Washington, D.C. 20549
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
The aggregate market value of the shares of the registrant's Common Stock held by non-affiliates as of June 30, 20212023 was approximately $15,976,000,000.$18,051,000,000.
Item 1. BUSINESS
The following table presents summary financial data over the last five years, including book valuestock price per common share, market pricebook value per common share and other important financial measures and metrics.
streams from our insurance operations beyond the traditional underwriting model. We believe this multi-platform approach provides us with a unique advantage through which we have the ability to unlock additional value for our customers and business partners, which we refer to as "the power of the platform."
Within our underwriting operations, we underwrite specialty insurance products on a risk-bearing basis. The specialty insurance market differs significantly from the standard market. In the standard market, insurance rates and forms are highly regulated, products and coverages are largely uniform with relatively predictable exposures, and companies tend to compete for customers on the basis of price. In contrast, the specialty market provides coverage for hard-to-place risks that generally do not fit the underwriting criteria of standard carriers.
Competition in the specialty insurance market tends to focus less on price than in the standard insurance market and more on other value-based considerations, such as availability, service and expertise. While specialty market exposures may have higher perceived insurance risks than their standard market counterparts, we seek to manage these risks and achieve higher financial returns. To reach our financial and operational goals, we must have extensive knowledge and expertise in our chosen markets. Many of our larger accounts are considered on an individual basis where customized forms and tailored solutions are employed.
We also participate in the reinsurance market in certain classes of reinsurance product offerings.offerings, primarily casualty lines and certain other specialty lines. In the reinsurance market, our clients are other insurance companies, or cedents. We typically write our reinsurance products in the form of treaty reinsurance contracts, which are contractual arrangements that provide for automatic reinsuring of a type or category of risk underwritten by cedents. Generally, we participateTreaty reinsurance products are written globally on reinsurance treaties withboth a numberquota share and excess of other reinsurers, each with an allocated portion of the treaty, with the terms and conditions of the treaty being substantially the same for each participating reinsurer.loss basis. With treaty reinsurance contracts, we do not separately evaluate each of the individual risks assumed under the contracts and are largely dependent on the individual underwriting decisions made by the cedent. Accordingly, we review and analyze the cedent's risk management and underwriting practices in deciding whether to provide treaty reinsurance and in pricing of treaty reinsurance contracts.
The following chart presents the composition of our underwriting operations between insuranceour Insurance segment and reinsuranceReinsurance segment based on 20212023 underwriting gross premium volume of $8.5 billion, which also aligns with our two reportable underwriting segments.
The following table summarizes our U.S. insurance and reinsurance underwriting subsidiaries.
In the U.S., we write business in the excess and surplus lines (E&S) and admitted insurance markets, as well as the reinsurance market. The primary distribution channels through which our U.S. business is placed are wholesale insurance and reinsurance markets. brokers, retail insurance agents and alternative channels, including third-party managing general agents.
In a reinsurance transaction, an insurance company transfers, or cedes, all or part of its exposure in return for a premium. In a retrocessional reinsurance transaction, a reinsured exposure is further ceded to another reinsurer. Within our underwriting operations, we seek to retain as much of our profitable business as possible while managing volatility within our underwriting results and capital requirements at our insurance subsidiaries. We purchase reinsurance and retrocessional reinsurance to manage our net retention on individual risks and overall exposure to losses, while providing us with the ability to offer policies with sufficient limits to meet policyholder needs. Our reinsurance and retrocessional reinsurance strategyThis includes purchasing sufficient coverage for our catastrophe-exposed policies to ensure that our net retained catastrophe risk is within our corporate tolerances. Additionally, with multiple
When appropriate, we pursue reinsurance commutations that involve the termination of ceded reinsurance and retrocessional reinsurance contracts. Our commutation strategy related to ceded reinsurance and retrocessional contracts is to reduce credit exposure and eliminate administrative expenses associated with the run-off of ceded reinsurance placed with certain reinsurers.
See note 1012 of the notes to consolidated financial statements included under Item 8 and Item 7A Quantitative and Qualitative Disclosures About Market Risk for additional information about our ceded reinsurance programs and exposures.
Competition and Underwriting Philosophy
We compete with numerous domestic and international insurance companies and reinsurers, Lloyd's syndicates, risk retention groups, insurance buying groups, risk securitization programs, alternative capital sources, such as that provided through ILS, and alternative self-insurance mechanisms. We also compete with new companies that continue to be formed to enter the insurance and reinsurance markets, particularly companies with new or "disruptive" technologies or business models. Competition may take the form of lower prices, broader coverages, greater product flexibility, enhanced digital capabilities for distribution of insurance products, higher coverage limits, higher quality services or higher ratings by independent rating agencies. In all of our markets, we compete on the basis of overall financial strength, ratings assigned by independent rating agencies, development of specialty products to satisfy well-defined market needs and by maintaining relationships with agents, brokers and insureds who rely on our expertise. This expertise is our principal means of competing. We offer a diverse portfolio of products, each with its own distinct competitive environment, which requires us to be responsive to changes in market conditions for individual product lines. With each of our products, we seek to write business that produces consistent underwriting profits by competing with innovative ideas, appropriate pricing, expense control and quality servicemaintaining adequate rates for our premium writings in relation to policyholders, agents and brokers. More recently, we have also leveraged our underwriting capacity and expertise through relationships with start-ups and digital distribution partners through which we can develop ideas that leverage emerging technologies and modern customer acquisition strategies to create the service and experience that consumers have grown to expect and demand.expected loss cost trends.
Few barriers exist to prevent insurers and reinsurerscompetition from entering our markets within the property and casualty industry. Market conditions, risk tolerance and capital capacity influence the degree of competition at any point in time. During periods of excess underwriting capacity, as defined by availability of capital, competition can result in lower pricing and less favorable policy terms and conditions for insurers. During periods of reduced underwriting capacity, pricing and policy terms and conditions are generally more favorable for insurers. Historically, the performance of the property and casualty insurance and reinsurance industries has tended to fluctuate in cyclical periods of price competition and excess underwriting capacity, followed by periods of high premium rates and shortages of underwriting capacity. At any given time, our portfolio of insurance products could be experiencing varying combinations of these characteristics. This cyclical market pattern can be more pronounced in the specialty insurance and reinsurance markets in which we compete than the standard insurance market.
Following several years of price decreases and the high level of natural catastrophes that occurred in 2017, we began seeing more favorable rates in 2018, particularly onWithin our catastrophe-exposed and loss-affected business. Since 2018, we have continued to see favorable rates across most product lines, which further strengthened in 2020 and 2021 following the continued high level of natural catastrophes and significant losses attributed to the COVID-19 pandemic. In 2020 and 2021, the favorable rate environment was most prominent within our professional liability and general liability product lines, based on general market conditions, the impacts of social inflation, including increased litigation, as well as an increase in the severity of losses in these product lines. Additionally, recent increases in economic inflation, and an expectation that this trend will continue, have created more uncertainty around the ultimate losses that will be incurred to settle claims on these longer-tail product lines. These factors, as well as the current and expected impacts of the sustained low interest rate environment on net investment income, have resulted in higher rates. The primary exception to the favorable rate environment is workers' compensation, where we continue to see low single digit rate decreases given generally favorable loss experience in recent years.
By focusing on market niches where we have underwriting expertise, and leveraging capabilities offered through our multiple insurance platforms,operations, we seek to earn consistentan underwriting profits, which are a key component of our strategy.profit every year. The property and casualty insurance industry commonly defines underwriting profit or loss as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. We believe that the ability to achieve consistent underwriting profits demonstrates knowledge and expertise, commitment to superior customer service and the ability to manage insurance risk. We use underwriting profit or loss as a basis for evaluating our underwriting performance. The 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. A combined ratio less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. In 2021,2023, our combined ratio was 90%98%. See Item 7 Management's Discussion & Analysis of Financial Condition and Results of Operations for a discussion of our underwriting results.
We routinely review the pricing for all of our major product lines. When we believe the prevailing market price will not support our underwriting profit targets, the business is not written. As a result of our underwriting discipline, gross premium volume may vary when we alter our product offerings to maintain or improve underwriting profitability.
Over the past few years, For example, in 2023, we have increasedadjusted our focus on growing our most profitable lines of business and have discontinued certain lines or programs that have not performed consistent with our expectations. This is particularly truewritings within our Reinsurance segment, where we discontinued writing property reinsurance business, including catastrophe-exposed property business, on a risk-bearing basisU.S. and Bermuda directors and officers and errors and omissions product lines in 2021, and instead, any such business written is now ceded to our ILS operations to be placed with third party capital. In more limited instances, we have taken similar actions within our Insurance segment in response to unfavorable loss cost trends and we have also made changes in our ceded reinsurance programs, as previously discussed. With these changes, along with the more favorable rates we are seeing in the market, we expect less volatility in our underwriting results going forward.downward pressure on rates.
Underwriting Segments
We monitor and assessesassess the performance of our ongoing underwriting operations on a global basis in the following two segments: Insurance and Reinsurance. See note 2 of the notes to consolidated financial statements included under Item 8 for additional segment reporting disclosures.
Insurance Segment
Our Insurance segment reported gross premium volume of $7.2$9.2 billion, earned premiums of $5.5$7.3 billion and an underwriting profit of $696.4$162.2 million in 2021.2023. The following chart presents the composition of our Insurance segment by division based on 20212023 gross premium volume.
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The Markel Specialty division is comprised of our U.S. and Bermuda based insurance underwriting operations and writes business on an admitted and non-admitted basis for insureds ranging from individuals and small businesses to Fortune 1000 companies through agents and brokers in the U.S., Bermuda, the U.K., the E.U., Asia and Ireland as well as program insurance and other specialty coverages for well-defined niche markets.Australia. The Markel Specialty division is a unified platform that provides easy access to our diverse portfolio of products and capabilities. The Markel International division writes business worldwide from our London and Munich-based platforms, which include branch offices aroundin Canada, Asia, Australia and across the world.E.U. The State National division writes collateral protection insurance which insures personal automobilesfor automobile and other vehicles held as collateral forvehicle loans made by credit unions, banks and specialty finance companies through its lender services product line on both an admitted and non-admitted basis.in the U.S.
The following chart displays the types of products written in our Insurance segment based on 20212023 gross premium volume.
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Professional liability coverages include unique solutions for highly specialized professions, including architects and engineers, lawyers, accountants, agents and brokers, service technicians and consultants. We offer claims-made healthcare liability coverage for doctors and dentists; claims-made professional liability coverage for individual healthcare providers such as therapists, pharmacists, physician assistants and nurse anesthetists; and coverages for medical facilities and other allied healthcare risks such as clinics, laboratories, pharmacies and senior living facilities. Other professional liability coverages include errors and omissions, union liability, professional indemnity, intellectual property, executive liability for financial institutions and Fortune 1000 companies, including transaction liability for mergers and acquisitions, and management liability. Additionally, we offer cyber liability products, which provide coverage for, among other things, data breach and privacy liability, data breach loss to insureds and electronic media coverage.
General liability product offerings include a variety of primary and excess liability coverages targeting apartments and office buildings, retail stores, contractors, consultants, construction professionals, financial service professionals, professional practices, social welfare organizations and medical products, as well ascoverages. We focus on businesses in the construction, life sciences, energy, medical, healthcare, pharmaceutical, professional services, social welfare, recreational, transportation, heavy industrial and hospitality industries. Specific products include primary general liability, excess and umbrella products, products liability products, environmental liability products and casualty facultative reinsurance written for individual casualty risks.
Our professional liability product lines provide insurance solutions for small, middle market and risk management accounts with coverage that is tailored to their exposures and needs. Professional liability coverages include errors and omissions, directors and officers, cyber, employment practices liability, professional indemnity, transaction liability, intellectual property and union liability. Errors and omissions coverage provides solutions for specialized professions including lawyers, accountants, agents and brokers, service technicians and consultants, as well as other less-specialized professionals. Directors and officers coverage is provided for publicly-traded, private and non-profit companies, including financial institutions and Fortune 1000 companies. We also offer claims-made professional liability coverage for individual healthcare providers and coverages for medical facilities.
Personal lines products provide first and third partythird-party coverages in the U.S. for classic cars, motorcycles and a variety of personal watercraft, including vintage boats, high performancehigh-performance boats and yachts and recreational vehicles, such as motorcycles, snowmobiles and ATVs. Based on the seasonal nature of much of our personal lines business, we generally will experience higher claims activity during the second and third quarters of the year. Additionally, property coverages are offered for mobile homes, dwellings and homeowners that do not qualify for standard homeowner's coverage, as well as personal umbrella coverage.
