturity, the credit quality of the issuer and the ability to recover all amounts outstanding when contractually due. For fixed maturities where the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost, a decline in fair value is considered to be other-than-temporary and is recognized in net income based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security. If the decline in fair value of a fixed maturity below its amortized cost is considered to be other-than-temporary based upon other considerations, the Company compares the estimated present value of the cash flows expected to be collected to the amortized cost of the security. The extent to which the estimated present value of the cash flows expected to be collected is less than the amortized cost of the security represents the credit-related portion of the other-than-temporary impairment, which is recognized in net income, resulting in a new cost basis for the security. Any remaining decline in fair value represents the non-credit portion of the other-than-temporary impairment, which is recognized in other comprehensive income.
c)
The amortized cost and estimated fair value of fixed maturities at
June 30, 2019
are shown below by contractual maturity.
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Amortized
Cost
|
|
Estimated
Fair Value
|
Due in one year or less
|
$
|
457,283
|
|
|
$
|
454,221
|
|
Due after one year through five years
|
1,348,961
|
|
|
1,380,636
|
|
Due after five years through ten years
|
2,078,025
|
|
|
2,188,372
|
|
Due after ten years
|
3,269,532
|
|
|
3,556,224
|
|
|
7,153,801
|
|
|
7,579,453
|
|
Commercial mortgage-backed securities
|
1,709,453
|
|
|
1,758,022
|
|
Residential mortgage-backed securities
|
877,279
|
|
|
909,969
|
|
Asset-backed securities
|
11,150
|
|
|
11,196
|
|
Total fixed maturities
|
$
|
9,751,683
|
|
|
$
|
10,258,640
|
|
d)
The following table presents the components of net investment
income
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
Six Months Ended June 30,
|
(dollars in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Interest:
|
|
|
|
|
|
|
|
Municipal bonds (tax-exempt)
|
$
|
17,885
|
|
|
$
|
20,287
|
|
|
$
|
36,711
|
|
|
$
|
41,222
|
|
Municipal bonds (taxable)
|
18,613
|
|
|
18,220
|
|
|
37,192
|
|
|
35,853
|
|
Other taxable bonds
|
41,242
|
|
|
39,548
|
|
|
82,023
|
|
|
77,017
|
|
Short-term investments, including overnight deposits
|
13,753
|
|
|
11,915
|
|
|
23,965
|
|
|
22,505
|
|
Dividends on equity securities
|
22,207
|
|
|
20,474
|
|
|
47,993
|
|
|
44,481
|
|
Income (loss) from equity method investments
|
1,174
|
|
|
(1,490
|
)
|
|
3,070
|
|
|
288
|
|
Other
|
873
|
|
|
97
|
|
|
3,174
|
|
|
(13
|
)
|
|
115,747
|
|
|
109,051
|
|
|
234,128
|
|
|
221,353
|
|
Investment expenses
|
(3,916
|
)
|
|
(3,664
|
)
|
|
(8,115
|
)
|
|
(7,950
|
)
|
Net investment income
|
$
|
111,831
|
|
|
$
|
105,387
|
|
|
$
|
226,013
|
|
|
$
|
213,403
|
|
e)
The following table presents net investment
gains (losses)
and the change in net unrealized gains on available-for-sale investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
Six Months Ended June 30,
|
(dollars in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Realized gains:
|
|
|
|
|
|
|
|
Sales and maturities of fixed maturities
|
$
|
1,661
|
|
|
$
|
1,085
|
|
|
$
|
1,804
|
|
|
$
|
1,226
|
|
Sales and maturities of short-term investments
|
499
|
|
|
21
|
|
|
1,334
|
|
|
787
|
|
Other
|
452
|
|
|
789
|
|
|
460
|
|
|
867
|
|
Total realized gains
|
2,612
|
|
|
1,895
|
|
|
3,598
|
|
|
2,880
|
|
Realized losses:
|
|
|
|
|
|
|
|
Sales and maturities of fixed maturities
|
(630
|
)
|
|
(1,092
|
)
|
|
(911
|
)
|
|
(2,044
|
)
|
Sales and maturities of short-term investments
|
(2,049
|
)
|
|
(7,609
|
)
|
|
(2,073
|
)
|
|
(6,657
|
)
|
Other
|
—
|
|
|
(836
|
)
|
|
—
|
|
|
(2,767
|
)
|
Total realized losses
|
(2,679
|
)
|
|
(9,537
|
)
|
|
(2,984
|
)
|
|
(11,468
|
)
|
Net realized investment gains (losses)
|
(67
|
)
|
|
(7,642
|
)
|
|
614
|
|
|
(8,588
|
)
|
Change in fair value of equity securities:
|
|
|
|
|
|
|
|
Change in fair value of equity securities sold during the period
|
202
|
|
|
9,631
|
|
|
26,616
|
|
|
13,897
|
|
Change in fair value of equity securities held at the end of the period
|
425,518
|
|
|
103,260
|
|
|
1,010,614
|
|
|
(23,058
|
)
|
Change in fair value of equity securities
|
425,720
|
|
|
112,891
|
|
|
1,037,230
|
|
|
(9,161
|
)
|
Net investment gains (losses)
|
$
|
425,653
|
|
|
$
|
105,249
|
|
|
$
|
1,037,844
|
|
|
$
|
(17,749
|
)
|
Change in net unrealized gains on available-for-sale investments included in other comprehensive income (loss):
|
|
|
|
|
|
|
|
Fixed maturities
|
$
|
197,248
|
|
|
$
|
(143,593
|
)
|
|
$
|
414,542
|
|
|
$
|
(281,093
|
)
|
Short-term investments
|
2,506
|
|
|
5,499
|
|
|
3,861
|
|
|
(1,178
|
)
|
Net increase (decrease)
|
$
|
199,754
|
|
|
$
|
(138,094
|
)
|
|
$
|
418,403
|
|
|
$
|
(282,271
|
)
|
5
. Fair Value Measurements
Accounting Standards Codification (ASC) 820,
Fair Value Measurements and Disclosures,
establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability.
Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded and the reliability and transparency of the assumptions used to determine fair value. The hierarchy requires the use of observable market data when available. The levels of the hierarchy are defined as follows:
Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active markets.
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.
Level 3 – Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement.
In accordance with ASC 820, the Company determines fair value based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods, including the market, income and cost approaches. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The following section describes the valuation methodologies used by the Company to measure assets and liabilities at fair value, including an indication of the level within the fair value hierarchy in which each asset or liability is generally classified.
Available-for-sale investments and equity securities.
Available-for-sale investments and equity securities are recorded at fair value on a recurring basis. Available-for-sale investments include fixed maturities and short-term investments. Short-term investments include certificates of deposit, commercial paper, discount notes and treasury bills with original maturities of
one year
or less. Fair value for available-for-sale investments and equity securities are determined by the Company after considering various sources of information, including information provided by a third party pricing service. The pricing service provides prices for substantially all of the Company's fixed maturities and equity securities. In determining fair value, the Company generally does not adjust the prices obtained from the pricing service. The Company obtains an understanding of the pricing service's valuation methodologies and related inputs, which include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, duration, credit ratings, estimated cash flows and prepayment speeds. The Company validates prices provided by the pricing service by reviewing prices from other pricing sources and analyzing pricing data in certain instances.
The Company has evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Level 1 investments include those traded on an active exchange, such as the New York Stock Exchange. Level 2 investments include U.S. Treasury securities, U.S. government-sponsored enterprises, municipal bonds, foreign government bonds, commercial mortgage-backed securities, residential mortgage-backed securities, asset-backed securities and corporate debt securities. Level 3 investments include the Company's investments in certain insurance-linked securities funds managed by Markel CATCo Investment Management Ltd. (MCIM), a consolidated subsidiary, that are not traded on an active exchange, as further described and defined in note
14
(the Markel CATCo Funds), and are valued using unobservable inputs.
Fair value for available-for-sale investments and equity securities is measured based upon quoted prices in active markets, if available. Due to variations in trading volumes and the lack of quoted market prices, fixed maturities are classified as Level 2 investments. The fair value of fixed maturities is normally derived through recent reported trades for identical or similar securities, making adjustments through the reporting date based upon available market observable data described above. If there are no recent reported trades, the fair value of fixed maturities may be derived through the use of matrix pricing or model processes, where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Significant inputs used to determine the fair value of obligations of states, municipalities and political subdivisions, corporate bonds and obligations of foreign governments include reported trades, benchmark yields, issuer spreads, bids, offers, credit information and estimated cash flows. Significant inputs used to determine the fair value of commercial mortgage-backed securities, residential mortgage-backed securities and asset-backed securities include the type of underlying assets, benchmark yields, prepayment speeds, collateral information, tranche type and volatility, estimated cash flows, credit information, default rates, recovery rates, issuer spreads and the year of issue.
