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 March 31, 2020 and the related consolidated statements of income (loss) and comprehensive income (loss), changes in equity and cash flows for the three months ended March 31, 2020 and 2019 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, 2019 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. The following accounting policies were updated to reflect accounting pronouncements that became effective in 2020. See note 2. Readers are urged to review the Company's 2019 Annual Report on Form 10-K for a more complete description of the Company's business and accounting policies.
b)Investments. Available-for-sale investments and equity securities are recorded at estimated fair value. Unrealized gains and losses on available-for-sale investments, net of income taxes, are included in other comprehensive income. Unrealized gains and losses on equity securities, net of income taxes, are included in earnings.
The Company completes a detailed analysis each quarter to assess declines in the fair value of available-for-sale investments. Effective January 1, 2020, the Company adopted Financial Accounting Standards Board (FASB) ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and related amendments, which created a new comprehensive credit losses standard, FASB Accounting Standards Codification (ASC) 326, Financial Instruments—Credit Losses. Upon adoption of ASC 326, any impairment losses on the Company's available-for-sale investments are recorded as an allowance, subject to reversal, rather than as a reduction in amortized cost, as was required under the previous other-than-temporary impairment (OTTI) model. In accordance with the provisions of the ASU, prior periods have not been restated.
Premiums and discounts are amortized or accreted over the lives of the related fixed maturities as an adjustment to the yield using the effective interest method. Dividend and interest income are recognized when earned. The Company excludes accrued interest receivable from both the estimated fair value and the amortized cost basis of available-for-sale securities and includes such amount within other assets on the Company's consolidated balance sheets. Any uncollectible accrued interest receivable is written off in the period it is deemed uncollectible. Realized investment gains or losses on available-for-sale investments are included in earnings. Realized gains or losses from sales of available-for-sale investments are derived using the first-in, first-out method on the trade date.
c) Receivables. Receivables include amounts receivable from agents, brokers and insureds, which represent premiums that are both currently due and amounts not yet due on insurance and reinsurance policies. Premiums for insurance policies are generally due at inception. Premiums for reinsurance policies generally become due over the period of coverage based on the policy terms. Changes in the estimate of reinsurance premiums written will result in an adjustment to premiums receivable in the period they are determined. Receivables also include amounts receivable from contracts with customers, which represent the Company’s unconditional right to consideration for satisfying the performance obligations outlined in the contract.
The Company monitors credit risk associated with receivables, taking into consideration the fact that in certain instances in the Company’s insurance operations, credit risk may be reduced by the Company's right to offset loss obligations or unearned premiums against premiums receivable. An allowance is established for amounts deemed uncollectible and receivables are recorded net of this allowance. Following the adoption of ASC 326, as described in note 2, beginning January 1, 2020 an allowance is established for expected credit losses to be recognized over the life of the receivable. The Company considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions when estimating the allowance for credit losses. The Company uses information obtained from external sources to forecast short-term changes in macroeconomic conditions that are expected to impact the Company’s exposure to credit losses. Any allowance for credit losses is charged to net income in the period the receivable is recorded and revised in subsequent periods to reflect changes in the Company’s estimate of expected credit losses.
d) Reinsurance Recoverables. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk to minimize its exposure to significant losses from individual reinsurers. To further reduce credit exposure on reinsurance recoverables, the Company has received collateral, including letters of credit and trust accounts, from certain reinsurers. Collateral related to these reinsurance agreements is available, without restriction, when the Company pays losses covered by the reinsurance agreements. An allowance is established for amounts deemed uncollectible and reinsurance recoverables are recorded net of this allowance. Following the adoption of ASC 326, as described in note 2, beginning January 1, 2020 the allowance is established for expected credit losses to be recognized over the life of the receivable. The Company considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions when estimating the allowance for credit losses. The Company uses information obtained from external sources to forecast short-term changes in macroeconomic conditions that are expected to impact the Company’s exposure to credit losses. Any allowance for credit losses is charged to net income in the period the recoverable is recorded and revised in subsequent periods to reflect changes in the Company’s estimate of expected credit losses.
2. Recent Accounting Pronouncements
Accounting Standards Adopted in 2020
Effective January 1, 2020, the Company adopted ASC 326, Financial Instruments—Credit Losses. This new standard replaced the incurred loss model used to measure impairment losses for financial assets measured at amortized cost with a current expected credit loss (CECL) model and also made changes to the impairment model for available-for-sale investments. Under CECL, allowances are established for expected credit losses to be recognized over the life of financial assets. Application of the CECL model does not impact the Company's investment portfolio, which is not measured at amortized cost, but it impacts certain of the Company's other financial assets, including its reinsurance recoverables and receivables. ASC 326 also replaced the OTTI model with an impairment allowance model, subject to reversal, for available-for-sale investments, which are measured at fair value. As a result of adopting ASC 326, the Company increased its allowances for credit losses related to its reinsurance recoverables and receivables by $3.8 million and $1.0 million, respectively, which was recorded through a cumulative-effect adjustment to retained earnings as of January 1, 2020 ($3.8 million, net of taxes). The Company continues to apply the previous guidance to 2019 and prior periods.
The following ASUs issued by the FASB are relevant to the Company's operations and were adopted effective January 1, 2020. These ASUs did not 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. 2018-15, 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
|
|
|
•
|
ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities
|
Accounting Standards Not Yet Adopted
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. In August 2019, the FASB proposed an update to ASU No. 2018-12 to defer its effective date. The proposed update would make the ASU effective for the Company during the first quarter of 2022. ASU No. 2018-12 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.
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. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
|
|
|
•
|
ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
|
3. Acquisitions
VSC Fire & Security, Inc.
In November 2019, the Company acquired VSC Fire & Security, Inc. (VSC), a provider of comprehensive fire protection, life safety, and low voltage solutions to retailers, commercial campuses, healthcare facilities, and government properties throughout the southeastern United States. Total consideration for the acquisition was $225.0 million, which included cash consideration of $204.0 million. Total consideration also included the estimated fair value of contingent consideration the Company expects to pay in 2021 based on VSC’s earnings, as defined in the purchase agreement.
As of December 31, 2019, the purchase price was preliminarily allocated to the acquired assets and liabilities of VSC based on estimated fair value at the acquisition date. During the first quarter of 2020, the Company completed the process of determining the fair value of the assets and liabilities acquired with VSC. The Company recognized goodwill of $124.9 million, which is primarily attributable to expected future earnings and cash flow potential of VSC. All of the goodwill recognized is deductible for income tax purposes. The Company also recognized other intangible assets of $64.5 million, which includes $48.0 million of customer relationships, $14.0 million of trade names and $2.5 million of other intangible assets, which are being amortized over a weighted average period of 12 years, 12 years and 8 years, respectively. Results attributable to VSC are included in the Company's Markel Ventures segment.