Marine and energy products include a portfolio of coverages for cargo, energy, hull, liability, war and terrorism risks.risks worldwide. The cargo product line is an international transit-based book providing coverage for many types of cargo. Energy coverage includes all aspects of oil, gas and renewable energy activities. Our renewable energy activities include coverages for onshore and offshore wind farms, as well as alternative energy generation and storage technology projects. Hull coverages consist of coverage for physical damage to ocean-going tonnage, yachts and mortgagees' interests. Liability coverage provides coverage for a broad range of energy liabilities, as well as traditional marine exposures including charterers, terminal operators and ship repairers. WarMarine war coverage includes protections for the hulls of ships, and aircraft, and other related interests, against war and associated perils. Terrorism coverage providesincludes coverage for property damage and business interruption related to political and civil violence includingand war and civil war.on land.
Property coverages consist principally of fire, allied lines (including windstorm, hail and water damage) and other specialized property coverages, including catastrophe-exposed property risks such as earthquake and wind on both a primary and excess basis. Catastrophe-exposed property risks are typically lower frequency andcan present higher severity in nature than more standard property risks.risks due to the impacts from earthquakes and severe weather events such as hurricanes, convective storms and wildfires. Our property coverages are exposed to windstorm losses that, based on the seasonal nature of those events, are more likely to occur in the third and fourth quarters of the year. Our property risks range from small, single-location accounts to large, multi-state, multi-location, multi-national accounts on a worldwide basis. Other types of property products include inland marine products, railroad-related products and specie coverage for fine art on exhibition and in private collections.
Specialty programs business is offered in the U.S. on a standalone or package basis and generally targets specialized commercial markets and various customer groups, such as amateur sports and fitness clubs. Certain specialty programs written in this segment use managing general agents to offer single source admitted and non-admitted programs for a specific industry, class or line of business.
Workers' compensation products are offered in the U.S. and provide wage replacement and medical benefits to employees injured in the course of employment and target main-street, service and artisan contractor businesses, retail stores and restaurants.
Specialty programs business included in this segment is offered on a standalone or package basis and generally targets specialized commercial markets and various customer groups, such as amateur sports and fitness clubs. Other specialty programs business written in this segment includes general agent programs that use managing general agents to offer single source admitted and non-admitted programs for a specific industry, class or line of business, including first and third party coverages such as packaged policies for providers of leisure and recreational activities.
Credit and surety products consist primarily of trade credit and prepayment coverage and a range of bonds and guarantees that support contractual obligations, as well as other coverages for specific credit risks, markets and contingencies. Key credit risks covered include those of counterparty insolvency and defaults by government-owned entities. The key coverages under surety products include contractual performance and payment risks, commercial license and permit obligations and obligations related to judicial proceedings such as court and fiduciary bonds.
Other product lines within the Insurance segment primarily include auto and collateral protection insurance.insurance, which insures personal automobiles and other vehicles held as collateral for loans made by credit unions, banks and specialty finance companies.
Reinsurance Segment
Our Reinsurance segment product offerings are underwritten primarily by our Global Reinsurance division, which operates from platforms in the U.S., Bermuda and the U.K. We write quota share and excess of loss reinsurance on a local, national and global basis. Our Reinsurance segment reported gross premium volume of $1.2$1.0 billion, earned premiums of $1.0 billion and an underwriting loss of $55.2$19.3 million in 2021.2023. The following chart displays the types of products written in our Reinsurance segment based on 20212023 gross premium volume.
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Our casualty treaty reinsurance programs are written on a quota share and excess of loss basis and include general liability, professional liability, transaction liability, healthcare liability and environmental impairment liability. General liability reinsurance includesprimarily consists of umbrella and excess casualty products, thatas well as environmental liability products covering pollution legal liability and contractors' pollution exposures.
Our specialty treaty reinsurance products are written worldwide. Our professionalacross a wide range of specialty product lines, primarily consisting of the following:
•Credit and surety products, including structured and whole turnover credit, political risk and contract and commercial surety reinsurance programs covering worldwide exposures;
•Workers' compensation and accident and health products covering both standard and catastrophe-exposed business in the U.S. and worldwide;
•Marine and energy products covering both offshore and onshore marine, energy and renewable energy risks on a worldwide basis, including hull, cargo and liability;
•Public entity reinsurance products offering casualty coverage for municipalities, schools, special districts, public housing authorities and public entity affiliated non-profits;
•Mortgage default insurance offering coverage for private mortgage insurers predominantly located in the U.S. and Australia;
•Aviation and space coverage, including major risk, general aviation, satellite launch and orbit;
•Agriculture reinsurance covering multi-peril crop insurance, hail and related exposures for risks located in the U.S. and Canada; and
•Discrete political violence and national terror pools in select jurisdictions globally.
Professional liability reinsurance programs are offered worldwide and consistprimarily consists of directors and officersthe following:
•Transaction liability, including publicly traded, private, and non-profit companies in both commercial and financial institution arenas; lawyers errors and omissions for small, medium and large-sized law firms; accountants errors and omissions for small and medium-sized firms; technology errors and omissions and cyber liability focusing on network security and privacy exposures. Transaction liabilitywhich provides representation, warranty and indemnity coverage for mergers and acquisitions, including coverage for tax and contingent liability;
•Directors and officers liability for publicly-traded, private and specific litigation claims. non-profit companies;
•Cyber and technology errors and omissions covering both first and third-party exposures;
•Errors and omissions for lawyers, accountants, agents and brokers, services technicians and consultants; and
•Healthcare liability reinsurance products are offered in the United States and include coverage for physician, surgeon, hospital andphysicians, hospitals, long-term care and other medical malpractice writers. Environmental treaty reinsurance provides coverage for pollution legal liability, contractors pollution and professional liability exposures on both a nationwide and regional basis within the U.S.
facilities.
Specialty treaty reinsurance products offered in the Reinsurance segment include structured and whole turnover credit, political risk, mortgage and contract and commercial surety reinsurance programs covering worldwide exposures, public entity reinsurance products, workers' compensation excess of loss and quota share treaties, whole account, marine and agriculture reinsurance products. Our mortgage products offer coverage for private mortgage insurers in the U.S., Australia and Europe. Our public entity reinsurance products offer customized programs for government risk pools, including counties, municipalities, schools, public housing authorities and special districts (e.g., water, sewer, parks) located in the U.S. Types of coverage for public entities include general liability, environmental impairment liability, cyber and errors and omissions. Our workers' compensation business includes standard and catastrophe-exposed workers' compensation business. Marine reinsurance products include offshore and onshore marine and energy risks on a worldwide basis, including hull, cargo and liability. Agriculture reinsurance covers multi-peril crop insurance, hail and related exposures, for risks located in the U.S. and Canada.
Property reinsurance products offered in the Reinsurance segment in 2021 were primarily comprised of our retrocessional reinsurance business, a portion of which was ceded to Lodgepine Reinsurance Limited (Lodgepine Re) effective July 1, 2021. These products provide coverage for all types of underlying exposures, including catastrophe exposures, and worldwide geographic zones. Effective January 1, 2022, we discontinued writing property retrocessional reinsurance business. Prior to 2021, we also offered property reinsurance treaty products on an excess of loss and quota share basis for catastrophe exposures worldwide. Effective January 2021, we discontinued writing property reinsurance business, including catastrophe-exposed property business, on a risk-bearing basis within our Global Reinsurance division. Instead, we will only write such business on behalf of our Nephila ILS operations, to the extent it matches the risk profile of our third-party ILS investors, who will
ultimately assume the risk. This business is included with our other fronting operations, which are not included in a reportable segment. Some of our property reinsurance contracts written prior to 2021 had multi-year terms, however, effective January 1, 2022, we are off-risk for substantially all property loss exposures, including catastrophe exposures, previously written within our Reinsurance segment. On the contracts that are ceded to our Nephila ILS operations, we will continue to bear underwriting risk for aggregate agreement year losses on these exposures in excess of a limit that we believe is highly unlikely to be exceeded. Historically, our catastrophe exposures were generally written on an excess of loss basisProgram Services and targeted both personal and commercial lines of business providing coverage for losses from natural disasters, including hurricanes, windstorms and earthquakes. Based on the seasonal nature of hurricanes and windstorms, certain catastrophic losses are more likely to occur in the third and fourth quarters of the year.
Insurance-Linked Securities
Our insurance-linked securities operations are primarily comprised of our Nephila operations and are not included in a reportable segment. Through our insurance-linked securities operations, we offer alternative capital to the reinsurance market while providing investors with investment strategies that typically are uncorrelated with traditional asset classes. We receive management fees for investment and insurance management services provided through these 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. We also provide managing general agent services and receive commissions based on the direct written premiums of the insurance contracts placed. Total revenues from our insurance-linked securities operations for the year ended December 31, 2021 were $209.2 million, which are included in services and other revenues in our consolidated statement of income and comprehensive income.
Investment performance in the broader insurance-linked securities market has been adversely impacted by consecutive years of elevated catastrophe losses, as well as by COVID-19 in 2020. These events, as well as recent volatility in the capital markets, also have impacted investor decisions around allocation of capital to ILS, which in turn has impacted our capital raises and redemptions within the funds we manage.
Nephila
In November 2018, we completed the acquisition of all of the outstanding shares of Nephila Holdings Ltd. (together with its subsidiaries, Nephila). Headquartered in Bermuda, Nephila serves as an insurance and investment fund manager and managing general agent that offers a broad range of investment products to investors in an asset class that is uncorrelated to both traditional and alternative investments. Nephila structures bespoke risk transfer products for insurance and reinsurance companies, government entities, banks and institutional investors, including insurance-linked securities, catastrophe bonds, insurance swaps and weather derivatives.
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 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). Nephila also serves as a managing general agent that underwrites and administers property insurance policies and provides delegated underwriting services to providers of insurance capital, including Nephila Reinsurers. The results of the Nephila Reinsurers are attributed to the Nephila Funds primarily through derivative transactions between these entities. Neither the Nephila Funds nor the Nephila Reinsurers are subsidiaries of Markel Corporation, and as such, these entities are not included in our consolidated financial statements. As of December 31, 2021, Nephila's net assets under management were $8.8 billion.
The Nephila Reinsurers subscribe to various reinsurance contracts based on their investors' risk profiles, including property reinsurance business previously written through our Reinsurance segment. Leveraging the strength of our underwriting platform, beginning in 2021, we now write this business on behalf of our Nephila ILS operations to the extent it fits Nephila investors' risk profile and cede substantially all of the risk to Nephila Reinsurers.
See note 16 of the notes to consolidated financial statements included under Item 8 for further details regarding transactions with entities managed through our Nephila operations.
Lodgepine and Markel CATCo
Our insurance-linked securities operations also include our run-off Lodgepine and Markel CATCo operations, the results of which are reported separately from our ongoing insurance-linked securities operations.
Our Lodgepine operations are conducted through Lodgepine Capital Management Limited (LCM), which serves as the insurance manager for Lodgepine Re, a Bermuda Class 3 reinsurance company, and as the investment manager for Lodgepine Fund Limited, a Bermuda exempted mutual fund company comprised of multiple segregated accounts (Lodgepine Fund). Lodgepine Fund issued multiple classes of preference shares to investors and Lodgepine Fund is invested in preference shares of Lodgepine Re. Lodgepine Fund launched July 1, 2021 with initial investor capital of $98.9 million, which includes our initial investment of $18.9 million. Lodgepine Fund, through its preference shares held in Lodgepine Re, subscribes to a portfolio of retrocessional reinsurance property contracts written through our Reinsurance segment that were ceded to Lodgepine Re. In November 2021, these operations were placed into run-off.
Our Markel CATCo operations are conducted through Markel CATCo Investment Management Ltd. (MCIM), an ILS investment fund manager headquartered in Bermuda. MCIM serves as the insurance manager for Markel CATCo Re Ltd., 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. In July 2019, these operations were placed into run-off. In September and October 2021, and in February 2022, terms were announced of a proposed transaction that would allow the acceleration of the return of capital to investors. For further details regarding our Markel CATCo operations and the proposed transaction, see note 19 of the notes to consolidated financial statements included under Item 8.
Program ServicesOther Fronting
Our program services and other fronting business generates fee income in the form of ceding fees in exchange for fronting insurance and reinsurance business tofor other insurance carriers (capacity providers). In general, fronting refers to business in which we write insurance on behalf of a general agent or capacity provider and then cede all, or substantially all, of the risk under these policies to the capacity provider in exchange for ceding fees. The results of our program services and other fronting operations are not included in a reportable segment.