Due to the significance of unobservable inputs required in measuring the fair value of the Company's investments in the Markel CATCo Funds, these investments are classified as Level 3 within the fair value hierarchy. The fair value of the securities are derived using their reported net asset value (NAV) as the primary input, as well as other observable and unobservable inputs as deemed necessary by management. Management has obtained an understanding of the inputs, assumptions, process, and controls used to determine NAV, which is calculated by an independent third party. Unobservable inputs to the NAV calculations include assumptions around premium earnings patterns and loss reserve estimates for the underlying securitized reinsurance contracts in which the Markel CATCo Funds invest. Significant unobservable inputs used in the valuation of these investments include an adjustment to include the fair value of the equity that was issued by one of the Markel CATCo Funds in exchange for notes receivable, rather than cash, which is excluded from NAV. The determination of fair value of the securities also considers external market data, including the trading price relative to its NAV of CATCo Reinsurance Opportunities Fund Ltd. (CROF), a comparable security traded on a market operated by the London Stock Exchange and on the Bermuda Stock Exchange further described in note
14
. Generally, the Company's investments in the Markel CATCo Funds are redeemable annually as of January 1
st
of each calendar year. However, in years with significant loss events on the underlying securitized reinsurance contracts, as was the case in 2018 and 2017, payment for the redemption of certain investments may be restricted for up to three years.
The Company's valuation policies and procedures for Level 3 investments are determined by management. Fair value measurements are analyzed quarterly to ensure the change in fair value from prior periods is reasonable relative to management's understanding of the underlying investments, recent market trends and external market data.
Senior long-term debt and other debt.
Senior long-term debt and other debt is carried at amortized cost with the estimated fair value disclosed in the consolidated balance sheets. Senior long-term debt and other debt is classified as Level 2 within the fair value hierarchy due to variations in trading volumes and the lack of quoted market prices. Fair value for senior long-term debt and other debt is generally derived through recent reported trades for identical securities, making adjustments through the reporting date, if necessary, based upon available market observable data including U.S. Treasury securities and implied credit spreads. Significant inputs used to determine the fair value of senior long-term debt and other debt include reported trades, benchmark yields, issuer spreads, bids and offers.
The following tables present the balances of assets measured at fair value on a recurring basis by level within the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
(dollars in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
—
|
|
|
$
|
297,673
|
|
|
$
|
—
|
|
|
$
|
297,673
|
|
U.S. government-sponsored enterprises
|
—
|
|
|
356,859
|
|
|
—
|
|
|
356,859
|
|
Obligations of states, municipalities and political subdivisions
|
—
|
|
|
4,362,197
|
|
|
—
|
|
|
4,362,197
|
|
Foreign governments
|
—
|
|
|
1,632,575
|
|
|
—
|
|
|
1,632,575
|
|
Commercial mortgage-backed securities
|
—
|
|
|
1,758,022
|
|
|
—
|
|
|
1,758,022
|
|
Residential mortgage-backed securities
|
—
|
|
|
909,969
|
|
|
—
|
|
|
909,969
|
|
Asset-backed securities
|
—
|
|
|
11,196
|
|
|
—
|
|
|
11,196
|
|
Corporate bonds
|
—
|
|
|
930,149
|
|
|
—
|
|
|
930,149
|
|
Total fixed maturities, available-for-sale
|
—
|
|
|
10,258,640
|
|
|
—
|
|
|
10,258,640
|
|
Equity securities:
|
|
|
|
|
|
|
|
Insurance, banks and other financial institutions
|
2,219,767
|
|
|
—
|
|
|
37,988
|
|
|
2,257,755
|
|
Industrial, consumer and all other
|
4,618,178
|
|
|
—
|
|
|
—
|
|
|
4,618,178
|
|
Total equity securities
|
6,837,945
|
|
|
—
|
|
|
37,988
|
|
|
6,875,933
|
|
Short-term investments, available-for-sale
|
1,279,382
|
|
|
104,190
|
|
|
—
|
|
|
1,383,572
|
|
Total investments
|
$
|
8,117,327
|
|
|
$
|
10,362,830
|
|
|
$
|
37,988
|
|
|
$
|
18,518,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
(dollars in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
—
|
|
|
$
|
246,642
|
|
|
$
|
—
|
|
|
$
|
246,642
|
|
U.S. government-sponsored enterprises
|
—
|
|
|
359,322
|
|
|
—
|
|
|
359,322
|
|
Obligations of states, municipalities and political subdivisions
|
—
|
|
|
4,352,930
|
|
|
—
|
|
|
4,352,930
|
|
Foreign governments
|
—
|
|
|
1,559,604
|
|
|
—
|
|
|
1,559,604
|
|
Commercial mortgage-backed securities
|
—
|
|
|
1,650,199
|
|
|
—
|
|
|
1,650,199
|
|
Residential mortgage-backed securities
|
—
|
|
|
880,172
|
|
|
—
|
|
|
880,172
|
|
Asset-backed securities
|
—
|
|
|
19,408
|
|
|
—
|
|
|
19,408
|
|
Corporate bonds
|
—
|
|
|
974,911
|
|
|
—
|
|
|
974,911
|
|
Total fixed maturities, available-for-sale
|
—
|
|
|
10,043,188
|
|
|
—
|
|
|
10,043,188
|
|
Equity securities:
|
|
|
|
|
|
|
|
Insurance, banks and other financial institutions
|
1,876,811
|
|
|
—
|
|
|
53,728
|
|
|
1,930,539
|
|
Industrial, consumer and all other
|
3,790,406
|
|
|
—
|
|
|
—
|
|
|
3,790,406
|
|
Total equity securities
|
5,667,217
|
|
|
—
|
|
|
53,728
|
|
|
5,720,945
|
|
Short-term investments, available-for-sale
|
981,616
|
|
|
96,080
|
|
|
—
|
|
|
1,077,696
|
|
Total investments
|
$
|
6,648,833
|
|
|
$
|
10,139,268
|
|
|
$
|
53,728
|
|
|
$
|
16,841,829
|
|
The following table summarizes changes in Level 3 investments measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
Six Months Ended June 30,
|
(dollars in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Equity securities, beginning of period
|
$
|
44,812
|
|
|
$
|
151,398
|
|
|
$
|
53,728
|
|
|
$
|
168,809
|
|
Purchases
|
500
|
|
|
—
|
|
|
500
|
|
|
28,900
|
|
Sales
|
—
|
|
|
(6,401
|
)
|
|
(6,869
|
)
|
|
(34,653
|
)
|
Net investment losses on Level 3 investments
|
(7,324
|
)
|
|
(25,322
|
)
|
|
(9,371
|
)
|
|
(43,381
|
)
|
Transfers into Level 3
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Transfers out of Level 3
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity securities, end of period
|
$
|
37,988
|
|
|
$
|
119,675
|
|
|
$
|
37,988
|
|
|
$
|
119,675
|
|
Net investment losses related to the Company's investments in the Markel CATCo Funds primarily resulted from decreases in the NAV of these funds in the quarters and
six
months ended
June 30, 2019
and
2018
.
The Company also holds an investment in CROF which is a Level 1 investment included in equity securities in the Company's consolidated balance sheets. CROF is managed by MCIM and invests substantially all of its assets in one of the unconsolidated Markel CATCo Funds.
Net investment losses for the quarters ended
June 30, 2019
and
June 30, 2018
, included a loss of
$1.6 million
and
$2.6 million
, respectively, related to the Company's investment in CROF. Net investment losses for the
six
months ended
June 30, 2019
and
June 30, 2018
included a loss of
$2.1 million
and
$8.5 million
, respectively, attributable to the Company's investment in CROF. At
June 30, 2019
and
December 31, 2018
, the fair value of the Company's investment in CROF was
$2.4 million
and
$4.5 million
, respectively.
There were no transfers into or out of Level 1 and Level 2 during the quarters and
six
months ended
June 30, 2019
and
2018
.
The Company did not have any assets or liabilities measured at fair value on a non-recurring basis during the
six
months ended
June 30, 2019
and
2018
.
6
. Segment Reporting Disclosures
The Company's chief operating decision maker reviews the Company's ongoing underwriting operations on a global basis in the following
two
segments: Insurance and Reinsurance. In determining how to allocate resources and assess the performance of its underwriting results, management considers many factors, including the nature of the insurance product sold, the type of account written and the type of customer served. The Insurance segment includes all direct business and facultative placements written across the Company. The Reinsurance segment includes all treaty reinsurance written across the Company. All investing activities related to the Company's underwriting operations are included in the Investing segment.
The Markel Ventures segment primarily consists of controlling interests in a diverse portfolio of businesses that operate in various industries. The chief operating decision maker reviews and assesses Markel Ventures’ performance in the aggregate, as a single operating segment.
The Company's other operations include the results of the Company's program services business and the results of the Company's insurance-linked securities operations attributable to MCIM and, beginning November 2018, Nephila. The Company's other operations also include results for underwriting lines of business discontinued prior to, or in conjunction with, acquisitions, including development on asbestos and environmental loss reserves and results attributable to the run-off of life and annuity reinsurance business, which are monitored separately from the Company's ongoing underwriting operations. For purposes of segment reporting, none of the Company's other operations are considered to be reportable segments.