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. The net unrealized holding gains in the tables below are presented before taxes and any reserve deficiency adjustments for life and annuity benefit reserves. See note 11.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
(dollars in thousands)
|
Amortized
Cost
|
|
Gross
Unrealized
Holding
Gains
|
|
Gross
Unrealized
Holding
Losses
|
|
Allowance for
Credit
Losses (1)
|
|
Estimated
Fair
Value
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
320,475
|
|
|
$
|
11,932
|
|
|
$
|
(29
|
)
|
|
$
|
—
|
|
|
$
|
332,378
|
|
U.S. government-sponsored enterprises
|
324,596
|
|
|
48,688
|
|
|
—
|
|
|
—
|
|
|
373,284
|
|
Obligations of states, municipalities and political subdivisions
|
3,969,616
|
|
|
248,875
|
|
|
(4,090
|
)
|
|
—
|
|
|
4,214,401
|
|
Foreign governments
|
1,405,153
|
|
|
141,236
|
|
|
(29,019
|
)
|
|
—
|
|
|
1,517,370
|
|
Commercial mortgage-backed securities
|
1,820,232
|
|
|
104,386
|
|
|
(451
|
)
|
|
—
|
|
|
1,924,167
|
|
Residential mortgage-backed securities
|
849,171
|
|
|
71,191
|
|
|
(265
|
)
|
|
—
|
|
|
920,097
|
|
Asset-backed securities
|
8,648
|
|
|
1
|
|
|
(40
|
)
|
|
—
|
|
|
8,609
|
|
Corporate bonds
|
806,827
|
|
|
34,672
|
|
|
(6,451
|
)
|
|
(1,739
|
)
|
|
833,309
|
|
Total fixed maturities
|
9,504,718
|
|
|
660,981
|
|
|
(40,345
|
)
|
|
(1,739
|
)
|
|
10,123,615
|
|
Short-term investments
|
256,283
|
|
|
429
|
|
|
(5,840
|
)
|
|
—
|
|
|
250,872
|
|
Investments, available-for-sale
|
$
|
9,761,001
|
|
|
$
|
661,410
|
|
|
$
|
(46,185
|
)
|
|
$
|
(1,739
|
)
|
|
$
|
10,374,487
|
|
|
|
(1)
|
Effective January 1, 2020, the Company adopted ASC 326 and as a result any impairment losses on the Company's available-for-sale investments are recorded as an allowance, subject to reversal. Prior periods have not been restated to conform with the current year presentation. See note 1.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(dollars in thousands)
|
Amortized
Cost
|
|
Gross
Unrealized
Holding
Gains
|
|
Gross
Unrealized
Holding
Losses
|
|
Estimated
Fair
Value
|
Fixed maturities:
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
282,305
|
|
|
$
|
2,883
|
|
|
$
|
(402
|
)
|
|
$
|
284,786
|
|
U.S. government-sponsored enterprises
|
318,831
|
|
|
23,949
|
|
|
(200
|
)
|
|
342,580
|
|
Obligations of states, municipalities and political subdivisions
|
3,954,779
|
|
|
235,915
|
|
|
(812
|
)
|
|
4,189,882
|
|
Foreign governments
|
1,415,639
|
|
|
135,763
|
|
|
(9,398
|
)
|
|
1,542,004
|
|
Commercial mortgage-backed securities
|
1,761,777
|
|
|
57,450
|
|
|
(1,382
|
)
|
|
1,817,845
|
|
Residential mortgage-backed securities
|
855,641
|
|
|
32,949
|
|
|
(517
|
)
|
|
888,073
|
|
Asset-backed securities
|
11,042
|
|
|
28
|
|
|
(22
|
)
|
|
11,048
|
|
Corporate bonds
|
848,826
|
|
|
47,551
|
|
|
(1,686
|
)
|
|
894,691
|
|
Total fixed maturities
|
9,448,840
|
|
|
536,488
|
|
|
(14,419
|
)
|
|
9,970,909
|
|
Short-term investments
|
1,194,953
|
|
|
1,355
|
|
|
(60
|
)
|
|
1,196,248
|
|
Investments, available-for-sale
|
$
|
10,643,793
|
|
|
$
|
537,843
|
|
|
$
|
(14,479
|
)
|
|
$
|
11,167,157
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
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
|
$
|
3,299
|
|
|
$
|
(29
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,299
|
|
|
$
|
(29
|
)
|
Obligations of states, municipalities and political subdivisions
|
125,241
|
|
|
(3,988
|
)
|
|
3,021
|
|
|
(102
|
)
|
|
128,262
|
|
|
(4,090
|
)
|
Foreign governments
|
315,196
|
|
|
(11,902
|
)
|
|
166,516
|
|
|
(17,117
|
)
|
|
481,712
|
|
|
(29,019
|
)
|
Commercial mortgage-backed securities
|
31,968
|
|
|
(299
|
)
|
|
22,584
|
|
|
(152
|
)
|
|
54,552
|
|
|
(451
|
)
|
Residential mortgage-backed securities
|
3,441
|
|
|
(102
|
)
|
|
8,085
|
|
|
(163
|
)
|
|
11,526
|
|
|
(265
|
)
|
Asset-backed securities
|
6,653
|
|
|
(31
|
)
|
|
1,949
|
|
|
(9
|
)
|
|
8,602
|
|
|
(40
|
)
|
Corporate bonds
|
205,086
|
|
|
(4,547
|
)
|
|
40,188
|
|
|
(1,904
|
)
|
|
245,274
|
|
|
(6,451
|
)
|
Total fixed maturities
|
690,884
|
|
|
(20,898
|
)
|
|
242,343
|
|
|
(19,447
|
)
|
|
933,227
|
|
|
(40,345
|
)
|
Short-term investments
|
70,547
|
|
|
(5,840
|
)
|
|
—
|
|
|
—
|
|
|
70,547
|
|
|
(5,840
|
)
|
Total
|
$
|
761,431
|
|
|
$
|
(26,738
|
)
|
|
$
|
242,343
|
|
|
$
|
(19,447
|
)
|
|
$
|
1,003,774
|
|
|
$
|
(46,185
|
)
|
At March 31, 2020, the Company held 242 available-for-sale securities with a total estimated fair value of $1.0 billion and gross unrealized losses of $46.2 million. Of these 242 securities, 64 securities had been in a continuous unrealized loss position for one year or longer and had a total estimated fair value of $242.3 million and gross unrealized losses of $19.4 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, 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
|
$
|
36,862
|
|
|
$
|
(361
|
)
|
|
$
|
46,518
|
|
|
$
|
(41
|
)
|
|
$
|
83,380
|
|
|
$
|
(402
|
)
|
U.S. government-sponsored enterprises
|
24,148
|
|
|
(197
|
)
|
|
2,868
|
|
|
(3
|
)
|
|
27,016
|
|
|
(200
|
)
|
Obligations of states, municipalities and political subdivisions
|
127,836
|
|
|
(702
|
)
|
|
6,830
|
|
|
(110
|
)
|
|
134,666
|
|
|
(812
|
)
|
Foreign governments
|
162,907
|
|
|
(3,393
|
)
|
|
159,888
|
|
|
(6,005
|
)
|
|
322,795
|
|
|
(9,398
|
)
|
Commercial mortgage-backed securities
|
202,530
|
|
|
(1,126
|
)
|
|
33,853
|
|
|
(256
|
)
|
|
236,383
|
|
|
(1,382
|
)
|
Residential mortgage-backed securities
|
11,706
|
|
|
(66
|
)
|
|
58,162
|
|
|
(451
|
)
|
|
69,868
|
|
|
(517
|
)
|
Asset-backed securities
|
—
|
|
|
—
|
|
|
3,632
|
|
|
(22
|
)
|
|
3,632
|
|
|
(22
|
)
|
Corporate bonds
|
41,847
|
|
|
(1,287
|
)
|
|
40,274
|
|
|
(399
|
)
|
|
82,121
|
|
|
(1,686
|
)
|
Total fixed maturities
|
607,836
|
|
|
(7,132
|
)
|
|
352,025
|
|
|
(7,287
|
)
|
|
959,861
|
|
|
(14,419
|
)
|
Short-term investments
|
3,316
|
|
|
(60
|
)
|
|
—
|
|
|
—
|
|
|
3,316
|
|
|
(60
|
)
|
Total
|
$
|
611,152
|
|
|
$
|
(7,192
|
)
|
|
$
|
352,025
|
|
|
$
|
(7,287
|
)
|
|
$
|
963,177
|
|
|
$
|
(14,479
|
)
|
At December 31, 2019, the Company held 201 securities with a total estimated fair value of $963.2 million and gross unrealized losses of $14.5 million. Of these 201 securities, 122 securities had been in a continuous unrealized loss position for one year or longer and had a total estimated fair value of $352.0 million and gross unrealized losses of $7.3 million.
Following the adoption of ASC 326, as described in note 1, beginning January 1, 2020 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 the result of a credit loss. 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 credit-related impairment to determine whether a credit loss exists, including the extent to which fair value is below cost, the implied yield to maturity, rating downgrades of the security and whether or not the issuer has failed to make scheduled principal or interest payments. The Company also takes into consideration information about the financial condition of the issuer and industry factors that could negatively impact the capital markets.
If the decline in fair value of an available-for-sale security below its amortized cost is considered to be the result of a credit loss, 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 loss, which is recorded as an allowance and recognized in net income. The allowance is limited to the difference between the fair value and the amortized cost of the security. Any remaining decline in fair value represents the non-credit portion of the impairment, which is recognized in other comprehensive income.