Our program services business, which is provided through our State National division, offers issuing carrier capacity to both specialty managing general agents and other producers who sell, control and administer books of insurance business that are supported by third parties that assume reinsurance risk, including Syndicate 2357 and otherthe Nephila Reinsurers. These reinsurers areinclude domestic and foreign insurers and institutional risk investors that want to access specific lines of U.S. property and casualty insurance business but may not have the required licenses, and filings or financial strength ratings to do so.
Beginning in 2024, our State National division is expanding internationally through a partnership with our Markel International division to create an international program services division to serve managing general agents in the U.K. market. The new division is another example of how we can leverage our array of capabilities to effectively and efficiently connect capital with risk.
Through our program services business, we write a wide variety of insurance and reinsurance products, principally including general liability, commercial liability, commercial multi-peril, property insurance and workers' compensation. Program services business written through our State National division is separately managed from our underwriting divisions, which may write similar products, in order to protect our program services customers.
The following table summarizes the primary subsidiaries through which our program services business is primarily written.
| | | | | | | | | | | | | | |
Legal Entity | | Abbreviation | | State of Domicile |
City National Insurance Company | | CNIC | | Texas |
Independent Specialty Insurance Company | | ISIC | | Delaware |
National Specialty Insurance Company | | NSIC | | Texas |
Pinnacle National Insurance Company | | PNIC | | Texas |
State National Insurance Company, Inc. | | SNIC | | Texas |
Superior Specialty Insurance Company | | SSIC | | Delaware |
United Specialty Insurance Company | | USIC | | Delaware |
All ofThrough these subsidiaries, areour program services business is licensed or authorized or licensed to write property and casualty insurancebusiness in all 50 states and the District of Columbia. USIC is also eligible to write business in the U.S. Virgin Islands. Many of our programs are arranged with the assistance of brokers that are seeking to provide customized insurance solutions for specialty insurance business that requires a carrier rated "A" by A.M. Best Company (Best)(A.M. Best). Our specialized business model relies on third partythird-party producers or capacity providers to provide the infrastructure associated with providing policy administration, claims handling, cash handling, underwriting, or other traditional insurance company services. We compete primarily on the basis of price, customer service, geographic coverage, financial strength ratings, licenses, reputation, business model and experience.
Total revenues attributed to our program services business for the year ended December 31, 20212023 were $119.8$151.8 million. Our program services business generated $2.7$2.9 billion of gross written premium volume for the year ended December 31, 2021.2023.
In our program services business, we generally enter into a 100% quota share reinsurance agreementagreements whereby we cede to the capacity providerproviders 100% of the premium written and substantially all of our gross liability under all policies issued by and on behalf of us by the producer. The capacity provider is generally entitled to 100% of the net premiums received on policies reinsured, less the ceding fee to us, the commission paid to the producer and premium taxes on the policies. In connection with writing this business, we also enter into agency agreements with both the producer and the capacity provider whereby the producer and capacity provider are generally required to deal directly with each other to develop business structures and terms to implement and maintain the ongoing contractual relationship. In a number of cases, the producer and capacity provider for a program are part of the same organization or are otherwise affiliated. As a result of our contract design, substantially all of the underwriting risk and operational risk inherent in the arrangement is borne by the capacity provider. The capacity provider assumes and is liable for substantially all losses incurred in connection with the risks under the reinsurance agreement, including judgments and settlements. providers.
Our contracts with capacity providers do not legally discharge us from our primary liability for the full amount of the policies, and we will be required to pay the loss and bear collection risk if thea capacity provider fails to meet its obligations under the reinsurance agreement. As a result, we remain exposed to the credit risk of capacity providers, orincluding the risk that one of our capacity providers becomes insolvent or is otherwise unable or unwilling to pay policyholder claims. We mitigate this credit risk generally by either selecting well capitalized, highly rated authorized capacity providers or requiring that the capacity provider post substantial collateral to secure the reinsured risks, which, in some instances, exceeds the related reinsurance recoverable.
In certain instances,our other fronting business, we also leverage the strength of our underwriting platform, including our highly rated insurance subsidiaries, to frontwrite business toon behalf of our Nephila ILS operations, in exchange for ceding fees, to support theirits business plans and assist in meeting theirits desired return objectives. ThisOur other fronting business is conductedmanaged separately from our program services business. The results of our other fronting business are not included in a reportable segment. Total revenues attributed to our other fronting business for the year ended December 31, 2023 were $20.7 million. Our other fronting business generated $840.9 million of gross written premium volume for the year ended December 31, 2023.
Business written on behalf of our Nephila ILS operations within both our program services and other fronting operations primarily consists of the catastrophe-exposed property insurance and reinsurance business, previously written through our Reinsurance segment. Effective January 1, 2021, any suchas well as specialty and climate reinsurance business. The business written is ceded to the Nephila Reinsurers, whose investors ultimately assume the risk. To mitigate credit risk for this business, we require collateral up to a specified level of annual aggregate agreement year losses, which is held in a trust for which we are the beneficiary. See note 18 of the notes to consolidated financial statements included under Item 8 for further details regarding our programs with Nephila ILS operations to be placed with third party capital in exchange for ceding fees.Reinsurers.
Although we reinsure substantially all of the risks inherent in our program services business and ILSother fronting arrangements,businesses, we have certain programs that contain limits on our reinsurers' obligations to us that expose us to underwriting risk, including loss ratio caps, aggregate reinsurance limits or exclusion of the credit risk of producers. Under certain programs, including programs and contracts with Nephila Reinsurers, we also bear underwriting risk for annual aggregate agreement year losses in excess of a limit that we believe is unlikely to be exceeded.
Insurance-Linked Securities
Our insurance-linked securities operations are primarily comprised of our Nephila operations and are not included in a reportable segment. Nephila Holdings Ltd. (together with its subsidiaries, Nephila) provides investment and insurance management services through which we offer alternative capital to the insurance and reinsurance markets while providing investors with investment strategies that typically are uncorrelated with traditional asset classes. We receive management fees for investment and insurance management services provided through these operations, and for certain funds, incentive fees based on their annual performance. Our management fees are based on the net asset value of the accounts managed for most of our funds and gross premium volume for the remaining funds. Total revenues from our insurance-linked securities operations for the year ended December 31, 2023 were $99.5 million. As of December 31, 2023, Nephila's net assets under management were $6.8 billion.
Our fund management operations provide insurance and investment management services for a broad range of investment products for insurance and reinsurance companies, government entities, banks, hedge funds, pension funds and institutional investors, including insurance-linked securities such as catastrophe bonds, insurance swaps, traditional reinsurance contracts, industry loss warranties and other financial instruments. Nephila serves as the investment manager to several Bermuda based private funds (the Nephila Funds). To provide access for the Nephila Funds to a variety of insurance-linked securities in the property catastrophe, climate and specialty markets, Nephila acts as an insurance manager to certain Bermuda Class 3, collateralized and special purpose reinsurance companies, Lloyd's Syndicate 2357 and Lloyd's Syndicate 2358 (collectively, the Nephila Reinsurers). The results of the Nephila Reinsurers are attributed to the Nephila Funds primarily through derivative transactions between these entities. Neither the Nephila Funds nor the Nephila Reinsurers are subsidiaries of Markel Group, and as such, these entities are not included in our consolidated financial statements.
The Nephila Reinsurers subscribe to various property, climate and specialty reinsurance contracts based on their investors' risk profiles, which include business ceded by our underwriting and program services and other fronting platforms. We write this business on behalf of our Nephila ILS operations to the extent it fits Nephila investors' risk profile and cede substantially all of the risk to Nephila Reinsurers. See note 1618 of the notes to consolidated financial statements included under Item 8 for further details regarding transactions with entities managed through our programs with Nephila Reinsurers.operations.
Ratings
Financial stability and strength are important purchase considerations of policyholders, cedents and insurance agents and brokers. Because an insurance premium paid today purchases coverage for losses that might not be paid for many years, the financial viability of the insurer is of critical concern. Various independent rating agencies provide information and assign ratings to assist buyers in their search for financially sound insurers. Rating agencies periodically re-evaluate assigned ratings based upon changes in the insurer's operating results, financial condition or other significant factors influencing the insurer's business. ChangesDowngrades in assigned ratings and other negative actions could have an adverse impact on an insurer's ability to write new business.
Rating agencies assign financial strength ratings (FSRs) to property and casualty insurance companies, or group of companies, based on quantitative criteria such as profitability, leverage and liquidity, as well as qualitative assessments such as the spread of risk, themarket placement, business profile, adequacy and soundness of ceded reinsurance, the quality and estimated market value of assets, the adequacy of loss reserves and surplus and the competence, experience and integrity of management.
SeventeenSixteen of our eighteenseventeen insurance subsidiaries are rated by Best. All seventeen ofA.M. Best, while our insurance subsidiaries rated by Best have been assigned an FSR of "A" (excellent). Our Lloyd's syndicate is part of a group rating for the Lloyd's overall market, whichmarket. All sixteen of our insurance subsidiaries rated by A.M. Best have been assigned an FSR of "A" (excellent). The Lloyd's group has been assigned an FSR of "A" (excellent) by A.M. Best.
Nine of our eighteenseventeen insurance subsidiaries are rated by Standard & Poor's (S&P)., while our Lloyd's syndicate is part of a group rating for the Lloyd's overall market. All nine of our insurance subsidiaries rated by S&P have been assigned an FSR of "A" (strong). OurThe Lloyd's syndicate is part of a group rating for the Lloyd's overall market, which has been assigned an FSR of "A+" (strong) by S&P.
Five of our eighteenseventeen insurance subsidiaries are rated by Moody's Corporation (Moody's). All five insurance subsidiaries rated by Moody's have been assigned an FSR of "A2" (good).
Investments
Our business strategy recognizesinvestment operations manage the importancecapital held within our underwriting operations, as well as capital allocated by Markel Group. Invested assets managed through our investment operations includes our portfolio of both consistentpublicly traded fixed maturity and equity securities, as well as cash and short-term investments.
Our underwriting and operating profits and superioroperations provide our investment returns to build shareholder value. We rely on sound underwriting practices to produce investable funds. The majorityoperations with steady inflows of our investable assets come from premiums paid by policyholders. Policyholderpremiums. These funds are invested predominantly in high-quality government and municipal bonds and corporate bondsmortgage-backed securities that generally match the duration and currency of our loss reserves. The balance, comprised of shareholder funds,We typically hold these investments until maturity. As a result, unrealized holding gains and losses on these securities are generally expected to reverse as the securities mature. Premiums collected through our underwriting operations may also be held as short-term investments or cash and cash equivalents to provide short-term liquidity for projected claims payments, reinsurance costs and operating expenses.
Our investments in equity securities are predominantly held within our regulated insurance subsidiaries to support capital requirements. Capital held by our insurance subsidiaries beyond that which we anticipate will be needed to cover claims payments and operating expenses is available to be invested in equity securities, which overalong with additional capital allocated for investment purposes by Markel Group. We allocate a higher percentage of capital to equity securities than most other insurance companies. Over the long run, equity securities have produced higher returns relative to fixed maturity securities and short-term investments.
When purchasing equity securities, we seek to invest in profitable companies with high returns on capital and low debt, with honest and talented management that exhibitand significant reinvestment opportunities and capital discipline, atall while paying reasonable prices.prices for those securities. We intend to hold these equity investments over the long-term. We believe our long-term time horizon and internal sourcing of capital for investment provides us with a distinct competitive advantage compared to other companies. Substantially all of our investment portfolio is managed by company employees.employees, which helps minimize costs in our investment operations. The breadth of our operating businesses, and the experience we garner from supporting them, also informs and enhances the efficacy of our investment activities.
Invested assets, comprised of fixed maturity securities, equity securities, short-term investments, cash and cash equivalents and restricted cash and cash equivalents, were $30.9 billion at December 31, 2023. The following chart displays the composition of our invested assets as of December 31, 2023.
![1784](https://capedge.com/proxy/10-K/0001096343-24-000025/mkl-20231231_g6.jpg)
We evaluatemeasure our investment performance by analyzing net investment income netearned on our investment gainsportfolio, which reflects the recurring interest and the change in net unrealizeddividend earnings on our investment gains on available-for-sale investments, as well asportfolio. In 2023, our taxable equivalent total investment return, which is a non-GAAP financial measure. In 2021, net investment income was $374.6 million,$734.5 million. We also analyze net investment gains, were $2.0 billion,which include unrealized gains and losses on our equity portfolio. Based on the decreasepotential for volatility in net unrealized investment gains on available-for-sale investments was $450.1 million. We focus on long-term total investment return, understandingthe financial markets, we understand that the level of investment gains or losses and unrealized gains or losses may vary from one period to the next. Throughnext, and therefore believe that our investment performance is best analyzed over longer periods of time. Our annual return on equity securities for the five-year period ended December 31, 2021, the five-year annual return for our investment portfolio2023 was 8.3%14.6%. See "Investing Results" under Item 7 Management's Discussion & Analysis of Financial Condition and Results of Operations for more information about our investing results, including taxable equivalent total investment return, and Item 7A Quantitative and Qualitative Disclosures About Market Risk for more information about our investments.