Segment profit for the Company's underwriting segments is measured by underwriting profit. The property and casualty insurance industry commonly defines underwriting profit as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. Underwriting profit does not replace operating income or net income computed in accordance with U.S. GAAP as a measure of profitability. Underwriting profit or loss provides a basis for management to evaluate the Company's underwriting performance. Segment profit for the Investing segment is measured by net investment income and net investment gains. Segment profit for the Markel Ventures segment is measured by operating income.
For management reporting purposes, the Company allocates assets to its underwriting, investing, Markel Ventures and other operations. Underwriting assets are all assets not specifically allocated to the Investing or Markel Ventures segments, or to the Company's other operations. Underwriting and investing assets are not allocated to the Insurance and Reinsurance segments since the Company does not manage its assets by underwriting segment. The Company does not allocate capital expenditures for long-lived assets to either of its underwriting segments for management reporting purposes.
The following tables summarize the Company's segment disclosures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, 2019
|
(dollars in thousands)
|
Insurance
|
|
Reinsurance
|
|
Investing
|
|
Markel Ventures
(1)
|
|
Other
(2)
|
|
Consolidated
|
Gross premium volume
|
$
|
1,368,348
|
|
|
$
|
223,381
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
655,418
|
|
|
$
|
2,247,147
|
|
Net written premiums
|
1,126,170
|
|
|
178,802
|
|
|
—
|
|
|
—
|
|
|
666
|
|
|
1,305,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
991,269
|
|
|
207,728
|
|
|
—
|
|
|
—
|
|
|
464
|
|
|
1,199,461
|
|
Losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
(657,372
|
)
|
|
(139,340
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(796,712
|
)
|
Prior accident years
|
101,721
|
|
|
18,190
|
|
|
—
|
|
|
—
|
|
|
(1,319
|
)
|
|
118,592
|
|
Amortization of policy acquisition costs
|
(208,609
|
)
|
|
(54,456
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(263,065
|
)
|
Other operating expenses
|
(179,432
|
)
|
|
(23,306
|
)
|
|
—
|
|
|
—
|
|
|
3,487
|
|
|
(199,251
|
)
|
Underwriting profit
|
47,577
|
|
|
8,816
|
|
|
—
|
|
|
—
|
|
|
2,632
|
|
|
59,025
|
|
Net investment income
|
—
|
|
|
—
|
|
|
111,633
|
|
|
198
|
|
|
—
|
|
|
111,831
|
|
Net investment gains
|
—
|
|
|
—
|
|
|
425,653
|
|
|
—
|
|
|
—
|
|
|
425,653
|
|
Products revenues
|
—
|
|
|
—
|
|
|
—
|
|
|
501,676
|
|
|
—
|
|
|
501,676
|
|
Services and other revenues
|
—
|
|
|
—
|
|
|
—
|
|
|
115,311
|
|
|
85,184
|
|
|
200,495
|
|
Products expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(425,138
|
)
|
|
—
|
|
|
(425,138
|
)
|
Services and other expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(99,860
|
)
|
|
(70,936
|
)
|
|
(170,796
|
)
|
Amortization of intangible assets
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,510
|
)
|
|
(25,790
|
)
|
|
(36,300
|
)
|
Segment profit (loss)
|
$
|
47,577
|
|
|
$
|
8,816
|
|
|
$
|
537,286
|
|
|
$
|
81,677
|
|
|
$
|
(8,910
|
)
|
|
$
|
666,446
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(41,267
|
)
|
Net foreign exchange gains
|
|
|
|
|
|
|
|
|
|
|
25,015
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
$
|
650,194
|
|
U.S. GAAP combined ratio
(4)
|
95
|
%
|
|
96
|
%
|
|
|
|
|
|
NM
|
|
(5)
|
95
|
%
|
|
|
(1)
|
Products expenses and services and other expenses for the Markel Ventures segment include depreciation expense of
$13.5 million
for the quarter ended
June 30, 2019
.
|
|
|
(2)
|
Other represents the total
profit (loss)
attributable to the Company's operations that are not included in a reportable segment as well as any amortization of intangible assets that are not allocated to a reportable segment.
|
|
|
(3)
|
Segment profit for the Markel Ventures segment includes amortization of intangible assets attributable to Markel Ventures. Amortization of intangible assets is not allocated to any other reportable segments.
|
|
|
(4)
|
The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.
|
|
|
(5)
|
NM - Ratio is not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, 2018
|
(dollars in thousands)
|
Insurance
|
|
Reinsurance
|
|
Investing
|
|
Markel Ventures
(1)
|
|
Other
(2)
|
|
Consolidated
|
Gross premium volume
|
$
|
1,233,828
|
|
|
$
|
208,805
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
554,800
|
|
|
$
|
1,997,433
|
|
Net written premiums
|
1,001,126
|
|
|
178,729
|
|
|
—
|
|
|
—
|
|
|
751
|
|
|
1,180,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
918,194
|
|
|
229,613
|
|
|
—
|
|
|
—
|
|
|
377
|
|
|
1,148,184
|
|
Losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
(610,634
|
)
|
|
(145,992
|
)
|
|
—
|
|
|
—
|
|
|
(48
|
)
|
|
(756,674
|
)
|
Prior accident years
|
139,485
|
|
|
18,525
|
|
|
—
|
|
|
—
|
|
|
(514
|
)
|
|
157,496
|
|
Amortization of policy acquisition costs
|
(191,843
|
)
|
|
(57,407
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(249,250
|
)
|
Other operating expenses
|
(180,928
|
)
|
|
(21,178
|
)
|
|
—
|
|
|
—
|
|
|
(214
|
)
|
|
(202,320
|
)
|
Underwriting profit (loss)
|
74,274
|
|
|
23,561
|
|
|
—
|
|
|
—
|
|
|
(399
|
)
|
|
97,436
|
|
Net investment income
|
—
|
|
|
—
|
|
|
105,195
|
|
|
192
|
|
|
—
|
|
|
105,387
|
|
Net investment gains
|
—
|
|
|
—
|
|
|
105,249
|
|
|
—
|
|
|
—
|
|
|
105,249
|
|
Products revenues
|
—
|
|
|
—
|
|
|
—
|
|
|
472,323
|
|
|
—
|
|
|
472,323
|
|
Services and other revenues
|
—
|
|
|
—
|
|
|
—
|
|
|
106,433
|
|
|
49,437
|
|
|
155,870
|
|
Products expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(450,585
|
)
|
|
—
|
|
|
(450,585
|
)
|
Services and other expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(90,344
|
)
|
|
(39,510
|
)
|
|
(129,854
|
)
|
Amortization of intangible assets
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,096
|
)
|
|
(19,545
|
)
|
|
(29,641
|
)
|
Impairment of goodwill and intangible assets
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,904
|
)
|
|
—
|
|
|
(14,904
|
)
|
Segment profit (loss)
|
$
|
74,274
|
|
|
$
|
23,561
|
|
|
$
|
210,444
|
|
|
$
|
13,019
|
|
|
$
|
(10,017
|
)
|
|
$
|
311,281
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(36,702
|
)
|
Net foreign exchange gains
|
|
|
|
|
|
|
|
|
|
|
86,158
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
$
|
360,737
|
|
U.S. GAAP combined ratio
(4)
|
92
|
%
|
|
90
|
%
|
|
|
|
|
|
NM
|
|
(5)
|
92
|
%
|
|
|
(1)
|
Products expenses and services and other expenses for the Markel Ventures segment include depreciation expense of
$12.8 million
for the quarter ended
June 30, 2018
.
|
|
|
(2)
|
Other represents the total
loss
attributable to the Company's operations that are not included in a reportable segment as well as any amortization of intangible assets that are not allocated to a reportable segment.
|
|
|
(3)
|
Segment profit for the Markel Ventures segment includes amortization of intangible assets attributable to Markel Ventures. Amortization of intangible assets is not allocated to any other reportable segments.
|
|
|
(4)
|
The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.