The Company also considers whether it intends to sell an available-for-sale security or if it is more likely than not that it will be required to sell the security before recovery of its amortized cost. In these instances, a decline in fair value 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.
c)The amortized cost and estimated fair value of fixed maturities at March 31, 2020 are shown below by contractual maturity.
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Amortized
Cost
|
|
Estimated
Fair Value
|
Due in one year or less
|
$
|
333,013
|
|
|
$
|
324,193
|
|
Due after one year through five years
|
1,265,722
|
|
|
1,298,257
|
|
Due after five years through ten years
|
2,178,183
|
|
|
2,305,468
|
|
Due after ten years
|
3,049,749
|
|
|
3,342,824
|
|
|
6,826,667
|
|
|
7,270,742
|
|
Commercial mortgage-backed securities
|
1,820,232
|
|
|
1,924,167
|
|
Residential mortgage-backed securities
|
849,171
|
|
|
920,097
|
|
Asset-backed securities
|
8,648
|
|
|
8,609
|
|
Total fixed maturities
|
$
|
9,504,718
|
|
|
$
|
10,123,615
|
|
d)The following table presents the components of net investment income.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(dollars in thousands)
|
2020
|
|
2019
|
Interest:
|
|
|
|
Municipal bonds (tax-exempt)
|
$
|
16,601
|
|
|
$
|
18,826
|
|
Municipal bonds (taxable)
|
16,895
|
|
|
18,579
|
|
Other taxable bonds
|
39,972
|
|
|
40,781
|
|
Short-term investments, including overnight deposits
|
10,243
|
|
|
10,212
|
|
Dividends on equity securities
|
28,614
|
|
|
25,786
|
|
Income (loss) from equity method investments
|
(19,979
|
)
|
|
1,896
|
|
Other
|
757
|
|
|
2,301
|
|
|
93,103
|
|
|
118,381
|
|
Investment expenses
|
(4,860
|
)
|
|
(4,199
|
)
|
Net investment income
|
$
|
88,243
|
|
|
$
|
114,182
|
|
e)The following table presents net investment gains (losses) and the change in net unrealized gains included in other comprehensive income.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(dollars in thousands)
|
2020
|
|
2019
|
Realized gains:
|
|
|
|
Sales and maturities of fixed maturities
|
$
|
1,385
|
|
|
$
|
144
|
|
Sales and maturities of short-term investments
|
98
|
|
|
1,591
|
|
Sales of cost method investments
|
11,167
|
|
|
—
|
|
Other
|
1,749
|
|
|
8
|
|
Total realized gains
|
14,399
|
|
|
1,743
|
|
Realized losses:
|
|
|
|
Sales and maturities of fixed maturities
|
(2,884
|
)
|
|
(280
|
)
|
Sales and maturities of short-term investments
|
(172
|
)
|
|
(782
|
)
|
Other
|
(1,605
|
)
|
|
—
|
|
Total realized losses
|
(4,661
|
)
|
|
(1,062
|
)
|
Net realized investment gains
|
9,738
|
|
|
681
|
|
Change in fair value of equity securities:
|
|
|
|
Equity securities sold during the period
|
(39,065
|
)
|
|
10,558
|
|
Equity securities held at the end of the period
|
(1,652,114
|
)
|
|
600,952
|
|
Change in fair value of equity securities
|
(1,691,179
|
)
|
|
611,510
|
|
Net investment gains (losses)
|
$
|
(1,681,441
|
)
|
|
$
|
612,191
|
|
Change in net unrealized gains on available-for-sale investments included in other comprehensive income:
|
|
|
|
Fixed maturities
|
$
|
98,567
|
|
|
$
|
217,294
|
|
Short-term investments
|
(6,706
|
)
|
|
1,355
|
|
Reserve deficiency adjustment for life and annuity benefit reserves (see note 11)
|
(12,872
|
)
|
|
(25,813
|
)
|
Net increase
|
$
|
78,989
|
|
|
$
|
192,836
|
|
5. Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability.
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 12 (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. In July 2019, the Markel CATCo Funds were placed into run-off and capital is being returned to investors as it becomes available. However, due to the significant loss events on the underlying securitized reinsurance contracts in 2017 and 2018, portions of the Company's investments may be restricted up to three years.
The Company's valuation policies and procedures for Level 3 investments are determined by management. Fair value measurements are analyzed quarterly to ensure the change in fair value from prior periods is reasonable relative to management's understanding of the underlying investments, recent market trends and external market data.
Senior long-term debt and other debt. Senior long-term debt and other debt is carried at amortized cost with the estimated fair value disclosed on the consolidated balance sheets. Senior long-term debt and other debt is classified as Level 2 within the fair value hierarchy due to variations in trading volumes and the lack of quoted market prices. Fair value for senior long-term debt and other debt is generally derived through recent reported trades for identical securities, making adjustments through the reporting date, if necessary, based upon available market observable data including U.S. Treasury securities and implied credit spreads. Significant inputs used to determine the fair value of senior long-term debt and other debt include reported trades, benchmark yields, issuer spreads, bids and offers.
The following tables present the balances of assets measured at fair value on a recurring basis by level within the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
(dollars in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
—
|
|
|
$
|
332,378
|
|
|
$
|
—
|
|
|
$
|
332,378
|
|
U.S. government-sponsored enterprises
|
—
|
|
|
373,284
|
|
|
—
|
|
|
373,284
|
|
Obligations of states, municipalities and political subdivisions
|
—
|
|
|
4,214,401
|
|
|
—
|
|
|
4,214,401
|
|
Foreign governments
|
—
|
|
|
1,517,370
|
|
|
—
|
|
|
1,517,370
|
|
Commercial mortgage-backed securities
|
—
|
|
|
1,924,167
|
|
|
—
|
|
|
1,924,167
|
|
Residential mortgage-backed securities
|
—
|
|
|
920,097
|
|
|
—
|
|
|
920,097
|
|
Asset-backed securities
|
—
|
|
|
8,609
|
|
|
—
|
|
|
8,609
|
|
Corporate bonds
|
—
|
|
|
833,309
|
|
|
—
|
|
|
833,309
|
|
Total fixed maturities, available-for-sale
|
—
|
|
|
10,123,615
|
|
|
—
|
|
|
10,123,615
|
|
Equity securities:
|
|
|
|
|
|
|
|
Insurance, banks and other financial institutions
|
1,940,775
|
|
|
—
|
|
|
131,307
|
|
|
2,072,082
|
|
Industrial, consumer and all other
|
3,612,005
|
|
|
—
|
|
|
—
|
|
|
3,612,005
|
|
Total equity securities
|
5,552,780
|
|
|
—
|
|
|
131,307
|
|
|
5,684,087
|
|
Short-term investments, available-for-sale
|
151,000
|
|
|
99,872
|
|
|
—
|
|
|
250,872
|
|
Total investments
|
$
|
5,703,780
|
|
|
$
|
10,223,487
|
|
|
$
|
131,307
|
|
|
$
|
16,058,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(dollars in thousands)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale:
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
—
|
|
|
$
|
284,786
|
|
|
$
|
—
|
|
|
$
|
284,786
|
|
U.S. government-sponsored enterprises
|
—
|
|
|
342,580
|
|
|
—
|
|
|
342,580
|
|
Obligations of states, municipalities and political subdivisions
|
—
|
|
|
4,189,882
|
|
|
—
|
|
|
4,189,882
|
|
Foreign governments
|
—
|
|
|
1,542,004
|
|
|
—
|
|
|
1,542,004
|
|
Commercial mortgage-backed securities
|
—
|
|
|
1,817,845
|
|
|
—
|
|
|
1,817,845
|
|
Residential mortgage-backed securities
|
—
|
|
|
888,073
|
|
|
—
|
|
|
888,073
|
|
Asset-backed securities
|
—
|
|
|
11,048
|
|
|
—
|
|
|
11,048
|
|
Corporate bonds
|
—
|
|
|
894,691
|
|
|
—
|
|
|
894,691
|
|
Total fixed maturities, available-for-sale
|
—
|
|
|
9,970,909
|
|
|
—
|
|
|
9,970,909
|
|
Equity securities:
|
|
|
|
|
|
|
|
Insurance, banks and other financial institutions
|
2,463,190
|
|
|
—
|
|
|
45,992
|
|
|
2,509,182
|
|
Industrial, consumer and all other
|
5,081,573
|
|
|
—
|
|
|
—
|
|
|
5,081,573
|
|
Total equity securities
|
7,544,763
|
|
|
—
|
|
|
45,992
|
|
|
7,590,755
|
|
Short-term investments, available-for-sale
|
1,093,799
|
|
|
102,449
|
|
|
—
|
|
|
1,196,248
|
|
Total investments
|
$
|
8,638,562
|
|
|
$
|
10,073,358
|
|
|
$
|
45,992
|
|
|
$
|
18,757,912
|
|
The following table summarizes changes in Level 3 investments measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(dollars in thousands)
|
2020
|
|
2019
|
Equity securities, beginning of period
|
$
|
45,992
|
|
|
$
|
53,728
|
|
Purchases
|
90,000
|
|
|
—
|
|
Sales
|
(1,364
|
)
|
|
(6,869
|
)
|
Net investment losses on Level 3 investments
|
(3,321
|
)
|
|
(2,047
|
)
|
Transfers into Level 3
|
—
|
|
|
—
|
|
Transfers out of Level 3
|
—
|
|
|
—
|
|
Equity securities, end of period
|
$
|
131,307
|
|
|
$
|
44,812
|
|
In connection with the run-off of one of the Markel CATCo Funds and to facilitate the return of capital to third party investors, the Company invested $90.0 million in that fund effective January 1, 2020. This investment replaces collateral previously provided by other investors for risk exposures within the underlying reinsurance contracts in which the fund is invested related to loss events that occur after December 31, 2019 and through the expiration of the reinsurance contracts in 2020. Underwriting results for the 2020 loss exposures on these contracts are attributed to the Company through its investment in the fund.