Markel Ventures
Through our wholly owned subsidiary Markel Ventures, Inc. (Markel Ventures), we own controlling interests in various high-quality businesses that operate outsidein a variety of the specialty insurance marketplace but havedifferent industries with shared values and the shared goal of positively contributing to the long-term financial performance of Markel Corporation. Management views these businesses as separate and distinct from our insurance operations.Group. Management teams for each business operate autonomously and are responsible for developing strategic initiatives, managing day-to-day operations and making investment and capital allocation decisions for their respective companies.
Our seniorMarkel Ventures management team is responsible for decisions regarding allocation of capital for acquisitions and new investments. Our strategy in making these investmentsacquisitions is similar to our strategy for purchasing equity securities. We seek to invest in profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline, at reasonable prices. We intend to own the businesses acquired for a long period of time.
Our chief operating decision maker allocates resources to and assesses the performance of these various businesses in the aggregate as the Markel Ventures segment. ThisSee note 2 of the notes to consolidated financial statements included under Item 8 for additional segment reporting disclosures. The Markel Ventures segment includes a diverse portfolio of specialized businesses from different industries that offer various types of products and services to businesses and consumers across many markets. All of our businesses in this segment are headquartered in the U.S., with subsidiaries of certain businesses located outside of the U.S. This segment encounters a variety of competitors that vary by product line, end market and geographic area. Each business within the segment has several main competitors and numerous smaller ones in most of their end markets and geographic areas. See note 2 of the notes to consolidated financial statements included under Item 8 for additional segment reporting disclosures.
During the last three years,In 2021, our Markel Ventures operations have continued to expandexpanded through acquisitions of majority interests in various businesses, including Metromont LLC and Buckner HeavyLift Cranes in 2021, Lansing Building Products, LLC in 2020, and VSC Fire & Security, Inc. in 2019.Cranes. See note 3 of the notes to consolidated financial statements included under Item 8 for additional details related to these acquisitions. This follows the acquisition of Lansing Building Products, LLC in 2020 and VSC Fire & Security, Inc. in 2019. We continue to look for acquisition opportunities that align with our investment criteria and strategic objectives around diversification and specialization.
In 2021,2023, our Markel Ventures operations reported revenues of $3.6$5.0 billion, operating income of $272.6 million, net income to shareholders of $174.4$437.5 million and earnings before interest, income taxes, depreciation and amortization (EBITDA) of $402.7$628.5 million. We use Markel Ventures EBITDA, which is a non-GAAP financial measure, as an operating performance measure in conjunction with revenues, operating income and net income. See "Markel Ventures" under Item 7 Management's Discussion & Analysis of Financial Condition and Results of Operations for more information on our Markel Ventures results, including EBITDA.
The following chart displays the types of businesses within our Markel Ventures segment based on 20212023 operating revenues.
Products and services offered through these types of businesses are as follows:
•Construction Services - Our construction services businesses include companies that provide distribution services for exterior building products, crane rental services and fire protection and life safety services to other businesses in the U.S. construction market. These businesses may experience revenue fluctuations over time due to the cyclical nature of supply and demand in the construction industry, which they support.
•Consumer and Building Products - Our consumer and building products businesses include companies that produce or build ornamental plants, residential homes, luxury handbags and architectural products, which are primarily sold to consumers in the U.S. retail and housing markets. Certain of these businesses experience variations in revenues throughout the year due to seasonal demand for their products.
•Transportation-Related Products - Our transportation-related products businesses include companies that manufacture and sell over-the-road car haulers, laminated oak and composite wood flooring and tube and tank trailers primarily used in the U.S. trucking industry.
•Equipment Manufacturing Products - Our equipment manufacturing products businesses include companies that manufacture and sell equipment used in commercial baking systems and food processing, as well as dredges, in both the U.S. and international markets.
•Consulting Services - Our consulting services businesses include companies that provide management and technology consulting and retail intelligence services to other businesses primarily in the U.S. market.
•Other Services - Our other services businesses include companies that provide healthcare, leasing and investment services.
Our seniorMarkel Ventures management team does not manage the Markel Ventures portfolio of businesses at this level of aggregation due to the distinct characteristics of each business and the autonomy with which local management operates each business.
The following table provides summary information about our portfolio of Markel Ventures companies by type of business.
| | | | | | | | | | | | | | | | | | | | |
Company | | Category | | Year Founded | | Joined Markel Group Family |
Markel Food Group - Global manufacturer and designer of industrial food equipment | | Equipment manufacturing | | 1915 | | 2005 |
ParkLand Ventures - Operator of manufactured housing communities in the U.S. | | Other | | 2008 | | 2008 |
Panel Specialists - Manufacturer of dorm room furniture and wall panel systems | | Consumer and building products | | 1990 | | 2009 |
Ellicott Dredges - Manufacturer and designer of cutter suction dredges | | Equipment manufacturing | | 1885 | | 2009 |
RetailData - Provider of retail intelligence solutions | | Consulting services | | 1988 | | 2010 |
PartnerMD - Concierge healthcare membership provider offering personalized primary care, advanced physicals, and wellness services | | Other | | 2003 | | 2011 |
Weldship - Manufacturer of industrial and specialty gas transportation and storage equipment | | Transportation-related products | | 1946 | | 2011 |
Havco - Manufacturer of laminated wood flooring for dry-van trailers, truck bodies and containers | | Transportation-related products | | 1978 | | 2012 |
Eagle - Designer and builder of single family attached and detached homes | | Consumer and building products | | 1984 | | 2013 |
Cottrell - Manufacturer of over-the-road auto hauler equipment | | Transportation-related products | | 1975 | | 2014 |
CapTech - Management and information technology consulting firm | | Consulting services | | 1997 | | 2015 |
Costa Farms - Largest producer of ornamental plants in the U.S. 4 | | Consumer and building products | | 1961 | | 2017 |
Rosemont Investment Group - Specialist investor in asset and wealth management companies | | Other | | 2018 | | 2018 |
Brahmin - Creator of fashion leather handbags | | Consumer and building products | | 1982 | | 2018 |
VSC Fire & Security - Distributor of comprehensive fire protection, life safety, and low voltage solutions | | Construction services | | 1958 | | 2019 |
Lansing Building Products - Supplier of exterior building products and materials to professional contractors | | Construction services | | 1955 | | 2020 |
Buckner Heavylift Cranes - Provider of heavylift crane rental solutions | | Construction services | | 1947 | | 2021 |
Metromont - Manufacturer of highly engineered precast concrete solutions | | Consumer and building products | | 1925 | | 2021 |
Markel Ventures businesses encounter a variety of competitors that vary by industry, end market and geographic area. Each Markel Ventures business has several main competitors and numerous smaller ones in most of its respective end markets and geographic areas.
Many of the businesses in this segment experience revenue fluctuations over time due to the cyclical nature of supply and demand in their particular industry. For example, the construction industry is cyclical based on certain larger economic trends and factors, including the inflationary and interest rate environment and, for some businesses, the level of government investment. Additionally, many of our businesses experience fluctuation in demand throughout the year based on the seasonality of the products they sell or services they provide. For example, the demand for ornamental plants is particularly high during the spring and summer seasons as compared to the rest of the year.
4Measured by 2023 square footage of production. Greenhouse Grower's 2023 Top 100 Growers, Greenhouse Grower (May 11, 2023)
Businesses in this segment are reliant on inputs, such as raw materials and labor, to manufacture products and deliver services, and the operating results of these businesses could be impacted by the ability or inability to source these inputs and obtain price increases from customers in response to increases in the price of these inputs, including the cost of shipping. For example, shipping costs at some of our businesses increased significantly in 2022 before reverting to more typical levels in 2023, which has resulted in higher margins in 2023 compared to 2022 at the impacted businesses.
Management teams for each of our businesses proactively manage the risks and challenges posed by cyclicality, seasonality and inflation, among other things, in a variety of ways as appropriate and as needed for their business.
Regulatory Environment
We are subject to extensive U.S. state and federal, andas well as international, regulation and supervision in the jurisdictions in which we do business. Regulations vary from jurisdiction to jurisdiction. Additionally, as a company with publicly-tradedpublicly traded securities, we are also subject to certain legal and regulatory requirements applicable generally to public companies, including the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and the New York Stock Exchange relating to reporting and disclosure, accounting and financial reporting, corporate governance and other matters.
The following is a summary of significant regulations that apply to our businesses, but it is not intended to be a comprehensive review of every regulation to which we are subject. For information regarding certain risks associated with regulations applicable to us,our businesses, see Item 1A Risk Factors.
U.S.Group Insurance Regulation
State Regulation
Overview. Our U.S. insurance company subsidiaries are subject to varying degrees of regulation and supervision by the states and other jurisdictions in which they do business. In the U.S., authority for the regulation, supervision and administration of the business of insurance in each state is generally delegated to a state insurance commissioner who oversees a regulatory body responsible for the supervision of the business of insurance. Through this authority, state regulatory authorities have broad regulatory, supervisory and administrative powers relating to: solvency standards; corporate conduct; market conduct activities; regulating unfair trade and claims practices; licensing of insurers; licensing and appointment of agents; approval of forms and policies used; the nature of, and limitations on, insurers' investments; the form and content of annual statements and other reports on the financial condition of insurers; and establishment of loss reserves. States also regulate various aspects of the contractual relationships between insurers and independent agents. In addition, the National Association of Insurance Commissioners (NAIC), comprised of the insurance commissioners of each U.S. jurisdiction, develops or amends model statutes and regulations that, in turn, most states adopt.Supervision
Group Supervision - Global Supervisory College; Global Common Framework. Framework. Regulators within and outside the U.S. are increasingly coordinating the regulation of multinational insurers by conducting a supervisory college. A supervisory college is a forum of the regulators having jurisdictional authority over an insurance holding company's worldwide insurance subsidiaries. The supervisory college meets with executive management to evaluate the insurance group on both a group-wide and legal-entity basis, particularly with respect to its financial data, business strategies, enterprise risk management and corporate governance. The Illinois Department of Insurance is our lead insurance regulator for purposes of conducting our supervisory college.
In 2020, the International Association of Insurance Supervisors adopted its Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame). ComFrame establishes a comprehensive framework for supervisors to address group-wide activities and risks of internationally active insurance groups (IAIGs) and lays the groundwork for better supervisory cooperation and coordination. ComFrame requires the designation of a group-wide supervisor (regulator) for each IAIG and imposes a group capital requirement that will be applied to an IAIG in addition to the current legal entity capital requirements imposed by state and international insurance regulators. In response to ComFrame, the NAICNational Association of Insurance Commissioners (NAIC) revised the model Insurance Holding Company System Regulatory Act to allow state insurance regulators in the U.S. to be designated as group-wide supervisors for U.S. based IAIGs. In 2023, it was determined that we meet the criteria to be identified as an IAIG. The Illinois Department of Insurance has been designated as our group-wide supervisor.
Holding Company StatutesStatutes. . In addition to regulatory supervision of our U.S. insurance subsidiaries, weWe also are subject to state statutes governing insurance holding company systems. Typically, those statutessystems, which typically require that we periodically file information with the appropriate state insurance commissioner, including information concerning our capital structure, ownership, financial condition, dividend payments and other material transactions with affiliates, and general business operations. These statutes also require approval of changes in control of an insurer or an insurance holding company. Generally, "control" for these purposes is defined as ownership or voting power of 10% or more of a company's voting shares. Additional requirements include group-level reporting, submission ofWe also must submit an annual group-level enterprise risk report, by a regulated insurance company's ultimate controlling person and providingwhich provides information regarding an insurer's non-insurer affiliates.material risks within the insurance holding company system that could pose enterprise risk to its U.S. insurance subsidiaries.
Risk Based Capital Requirements. The NAIC uses a risk based capital (RBC) formula that is designed to measure the capital of an insurer taking into account the company's investments and products. RBC requirements provide a formula which, for property and casualty insurance companies, establishes capital thresholds for four categories of risk: asset risk, insurance risk, interest rate risk and business risk.
Financial Exams. State insurance regulators also prescribe the form and content of statutory financial statements, perform periodic financial examinations of insurers, set minimum reserve and loss ratio requirements, establish standards for permissible types and amounts of investments and require minimum capital and surplus levels. These statutory capital and surplus requirements include RBC rules promulgated by the NAIC.