|
|
|
(5)
|
NM - Ratio is not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
(dollars in thousands)
|
Insurance
|
|
Reinsurance
|
|
Investing
|
|
Markel Ventures
(1)
|
|
Other
(2)
|
|
Consolidated
|
Gross premium volume
|
$
|
2,561,196
|
|
|
$
|
736,758
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,204,235
|
|
|
$
|
4,502,189
|
|
Net written premiums
|
2,124,528
|
|
|
657,769
|
|
|
—
|
|
|
—
|
|
|
434
|
|
|
2,782,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
1,964,996
|
|
|
438,238
|
|
|
—
|
|
|
—
|
|
|
204
|
|
|
2,403,438
|
|
Losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
(1,275,870
|
)
|
|
(278,812
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,554,682
|
)
|
Prior accident years
|
174,295
|
|
|
6,895
|
|
|
—
|
|
|
—
|
|
|
7,626
|
|
|
188,816
|
|
Amortization of policy acquisition costs
|
(408,608
|
)
|
|
(116,284
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(524,892
|
)
|
Other operating expenses
|
(355,153
|
)
|
|
(37,865
|
)
|
|
—
|
|
|
—
|
|
|
382
|
|
|
(392,636
|
)
|
Underwriting profit
|
99,660
|
|
|
12,172
|
|
|
—
|
|
|
—
|
|
|
8,212
|
|
|
120,044
|
|
Net investment income
|
—
|
|
|
—
|
|
|
225,563
|
|
|
450
|
|
|
—
|
|
|
226,013
|
|
Net investment gains
|
—
|
|
|
—
|
|
|
1,037,844
|
|
|
—
|
|
|
—
|
|
|
1,037,844
|
|
Products revenues
|
—
|
|
|
—
|
|
|
—
|
|
|
850,470
|
|
|
—
|
|
|
850,470
|
|
Services and other revenues
|
—
|
|
|
—
|
|
|
—
|
|
|
221,280
|
|
|
172,559
|
|
|
393,839
|
|
Products expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(744,564
|
)
|
|
—
|
|
|
(744,564
|
)
|
Services and other expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(194,730
|
)
|
|
(150,672
|
)
|
|
(345,402
|
)
|
Amortization of intangible assets
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
(21,317
|
)
|
|
(55,651
|
)
|
|
(76,968
|
)
|
Segment profit (loss)
|
$
|
99,660
|
|
|
$
|
12,172
|
|
|
$
|
1,263,407
|
|
|
$
|
111,589
|
|
|
$
|
(25,552
|
)
|
|
$
|
1,461,276
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(81,557
|
)
|
Net foreign exchange gains
|
|
|
|
|
|
|
|
|
|
|
3,151
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
$
|
1,382,870
|
|
U.S. GAAP combined ratio
(4)
|
95
|
%
|
|
97
|
%
|
|
|
|
|
|
NM
|
|
(5)
|
95
|
%
|
|
|
(1)
|
Products expenses and services and other expenses for the Markel Ventures segment include depreciation expense of
$27.5 million
for the
six
months ended
June 30, 2019
.
|
|
|
(2)
|
Other represents the total
profit (loss)
attributable to the Company's operations that are not included in a reportable segment as well as any amortization of intangible assets that are not allocated to a reportable segment.
|
|
|
(3)
|
Segment profit for the Markel Ventures segment includes amortization of intangible assets attributable to Markel Ventures. Amortization of intangible assets is not allocated to any other reportable segments.
|
|
|
(4)
|
The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.
|
|
|
(5)
|
NM - Ratio is not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
(dollars in thousands)
|
Insurance
|
|
Reinsurance
|
|
Investing
|
|
Markel Ventures
(1)
|
|
Other
(2)
|
|
Consolidated
|
Gross premium volume
|
$
|
2,327,190
|
|
|
$
|
701,138
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,015,989
|
|
|
$
|
4,044,317
|
|
Net written premiums
|
1,914,105
|
|
|
599,787
|
|
|
—
|
|
|
—
|
|
|
1,516
|
|
|
2,515,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
1,821,045
|
|
|
477,577
|
|
|
—
|
|
|
—
|
|
|
583
|
|
|
2,299,205
|
|
Losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
(1,180,661
|
)
|
|
(299,173
|
)
|
|
—
|
|
|
—
|
|
|
(48
|
)
|
|
(1,479,882
|
)
|
Prior accident years
|
258,658
|
|
|
5,454
|
|
|
—
|
|
|
—
|
|
|
1,474
|
|
|
265,586
|
|
Amortization of policy acquisition costs
|
(371,328
|
)
|
|
(119,827
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(491,155
|
)
|
Other operating expenses
|
(350,899
|
)
|
|
(33,308
|
)
|
|
—
|
|
|
—
|
|
|
(598
|
)
|
|
(384,805
|
)
|
Underwriting profit
|
176,815
|
|
|
30,723
|
|
|
—
|
|
|
—
|
|
|
1,411
|
|
|
208,949
|
|
Net investment income
|
—
|
|
|
—
|
|
|
213,089
|
|
|
314
|
|
|
—
|
|
|
213,403
|
|
Net investment losses
|
—
|
|
|
—
|
|
|
(17,749
|
)
|
|
—
|
|
|
—
|
|
|
(17,749
|
)
|
Products revenues
|
—
|
|
|
—
|
|
|
—
|
|
|
766,459
|
|
|
—
|
|
|
766,459
|
|
Services and other revenues
|
—
|
|
|
—
|
|
|
—
|
|
|
204,354
|
|
|
96,812
|
|
|
301,166
|
|
Products expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(720,282
|
)
|
|
—
|
|
|
(720,282
|
)
|
Services and other expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(178,952
|
)
|
|
(83,335
|
)
|
|
(262,287
|
)
|
Amortization of intangible assets
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
(20,193
|
)
|
|
(38,271
|
)
|
|
(58,464
|
)
|
Impairment of goodwill and intangible assets
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,904
|
)
|
|
—
|
|
|
(14,904
|
)
|
Segment profit (loss)
|
$
|
176,815
|
|
|
$
|
30,723
|
|
|
$
|
195,340
|
|
|
$
|
36,796
|
|
|
$
|
(23,383
|
)
|
|
$
|
416,291
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(76,761
|
)
|
Net foreign exchange gains
|
|
|
|
|
|
|
|
|
|
|
64,044
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
$
|
403,574
|
|
U.S. GAAP combined ratio
(4)
|
90
|
%
|
|
94
|
%
|
|
|
|
|
|
NM
|
|
(5)
|
91
|
%
|
|
|
(1)
|
Products expenses and services and other expenses for the Markel Ventures segment include depreciation expense of
$25.5 million
for the
six
months ended
June 30, 2018
.
|
|
|
(2)
|
Other represents the total
profit (loss)
attributable to the Company's operations that are not included in a reportable segment as well as any amortization of intangible assets that are not allocated to a reportable segment.
|
|
|
(3)
|
Segment profit for the Markel Ventures segment includes amortization of intangible assets attributable to Markel Ventures. Amortization of intangible assets is not allocated to any other reportable segments.
|
|
|
(4)
|
The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.
|
|
|
(5)
|
NM - Ratio is not meaningful
|
|
|
b)
|
The following table reconciles segment assets to the Company's consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
June 30, 2019
|
|
December 31, 2018
|
Segment assets:
|
|
|
|
Investing
|
$
|
21,214,083
|
|
|
$
|
19,100,790
|
|
Underwriting
|
7,186,643
|
|
|
6,451,984
|
|
Markel Ventures
|
2,308,908
|
|
|
2,124,506
|
|
Total segment assets
|
30,709,634
|
|
|
27,677,280
|
|
Other operations
|
5,711,950
|
|
|
5,628,983
|
|
Total assets
|
$
|
36,421,584
|
|
|
$
|
33,306,263
|
|
7
. Products, Services and Other Revenues
The amount of revenues from contracts with customers was
$645.1 million
and
$581.4 million
for the quarters ended
June 30, 2019
and
2018
, respectively, and
$1.1 billion
and
$978.6 million
for the
six
months ended
June 30, 2019
and
2018
, respectively.
The following table disaggregates revenues from contracts with customers by type, all of which are included in products revenues and services and other revenues in the consolidated statements of income and comprehensive income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
2019
|
|
2018
|
(dollars in thousands)
|
Markel Ventures
|
|
Other
|
|
Total
|
|
Markel Ventures
|
|
Other
|
|
Total
|
Products
|
$
|
486,209
|
|
|
$
|
—
|
|
|
$
|
486,209
|
|
|
$
|
461,007
|
|
|
$
|
—
|
|
|
$
|
461,007
|
|
Services
|
101,908
|
|
|
26,881
|
|
|
128,789
|
|
|
94,035
|
|
|
8,972
|
|
|
103,007
|
|
Investment management
|
—
|
|
|
30,096
|
|
|
30,096
|
|
|
—
|
|
|
17,418
|
|
|
17,418
|
|
Total revenues from contracts with customers
|
588,117
|
|
|
56,977
|
|
|
645,094
|
|
|
555,042
|
|
|
26,390
|
|
|
581,432
|
|
Program services and other fronting arrangements
|
—
|
|
|
27,861
|
|
|
27,861
|
|
|
—
|
|
|
22,635
|
|
|
22,635
|
|
Other
|
28,870
|
|
|
346
|
|
|
29,216
|
|
|
23,714
|
|
|
412
|
|
|
24,126
|
|
Total
|
$
|
616,987
|
|
|
$
|
85,184
|
|
|
$
|
702,171
|
|
|
$
|
578,756
|
|
|
$
|
49,437
|
|
|
$
|
628,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
(dollars in thousands)
|
Markel Ventures
|
|
Other
|
|
Total
|
|
Markel Ventures
|
|
Other
|
|
Total
|
Products
|
$
|
819,703
|
|
|
$
|
—
|
|
|
$
|
819,703
|
|
|
$
|
744,480
|
|
|
$
|
—
|
|
|
$
|
744,480
|
|
Services
|
194,555
|
|
|
46,626
|
|
|
241,181
|
|
|
181,477
|
|
|
17,896
|
|
|
199,373
|
|
Investment management
|
—
|
|
|
70,988
|
|
|
70,988
|
|
|
—
|
|
|
34,707
|
|
|
34,707
|
|
Total revenues from contracts with customers
|
1,014,258
|
|
|
117,614
|
|
|
1,131,872
|
|
|
925,957
|
|
|
52,603
|
|
|
978,560
|
|
Program services and other fronting arrangements
|
—
|
|
|
54,178
|
|
|
54,178
|
|
|
—
|
|
|
43,332
|
|
|
43,332
|
|
Other
|
57,492
|
|
|
767
|
|
|
58,259
|
|
|
44,856
|
|
|
877
|
|
|
45,733
|
|
Total
|
$
|
1,071,750
|
|
|
$
|
172,559
|
|
|
$
|
1,244,309
|
|
|
$
|
970,813
|
|
|
$
|
96,812
|
|
|
$
|
1,067,625
|
|
The following table presents receivables and customer deposits related to contracts with customers.