The Company did not have any assets or liabilities measured at fair value on a non-recurring basis during the three months ended March 31, 2020 and 2019.
6. Receivables
The following table presents the components of receivables and the related allowance for credit losses.
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
March 31, 2020
|
|
December 31, 2019
|
Amounts receivable from agents, brokers and insureds
|
$
|
1,657,896
|
|
|
$
|
1,424,881
|
|
Trade accounts receivable
|
259,360
|
|
|
259,062
|
|
Other
|
194,173
|
|
|
182,582
|
|
|
2,111,429
|
|
|
1,866,525
|
|
Allowance for credit losses
|
(22,850
|
)
|
|
(18,723
|
)
|
Receivables
|
$
|
2,088,579
|
|
|
$
|
1,847,802
|
|
Following the adoption of ASC 326, as described in note 1, beginning January 1, 2020 the Company considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions to determine the allowance for credit losses. The increase in the allowance for credit losses on receivables from December 31, 2019 to March 31, 2020 reflects the impact of adopting this standard effective January 1, 2020 as well as a decline in short-term economic conditions as forecasted during the first quarter of 2020 as a result of expected impacts from the COVID-19 pandemic.
7. Segment Reporting Disclosures
The chief operating decision maker reviews the Company's ongoing underwriting operations on a global basis in the following two segments: Insurance and Reinsurance. In determining how to allocate resources and assess the performance of its underwriting results, management considers many factors, including the nature of the insurance product sold, the type of account written and the type of customer served. The Insurance segment includes all direct business and facultative placements written within the Company's underwriting operations. The Reinsurance segment includes all treaty reinsurance written within the Company's underwriting operations. All investing activities related to the Company's insurance operations are included in the Investing segment.
The chief operating decision maker reviews and assesses Markel Ventures’ performance in the aggregate, as a single operating segment. The Markel Ventures segment primarily consists of controlling interests in a diverse portfolio of businesses that operate in various industries.
The Company's other operations include the results of the Company's insurance-linked securities operations and program services business, as well as the results of its legal and professional consulting services. Other operations also include results for lines of business discontinued prior to, or in conjunction with, acquisitions, including development on asbestos and environmental loss reserves and results attributable to the run-off of life and annuity reinsurance business, which are monitored separately from the Company's ongoing underwriting operations. For purposes of segment reporting, none of these other operations are considered to be reportable segments.
Segment profit for each of the Company's underwriting segments is measured by underwriting profit. The property and casualty insurance industry commonly defines underwriting profit as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. Underwriting profit does not replace operating income or net income computed in accordance with U.S. GAAP as a measure of profitability. Underwriting profit or loss provides a basis for management to evaluate the Company's underwriting performance. Segment profit for the Investing segment is measured by net investment income and net investment gains. Segment profit for the Markel Ventures segment is measured by operating income.
For management reporting purposes, the Company allocates assets to its underwriting operations and to its Investing and Markel Ventures segments and certain of its other operations, including its program services and insurance-linked securities operations. Underwriting assets include assets attributed to the Company's Insurance and Reinsurance segments, discontinued underwriting lines of business, as well as assets that are not specifically allocated to the Company's other operations. Underwriting and investing assets are not allocated to the Company's underwriting segments since the Company does not manage its assets by underwriting segment. The Company does not allocate capital expenditures for long-lived assets to either of its underwriting segments for management reporting purposes.
|
|
a)
|
The following tables summarize the Company's segment disclosures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
(dollars in thousands)
|
Insurance
|
|
Reinsurance
|
|
Investing
|
|
Markel Ventures (1)
|
|
Other (2)
|
|
Consolidated
|
Gross premium volume
|
$
|
1,414,711
|
|
|
$
|
513,186
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
394,927
|
|
|
$
|
2,322,824
|
|
Net written premiums
|
1,195,737
|
|
|
452,749
|
|
|
—
|
|
|
—
|
|
|
(2,008
|
)
|
|
1,646,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
1,106,851
|
|
|
225,960
|
|
|
—
|
|
|
—
|
|
|
(2,102
|
)
|
|
1,330,709
|
|
Losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
(1,006,635
|
)
|
|
(173,730
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,180,365
|
)
|
Prior accident years
|
116,132
|
|
|
(13,912
|
)
|
|
—
|
|
|
—
|
|
|
1,797
|
|
|
104,017
|
|
Amortization of policy acquisition costs
|
(239,420
|
)
|
|
(56,391
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(295,811
|
)
|
Other operating expenses
|
(183,302
|
)
|
|
(15,886
|
)
|
|
—
|
|
|
—
|
|
|
(164
|
)
|
|
(199,352
|
)
|
Underwriting loss
|
(206,374
|
)
|
|
(33,959
|
)
|
|
—
|
|
|
—
|
|
|
(469
|
)
|
|
(240,802
|
)
|
Net investment income
|
—
|
|
|
—
|
|
|
88,059
|
|
|
184
|
|
|
—
|
|
|
88,243
|
|
Net investment losses
|
—
|
|
|
—
|
|
|
(1,681,441
|
)
|
|
—
|
|
|
—
|
|
|
(1,681,441
|
)
|
Products revenues
|
—
|
|
|
—
|
|
|
—
|
|
|
352,161
|
|
|
—
|
|
|
352,161
|
|
Services and other revenues
|
—
|
|
|
—
|
|
|
—
|
|
|
158,876
|
|
|
87,118
|
|
|
245,994
|
|
Products expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(314,071
|
)
|
|
—
|
|
|
(314,071
|
)
|
Services and other expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(143,552
|
)
|
|
(74,004
|
)
|
|
(217,556
|
)
|
Amortization of intangible assets (3)
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,841
|
)
|
|
(26,017
|
)
|
|
(37,858
|
)
|
Segment profit (loss)
|
$
|
(206,374
|
)
|
|
$
|
(33,959
|
)
|
|
$
|
(1,593,382
|
)
|
|
$
|
41,757
|
|
|
$
|
(13,372
|
)
|
|
$
|
(1,805,330
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(45,030
|
)
|
Net foreign exchange gains
|
|
|
|
|
|
|
|
|
|
|
78,301
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,772,059
|
)
|
U.S. GAAP combined ratio (4)
|
119
|
%
|
|
115
|
%
|
|
|
|
|
|
NM
|
|
(5)
|
118
|
%
|
|
|
(1)
|
Products expenses and services and other expenses for the Markel Ventures segment include depreciation expense of $13.9 million for the three months ended March 31, 2020.