Statutory Accounting Principles. Each of our U.S. insurance company subsidiaries is required to file detailed quarterly and annual reports, including financial statements, in accordance with prescribed statutory accounting rules, with regulatory officials in the jurisdictions in which they conduct business. The quarterly and annual financial reports filed with the states utilize statutory accounting principles (SAP) that are different from U.S. GAAP. In developing SAP, insurance regulators were primarily concerned with monitoring the solvency of insurance companies to assure an insurer's ability to pay all its current and future obligations to policyholders.
Own Risk and Solvency Assessment and Enterprise Risk Management. We must submit an Own Risk and Solvency Assessment Summary Report (ORSA) annually to our lead insurance regulator. The ORSA is a confidential internal assessment of the material and relevant risks associated with an insurer's current business plan and the sufficiency of capital resources to support those risks. In addition, we must file an annual enterprise risk report with our lead insurance regulator. The report must identify the material risks within the insurance holding company system that could pose enterprise risk to theour U.S. insurance subsidiaries.
U.S. Insurance Regulation
State Regulation
Overview. Our U.S. insurance company subsidiaries are subject to varying degrees of regulation and supervision by the states and other jurisdictions in which they do business. In the U.S., authority for the regulation, supervision and administration of the business of insurance in each state is generally delegated to a state insurance commissioner who oversees a regulatory body responsible for the supervision of the business of insurance. State regulatory authorities have broad regulatory, supervisory and administrative powers relating to: solvency standards; corporate conduct; market conduct activities; regulating unfair trade and claims practices; licensing of insurers; licensing and appointment of agents; approval of forms and policies used; the nature of, and limitations on, insurers' investments; the form and content of annual statements and other reports on the financial condition of insurers; and establishment of loss reserves. States also regulate various aspects of the contractual relationships between insurers and independent agents. In addition, the NAIC, comprised of the insurance commissioners of each U.S. jurisdiction, develops or amends model statutes and regulations that, in turn, most states adopt.
Risk Based Capital Requirements. The NAIC uses a risk based capital (RBC) formula to measure the capital of an insurer, taking into account the company's investments and products. For property and casualty insurance companies, RBC requirements establish capital thresholds for four categories of risk: asset risk, insurance risk, interest rate risk and business risk.
Financial Exams. State insurance regulators also prescribe the form and content of statutory financial statements, perform periodic financial examinations of insurers regarding activities in their respective states, set minimum reserve and loss ratio requirements, establish standards for permissible types and amounts of investments and require minimum capital and surplus levels. These statutory capital and surplus requirements include RBC rules promulgated by the NAIC.
Statutory Accounting Principles. Each of our U.S. insurance companies is required to file detailed quarterly and annual reports, including financial statements, in accordance with prescribed statutory accounting rules. The quarterly and annual financial reports utilize statutory accounting principles (SAP) that are different from U.S. GAAP. In developing SAP, insurance regulators were primarily concerned with monitoring the solvency of insurance companies to assure an insurer's ability to pay all its current and future obligations to policyholders.
Rates and Form Filings. The policy forms and various premium rates of our U.S. admitted insurance subsidiaries are subject to regulation in every state in which they conduct business. In many states, rates and policy forms must be filed with the applicable insurance regulator prior to their use, and in some states, rates and forms must be affirmatively approved by the applicable insurance regulator prior to use.
Dividends. The laws of the domicile states of our U.S. insurance subsidiaries govern the amount of dividends that may be paid to our holding company, Markel Corporation.Group. Generally, statutes in the domicile states of our insurance subsidiaries require prior approval for payment of extraordinary, as opposed to ordinary, dividends. See note 2022 of the notes to consolidated financial statements included under Item 8.
Market Conduct. State insurance laws and regulations include numerous provisions governing trade practices and the marketplace activities of insurers, including provisions governing marketing and sales practices, data security, compliance of underwriting services to policyholders, confirmation of licensing and appointment of producers, claims management, anti-fraud controls and complaint handling. State regulatory authorities generally enforce these provisions through periodic market conduct examinations.
Investment Regulation. Investments by our U.S. insurance companies must comply with applicable laws and regulations that prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate and certain other investments, subject to specified limits and certain other qualifications.
Cybersecurity; Data Privacy. Several states have enacted laws establishing cybersecurity requirements for financial services companies, including insurance companies, that require implementation of security measures for the monitoring, detection, prevention, mitigation and management of cybersecurity incidents. Several states also have enacted laws addressing data privacy concerns and the protection of consumer data.
Federal Regulation
The U.S. federal government and its regulatory agencies generally do not directly regulate the business of insurance. However, two federal government bodies, the Federal Insurance Office (FIO) and the Financial Stability Oversight Council (FSOC), each created under The Dodd Frank Wall Street Reform and Consumer Protection Act, may impact the regulation of insurance. Although the FIO is prohibited from directly regulating the business of insurance, it has authority to represent the U.S. in international insurance matters and has limited powers to preempt certain types of state insurance laws. The FIO also can recommend to the FSOC that it designate an insurer as an entity posing risks to the U.S. financial stability in the event of the insurer's material financial distress or failure. We have not been so designated. The U.S. federal laws that most affect our day-to-day insurance operations are: the Gramm-Leach-Bliley Act; the Fair Credit Reporting Act; the Health Insurance Portability and Accountability Act of 1996, as amended;1996; the Terrorism Risk Insurance Act of 2002, as amended;2002; anti-money laundering laws and regulations; the Nonadmitted and Reinsurance Reform Act of 2010, as amended;2010; the Foreign Corrupt Practices Act, and the rules and regulations of the Office of Foreign Assets Control.
International Insurance Regulation
Overview. Our international insurance operations are subject to regulation and supervision in various jurisdictions. These regulations, which vary depending on the jurisdiction, include, among others, solvency and market conduct regulations; anti-corruption, anti-money laundering, and anti-terroristanti-terrorism financing guidelines, laws and regulations; various privacy, insurance, tax, tariff, trade and sanctions laws and regulations; and corporate, competition, employment, intellectual property and investment laws and regulations. Outside of the U.S., we haveOur international insurance operations are domiciled in the U.K., Europe and Bermuda whichand are subject to regulation in those jurisdictions. In addition, we conduct business in Canada, Asia, Australia and the Middle East, where our businesses also are supervised by local regulatory authorities.
U.K. and European Regulation. We are subject to regulation by the Prudential Regulatory Authority and Financial Conduct Authority in respect of our U.K. insurance businesses. We are also subject to regulation by the Federal Financial Supervisory Authority, better known by its abbreviation BaFin, in respect of our German insurance carrier.
Our U.K. and German insurance businesses are subject to both the E.U.'s General Data Protection Regulation (GDPR) and the Solvency II. II Directive (Solvency II).
GDPR came into effect in May 2018, and requires businesses operating in the E.U., and businesses transacting with E.U. citizens, to comply with conditions for processing personal data. Following the U.K.'s exit from the E.U., GDPR was transposed into U.K. law. The E.U. has granted adequacy status to the U.K.'s data protection laws, valid until June 2025 with the possibility of renewal, meaning that they are deemed essentially equivalent to E.U. data protection laws.
Solvency II came into effect in January 2016 and requires our U.K. and German businesses to maintain certain capital standards and publish risk-related information in the form of a Solvency and Financial Condition Report. Following the U.K.'s exit from the E.U., the U.K.'s European Union (Withdrawal) Act 2018 transposes GDPR and Solvency II also was transposed into U.K. law as E.U. retained law. Furthermore,The U.K. government, under the Financial Services and Markets Act 2023, has opted to repeal certain portions of retained E.U. has granted adequacy status tolaw. This repeal will occur in stages and, where necessary, after replacement regulations designed for the U.K.'s data protection laws, valid until June 2025 with are in place. This repeal of retained E.U. law includes reforms to Solvency II. The Prudential Regulation Authority has consulted on the possibility of renewal, meaning that theyreforms, to be known as Solvency UK, which are deemed essentially equivalentexpected to E.U. data protection laws.be implemented in 2024.
Bermuda Regulation. The insurance industry in Bermuda is regulated by the Bermuda Monetary Authority (BMA). Under the Bermuda Insurance Act 1978, and related regulations and standards of the BMA, each Bermuda insurance company is subject to, among other things: licensing, capital, surplus and liquidity requirements; solvency standards; restrictions on dividends and distributions; and periodic examinations of the company and its financial condition. In addition, each insurance company must obtain prior approval of ownership and transfer of shares and maintain a principal office and appoint and maintain a principal representative in Bermuda. The BMA also requires that each insurance company contract for local services, such as corporate secretary insurance manager and registered representative services, at market rates.
ILS Regulation
Our Nephila insurance-linked securities operations are subject to regulation and supervision by various regulatory authorities, both in the U.S. and internationally. Certain of our ILS subsidiaries are organized and regulated as follows:
•registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended,
•registered with the U.S. Commodity Futures Trading Commission as a commodity pool operator or a commodity trading advisor under the Commodity Exchange Act, as amended,and/or
•registered with the BMA as an insurance manager under the Bermuda Insurance Act 1978, and/or
•registered with the BMA as an investment manager under the Bermuda Investments Business Act 2003.1978.
Certain other ILS subsidiaries serve as the investment manager to one or more private funds that are registered with the BMA under the Investment Funds Act 2006, as amended, or the Segregated Accounts Companies Act 2000, as amended. In addition, these operations include business relationships with certain U.S., U.K. and Bermuda insurance companies that are subject to U.S. and international insurance regulation as previously described in this "Regulatory Environment" section.
As a result, subsidiaries involved in our ILS operations are subject to regulations that may impose substantive and material restrictions and requirements on their operations, including, among other things: a broader fiduciary duty to act in the best interests of their clients; disclosure of information about our businesses and conflicts of interests to clients; maintenance of written policies and procedures; maintenance of extensive books and records; restrictions on the types of fees we may charge, including performance fees; restrictions on solicitation arrangements; requirements regarding engaging in transactions with clients; maintenance of an effective compliance program; and other restrictions and requirements applicable to custody of client assets, client privacy, advertising, pay-to-play prohibitions and cybersecurity; as well as possible sanctions, disciplinary actions or other penalties for non-compliance.
Markel Ventures Regulation
Our Markel Ventures businesses are subject to a wide variety of U.S. federal, state, and local laws and regulations, as well as international laws and regulations applicable to their international operations. Specifically, the most significant of these laws and regulations cover the following areas: safety, health, employment, the environment, transportation, U.S. and international trade, anti-corruption, data privacy and security and government contracts.
Human Capital
Our culture is our greatest asset and is defined by the Markel Style. Written in 1986, in preparation for our initial public offering, the Markel Style memorialized how we seek to operate our businesses and treat one another. It continues to provide our guiding principles across our diverse group of businesses. Key within the Markel Style is the encouragement to look for a better way to do things, to challenge management. We also seek spontaneity and flexibility and have a respect for authority, but disdain for bureaucracy. Our diverse financial holding company and each of our businesses is managed in a way to accomplish these principles. Each of our businesses operates with a high degree of autonomy so long as they operate within the principles of the Markel Style. This allows our managers to make decisions that are best for their employees and customers, as well as our shareholders. We believe this high degree of empowerment leads to the satisfaction that comes from being trusted in the responsibilities one has been given.
Further outlined in the Markel Style is our creed of honesty and fairness in all our dealings; holding the individual's right to self-determination in the highest light; putting aside individual concerns in the spirit of teamwork; and providing an atmosphere in which people can reach their full potential. We greatly value our employees, encourage their career development and reward their pursuit of excellence, while also celebrating a diverse workforce.
At December 31, 2021,2023, we had approximately 20,30021,600 employees, of whom approximately 4,7005,400 were employed within our insurance operations and approximately 15,60016,200 were employed within our Markel Ventures operations.
Insurance
Our principalspecialty insurance business, Markel, markets and underwrites specialty insurance products and within that business existsproducts. Markel has a well-developed process to ensure effective performance management, including an embedded annual and mid-year review process that enables goal setting, development planning and performance assessment. Within our insurance operations, weMarkel has also have undertaken significant work over recent years to establishestablished global leadership development programs for different levels of leadership at Markel, including partnering with various renowned business schools to create leading-edge curriculumcurricula in this area.
With the Markel Style as ourthe foundation, we haveMarkel has identified five pillars of focus that relate to today's challenges and opportunities—diversity and inclusion, community, innovation, well-being, and recognition. This program is both company and employee led—collectively, we want to bring the values of the Markel Style to life with our actions, not just our words. OurThe intent is to create an environment where employees are able to authentically bring their true selves to work, a place where all ideas are heard and diverse perspectives are valued, a culture that prioritizes innovation, the ability to make a difference for our local communities and the wider world, and a foundation for holding ourselves accountable for our own well-being and of those around us.