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
June 30, 2019
|
|
December 31, 2018
|
Receivables
|
$
|
375,038
|
|
|
$
|
247,532
|
|
Customer deposits
|
$
|
70,785
|
|
|
$
|
48,238
|
|
8
. Unpaid Losses and Loss Adjustment Expenses
The following table presents a reconciliation of consolidated beginning and ending reserves for losses and loss adjustment expenses.
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
(dollars in thousands)
|
2019
|
|
2018
|
Net reserves for losses and loss adjustment expenses, beginning of year
|
$
|
9,214,443
|
|
|
$
|
8,964,945
|
|
Foreign currency movements
|
(2,866
|
)
|
|
(20,554
|
)
|
Adjusted net reserves for losses and loss adjustment expenses, beginning of year
|
9,211,577
|
|
|
8,944,391
|
|
Incurred losses and loss adjustment expenses:
|
|
|
|
Current accident year
|
1,554,682
|
|
|
1,479,882
|
|
Prior accident years
|
(188,949
|
)
|
|
(265,613
|
)
|
Total incurred losses and loss adjustment expenses
|
1,365,733
|
|
|
1,214,269
|
|
Payments:
|
|
|
|
Current accident year
|
206,461
|
|
|
195,873
|
|
Prior accident years
|
1,173,743
|
|
|
1,073,004
|
|
Total payments
|
1,380,204
|
|
|
1,268,877
|
|
Effect of foreign currency rate changes
|
760
|
|
|
(101
|
)
|
Net reserves for losses and loss adjustment expenses, end of period
|
9,197,866
|
|
|
8,889,682
|
|
Reinsurance recoverables on unpaid losses
|
5,137,917
|
|
|
4,739,259
|
|
Gross reserves for losses and loss adjustment expenses, end of period
|
$
|
14,335,783
|
|
|
$
|
13,628,941
|
|
For the
six
months ended
June 30, 2019
, incurred losses and loss adjustment expenses included
$188.9 million
of favorable development on prior years' loss reserves, which included
$168.1 million
of favorable development on the Company's general liability, workers' compensation and personal lines product lines within the Insurance segment, and aviation, whole account and auto product lines within the Reinsurance segment.
For the
six
months ended
June 30, 2018
, incurred losses and loss adjustment expenses included
$265.6 million
of favorable development on prior years' loss reserves, which included
$211.9 million
of favorable development on the Company's general liability, professional liability, workers' compensation and marine and energy product lines within the Insurance segment and surety and marine and energy product lines within the Reinsurance segment.
9
. Reinsurance
The following tables summarize the effect of reinsurance and retrocessional reinsurance on premiums written and earned.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
2019
|
|
2018
|
(dollars in thousands)
|
Direct
|
|
Assumed
|
|
Ceded
|
|
Net Premiums
|
|
Direct
|
|
Assumed
|
|
Ceded
|
|
Net Premiums
|
Underwriting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
|
$
|
1,323,128
|
|
|
$
|
268,837
|
|
|
$
|
(286,978
|
)
|
|
$
|
1,304,987
|
|
|
$
|
1,182,683
|
|
|
$
|
259,960
|
|
|
$
|
(262,781
|
)
|
|
$
|
1,179,862
|
|
Earned
|
1,159,544
|
|
|
331,842
|
|
|
(292,374
|
)
|
|
1,199,012
|
|
|
1,070,248
|
|
|
316,718
|
|
|
(239,152
|
)
|
|
1,147,814
|
|
Program services and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
|
652,716
|
|
|
2,466
|
|
|
(654,531
|
)
|
|
651
|
|
|
549,630
|
|
|
5,160
|
|
|
(554,046
|
)
|
|
744
|
|
Earned
|
538,131
|
|
|
12,878
|
|
|
(550,560
|
)
|
|
449
|
|
|
470,824
|
|
|
2,286
|
|
|
(472,740
|
)
|
|
370
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
|
1,975,844
|
|
|
271,303
|
|
|
(941,509
|
)
|
|
1,305,638
|
|
|
1,732,313
|
|
|
265,120
|
|
|
(816,827
|
)
|
|
1,180,606
|
|
Earned
|
$
|
1,697,675
|
|
|
$
|
344,720
|
|
|
$
|
(842,934
|
)
|
|
$
|
1,199,461
|
|
|
$
|
1,541,072
|
|
|
$
|
319,004
|
|
|
$
|
(711,892
|
)
|
|
$
|
1,148,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
(dollars in thousands)
|
Direct
|
|
Assumed
|
|
Ceded
|
|
Net Premiums
|
|
Direct
|
|
Assumed
|
|
Ceded
|
|
Net Premiums
|
Underwriting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
|
$
|
2,450,516
|
|
|
$
|
846,934
|
|
|
$
|
(515,610
|
)
|
|
$
|
2,781,840
|
|
|
$
|
2,222,061
|
|
|
$
|
806,273
|
|
|
$
|
(514,338
|
)
|
|
$
|
2,513,996
|
|
Earned
|
2,291,100
|
|
|
619,217
|
|
|
(507,540
|
)
|
|
2,402,777
|
|
|
2,108,183
|
|
|
652,208
|
|
|
(461,665
|
)
|
|
2,298,726
|
|
Program services and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
|
1,170,417
|
|
|
34,322
|
|
|
(1,203,848
|
)
|
|
891
|
|
|
1,007,454
|
|
|
8,529
|
|
|
(1,014,571
|
)
|
|
1,412
|
|
Earned
|
1,053,083
|
|
|
29,273
|
|
|
(1,081,695
|
)
|
|
661
|
|
|
893,749
|
|
|
3,738
|
|
|
(897,008
|
)
|
|
479
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
|
3,620,933
|
|
|
881,256
|
|
|
(1,719,458
|
)
|
|
2,782,731
|
|
|
3,229,515
|
|
|
814,802
|
|
|
(1,528,909
|
)
|
|
2,515,408
|
|
Earned
|
$
|
3,344,183
|
|
|
$
|
648,490
|
|
|
$
|
(1,589,235
|
)
|
|
$
|
2,403,438
|
|
|
$
|
3,001,932
|
|
|
$
|
655,946
|
|
|
$
|
(1,358,673
|
)
|
|
$
|
2,299,205
|
|
Substantially all of the premiums written and earned in the Company's program services business for the quarter and
six
months ended
June 30, 2019
and
2018
was ceded. The percentage of consolidated ceded earned premiums to gross earned premiums was
41%
and
40%
for the quarter and
six
months ended
June 30, 2019
, respectively, and
38%
and
37%
for the quarter and
six
months ended
June 30, 2018
, respectively. The percentage of consolidated assumed earned premiums to net earned premiums was
29%
and
27%
for the quarter and
six
months ended
June 30, 2019
, respectively, and
28%
and
29%
for the quarter and
six
months ended
June 30, 2018
, respectively.
Substantially all of the incurred losses and loss adjustment expenses in the Company's program services business, which totaled
$338.5 million
and
$703.5 million
for the quarter and
six
months ended
June 30, 2019
, respectively, and
$373.3 million
and
$629.6 million
for the quarter and
six
months ended
June 30, 2018
, respectively, were ceded. Incurred losses and loss adjustment expenses for the Company's underwriting operations were net of ceded incurred losses and loss adjustment expenses of
$215.4 million
and
$349.4 million
for the quarter and
six
months ended
June 30, 2019
, respectively, and
$52.0 million
and
$223.8 million
for the quarter and
six
months ended
June 30, 2018
, respectively.
10
.