|
|
|
(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 is not allocated to a reportable segment. Amortization of intangible assets attributable to the Company's underwriting segments was $10.5 million for the three months ended March 31, 2020, however, the Company does not allocate amortization of intangible assets between the Insurance and Reinsurance segments.
|
|
|
(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 the Company's Insurance and Reinsurance 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
(dollars in thousands)
|
Insurance
|
|
Reinsurance
|
|
Investing
|
|
Markel Ventures (1)
|
|
Other (2)
|
|
Consolidated
|
Gross premium volume
|
$
|
1,192,848
|
|
|
$
|
513,377
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
548,817
|
|
|
$
|
2,255,042
|
|
Net written premiums
|
998,358
|
|
|
478,967
|
|
|
—
|
|
|
—
|
|
|
(232
|
)
|
|
1,477,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
973,727
|
|
|
230,510
|
|
|
—
|
|
|
—
|
|
|
(260
|
)
|
|
1,203,977
|
|
Losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year
|
(618,498
|
)
|
|
(139,472
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(757,970
|
)
|
Prior accident years
|
72,574
|
|
|
(11,295
|
)
|
|
—
|
|
|
—
|
|
|
8,945
|
|
|
70,224
|
|
Amortization of policy acquisition costs
|
(199,999
|
)
|
|
(61,828
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(261,827
|
)
|
Other operating expenses
|
(175,721
|
)
|
|
(14,559
|
)
|
|
—
|
|
|
—
|
|
|
(3,105
|
)
|
|
(193,385
|
)
|
Underwriting profit
|
52,083
|
|
|
3,356
|
|
|
—
|
|
|
—
|
|
|
5,580
|
|
|
61,019
|
|
Net investment income
|
—
|
|
|
—
|
|
|
113,930
|
|
|
252
|
|
|
—
|
|
|
114,182
|
|
Net investment gains
|
—
|
|
|
—
|
|
|
612,191
|
|
|
—
|
|
|
—
|
|
|
612,191
|
|
Products revenues
|
—
|
|
|
—
|
|
|
—
|
|
|
348,794
|
|
|
—
|
|
|
348,794
|
|
Services and other revenues
|
—
|
|
|
—
|
|
|
—
|
|
|
105,969
|
|
|
87,375
|
|
|
193,344
|
|
Products expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(319,426
|
)
|
|
—
|
|
|
(319,426
|
)
|
Services and other expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(94,870
|
)
|
|
(79,736
|
)
|
|
(174,606
|
)
|
Amortization of intangible assets (3)
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,807
|
)
|
|
(29,861
|
)
|
|
(40,668
|
)
|
Segment profit (loss)
|
$
|
52,083
|
|
|
$
|
3,356
|
|
|
$
|
726,121
|
|
|
$
|
29,912
|
|
|
$
|
(16,642
|
)
|
|
$
|
794,830
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(40,290
|
)
|
Net foreign exchange losses
|
|
|
|
|
|
|
|
|
|
|
(21,864
|
)
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
$
|
732,676
|
|
U.S. GAAP combined ratio (4)
|
95
|
%
|
|
99
|
%
|
|
|
|
|
|
NM
|
|
(5)
|
95
|
%
|
|
|
(1)
|
Products expenses and services and other expenses for the Markel Ventures segment include depreciation expense of $14.0 million for the three months ended March 31, 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 is not allocated to a reportable segment. Amortization of intangible assets attributable to the Company's underwriting segments was $9.8 million for the three months ended March 31, 2019, however, the Company does not allocate amortization of intangible assets between the Insurance and Reinsurance segments.
|
|
|
(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 the Company's Insurance and Reinsurance 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)
|
March 31, 2020
|
|
December 31, 2019
|
Segment assets:
|
|
|
|
Investing
|
$
|
20,348,287
|
|
|
$
|
22,129,633
|
|
Underwriting
|
7,155,387
|
|
|
6,621,639
|
|
Markel Ventures
|
2,612,212
|
|
|
2,550,835
|
|
Total segment assets
|
30,115,886
|
|
|
31,302,107
|
|
Other operations
|
5,932,901
|
|
|
6,171,708
|
|
Total assets
|
$
|
36,048,787
|
|
|
$
|
37,473,815
|
|
8. Products, Services and Other Revenues
The amount of revenues from contracts with customers was $542.2 million and $486.8 million for the three months ended March 31, 2020 and 2019, 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 (loss) and comprehensive income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
(dollars in thousands)
|
Markel Ventures
|
|
Other
|
|
Total
|
|
Markel Ventures
|
|
Other
|
|
Total
|
Products
|
$
|
338,238
|
|
|
$
|
—
|
|
|
$
|
338,238
|
|
|
$
|
333,494
|
|
|
$
|
—
|
|
|
$
|
333,494
|
|
Services
|
143,264
|
|
|
30,885
|
|
|
174,149
|
|
|
92,647
|
|
|
19,745
|
|
|
112,392
|
|
Investment management
|
—
|
|
|
29,823
|
|
|
29,823
|
|
|
—
|
|
|
40,893
|
|
|
40,893
|
|
Total revenues from contracts with customers
|
481,502
|
|
|
60,708
|
|
|
542,210
|
|
|
426,141
|
|
|
60,638
|
|
|
486,779
|
|
Program services and other fronting
|
—
|
|
|
25,704
|
|
|
25,704
|
|
|
—
|
|
|
24,109
|
|
|
24,109
|
|
Other
|
29,535
|
|
|
706
|
|
|
30,241
|
|
|
28,622
|
|
|
2,628
|
|
|
31,250
|
|
Total
|
$
|
511,037
|
|
|
$
|
87,118
|
|
|
$
|
598,155
|
|
|
$
|
454,763
|
|
|
$
|
87,375
|
|
|
$
|
542,138
|
|
The following table presents receivables and customer deposits related to contracts with customers.
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
March 31, 2020
|
|
December 31, 2019
|
Receivables
|
$
|
332,530
|
|
|
$
|
263,904
|
|
Customer deposits
|
$
|
100,392
|
|
|
$
|
60,623
|
|
9. Unpaid Losses and Loss Adjustment Expenses
The following table presents a reconciliation of consolidated beginning and ending reserves for losses and loss adjustment expenses.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(dollars in thousands)
|
2020
|
|
2019
|
Net reserves for losses and loss adjustment expenses, beginning of year
|
$
|
9,475,261
|
|
|
$
|
9,214,443
|
|
Effect of foreign currency rate changes on beginning of year balance
|
(96,339
|
)
|
|
28,649
|
|
Adjusted net reserves for losses and loss adjustment expenses, beginning of year
|
9,378,922
|
|
|
9,243,092
|
|
Incurred losses and loss adjustment expenses:
|
|
|
|
Current accident year
|
1,180,365
|
|
|
757,970
|
|
Prior accident years
|
(104,072
|
)
|
|
(70,210
|
)
|
Total incurred losses and loss adjustment expenses
|
1,076,293
|
|
|
687,760
|
|
Payments:
|
|
|
|
Current accident year
|
58,699
|
|
|
55,999
|
|
Prior accident years
|
587,664
|
|
|
635,980
|
|
Total payments
|
646,363
|
|
|
691,979
|
|
Effect of foreign currency rate changes on current year activity
|
(488
|
)
|
|
(22
|
)
|
Net reserves for losses and loss adjustment expenses, end of period
|
9,808,364
|
|
|
9,238,851
|
|
Reinsurance recoverables on unpaid losses
|
5,230,448
|
|
|
5,093,814
|
|
Gross reserves for losses and loss adjustment expenses, end of period
|
$
|
15,038,812
|
|
|
$
|
14,332,665
|
|
Underwriting results for the three months ended March 31, 2020 included $325.0 million of net losses and loss adjustment expenses attributed to the COVID-19 pandemic. These losses and loss adjustment expenses were net of ceded losses of $58.0 million.
Both the gross and net loss estimates for COVID-19 represent the Company's best estimate of losses based upon information currently available. The Company's estimate for these losses and loss adjustment expenses is based on detailed policy level reviews, as well as a review of in-force assumed reinsurance contracts, for potential exposures. This estimate also considered preliminary industry loss estimates and analysis provided by brokers and claims counsel. At this time, few claims for covered losses have been received and there are no historical events with similar characteristics to COVID-19, and therefore the Company had no past loss experience on which to base its estimates. Additionally, the economic impacts of the pandemic continue to evolve.