Employee health and overall well-being is a key priority, and we provide a range of employee and eligible partner plans and programs, including health and voluntary benefits. These offerings include a variety of financial protection programs to help our employees meet their unique investment and savings needs including life insurance, retirement savings with company contributions in most situations and an employee stock purchase plan. Comprehensive employee assistance programs are available in all of our major markets along with other well-being and fitness resources.
We rely on our employees' ideas and input to help make Markel a great place to work. For example, we conductsenior leadership conducts regular pulse surveysemployee communication meetings, inclusive of employeesquestion and answer sessions, across our insurance operations regarding their well-being and provides opportunities for employees to share their ideas on how we can improve employee engagement. In addition, every two years we conduct a major, global employee engagement survey, across our insurance operations, which most recentlyin early 2022 garnered 88% participation, and which enables us to identify, focus on and track progress against key engagement drivers and external norms for high performing companies. This survey has generated additional ideas for employee engagement;engagement, and we have made substantialmeaningful changes and improvements in our human capital practices based on this feedback. Plans are underway to conduct an employee engagement survey in early 2024. Additionally, Markel conducts regular pulse and employee net promoter score surveys on a departmental level across the organization throughout the year.
We are committed to embracing all aspects of diversity, including diversity of perspective, which we believe is crucial to sustainable success. Markel accordingly supports and encourages focused efforts to continue to build the diversity of our employee population and the inclusiveness of our culture. Our diversity and inclusion efforts seek to cultivate an inclusive environment in which every employee feels valued, respected and accepted. We believe this environment helps us increase creativity and innovation, foster business connections, serve our customers and maintain our market leadership.
Within our insurance business, ourMarkel's global Diversity and Inclusion (D&I) Steering Committee comprises more than 2015 senior managers from around the globe who are charged with advising on D&I strategy and providing leadership support and advocacy for our D&I efforts. We have a dedicated leader responsible for talent, diversity and inclusion,Our Human Resources leadership team works to further shape the D&I strategy for our global workforce, and to ensure the integration of our D&I efforts with our global talent acquisition and development processes. We recently introducedhave various early career programs open to a diverse range of applicants and a regional scholarship program that is focused on underrepresented groups in the insurance industry and are in the process of a two-year diversity and inclusion training program, including micro learning on priority topics.groups.
Our insurance operations supportMarkel supports a range of employee-led D&I networks and resource groups, that provide employee support and development, while also engaging in community outreach, including our Markel Women's Network, BEAM (Black Engagement at Markel), PRISM (LGBTQ+), Jitneys (Young Professionals), Markel Asian Professionals Network, Markel Veterans Network, sponsorship of Dive-In (the insurance industry's annual diversityUN1DOS (Latin and inclusion festival)Hispanic Network), and across our international operations, an Inclusion Network with connections to a number of the London market partner networks. All of these networks and organizations have put in place goals and programming that are focused on education and development, community engagement, talent acquisition and networking/support. Additionally, we continue our global sponsorship of Dive-In, the insurance industry's annual diversity and inclusion festival.
Markel Ventures
Our Markel Ventures operations are comprised of a diverse portfolio of businesses from different industries through which we own controlling interests. The Markel Ventures operations are viewed by management as separate and distinct from our insurance operations with local management teams that direct the strategy and day-to-day operations of their respective companies, including human capital matters. When making these acquisitions, we seek, among other things, businesses whose leadership teams demonstrate equal measures of both integrity and talent. As a result, each Markel Ventures business fosters a culture within their operations, and with their employees, that aligns with the principles of the Markel Style.
Item 1A. RISK FACTORS
A wide range of factors could materially affect our future prospects and performance. The matters addressed in Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations, including under "Safe Harbor and Cautionary Statement" and "Critical Accounting Estimates", and Item 7A Quantitative and Qualitative Disclosures About Market Risk, as well as other information included or incorporated in this report, describe many of the significant risks that could affect our businesses, results of operations and financial condition. We are also subject to the risks discussed below.
One or more of the risks discussed in this Item 1A. Risk Factors, and others we cannot anticipate, could have material adverse effects on our results of operations and financial condition; and the extent of these effects will depend, at least in part, on the scope, severity, frequency or duration of the specific event or circumstance. In addition, we may take steps to prevent, mitigate or manage potential risks or liabilities, and related developments, and some of those steps may have a material adverse effect on our results of operations and financial condition. Even if an unfavorable outcome does not materialize, these factors, and actions we may take in response, may have a material adverse impact on our reputation or result in substantial expense and disruption.
Headings and sub-headings for the Risk Factors below are for reference purposes only and are not intended to limit or affect in any way the meaning or scope of each Risk Factor.
Risks Primarily Related to Our Insurance OperationsCeded Reinsurance
Loss ExposuresIn a reinsurance transaction, an insurance company transfers, or cedes, all or part of its exposure in return for a premium. In a retrocessional reinsurance transaction, a reinsured exposure is further ceded to another reinsurer. Within our underwriting operations, we seek to retain as much of our profitable business as possible while managing volatility within our underwriting results and capital requirements at our insurance subsidiaries. We purchase reinsurance and retrocessional reinsurance to manage our net retention on individual risks and overall exposure to losses, while providing us with the ability to offer policies with sufficient limits to meet policyholder needs. This includes purchasing sufficient coverage for our catastrophe-exposed policies to ensure that our net retained catastrophe risk is within our corporate tolerances. The structure of our reinsurance purchases may vary from year to year depending on our risk tolerance and the availability and cost of reinsurance, as determined by current market conditions. In such instances, we may in turn modify our gross premium writings to manage our overall net loss exposures. Net retention of gross premium volume in our underwriting segments was 82% in 2023.
We may experience losses or disruptionsCeded reinsurance and retrocessional contracts do not legally discharge us from catastrophes. As a company with significant propertyour primary liability for the full amount of the policies, and casualty insurance underwriting operations, we may experience losses from man-made or natural catastrophes. Catastrophes include, but are not limited to, windstorms, hurricanes, earthquakes, tornadoes, derechos, hail, severe winter weather and wildfires and may include pandemics and events related to terrorism, riots and political and civil unrest. While we employ catastrophe modeling tools in our underwriting process, we cannot predict how severe a potential catastrophe will be before it occurs. The extentrequired to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. We attempt to minimize credit exposure to reinsurers through adherence to internal ceded reinsurance guidelines. We manage our exposures so that no unsecured exposure to any one reinsurer is material to our ongoing business. Treaties typically contain provisions that allow us to demand that a reinsurer post letters of losses from catastrophes iscredit or assets as collateral if a functionreinsurer becomes an unauthorized reinsurer under applicable regulations or if its rating falls below an acceptable level.
2Market Segment Report - Global Reinsurance, A.M. Best (August 22, 2023)
3Offshore Reinsurance in the U.S. Market, Reinsurance Association of the total amount of losses incurred, the number of insureds affected, the frequency and severity of the events, the effectiveness of our catastrophe risk management program and the adequacy of our reinsurance coverage. Most catastrophes occur over a small geographic area; however, some catastrophes may produce significant damage in large, heavily populated areas. In addition, catastrophes may have a material adverse effect on the investment management and incentive fees earned by our insurance-linked securities (ILS) operations and returns on ourAmerica (2022)
investmentsSee note 12 of the notes to consolidated financial statements included under Item 8 and Item 7A Quantitative and Qualitative Disclosures About Market Risk for additional information about our ceded reinsurance programs and exposures.
Competition and Underwriting Philosophy
We compete with numerous domestic and international insurance companies and reinsurers, Lloyd's syndicates, risk retention groups, insurance buying groups, risk securitization programs, alternative capital sources, such as that provided through ILS, and alternative self-insurance mechanisms. We also compete with new companies that continue to be formed to enter the insurance and reinsurance markets, particularly companies with new or "disruptive" technologies or business models. Competition may take the form of lower prices, broader coverages, greater product flexibility, enhanced digital capabilities for distribution of insurance products, higher coverage limits, higher quality services or higher ratings by independent rating agencies. In all of our markets, we compete on the basis of overall financial strength, ratings assigned by independent rating agencies, development of specialty products to satisfy well-defined market needs and by maintaining relationships with agents, brokers and insureds who rely on our expertise. This expertise is our principal means of competing. We offer a diverse portfolio of products, each with its own distinct competitive environment, which requires us to be responsive to changes in ILS funds. Catastrophes also maymarket conditions for individual product lines. With each of our products, we seek to write business that produces consistent underwriting profits by maintaining adequate rates for our premium writings in relation to expected loss cost trends.
Few barriers exist to prevent competition from entering our markets within the property and casualty industry. Market conditions, risk tolerance and capital capacity influence the degree of competition at any point in time. During periods of excess underwriting capacity, as defined by availability of capital, competition can result in significant disruptionslower pricing and less favorable policy terms and conditions for insurers. During periods of reduced underwriting capacity, pricing and policy terms and conditions are generally more favorable for insurers. Historically, the performance of the property and casualty insurance and reinsurance industries has tended to fluctuate in cyclical periods of price competition and excess underwriting capacity, followed by periods of high premium rates and shortages of underwriting capacity. At any given time, our portfolio of insurance products could be experiencing varying combinations of these characteristics.
Within our underwriting operations, we seek to earn an underwriting profit every year. The property and casualty insurance industry commonly defines underwriting profit or loss as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. We believe that the ability to achieve consistent underwriting profits demonstrates knowledge and expertise, commitment to superior customer service and the ability to manage insurance risk. We use underwriting profit or loss as a basis for evaluating our underwriting performance. The 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. A combined ratio less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. In 2023, our combined ratio was 98%. See Item 7 Management's Discussion & Analysis of Financial Condition and Results of Operations for a discussion of our underwriting results.
We routinely review the pricing for all of our product lines. When we believe the prevailing market price will not support our underwriting profit targets, the business is not written. As a result of our underwriting discipline, gross premium volume may vary when we alter our product offerings to maintain or improve underwriting profitability. For example, in 2023, we adjusted our writings within our U.S. and Bermuda directors and officers and errors and omissions product lines in our Insurance segment in response to unfavorable loss cost trends and downward pressure on rates.
Underwriting Segments
We monitor and assess the performance of our ongoing underwriting operations on a global basis in the following two segments: Insurance and Reinsurance. See note 2 of the notes to consolidated financial statements included under Item 8 for additional segment reporting disclosures.
Insurance Segment
Our Insurance segment reported gross premium volume of $9.2 billion, earned premiums of $7.3 billion and an underwriting profit of $162.2 million in 2023. The following chart presents the composition of our Insurance segment by division based on 2023 gross premium volume.
The Markel Specialty division is comprised of our U.S. and Bermuda based insurance underwriting operations and writes business for insureds ranging from individuals and small businesses to Fortune 1000 companies in the U.S., the U.K., the E.U., Asia and Australia. The Markel Specialty platform provides easy access to our diverse portfolio of products and capabilities. The Markel International division writes business worldwide from our London and Munich-based platforms, which include branch offices in Canada, Asia, Australia and across the E.U. The State National division writes collateral protection insurance for automobile and other vehicle loans in the U.S.
The following chart displays the types of products written in our Insurance segment based on 2023 gross premium volume.
General liability product offerings include a variety of primary and excess liability coverages. We focus on businesses in the construction, life sciences, energy, medical, healthcare, pharmaceutical, professional services, social welfare, recreational, transportation, heavy industrial and hospitality industries. Specific products include primary general liability, excess and umbrella products, products liability products, environmental liability products and casualty facultative reinsurance written for individual casualty risks.
Our professional liability product lines provide insurance solutions for small, middle market and risk management accounts with coverage that is tailored to their exposures and needs. Professional liability coverages include errors and omissions, directors and officers, cyber, employment practices liability, professional indemnity, transaction liability, intellectual property and union liability. Errors and omissions coverage provides solutions for specialized professions including lawyers, accountants, agents and brokers, service technicians and consultants, as well as other less-specialized professionals. Directors and officers coverage is provided for publicly-traded, private and non-profit companies, including financial institutions and Fortune 1000 companies. We also offer claims-made professional liability coverage for individual healthcare providers and coverages for medical facilities.
Personal lines products provide first and third-party coverages in the U.S. for classic cars, motorcycles and a variety of personal watercraft, including vintage boats, high-performance boats and yachts and recreational vehicles, such as motorcycles, snowmobiles and ATVs. Additionally, property coverages are offered for homeowners that do not qualify for standard homeowner's coverage, as well as personal umbrella coverage.