Life and Annuity Benefits
Life and annuity benefits are compiled on a reinsurance contract-by-contract basis and are discounted using standard actuarial techniques and cash flow models. Since the development of the life and annuity reinsurance reserves is based upon cash flow projection models, the Company must make estimates and assumptions based on cedent experience, industry mortality tables, and expense and investment experience, including a provision for adverse deviation. The assumptions used to determine policy benefit reserves are generally locked-in for the life of the contract unless an unlocking event occurs. Loss recognition testing is performed to determine if existing policy benefit reserves, together with the present value of future gross premiums and expected investment income earned thereon, are adequate to cover the present value of future benefits, settlement and maintenance costs. If the existing policy benefit reserves are not sufficient, the locked-in assumptions are revised to current best estimate assumptions and a charge to earnings for life and annuity benefits is recognized at that time.
Life and annuity benefits are also adjusted to the extent unrealized gains on the investments supporting the policy benefit reserves would result in a reserve deficiency if those gains were realized. During the quarter and
six
months ended
June 30, 2019
, the Company recognized a reserve deficiency resulting from a decrease in the market yield on the investment portfolio supporting the policy benefit reserves by increasing life and annuity benefits by
$36.0 million
and
$61.8 million
, respectively, and decreasing the change in net unrealized holding gains included in other comprehensive income by a corresponding amount. As of
June 30, 2019
, the cumulative adjustment to life and annuity benefits attributable to unrealized gains on the underlying investment portfolio totaled
$61.8 million
.
No
adjustment was required for the quarter or
six
months ended
June 30, 2018
.
11
. Senior Long-Term Debt and Other Debt
In
April 2019
, the Company entered into a credit agreement for a new 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 the Company's discretion, up to
$200 million
of the total capacity may be used for letters of credit. The Company 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. The Company pays interest on balances outstanding under the facility and a utilization fee for letters of credit issued under the facility. The Company also pays a commitment fee on the unused portion of the facility based on the Company's leverage ratio as calculated under the credit agreement. The credit agreement includes financial covenants that require that the Company not exceed a maximum leverage ratio and maintain a minimum amount of consolidated net worth, as well as other customary covenants and events of default. Markel Corporation, along with Alterra Finance LLC, guaranteed the obligations under the facility. This facility replaced the Company's previous
$300 million
revolving credit facility and is scheduled to expire in
April 2024
. There were
no
borrowings outstanding on either credit facility as of
June 30, 2019
or
December 31, 2018
.
In
May 2019
, the Company issued
$600 million
of
5.0%
unsecured senior notes due
May 20, 2049
. Net proceeds to the Company were
$592.2 million
, before expenses. The Company expects to use the proceeds to retire its
7.125%
unsecured senior notes when they come due September 30, 2019 (
$234.8 million
aggregate principal outstanding at
June 30, 2019
) and the remainder for general corporate purposes.
12
.
Leases
The Company's leases primarily consist of operating leases for real estate and have remaining terms of up to
15 years
.
Right-of-use lease assets and related lease liabilities included in the consolidated balance sheet for operating leases as of
June 30, 2019
were
$237.4 million
and
$261.7 million
, respectively. Total lease costs for operating leases were
$17.8 million
and
$33.3 million
for the quarter and
six
months ended
June 30, 2019
, respectively. The weighted-average discount rate and weighted average remaining lease term for operating leases was
3.3%
and
8.5 years
, respectively, as of
June 30, 2019
.
The table below summarizes maturities of the Company’s operating lease liabilities as of
June 30, 2019
, which reconciles to total lease liabilities included in other liabilities in the Company’s consolidated balance sheet.
|
|
|
|
|
Years Ending December 31,
|
(dollars in thousands)
|
2019
|
$
|
27,505
|
|
2020
|
46,088
|
|
2021
|
41,748
|
|
2022
|
35,556
|
|
2023
|
30,469
|
|
2024 and thereafter
|
122,095
|
|
Total lease payments
|
303,461
|
|
Less imputed interest
|
(41,741
|
)
|
Total operating lease liabilities
|
$
|
261,720
|
|
13
. Income Taxes
The effective tax rate was
22%
and
47%
for the
six
months ended
June 30, 2019
and
2018
, respectively. In 2018, the Company decided to elect to treat its two most significant United Kingdom (U.K.) subsidiaries as domestic corporations for U.S. tax purposes. As a result, the earnings and profits of those subsidiaries are no longer considered to be indefinitely reinvested, and during the six months ended June 30, 2018, the Company recorded a one-time deferred tax charge of
$102.0 million
related to the book and tax basis differences attributable to those subsidiaries. This tax charge represented
25%
of the 2018 effective tax rate.
The Company uses the estimated annual effective tax rate method for calculating its tax provision in interim periods. This method applies the Company's 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 Company's estimated annual effective tax rate, which excludes the tax attributable to the change in tax status of the two U.K. subsidiaries recorded in 2018, was
21%
and
20%
for the
six
months ended
June 30, 2019
and
2018
, respectively.
The Internal Revenue Service is currently examining the Company’s
2017
federal income tax return. The Company believes its income tax liabilities were adequate as of
June 30, 2019
, however, these liabilities could be adjusted as a result of this examination.
14
. Variable Interest Entities
MCIM, a wholly-owned consolidated subsidiary of the Company, is an insurance-linked securities investment fund manager and reinsurance manager headquartered in Bermuda. Results attributable to MCIM are not included in a reportable segment.
MCIM serves as the insurance manager for Markel CATCo Re Ltd. (Markel CATCo Re), a Bermuda Class 3 reinsurance company, and as the investment manager for Markel CATCo Reinsurance Fund Ltd., a Bermuda exempted mutual fund company comprised of multiple segregated accounts (Markel CATCo Funds). MCIM also serves as the investment manager to CATCo Reinsurance Opportunities Fund Ltd. (CROF), a limited liability closed-end Bermuda exempted mutual fund company which invests substantially all of its assets in Markel CATCo Reinsurance Fund Ltd. The Markel CATCo Funds issue multiple classes of nonvoting, redeemable preference shares to investors through its funds and the Markel CATCo Funds are primarily invested in nonvoting preference shares of Markel CATCo Re. The underwriting results of Markel CATCo Re are attributed to the Markel CATCo Funds through those nonvoting preference shares. Voting shares in Markel CATCo Reinsurance Fund Ltd. and Markel CATCo Re are held by MCIM.
The Markel CATCo Funds and Markel CATCo Re are considered VIEs, as their preference shareholders have no voting rights. MCIM has the power to direct the activities that most significantly impact the economic performance of these entities, but does not have a variable interest in any of the entities. Except as described below, the Company is not the primary beneficiary of the Markel CATCo Funds or Markel CATCo Re, and therefore does not consolidate these entities, as the Company's involvement is generally limited to that of an investment or insurance manager, receiving fees that are at market and commensurate with the level of effort required. Investment management and incentive fees earned by the Company from unconsolidated Markel CATCo Funds were
$8.5 million
and
$17.4 million
for the quarters ended
June 30, 2019
and
2018
, respectively, and
$18.1 million
and
$34.7 million
for the
six
months ended
June 30, 2019
and
2018
, respectively. The Company is the sole investor in one of the Markel CATCo Funds, the Markel Diversified Fund, and consolidates that fund as its primary beneficiary.
The following table presents the assets and liabilities of the Markel Diversified Fund, which are included in the Company's consolidated balance sheet.
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
June 30, 2019
|
|
December 31, 2018
|
Assets
|
|
|
|
Equity securities: Investment in unconsolidated Markel CATCo Fund
|
$
|
11,320
|
|
|
$
|
27,547
|
|
Other
|
503
|
|
|
1,082
|
|
Total Assets
|
$
|
11,823
|
|
|
$
|
28,629
|
|
|
|
|
|
Liabilities
|
|
|
|
Note payable
|
$
|
24,875
|
|
|
$
|
24,875
|
|
Other
|
99
|
|
|
200
|
|
Total Liabilities
|
$
|
24,974
|
|
|
$
|
25,075
|
|
The assets of th
e Markel Diversified Fund are available for use only by the Markel Diversified Fund, and are not available for use by the Company. Equity securities for the Markel Diversified Fund represent an investment in one of the unconsolidated Markel CATCo Funds and represent
2%
of the outstanding preference shares of that fund as of
June 30, 2019
and
December 31, 2018
. The note payable was delivered as part of the consideration provided for the Markel Diversified Fund's investment in the unconsolidated Fund. This note payable is included in senior long-term debt and other debt in the Company's consolidated balance sheets. Other than the note payable, any liabilities held by the Markel Diversified Fund have no recourse to the Company's general credit.
The Company also has an investment in another one of the Markel CATCo Funds (
$26.7 million
and
$26.2 million
as of
June 30, 2019
and
December 31, 2018
, respectively) but does not have the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE, and therefore does not consolidate that fund.
The Company also holds an investment in CROF, which is not a VIE. See note
5
.
The Company's exposure to risk from the unconsolidated Markel CATCo Funds and Markel CATCo Re was historically limited to its investment and any earned but uncollected fees. Beginning in 2019, the Company also entered into various reinsurance contracts on behalf of Markel CATCo Re. See note
15
. The Company has not issued any investment performance guarantees to these VIEs or their investors. As of
June 30, 2019
, net assets under management of MCIM for unconsolidated VIEs were
$3.1 billion
. See note
18
.