Significant assumptions on which the Company's estimates of reserves for COVID-19 losses and loss adjustment expenses are based include:
|
|
•
|
the scope of coverage provided under the Company's policies, particularly those that provide for business interruption coverage;
|
|
|
•
|
coverage provided under the Company's ceded reinsurance contracts;
|
|
|
•
|
the expected duration of the disruption caused by the COVID-19 pandemic; and
|
|
|
•
|
the ability of insureds to mitigate some or all of their losses.
|
The Company's estimates are based on broad assumptions about coverage, liability and reinsurance, which ultimately may be subjected to judicial review or legislative action. Additionally, it is highly likely that there will be significant litigation involved in the handling of claims associated with COVID-19, and in certain instances, assessing the validity of policy exclusions for pandemics and interpreting policy terms to determine coverage for pandemics. While the Company believes the net reserves for losses and loss adjustment expenses for COVID-19 as of March 31, 2020 are adequate based on information available at this time, the Company will continue to closely monitor reported claims, government actions, judicial decisions and changes in the levels of worldwide social disruption and economic activity arising from the pandemic and will adjust the estimates of gross and net losses as new information becomes available. Such adjustments to the Company's reserves for COVID-19 losses and loss adjustment expenses may be material to the Company's results of operations, financial condition and liquidity.
For the three months ended March 31, 2020, incurred losses and loss adjustment expenses included $104.1 million of favorable development on prior years' loss reserves, which included $89.6 million of favorable development on the Company's professional liability, workers' compensation and marine and energy product lines within the Insurance segment. Favorable development on prior years' loss reserves for the three months ended March 31, 2020 was partially offset by $13.9 million of adverse development within the Reinsurance segment.
For the three months ended March 31, 2019, incurred losses and loss adjustment expenses included $70.2 million of favorable development on prior years' loss reserves, which included $74.6 million of favorable development on the Company's general liability and workers' compensation product lines within the Insurance segment and credit and surety, aviation and whole account product lines within the Reinsurance segment. Favorable development on prior years' loss reserves for the three months ended March 31, 2019 was partially offset by $12.8 million of adverse development within the Reinsurance segment related primarily to Hurricanes Florence and Michael, Typhoon Jebi and wildfires in California.
10. Reinsurance
The following table summarizes the effect of reinsurance and retrocessional reinsurance on premiums written and earned.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
(dollars in thousands)
|
Direct
|
|
Assumed
|
|
Ceded
|
|
Net Premiums
|
|
Direct
|
|
Assumed
|
|
Ceded
|
|
Net Premiums
|
Underwriting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
|
$
|
1,349,241
|
|
|
$
|
578,656
|
|
|
$
|
(279,389
|
)
|
|
$
|
1,648,508
|
|
|
$
|
1,127,388
|
|
|
$
|
578,097
|
|
|
$
|
(228,632
|
)
|
|
$
|
1,476,853
|
|
Earned
|
1,275,671
|
|
|
326,700
|
|
|
(269,538
|
)
|
|
1,332,833
|
|
|
1,131,556
|
|
|
287,375
|
|
|
(215,166
|
)
|
|
1,203,765
|
|
Program services and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
|
388,924
|
|
|
6,003
|
|
|
(396,957
|
)
|
|
(2,030
|
)
|
|
517,701
|
|
|
31,856
|
|
|
(549,317
|
)
|
|
240
|
|
Earned
|
545,343
|
|
|
13,723
|
|
|
(561,190
|
)
|
|
(2,124
|
)
|
|
514,952
|
|
|
16,395
|
|
|
(531,135
|
)
|
|
212
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
|
1,738,165
|
|
|
584,659
|
|
|
(676,346
|
)
|
|
1,646,478
|
|
|
1,645,089
|
|
|
609,953
|
|
|
(777,949
|
)
|
|
1,477,093
|
|
Earned
|
$
|
1,821,014
|
|
|
$
|
340,423
|
|
|
$
|
(830,728
|
)
|
|
$
|
1,330,709
|
|
|
$
|
1,646,508
|
|
|
$
|
303,770
|
|
|
$
|
(746,301
|
)
|
|
$
|
1,203,977
|
|
Substantially all of the premiums written and earned in the Company's program services and other fronting operations for the three months ended March 31, 2020 and 2019 were ceded. The percentage of consolidated ceded earned premiums to gross earned premiums was 38% for both the three months ended March 31, 2020 and 2019. The percentage of consolidated assumed earned premiums to net earned premiums was 26% and 25%, respectively, for the three months ended March 31, 2020 and 2019.
Substantially all of the incurred losses and loss adjustment expenses in the Company's program services and other fronting operations, which totaled $308.0 million and $365.0 million, for the three months ended March 31, 2020 and 2019, respectively, were ceded.
The following table summarizes the effect of reinsurance and retrocessional reinsurance on losses and loss adjustment expenses in the Company's underwriting operations.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(dollars in thousands)
|
2020
|
|
2019
|
Gross
|
$
|
1,243,557
|
|
|
$
|
821,754
|
|
Ceded
|
(167,180
|
)
|
|
(134,023
|
)
|
Net losses and loss adjustment expenses
|
$
|
1,076,377
|
|
|
$
|
687,731
|
|
The following table presents the Company's reinsurance recoverables and the related allowance for credit losses.
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
March 31, 2020
|
|
December 31, 2019
|
Reinsurance recoverables, gross
|
$
|
5,472,480
|
|
|
$
|
5,459,561
|
|
Allowance for credit losses
|
(32,538
|
)
|
|
(26,849
|
)
|
Reinsurance recoverables
|
$
|
5,439,942
|
|
|
$
|
5,432,712
|
|
Following the adoption of ASC 326, as described in note 1, beginning January 1, 2020 the Company considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions to determine the allowance for credit losses. The increase in the allowance for credit losses on reinsurance recoverables from December 31, 2019 to March 31, 2020 reflects the impact of adopting this standard effective January 1, 2020 as well as a decline in short-term economic conditions as forecasted during the first quarter of 2020 as a result of expected impacts from the COVID-19 pandemic.
11. 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 three months ended March 31, 2020 and 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 $12.9 million and $25.8 million, respectively, and decreasing the change in net unrealized holding gains included in other comprehensive income (loss) by a corresponding amount. As of March 31, 2020 and December 31, 2019, the cumulative adjustment to life and annuity benefits attributable to unrealized gains on the underlying investment portfolio totaled $64.3 million and $51.4 million, respectively.
12. Variable Interest Entities
MCIM, a wholly-owned consolidated subsidiary of the Company, is an insurance-linked securities investment fund manager and reinsurance manager headquartered in Bermuda. Results attributable to MCIM are not included in a reportable segment.
MCIM serves as the insurance manager for Markel CATCo Re, a Bermuda Class 3 reinsurance company, and as the investment manager for Markel CATCo Reinsurance Fund Ltd., a Bermuda exempted mutual fund company comprised of multiple segregated accounts (Markel CATCo Funds). The Markel CATCo Funds issue multiple classes of nonvoting, redeemable preference shares to investors and the Markel CATCo Funds are primarily invested in nonvoting preference shares of Markel CATCo Re. The underwriting results of Markel CATCo Re are attributed to the Markel CATCo Funds through those nonvoting preference shares. 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. Generally, 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.
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. Total assets of the Markel Diversified Fund, which are included on the Company's consolidated balance sheets were $15.1 million and $19.6 million as of March 31, 2020 and December 31, 2019, respectively, and are primarily comprised of an investment in one of the Markel CATCo Funds. The Company also has investments in another one of the Markel CATCo Funds ($116.9 million and $26.8 million as of March 31, 2020 and December 31, 2019, respectively), which is not consolidated and includes a $90.0 million investment that was made in the first quarter of 2020. See note 5. With the exception of the Company's investment in the Markel Diversified Fund, the Company generally does not have the obligation to absorb losses or the right to receive benefits from its investments in the Markel CATCo Funds that could potentially be significant to the respective fund, and therefore does not consolidate those funds.