Marine and energy products include a portfolio of coverages for cargo, energy, hull, liability, war and terrorism risks worldwide. The cargo product line is an international transit-based book providing coverage for many types of cargo. Energy coverage includes all aspects of oil, gas and renewable energy activities. Our renewable energy activities include coverages for onshore and offshore wind farms, as well as alternative energy generation and storage technology projects. Hull coverages consist of coverage for physical damage to ocean-going tonnage, yachts and mortgagees' interests. Liability coverage provides coverage for a broad range of energy liabilities, as well as traditional marine exposures including charterers, terminal operators and ship repairers. Marine war coverage includes protections for the hulls of ships, and other related interests, against war and associated perils. Terrorism coverage includes coverage for property damage and business interruption related to political and civil violence and war on land.
Property coverages consist principally of fire, allied lines (including windstorm, hail and water damage) and other specialized property coverages, including catastrophe-exposed property risks such as earthquake and wind on both a primary and excess basis. Catastrophe-exposed property risks can present higher severity than more standard property risks due to the impacts from earthquakes and severe weather events such as hurricanes, convective storms and wildfires. Our property coverages are exposed to windstorm losses that, based on the seasonal nature of those events, are more likely to occur in the third and fourth quarters of the year. Our property risks range from small, single-location accounts to large, multi-state, multi-location, multi-national accounts on a worldwide basis. Other types of property products include inland marine products, railroad-related products and specie coverage for fine art on exhibition and in private collections.
Specialty programs business is offered in the U.S. on a standalone or package basis and generally targets specialized commercial markets and various customer groups, such as amateur sports and fitness clubs. Certain specialty programs written in this segment use managing general agents to offer single source admitted and non-admitted programs for a specific industry, class or line of business.
Workers' compensation products are offered in the U.S. and provide wage replacement and medical benefits to employees injured in the course of employment and target main-street, service and artisan contractor businesses, retail stores and restaurants.
Credit and surety products consist primarily of trade credit and prepayment coverage and a range of bonds and guarantees that support contractual obligations, as well as other coverages for specific credit risks, markets and contingencies. Key credit risks covered include those of counterparty insolvency and defaults by government-owned entities. The key coverages under surety products include contractual performance and payment risks, commercial license and permit obligations and obligations related to judicial proceedings such as court and fiduciary bonds.
Other product lines within the Insurance segment primarily include collateral protection insurance, which insures personal automobiles and other vehicles held as collateral for loans made by credit unions, banks and specialty finance companies.
Reinsurance Segment
Our Reinsurance segment product offerings are underwritten primarily by our Global Reinsurance division, which operates from platforms in the U.S., Bermuda and the U.K. We write quota share and excess of loss reinsurance on a local, national and global basis. Our Reinsurance segment reported gross premium volume of $1.0 billion, earned premiums of $1.0 billion and an underwriting loss of $19.3 million in 2023. The following chart displays the types of products written in our Reinsurance segment based on 2023 gross premium volume.
General liability reinsurance primarily consists of umbrella and excess casualty products, as well as environmental liability products covering pollution legal liability and contractors' pollution exposures.
Our specialty treaty reinsurance products are written across a wide range of specialty product lines, primarily consisting of the following:
•Credit and surety products, including structured and whole turnover credit, political risk and contract and commercial surety reinsurance programs covering worldwide exposures;
•Workers' compensation and accident and health products covering both standard and catastrophe-exposed business in the U.S. and worldwide;
•Marine and energy products covering both offshore and onshore marine, energy and renewable energy risks on a worldwide basis, including hull, cargo and liability;
•Public entity reinsurance products offering casualty coverage for municipalities, schools, special districts, public housing authorities and public entity affiliated non-profits;
•Mortgage default insurance offering coverage for private mortgage insurers predominantly located in the U.S. and Australia;
•Aviation and space coverage, including major risk, general aviation, satellite launch and orbit;
•Agriculture reinsurance covering multi-peril crop insurance, hail and related exposures for risks located in the U.S. and Canada; and
•Discrete political violence and national terror pools in select jurisdictions globally.
Professional liability reinsurance primarily consists of the following:
•Transaction liability, which provides representation, warranty and indemnity coverage for mergers and acquisitions, including coverage for tax and contingent liability;
•Directors and officers liability for publicly-traded, private and non-profit companies;
•Cyber and technology errors and omissions covering both first and third-party exposures;
•Errors and omissions for lawyers, accountants, agents and brokers, services technicians and consultants; and
•Healthcare liability for physicians, hospitals, long-term care and other medical facilities.
Program Services and Other Fronting
Our program services and other fronting business generates fee income in the form of ceding fees in exchange for fronting insurance and reinsurance business for other insurance carriers (capacity providers). In general, fronting refers to business in which we write insurance on behalf of a general agent or capacity provider and then cede all, or substantially all, of the risk under these policies to the capacity provider in exchange for ceding fees. The results of our program services and other fronting operations are not included in a reportable segment.
Our program services business, which is provided through our State National division, offers issuing carrier capacity to both specialty managing general agents and other producers who sell, control and administer books of insurance business that are supported by third parties that assume reinsurance risk, including the Nephila Reinsurers. These reinsurers include domestic and foreign insurers and institutional risk investors that want to access specific lines of U.S. property and casualty insurance business but may not have the required licenses, filings or financial strength ratings to do so.
Beginning in 2024, our State National division is expanding internationally through a partnership with our Markel International division to create an international program services division to serve managing general agents in the U.K. market. The new division is another example of how we can leverage our array of capabilities to effectively and efficiently connect capital with risk.
Through our program services business, we write a wide variety of insurance and reinsurance products, principally including general liability, commercial liability, commercial multi-peril, property and workers' compensation. Program services business written through our State National division is separately managed from our underwriting divisions, which may write similar products, in order to protect our program services customers.
The following table summarizes the subsidiaries through which our program services business is written.
| | | | | | | | | | | | | | |
Legal Entity | | Abbreviation | | State of Domicile |
City National Insurance Company | | CNIC | | Texas |
National Specialty Insurance Company | | NSIC | | Texas |
Pinnacle National Insurance Company | | PNIC | | Texas |
State National Insurance Company, Inc. | | SNIC | | Texas |
Superior Specialty Insurance Company | | SSIC | | Delaware |
United Specialty Insurance Company | | USIC | | Delaware |
Through these subsidiaries, our program services business is licensed or authorized to write business in all 50 states and the District of Columbia. Many of our programs are arranged with the assistance of brokers that are seeking to provide customized insurance solutions for specialty insurance business that requires a carrier rated "A" by A.M. Best Company (A.M. Best). Our specialized business model relies on third-party producers or capacity providers to provide policy administration, claims handling, cash handling, underwriting, or other traditional insurance company services. We compete primarily on the basis of price, customer service, financial strength ratings, licenses, reputation, business model and experience.
Total revenues attributed to our program services business for the year ended December 31, 2023 were $151.8 million. Our program services business generated $2.9 billion of gross written premium volume for the year ended December 31, 2023.
In our program services business, we enter into reinsurance agreements whereby we cede to the capacity providers 100% of the premium written and substantially all of our gross liability under all policies issued by and on behalf of us by the producer. As a result of our contract design, substantially all of the underwriting risk and operational risk inherent in the arrangement is borne by the capacity providers.
Our contracts with capacity providers do not legally discharge us from our primary liability for the full amount of the policies, and we will be required to pay the loss and bear collection risk if a capacity provider fails to meet its obligations under the reinsurance agreement. As a result, we remain exposed to the credit risk of capacity providers, including the risk that one of our capacity providers becomes insolvent or is otherwise unable or unwilling to pay policyholder claims. We mitigate this credit risk generally by either selecting well capitalized, highly rated authorized capacity providers or requiring that the capacity provider post substantial collateral to secure the reinsured risks, which, in some instances, exceeds the related reinsurance recoverable.
In our other fronting business, we leverage the strength of our underwriting platform, including our highly rated insurance subsidiaries, to write business on behalf of our Nephila ILS operations, in exchange for ceding fees, to support its business plans and assist in meeting its desired return objectives. Our other fronting business is managed separately from our program services business. The results of our other fronting business are not included in a reportable segment. Total revenues attributed to our other fronting business for the year ended December 31, 2023 were $20.7 million. Our other fronting business generated $840.9 million of gross written premium volume for the year ended December 31, 2023.
Business written on behalf of our Nephila ILS operations within both our program services and other fronting operations primarily consists of catastrophe-exposed property insurance and reinsurance business, as well as specialty and climate reinsurance business. The business written is ceded to the Nephila Reinsurers, whose investors ultimately assume the risk. To mitigate credit risk for this business, we require collateral up to a specified level of annual aggregate agreement year losses, which is held in a trust for which we are the beneficiary. See note 18 of the notes to consolidated financial statements included under Item 8 for further details regarding our programs with Nephila Reinsurers.
Although we reinsure substantially all of the risks inherent in our program services and other fronting businesses, we have certain programs that contain limits on our reinsurers' obligations to us that expose us to underwriting risk, including loss ratio caps, aggregate reinsurance limits or exclusion of the credit risk of producers. Under certain programs, including programs and contracts with Nephila Reinsurers, we also bear underwriting risk for annual aggregate agreement year losses in excess of a limit that we believe is unlikely to be exceeded.
Insurance-Linked Securities
Our insurance-linked securities operations are primarily comprised of our Nephila operations and are not included in a reportable segment. Nephila Holdings Ltd. (together with its subsidiaries, Nephila) provides investment and insurance management services through which we offer alternative capital to the insurance and reinsurance markets while providing investors with investment strategies that typically are uncorrelated with traditional asset classes. We receive management fees for investment and insurance management services provided through these operations, and for certain funds, incentive fees based on their annual performance. Our management fees are based on the net asset value of the accounts managed for most of our funds and gross premium volume for the remaining funds. Total revenues from our insurance-linked securities operations for the year ended December 31, 2023 were $99.5 million. As of December 31, 2023, Nephila's net assets under management were $6.8 billion.
Our fund management operations provide insurance and investment management services for a broad range of investment products for insurance and reinsurance companies, government entities, banks, hedge funds, pension funds and institutional investors, including insurance-linked securities such as catastrophe bonds, insurance swaps, traditional reinsurance contracts, industry loss warranties and other financial instruments. Nephila serves as the investment manager to several Bermuda based private funds (the Nephila Funds). To provide access for the Nephila Funds to a variety of insurance-linked securities in the property catastrophe, climate and specialty markets, Nephila acts as an insurance manager to certain Bermuda Class 3, collateralized and special purpose reinsurance companies, Lloyd's Syndicate 2357 and Lloyd's Syndicate 2358 (collectively, the Nephila Reinsurers). The results of the Nephila Reinsurers are attributed to the Nephila Funds primarily through derivative transactions between these entities. Neither the Nephila Funds nor the Nephila Reinsurers are subsidiaries of Markel Group, and as such, these entities are not included in our consolidated financial statements.
The Nephila Reinsurers subscribe to various property, climate and specialty reinsurance contracts based on their investors' risk profiles, which include business ceded by our underwriting and program services and other fronting platforms. We write this business on behalf of our Nephila ILS operations to the extent it fits Nephila investors' risk profile and cede substantially all of the risk to Nephila Reinsurers. See note 18 of the notes to consolidated financial statements included under Item 8 for further details regarding transactions with entities managed through our Nephila operations.
Ratings
Financial stability and strength are important considerations of policyholders, cedents and insurance agents and brokers. Because an insurance premium paid today purchases coverage for losses that might not be paid for many years, the financial viability of the insurer is of critical concern. Various independent rating agencies provide information and assign ratings to assist buyers in their search for financially sound insurers. Rating agencies periodically re-evaluate assigned ratings based upon changes in the insurer's operating results, financial condition or other significant factors influencing the insurer's business. Downgrades in assigned ratings and other negative actions could have an adverse impact on an insurer's ability to write new business.
Rating agencies assign financial strength ratings (FSRs) to property and casualty insurance companies, or group of companies, based on quantitative criteria such as profitability, leverage and liquidity, as well as qualitative assessments such as market placement, business profile, adequacy and soundness of ceded reinsurance, quality and estimated market value of assets, adequacy of loss reserves and surplus and competence, experience and integrity of management.
Sixteen of our seventeen insurance subsidiaries are rated by A.M. Best, while our Lloyd's syndicate is part of a group rating for the Lloyd's overall market. All sixteen of our insurance subsidiaries rated by A.M. Best have been assigned an FSR of "A" (excellent). The Lloyd's group has been assigned an FSR of "A" (excellent) by A.M. Best.