15
. Related Party Transactions
The Company engages in certain related party transactions in the normal course of business at arm's length. Details of the Company's transactions with related parties in its insurance-linked securities operations are included below.
Nephila
In November 2018, the Company expanded its insurance-linked securities operations through the acquisition of Nephila, which serves as the investment manager to several Bermuda, Ireland and U.S. based private funds (the Nephila Funds). To provide access for the Nephila Funds to the insurance, reinsurance and weather markets, Nephila also provides managing general agent services and acts as an insurance manager to certain Bermuda Class 3 and 3A reinsurance companies and as both a service company coverholder and agent with binding authority for Lloyd’s Syndicate 2357 (Syndicate 2357) (collectively, the Nephila Reinsurers). Nephila receives management fees for its investment and insurance management services from the Nephila Funds based on the net asset value of the accounts managed, and, for certain funds, incentive fees based on the annual performance of the funds it manages. Nephila also receives commissions from the Nephila Reinsurers, which are based on the direct written premiums of the insurance contracts placed. Total revenues attributed to services provided to the Nephila Funds and the Nephila Reinsurers for the quarter and
six
months ended
June 30, 2019
were
$38.8 million
and
$82.0 million
, respectively.
Within the Company’s program services business, the Company has a program with Nephila and Syndicate 2357, one of its unconsolidated affiliates, through which the Company writes insurance policies that are ceded to Syndicate 2357. Through this arrangement, Nephila utilizes certain of the Company’s licensed insurance companies to write U.S. catastrophe exposed property risk that is then ceded to Syndicate 2357. For the quarter and
six
months ended
June 30, 2019
, gross premiums written through the Company’s program with Nephila were
$141.2 million
and
$234.2 million
, respectively, all of which were ceded to Syndicate 2357. As of
June 30, 2019
and
December 31, 2018
, reinsurance recoverables in the consolidated balance sheet included
$200.9 million
and
$179.8 million
due from Syndicate 2357, respectively.
Under this program, the Company bears underwriting risk for annual aggregate agreement year losses in excess of a limit the Company believes is unlikely to be exceeded. To the extent losses under this program exceed the prescribed limit, the Company is obligated to pay such losses to the cedents without recourse to Syndicate 2357. While the Company believes losses under this program are unlikely, those losses, if incurred, could be material to the Company’s consolidated results of operations and financial condition.
The Company has also entered into both assumed and ceded reinsurance transactions with the Nephila Reinsurers in the normal course of business, which are not material to the Company's consolidated financial statements.
Markel CATCo
During the first quarter of 2019, the Company entered into various reinsurance contracts with third parties on behalf of Markel CATCo Re, an unconsolidated subsidiary, in exchange for ceding fees. These reinsurance contracts primarily cover losses for events that may occur during 2019, however, in some instances, coverage is also provided for adverse development on 2018 and prior accident years’ loss events. Incurred losses on these contracts are fully ceded to Markel CATCo Re. The loss exposures on these contracts are fully collateralized by Markel CATCo Re up to an amount that the Company believes is unlikely to be exceeded. The Company has credit risk from Markel CATCo Re for any uncollateralized amounts. Markel CATCo Re's ability to pay losses in excess of the collateralized amounts depends on the availability of funds that are not otherwise needed to pay losses on other contracts. As of
June 30, 2019
, the Company's maximum exposure to loss on these contracts, representing the net uncollateralized risks, was
$191.6 million
. Total ceding fees attributed to these contracts were
$8.8 million
, of which
$2.2 million
and
$4.4 million
was earned and included in services and other revenues in the Company's consolidated statements of income and other comprehensive income (loss) for the quarter and
six
months ended
June 30, 2019
, respectively. Results attributed to these contracts are not included in a reportable segment.
Within the Company's reinsurance operations, the Company also enters into reinsurance contracts that are ceded to Markel CATCo Re. Under this program, the Company retains underwriting risk for annual aggregate agreement year losses in excess of a limit the Company believes is unlikely to be exceeded. To the extent losses under this program exceed the prescribed limit, the Company is obligated to pay such losses to the cedents without recourse to Markel CATCo Re. Gross premiums written and ceded to Markel CATCo Re were
$1.4 million
and
$5.4 million
for the quarter and
six
months ended
June 30, 2019
, respectively, and
$4.1 million
and
$9.6 million
for the quarter and
six
months ended
June 30, 2018
, respectively.
See note
14
for details of the Company's other transactions with Markel CATCo Re and the Markel CATCo Funds.
16
. Net Income per Share
Net income per share was determined by dividing adjusted net income to shareholders by the applicable weighted average shares outstanding.
Diluted net income per share is computed by dividing adjusted net income to shareholders by the weighted average number of common shares and dilutive potential common shares outstanding during the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands, except per share amounts)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net income to shareholders
|
$
|
497,298
|
|
|
$
|
278,231
|
|
|
$
|
1,073,725
|
|
|
$
|
213,925
|
|
Adjustment of redeemable noncontrolling interests
|
3,324
|
|
|
363
|
|
|
21,685
|
|
|
5,414
|
|
Adjusted net income to shareholders
|
$
|
500,622
|
|
|
$
|
278,594
|
|
|
$
|
1,095,410
|
|
|
$
|
219,339
|
|
|
|
|
|
|
|
|
|
Basic common shares outstanding
|
13,866
|
|
|
13,925
|
|
|
13,881
|
|
|
13,929
|
|
Dilutive potential common shares from restricted stock units and restricted stock
|
12
|
|
|
25
|
|
|
12
|
|
|
24
|
|
Diluted shares outstanding
|
13,878
|
|
|
13,950
|
|
|
13,893
|
|
|
13,953
|
|
Basic net income per share
|
$
|
36.10
|
|
|
$
|
20.01
|
|
|
$
|
78.91
|
|
|
$
|
15.75
|
|
Diluted net income per share
|
$
|
36.07
|
|
|
$
|
19.97
|
|
|
$
|
78.85
|
|
|
$
|
15.72
|
|
17
. Other Comprehensive Income
Other comprehensive income includes net holding gains on available-for-sale investments arising during the period, changes in unrealized other-than-temporary impairment losses on fixed maturities arising during the period and reclassification adjustments for net gains included in net income. Other comprehensive income also includes changes in foreign currency translation adjustments and changes in net actuarial pension loss.
The following table presents the change in accumulated other comprehensive
income (loss)
by component, net of taxes and noncontrolling interests, for the
six
months ended
June 30, 2019
and
2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Unrealized Holding Gains
on Available-for-Sale Securities
|
|
Foreign Currency
|
|
Net Actuarial Pension Loss
|
|
Total
|
December 31, 2017
|
$
|
2,477,973
|
|
|
$
|
(74,003
|
)
|
|
$
|
(58,399
|
)
|
|
$
|
2,345,571
|
|
Cumulative effect of adoption of ASU No. 2016-01
|
(2,615,734
|
)
|
|
2,492
|
|
|
—
|
|
|
(2,613,242
|
)
|
Cumulative effect of adoption of ASU No. 2018-02
|
401,539
|
|
|
—
|
|
|
—
|
|
|
401,539
|
|
January 1, 2018
|
263,778
|
|
|
(71,511
|
)
|
|
(58,399
|
)
|
|
133,868
|
|
Other comprehensive income (loss) before reclassifications
|
(215,067
|
)
|
|
(5,516
|
)
|
|
1,232
|
|
|
(219,351
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
(5,077
|
)
|
|
—
|
|
|
—
|
|
|
(5,077
|
)
|
Total other comprehensive income (loss)
|
(220,144
|
)
|
|
(5,516
|
)
|
|
1,232
|
|
|
(224,428
|
)
|
June 30, 2018
|
$
|
43,634
|
|
|
$
|
(77,027
|
)
|
|
$
|
(57,167
|
)
|
|
$
|
(90,560
|
)
|
|
|
|
|
|
|
|
|
December 31, 2018
|
$
|
48,060
|
|
|
$
|
(86,652
|
)
|
|
$
|
(56,058
|
)
|
|
$
|
(94,650
|
)
|
Other comprehensive income (loss) before reclassifications
|
280,798
|
|
|
(1,381
|
)
|
|
1,876
|
|
|
281,293
|
|
Amounts reclassified from accumulated other comprehensive loss
|
557
|
|
|
—
|
|
|
—
|
|
|
557
|
|
Total other comprehensive income (loss)
|
281,355
|
|
|
(1,381
|
)
|
|
1,876
|
|
|
281,850
|
|
June 30, 2019
|
$
|
329,415
|
|
|
$
|
(88,033
|
)
|
|
$
|
(54,182
|
)
|
|
$
|
187,200
|
|
Effective January 1, 2018, the Company adopted ASU No. 2016-01 and as a result, equity securities are no longer classified as available-for-sale with unrealized gains and losses recognized in other comprehensive income. Rather, changes in the fair value of equity securities are now recognized in net income. Upon adoption of this ASU, cumulative net unrealized gains on equity securities of
$2.6 billion
, net of deferred income taxes, were reclassified from accumulated other comprehensive income into retained earnings.