The Company's exposure to risk from the unconsolidated Markel CATCo Funds and Markel CATCo Re is generally limited to its investment and any earned but uncollected fees. The Company has not issued any investment performance guarantees to these VIEs or their investors. As of March 31, 2020 and December 31, 2019, net assets under management of MCIM for unconsolidated VIEs were $2.6 billion and $2.7 billion, respectively. See note 16.
13. Related Party Transactions
The Company engages in certain related party transactions in the normal course of business at arm's length.
Insurance-Linked Securities
Within the Company's insurance-linked securities operations, the Company provides investment and insurance management services through MCIM and Nephila. See note 12 for details regarding operations conducted through MCIM. Nephila serves as the investment manager to several Bermuda, Ireland and U.S. based private funds (the Nephila Funds). To provide access for the Nephila Funds to the insurance, reinsurance and weather markets, Nephila also provides managing general agent services and acts as an insurance manager to certain Bermuda Class 3 and 3A reinsurance companies and Lloyd’s Syndicate 2357 (Syndicate 2357) (collectively, the Nephila Reinsurers). The Company receives management fees for investment and insurance management services provided through its insurance-linked securities operations based on the net asset value of the accounts managed, and, for certain funds, incentive fees based on the annual performance of the funds managed. Nephila also receives commissions from the Nephila Reinsurers, which are based on the direct written premiums of the insurance contracts placed. Total revenues from the Company's insurance-linked securities operations for the three months ended March 31, 2020 and 2019 were $53.2 million and $53.4 million, respectively, of which $43.9 million and $52.8 million, respectively, were attributed to unconsolidated entities managed by Nephila and MCIM. Other related party transactions with the Company's insurance-linked securities operations are described below.
Within the Company’s program services business, the Company has a program with Nephila through which the Company writes insurance policies that are ceded to Syndicate 2357 and certain other Nephila Reinsurers. 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 Nephila Reinsurers. For the three months ended March 31, 2020 and 2019, gross premiums written through the Company’s program with Nephila were $90.5 million and $93.0 million, respectively, all of which were ceded to Nephila Reinsurers. As of March 31, 2020 and December 31, 2019, reinsurance recoverables on the consolidated balance sheets included $217.2 million and $238.8 million, respectively, due from Nephila Reinsurers.
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 the Nephila Reinsurers. 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 other 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.
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), which is accounted for under the equity method. Hagerty Group also includes Hagerty Re, a Bermuda Class 3 reinsurance company. Essentia Insurance Company (Essentia), 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. For the three months ended March 31, 2020 and 2019, gross written premiums attributable to Hagerty written on Essentia were $100.9 million and $84.3 million, respectively, of which $47.8 million and $40.2 million, respectively, were ceded to Hagerty Re.
14. Net Income (Loss) per Share
Net income (loss) per share was determined by dividing adjusted net income (loss) to shareholders by the applicable weighted average shares outstanding. Basic shares outstanding include restricted stock units that are no longer subject to any contingencies for issuance, but for which corresponding shares have not been issued. Diluted net income (loss) per share is computed by dividing adjusted net income (loss) to shareholders by the weighted average number of common shares and dilutive potential common shares outstanding during the period.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands, except per share amounts)
|
2020
|
|
2019
|
Net income (loss) to shareholders
|
$
|
(1,405,763
|
)
|
|
$
|
576,427
|
|
Adjustment of redeemable noncontrolling interests
|
16,013
|
|
|
18,361
|
|
Adjusted net income (loss) to shareholders
|
$
|
(1,389,750
|
)
|
|
$
|
594,788
|
|
|
|
|
|
Basic common shares outstanding
|
13,815
|
|
|
13,895
|
|
Dilutive potential common shares from restricted stock units and restricted stock (1)
|
—
|
|
|
16
|
|
Diluted shares outstanding
|
13,815
|
|
|
13,911
|
|
Basic net income (loss) per share
|
$
|
(100.60
|
)
|
|
$
|
42.81
|
|
Diluted net income (loss) per share (1)
|
$
|
(100.60
|
)
|
|
$
|
42.76
|
|
|
|
(1)
|
The impact of restricted stock units and restricted stock of 13 thousand shares was excluded from the computation of diluted earnings per share for the three months ended March 31, 2020 because the effect would have been anti-dilutive.
|
15. Other Comprehensive Income (Loss)
Other comprehensive income includes net holding gains on available-for-sale investments arising during the period, changes in unrealized non-credit related 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 by component, net of taxes and noncontrolling interests, for the three months ended March 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Unrealized Holding Gains on Available-for-Sale Securities
|
|
Foreign Currency
|
|
Net Actuarial Pension Loss
|
|
Total
|
December 31, 2018
|
$
|
48,060
|
|
|
$
|
(86,652
|
)
|
|
$
|
(56,058
|
)
|
|
$
|
(94,650
|
)
|
Other comprehensive income before reclassifications
|
152,331
|
|
|
2,372
|
|
|
1,361
|
|
|
156,064
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(246
|
)
|
|
—
|
|
|
—
|
|
|
(246
|
)
|
Total other comprehensive income
|
152,085
|
|
|
2,372
|
|
|
1,361
|
|
|
155,818
|
|
March 31, 2019
|
$
|
200,145
|
|
|
$
|
(84,280
|
)
|
|
$
|
(54,697
|
)
|
|
$
|
61,168
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
$
|
346,037
|
|
|
$
|
(86,249
|
)
|
|
$
|
(51,016
|
)
|
|
$
|
208,772
|
|
Other comprehensive income (loss) before reclassifications
|
64,377
|
|
|
(12,610
|
)
|
|
—
|
|
|
51,767
|
|
Amounts reclassified from accumulated other comprehensive income
|
1,187
|
|
|
—
|
|
|
—
|
|
|
1,187
|
|
Total other comprehensive income (loss)
|
65,564
|
|
|
(12,610
|
)
|
|
—
|
|
|
52,954
|
|
March 31, 2020
|
$
|
411,601
|
|
|
$
|
(98,859
|
)
|
|
$
|
(51,016
|
)
|
|
$
|
261,726
|
|
The following table summarizes the tax expense associated with each component of other comprehensive income (loss).
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(dollars in thousands)
|
2020
|
|
2019
|
Change in net unrealized gains on available-for-sale investments:
|
|
|
|
Net holding gains arising during the period
|
$
|
13,110
|
|
|
$
|
40,818
|
|
Reclassification adjustments for net gains (losses) included in net income (loss)
|
315
|
|
|
(66
|
)
|
Change in net unrealized gains on available-for-sale investments
|
13,425
|
|
|
40,752
|
|
Change in net actuarial pension loss
|
—
|
|
|
362
|
|
Total
|
$
|
13,425
|
|
|
$
|
41,114
|
|
The following table presents the details of amounts reclassified from accumulated other comprehensive income into income (loss), by component.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(dollars in thousands)
|
2020
|
|
2019
|
Unrealized holding gains (losses) on available-for-sale investments:
|
|
|
|
Net realized investment gains (losses)
|
$
|
(1,502
|
)
|
|
$
|
312
|
|
Income taxes
|
315
|
|
|
(66
|
)
|
Reclassification of unrealized holding gains (losses), net of taxes
|
$
|
(1,187
|
)
|
|
$
|
246
|
|
|
|
|
|
Net actuarial pension loss:
|
|
|
|
Underwriting, acquisition and insurance expenses
|
$
|
—
|
|
|
$
|
(1,723
|
)
|
Income taxes
|
—
|
|
|
362
|
|
Reclassification of net actuarial pension loss, net of taxes
|
$
|
—
|
|
|
$
|
(1,361
|
)
|
16. Commitments and 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. On February 21, 2019, Anthony Belisle, one of the two senior executives that is no longer with MCIM, filed suit against MCIM and Markel Corporation, which suit was amended on March 29, 2019. 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 arbitrators have been selected, the arbitration proceeding has commenced and the arbitration hearing has been scheduled to begin in August 2020. The Company believes that Mr. Belisle's claims are without merit and any material loss resulting from the Belisle binding arbitration to be remote.
In July 2019, MCIM announced it would cease accepting new investments in the Markel CATCo Funds and would not write any new business in Markel CATCo Re. Both the Markel CATCo Funds and Markel CATCo Re have been placed into run-off, returning capital to investors as it becomes available. The process is expected to take approximately three years.
The Markel CATCo Inquiries, as well as other matters related to or arising from the Markel CATCo Inquiries, including 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.
b)Since becoming aware of a matter late in the first quarter of 2018 related to the manufacturing of products at one of the Company's Markel Ventures businesses, the Company has conducted an investigation, reviewed the business's operations and developed remediation plans. Upon completion of its review during 2018, the Company recorded an expense of $33.5 million in its results of operations. This amount represented management’s best estimate of amounts considered probable including: remediation costs associated with the manufacture of products, costs associated with the investigation of this matter, a write down of inventory on hand and settlement costs related to pre-existing litigation.
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 March 31, 2020, $20.2 million remained accrued for ongoing remediation efforts.
c)In 2019, the Company established Lodgepine Capital Management Limited (Lodgepine), a new retrocessional insurance-linked securities fund manager in Bermuda. Lodgepine's initial product offering will be Lodgepine Fund Limited, a property catastrophe retrocessional investment fund, which the Company is preparing to launch sometime in 2020. However, this timing may be impacted by the recent downturn in global market conditions, and corresponding impact on prospective investor capital allocation decisions. Subject to certain conditions, the Company has committed to invest up to $100 million in Lodgepine Fund Limited.
d)In March 2020, the Company entered into a definitive agreement to acquire a controlling interest in Lansing Building Products, LLC (Lansing), a supplier of exterior building products and materials to professional contractors throughout the U.S. Simultaneously, Lansing entered into a definitive agreement to acquire the distribution business of Harvey Building Products to enhance the geographic reach and scale of Lansing. Total consideration for both transactions is estimated to be $546.7 million, subject to closing and post-closing adjustments. All consideration is expected to be paid in cash. The transactions are scheduled to close in the second quarter of 2020 and are subject to customary closing conditions. Upon completion of the transactions, results attributable to Lansing will be included in the Company's Markel Ventures segment.
e)On March 11, 2020, COVID-19, a novel coronavirus outbreak, was declared a pandemic by the World Health Organization. See note 17 for further details regarding potential impacts of COVID-19 on the Company's business.
f)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.
17. Recent Developments Related to COVID-19
The COVID-19 pandemic has caused unprecedented social and economic disruption, increased volatility of capital markets and intervention by various governments and central banks around the world. The significant volatility in the equity markets arising from economic uncertainty resulted in net investment losses on the Company's equity portfolio of $1.7 billion for the quarter ended March 31, 2020 and further declines are possible. As described in note 9, the Company's underwriting results for the quarter included $325.0 million of net losses and loss adjustment expenses attributed to COVID-19 and assumptions used to develop this estimate are inherently uncertain and subject to a wide range of variability. During the period, the Company also considered whether an assessment of goodwill and intangible assets for impairment was required and concluded it was not. See further discussion regarding goodwill and intangible assets below. Other potential impacts to the Company's results of operations and financial condition that may result as the effects of the COVID-19 pandemic evolve are also discussed below.
Underwriting Operations
As efforts to respond to the pandemic continue to evolve, the Company expects that losses indirectly related to the COVID-19 pandemic and associated with a broader range of coverages are likely to emerge. As an example, the Company provides liability coverage for health and medical institutions and professions, as well as other professions, which have been strained or otherwise impacted by the pandemic, for which few claims have been reported thus far. Other product lines that may be impacted by losses derived from COVID-19 include the Company's trade credit business and workers’ compensation product lines, among others, including the Company's reinsurance product lines. Few losses have been reported at this time. Losses attributed to these exposures that are indirectly related to COVID-19 will be recognized in the period incurred.
The widespread economic and social disruption caused by COVID-19 has created significant financial hardships for individuals and businesses worldwide. In response, the Company is currently halting cancellations and delinquency actions following requests from customers and brokers for customers who express a financial hardship due to COVID-19, as well as directives from certain government authorities. While these actions will impact the timing of premium collections, at this time, the Company does not believe there has been any material change in its exposure to credit losses.
The significant decline in economic activity is likely to have an unfavorable impact on the Company's premium volume, due to business closures, reduced recreational activity and lower gross receipts, revenues and payrolls of insureds, among other things. For those policies where the underlying loss exposures have been reduced as a result of decreased economic activity or shelter-in-place orders resulting from COVID-19, the Company may also be required to refund premiums to policyholders. These adverse impacts on premium volume could be material.
Markel Ventures Operations
The results of operations, financial position and cash flows of the Company's Markel Ventures operations for the quarter ended March 31, 2020 did not reflect any material impacts from the COVID-19 pandemic, the effects of which had not yet had any material impacts on its operations. However, as the economic and social disruption created by the pandemic continues to evolve, it will impact many of the Markel Ventures businesses.
In certain of the Company's businesses, the Company has started to see orders and contracts canceled or postponed, and the Company has temporarily reduced capacity at certain of its operations for which the duration is currently uncertain. The Company's revenues also may be impacted by disruption in supply chains, changes in consumer behavior and the overall impact of current economic conditions on commercial and consumer spending. These impacts on the Company's revenues could be material.
In order to partially mitigate the impact of decreased revenues, certain of the Company's businesses are taking actions to reduce expenses, including, but not limited to, elimination of non-essential expenses, cancellation or deferral of open positions, salary reductions and workforce furloughs and reductions. The Company's businesses may increase borrowings, if needed, to maintain the cash flow required to operate.
Loss of revenues in the Company's products and services businesses, the extent of which the Company is currently unable to estimate, could also impact the carrying value of inventory, goodwill and intangible assets and other long-lived assets, which may become impaired. See further discussion below for considerations regarding the valuation of the Company's goodwill and intangible assets as of March 31, 2020. In certain cases, revenue declines also could result in ongoing cash and working capital constraints and could impact the companies’ liquidity and their ability to comply with debt covenants.
As a result of the economic hardship experienced by customers, the Company may modify its payment terms or offer discounts to customers, and the Company also is exposed to increased credit risk.
Insurance-Linked Securities and Program Services
For the three months ended March 31, 2020, investment losses to date within the investment funds managed through the Company's Insurance-Linked Securities operations have not been significant; however, uncertainty around potential COVID-19 loss exposures, has reduced, and may further reduce, the net asset value on which the Company's management fees are based. Deferred or reduced investment management fees and the associated decline in cash flows, the extent of which the Company is currently unable to estimate, also could impact the carrying value of the Company's goodwill and intangible assets, which may become impaired. See further discussion below for considerations regarding the valuation of the Company's goodwill and intangible assets as of March 31, 2020.
Volatility in the capital markets and investor uncertainty regarding insurance industry exposure to COVID-19 also may impact the Company's ability to raise additional third party capital for the funds managed and the Company may also experience higher than anticipated investor redemptions from the funds. These impacts could have a material impact on the Company's results of operations and financial condition.
The Company's program services business generates fee income, in the form of ceding (program service) fees. This fee income is calculated based on the gross premium volume of the insurance programs supported. Similar to the Company's underwriting operations, the significant decline in economic activity is likely to have an unfavorable impact on premium volume, which may result in a reduction in fee income.
Goodwill and Intangible Assets
The Company's consolidated balance sheet as of March 31, 2020 included goodwill and intangible assets of $4.0 billion. During the first quarter of 2020, the Company considered whether a quantitative assessment of goodwill and intangible assets for impairment was required as a result of the significant economic disruption caused by the COVID-19 pandemic. After considering qualitative factors regarding the expected impacts of the pandemic on the Company's operations, as well as the amount by which the fair value of the Company's reporting units exceeded their respective carrying values at the date of the last quantitative assessment, the Company determined these conditions did not indicate that it is more likely than not that the carrying value of the Company's reporting units exceeded their fair value as of March 31, 2020 based on information available at this time. Similar factors were considered to determine if these circumstances were an indicator requiring an assessment of the recoverability of the Company's intangible assets, and the Company concluded they were not based on information available at this time. However, delayed recovery or further deterioration in market conditions related to the general economy and the specific industries in which the Company operates, a sustained trend of weaker than anticipated financial performance within a reporting unit, or an increase in the market-based weighted average cost of capital, among other factors, could significantly impact the impairment analysis and may result in future goodwill or intangible asset impairment charges that, if incurred, could have a material adverse effect on the Company's financial condition, results of operations and liquidity.