Effective January 1, 2018, the Company adopted ASU No. 2018-02, which provided an option to reclassify tax effects remaining in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act to retained earnings. As a result of adopting the ASU, the Company reclassified
$401.5 million
of previously recognized deferred taxes from accumulated other comprehensive income into retained earnings as of January 1, 2018.
The following table summarizes the
tax expense (benefit)
associated with each component of other comprehensive
income (loss)
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
Six Months Ended June 30,
|
(dollars in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Change in net unrealized gains on available-for-sale investments:
|
|
|
|
|
|
|
|
Net holding gains (losses) arising during the period
|
$
|
34,332
|
|
|
$
|
(32,548
|
)
|
|
$
|
75,150
|
|
|
$
|
(60,778
|
)
|
Reclassification adjustments for net gains (losses) included in net income
|
214
|
|
|
(1,566
|
)
|
|
148
|
|
|
(1,349
|
)
|
Change in net unrealized gains on available-for-sale investments
|
34,546
|
|
|
(34,114
|
)
|
|
75,298
|
|
|
(62,127
|
)
|
Change in foreign currency translation adjustments
|
—
|
|
|
(4,288
|
)
|
|
—
|
|
|
(3,522
|
)
|
Change in net actuarial pension loss
|
137
|
|
|
192
|
|
|
499
|
|
|
328
|
|
Total
|
$
|
34,683
|
|
|
$
|
(38,210
|
)
|
|
$
|
75,797
|
|
|
$
|
(65,321
|
)
|
The following table presents the details of amounts reclassified from accumulated other comprehensive
income (loss)
into
income
, by component.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
Six Months Ended June 30,
|
(dollars in thousands)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Unrealized holding gains on available-for-sale investments:
|
|
|
|
|
|
|
|
Net realized investment gains (losses), excluding other-than-temporary impairment losses
|
(1,017
|
)
|
|
7,457
|
|
|
(705
|
)
|
|
6,426
|
|
Income taxes
|
214
|
|
|
(1,566
|
)
|
|
148
|
|
|
(1,349
|
)
|
Reclassification of unrealized holding gains (losses), net of taxes
|
$
|
(803
|
)
|
|
$
|
5,891
|
|
|
$
|
(557
|
)
|
|
$
|
5,077
|
|
|
|
|
|
|
|
|
|
Net actuarial pension loss:
|
|
|
|
|
|
|
|
Underwriting, acquisition and insurance expenses
|
$
|
(652
|
)
|
|
$
|
(760
|
)
|
|
$
|
(2,375
|
)
|
|
$
|
(1,560
|
)
|
Income taxes
|
137
|
|
|
192
|
|
|
499
|
|
|
328
|
|
Reclassification of net actuarial pension loss, net of taxes
|
$
|
(515
|
)
|
|
$
|
(568
|
)
|
|
$
|
(1,876
|
)
|
|
$
|
(1,232
|
)
|
18
. Contingencies
a)
Late in the fourth quarter of 2018, the Company was contacted by and received inquiries from the U.S. Department of Justice, U.S. Securities and Exchange Commission and Bermuda Monetary Authority (collectively, Governmental Authorities) into loss reserves recorded in late 2017 and early 2018 at Markel CATCo Re (the Markel CATCo Inquiries), an unconsolidated subsidiary managed by MCIM. As a result, the Company engaged outside counsel to conduct an internal review.
The internal review was completed in April 2019 and found no evidence that MCIM personnel acted in bad faith in exercising business judgment in the setting of reserves and making related disclosures during late 2017 and early 2018. The Company’s outside counsel has met with the Governmental Authorities and reported the findings from the internal review. The Markel CATCo Inquiries are ongoing. The Company cannot currently predict the duration, scope or result of the Markel CATCo Inquiries.
During the internal review, the Company discovered violations of Markel policies by two senior executives of MCIM. As a result, these two executives are no longer with the Company (the MCIM Executive Departures).
Between January 11, 2019 and March 7, 2019, several related putative class actions were filed in the U.S. District Court for the Southern District of New York against Markel Corporation and certain present or former officers and directors alleging violations of the federal securities laws relating to the matters that are the subject of the Markel CATCo Inquiries (the Markel Securities Litigation). Plaintiffs seek to represent a class of persons or entities that purchased Markel securities between July 26, 2017 and December 6, 2018. The actions have been consolidated. The Company believes that the claims against it are without merit. The Company further believes any material loss resulting from the suit to be remote.
On February 21, 2019, Anthony Belisle and Alissa Fredricks, two senior executives who are no longer with MCIM, each separately filed suit against MCIM and Markel Corporation, which suits were amended on March 29, 2019 and March 28, 2019, respectively (the MCIM Executive Suits). As amended, Mr. Belisle's complaint alleged claims for, among other things, breach of contract, defamation, invasion of privacy, indemnification, intentional interference with contractual relations and deceptive and unfair acts and sought relief of, among other things,
$66.0 million
in incentive compensation, enhanced compensatory damages, consequential damages, damages for emotional distress and injury to reputation, exemplary damages and attorneys' fees. In June 2019, MCIM, Markel Corporation, and Mr. Belisle agreed to commence binding arbitration to finally, fully and confidentially resolve the claims and counterclaims alleged in the action, and the Belisle suit was dismissed with prejudice in July 2019. The Company believes that Mr. Belisle's claims are without merit and any material loss resulting from the Belisle binding arbitration to be remote. As amended, Ms. Fredricks' complaint alleged claims for, among other things, breach of contract, defamation, invasion of privacy, indemnification, intentional interference with contractual relations and deceptive and unfair acts and sought relief of, among other things,
$7.5 million
in incentive compensation, consequential damages, damages for emotional distress and injury to reputation, exemplary damages and attorneys' fees. In June 2019, the action filed by Ms. Fredricks was settled by mutual agreement to the satisfaction of all parties.
The Markel CATCo Inquiries, Markel Securities Litigation, MCIM Executive Departures and MCIM Executive Suits, as well as other related matters of which the Company is currently unaware, could result in additional claims, litigation, investigations, enforcement actions or proceedings. For example, additional litigation may be filed by investors in the Markel CATCo Funds. The Company also could become subject to increased regulatory scrutiny, investigations or proceedings in any of the jurisdictions where it operates. If any regulatory authority takes action against the Company or the Company enters into an agreement to settle a matter, the Company may incur sanctions or be required to pay substantial fines or implement remedial measures that could prove costly or disruptive to its businesses and operations. Costs associated with the Company's internal review, including legal and investigation costs, as well as legal costs incurred in connection with any existing or future litigation, are being expensed as incurred.
An unfavorable outcome in one or more of these matters, and others the Company cannot anticipate, could have a material adverse effect on the Company’s results of operations and financial condition. In addition, the Company may take further steps to mitigate potential risks or liabilities that may arise from the Markel CATCo Inquiries and related developments and some of those steps may have a material impact on the Company’s results of operations or financial condition. Even if an unfavorable outcome does not materialize, these matters, and actions the Company may take in response, could have an adverse impact on the Company’s reputation and result in substantial expense and disruption.
In December 2018, investors in the Markel CATCo Funds were offered an additional redemption opportunity (the Special Redemption). Under the Special Redemption, investors in the Markel CATCo Funds were offered the option, through March 29, 2019, to redeem any or all shares held as of June 30, 2019. Through both the Special Redemption and the annual redemption for January 1, 2019, substantially all of the capital in the Markel CATCo Funds was tendered for redemption. In July 2019, MCIM announced it will cease accepting new investments in the Markel CATCo Funds and will not write any new business in Markel CATCo Re. Both the Markel CATCo Funds and Markel CATCo Re will be placed into run-off, returning capital to investors as it becomes available, which is expected to take approximately three years. Payment for the redemptions of shares is an obligation of the Markel CATCo Funds, not Markel Corporation or its subsidiaries.
b)
The Company has reviewed events at one of its Markel Ventures products businesses. Since becoming aware of a matter late in the first quarter of 2018 related to the business's manufacture of products, the Company has conducted an investigation, reviewed the business's operations and developed remediation plans. Upon completion of its review during 2018, the Company accrued an expense of
$33.5 million
in its results of operations. This amount represented management’s best estimate of amounts considered probable including: remediation costs associated with the manufacture of products, costs associated with the investigation of this matter, a write down of inventory on hand and settlement costs related to pre-existing litigation.
Final resolution of this matter could ultimately result in additional remediation and other costs, the amount of which cannot be estimated at this time, but which could have a material impact on the Company’s income before income taxes. However, management does not expect this matter ultimately will have a material adverse effect on the Company’s results of operations or financial condition. If a determination is made that additional costs associated with this matter are considered probable, these additional costs will be recognized as an expense in the Company's results of operations. As of
June 30, 2019
,
$26.4 million
remained accrued for ongoing remediation efforts.
In addition, contingencies arise in the normal course of the Company's operations and are not expected to have a material impact on the Company's financial condition or results of operations.