Nine of our seventeen insurance subsidiaries are rated by Standard & Poor's (S&P), while our Lloyd's syndicate is part of a group rating for the Lloyd's overall market. All nine of our insurance subsidiaries rated by S&P have been assigned an FSR of "A" (strong). The Lloyd's group has been assigned an FSR of "A+" (strong) by S&P.
Five of our seventeen insurance subsidiaries are rated by Moody's Corporation (Moody's). All five insurance subsidiaries rated by Moody's have been assigned an FSR of "A2" (good).
Investments
Our investment operations manage the capital held within our underwriting operations, as well as capital allocated by Markel Group. Invested assets managed through our investment operations includes our portfolio of publicly traded fixed maturity and equity securities, as well as cash and short-term investments.
Our underwriting operations provide our investment operations with steady inflows of premiums. These funds are invested predominantly in high-quality government and municipal bonds and mortgage-backed securities that generally match the duration and currency of our loss reserves. We typically hold these investments until maturity. As a result, unrealized holding gains and losses on these securities are generally expected to reverse as the securities mature. Premiums collected through our underwriting operations may also be held as short-term investments or cash and cash equivalents to provide short-term liquidity for projected claims payments, reinsurance costs and operating expenses.
Our investments in equity securities are predominantly held within our regulated insurance subsidiaries to support capital requirements. Capital held by our insurance subsidiaries beyond that which we anticipate will be needed to cover claims payments and operating expenses is available to be invested in equity securities, along with additional capital allocated for investment purposes by Markel Group. We allocate a higher percentage of capital to equity securities than most other insurance companies. Over the long run, equity securities have produced higher returns relative to fixed maturity securities and short-term investments.
When purchasing equity securities, we seek to invest in profitable companies with high returns on capital and low debt, with honest and talented management and significant reinvestment opportunities and capital discipline, all while paying reasonable prices for those securities. We intend to hold these equity investments over the long-term. We believe our long-term time horizon and internal sourcing of capital for investment provides us with a distinct competitive advantage compared to other companies. Substantially all of our investment portfolio is managed by company employees, which helps minimize costs in our investment operations. The breadth of our operating businesses, and the experience we garner from supporting them, also informs and enhances the efficacy of our investment activities.
Invested assets, comprised of fixed maturity securities, equity securities, short-term investments, cash and cash equivalents and restricted cash and cash equivalents, were $30.9 billion at December 31, 2023. The following chart displays the composition of our invested assets as of December 31, 2023.
![1784](https://capedge.com/proxy/10-K/0001096343-24-000025/mkl-20231231_g6.jpg)
We measure our investment performance by analyzing net investment income earned on our investment portfolio, which reflects the recurring interest and assets. If climate change results in an increasedividend earnings on our investment portfolio. In 2023, our net investment income was $734.5 million. We also analyze net investment gains, which include unrealized gains and losses on our equity portfolio. Based on the potential for volatility in the frequency and/financial markets, we understand that the level of gains or severitylosses may vary from one period to the next, and therefore believe that our investment performance is best analyzed over longer periods of weather-related catastrophes,time. Our annual return on equity securities for the five-year period ended December 31, 2023 was 14.6%.
Markel Ventures
Through our wholly owned subsidiary Markel Ventures, Inc. (Markel Ventures), we may experienceown controlling interests in high-quality businesses that operate in a variety of different industries with shared values and the shared goal of positively contributing to the long-term financial performance of Markel Group. Management teams for each business operate autonomously and are responsible for developing strategic initiatives, managing day-to-day operations and making investment and capital allocation decisions for their respective companies. Our Markel Ventures management team is responsible for decisions regarding allocation of capital for acquisitions and new investments. Our strategy in making these acquisitions is similar to our strategy for purchasing equity securities. We seek to invest in profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline, at reasonable prices. We intend to own the businesses acquired for a long period of time.
Our chief operating decision maker allocates resources to and assesses the performance of these various businesses in the aggregate as the Markel Ventures segment. See note 2 of the notes to consolidated financial statements included under Item 8 for additional or elevated catastrophe-related losses or disruptions,segment reporting disclosures. The Markel Ventures segment includes a diverse portfolio of specialized businesses from different industries that offer various types of products and services to businesses and consumers across many markets. All of our businesses in this segment are headquartered in the U.S., with subsidiaries of certain businesses located outside of the U.S. In 2021, our Markel Ventures operations expanded through acquisitions of majority interests in Metromont LLC and Buckner HeavyLift Cranes. See note 3 of the notes to consolidated financial statements included under Item 8 for additional details related to these acquisitions. This follows the acquisition of Lansing Building Products, LLC in 2020 and VSC Fire & Security, Inc. in 2019. We continue to look for acquisition opportunities that align with our investment criteria and strategic objectives around diversification and specialization.
In 2023, our Markel Ventures operations reported revenues of $5.0 billion, operating income of $437.5 million and earnings before interest, income taxes, depreciation and amortization (EBITDA) of $628.5 million. We use Markel Ventures EBITDA, which may be material.is a non-GAAP financial measure, as an operating performance measure in conjunction with operating income. See "Markel Ventures" under Item 7 Management's Discussion & Analysis of Financial Condition and Results of Operations for more information on our Markel Ventures results, including EBITDA.
The following chart displays the types of businesses within our Markel Ventures segment based on 2023 operating revenues. Our Markel Ventures management team does not manage the Markel Ventures portfolio of businesses at this level of aggregation due to the distinct characteristics of each business and the autonomy with which local management operates each business.
The failurefollowing table provides summary information about our portfolio of anyMarkel Ventures companies by type of business.
| | | | | | | | | | | | | | | | | | | | |
Company | | Category | | Year Founded | | Joined Markel Group Family |
Markel Food Group - Global manufacturer and designer of industrial food equipment | | Equipment manufacturing | | 1915 | | 2005 |
ParkLand Ventures - Operator of manufactured housing communities in the U.S. | | Other | | 2008 | | 2008 |
Panel Specialists - Manufacturer of dorm room furniture and wall panel systems | | Consumer and building products | | 1990 | | 2009 |
Ellicott Dredges - Manufacturer and designer of cutter suction dredges | | Equipment manufacturing | | 1885 | | 2009 |
RetailData - Provider of retail intelligence solutions | | Consulting services | | 1988 | | 2010 |
PartnerMD - Concierge healthcare membership provider offering personalized primary care, advanced physicals, and wellness services | | Other | | 2003 | | 2011 |
Weldship - Manufacturer of industrial and specialty gas transportation and storage equipment | | Transportation-related products | | 1946 | | 2011 |
Havco - Manufacturer of laminated wood flooring for dry-van trailers, truck bodies and containers | | Transportation-related products | | 1978 | | 2012 |
Eagle - Designer and builder of single family attached and detached homes | | Consumer and building products | | 1984 | | 2013 |
Cottrell - Manufacturer of over-the-road auto hauler equipment | | Transportation-related products | | 1975 | | 2014 |
CapTech - Management and information technology consulting firm | | Consulting services | | 1997 | | 2015 |
Costa Farms - Largest producer of ornamental plants in the U.S. 4 | | Consumer and building products | | 1961 | | 2017 |
Rosemont Investment Group - Specialist investor in asset and wealth management companies | | Other | | 2018 | | 2018 |
Brahmin - Creator of fashion leather handbags | | Consumer and building products | | 1982 | | 2018 |
VSC Fire & Security - Distributor of comprehensive fire protection, life safety, and low voltage solutions | | Construction services | | 1958 | | 2019 |
Lansing Building Products - Supplier of exterior building products and materials to professional contractors | | Construction services | | 1955 | | 2020 |
Buckner Heavylift Cranes - Provider of heavylift crane rental solutions | | Construction services | | 1947 | | 2021 |
Metromont - Manufacturer of highly engineered precast concrete solutions | | Consumer and building products | | 1925 | | 2021 |
Markel Ventures businesses encounter a variety of competitors that vary by industry, end market and geographic area. Each Markel Ventures business has several main competitors and numerous smaller ones in most of its respective end markets and geographic areas.
Many of the methods we employbusinesses in this segment experience revenue fluctuations over time due to managethe cyclical nature of supply and demand in their particular industry. For example, the construction industry is cyclical based on certain larger economic trends and factors, including the inflationary and interest rate environment and, for some businesses, the level of government investment. Additionally, many of our loss exposures could have a material adverse effectbusinesses experience fluctuation in demand throughout the year based on us.the seasonality of the products they sell or services they provide. For example, the demand for ornamental plants is particularly high during the spring and summer seasons as compared to the rest of the year.
4 We seekMeasured by 2023 square footage of production. Greenhouse Grower's 2023 Top 100 Growers, Greenhouse Grower (May 11, 2023)
Businesses in this segment are reliant on inputs, such as raw materials and labor, to manufacture products and deliver services, and the operating results of these businesses could be impacted by the ability or inability to source these inputs and obtain price increases from customers in response to increases in the price of these inputs, including the cost of shipping. For example, shipping costs at some of our businesses increased significantly in 2022 before reverting to more typical levels in 2023, which has resulted in higher margins in 2023 compared to 2022 at the impacted businesses.
Management teams for each of our businesses proactively manage our loss exposuresthe risks and challenges posed by cyclicality, seasonality and inflation, among other things, in a variety of ways as appropriate and as needed for their business.
Regulatory Environment
We are subject to extensive U.S. state and federal, as well as international, regulation and supervision in the jurisdictions in which we do business. Regulations vary from jurisdiction to jurisdiction. Additionally, as a company with publicly traded securities, we are also subject to certain legal and regulatory requirements applicable generally to public companies, including adheringthe rules and regulations of the U.S. Securities and Exchange Commission (SEC) and the New York Stock Exchange relating to maximumreporting and disclosure, accounting and financial reporting, corporate governance and other matters.
The following is a summary of significant regulations that apply to our businesses, but it is not intended to be a comprehensive review of every regulation to which we are subject. For information regarding certain risks associated with regulations applicable to our businesses, see Item 1A Risk Factors.
Group Insurance Regulation and Supervision
Group Supervision - Global Supervisory College; Global Common Framework. Regulators within and outside the U.S. are increasingly coordinating the regulation of multinational insurers by conducting a supervisory college. A supervisory college is a forum of the regulators having jurisdictional authority over an insurance holding company's worldwide insurance subsidiaries. The supervisory college meets with executive management to evaluate the insurance group on both a group-wide and legal-entity basis, particularly with respect to its financial data, business strategies, enterprise risk management and corporate governance. The Illinois Department of Insurance is our lead insurance regulator for purposes of conducting our supervisory college.
In 2020, the International Association of Insurance Supervisors adopted its Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame). ComFrame establishes a comprehensive framework for supervisors to address group-wide activities and risks of internationally active insurance groups (IAIGs) and lays the groundwork for better supervisory cooperation and coordination. ComFrame requires the designation of a group-wide supervisor (regulator) for each IAIG and imposes a group capital requirement that will be applied to an IAIG in addition to the current legal entity capital requirements imposed by state and international insurance regulators. In response to ComFrame, the National Association of Insurance Commissioners (NAIC) revised the model Insurance Holding Company System Regulatory Act to allow state insurance regulators in the U.S. to be designated as group-wide supervisors for U.S. based IAIGs. In 2023, it was determined that we meet the criteria to be identified as an IAIG. The Illinois Department of Insurance has been designated as our group-wide supervisor.
Holding Company Statutes. We also are subject to state statutes governing insurance holding company systems, which typically require that we periodically file information with the appropriate state insurance commissioner, including information concerning our capital structure, ownership, financial condition, dividend payments and other material transactions with affiliates, and general business operations. These statutes also require approval of changes in control of an insurer or an insurance holding company. Generally, "control" for these purposes is defined as ownership or voting power of 10% or more of a company's voting shares. We also must submit an annual group-level enterprise risk report, which provides information regarding material risks within the insurance holding company system that could pose enterprise risk to its U.S. insurance subsidiaries.
Own Risk and Solvency Assessment and Enterprise Risk Management. We must submit an Own Risk and Solvency Assessment Summary Report (ORSA) annually to our lead insurance regulator. The ORSA is a confidential internal assessment of the material and relevant risks associated with an insurer's current business plan and the sufficiency of capital resources to support those risks. In addition, we must file an annual enterprise risk report with our lead insurance regulator. The report must identify the material risks within the insurance holding company system that could pose enterprise risk to our U.S. insurance subsidiaries.
U.S. Insurance Regulation
State Regulation
Overview. Our U.S. insurance company subsidiaries are subject to varying degrees of regulation and supervision by the states and other jurisdictions in which they do business. In the U.S., authority for the regulation, supervision and administration of the business of insurance in each state is generally delegated to a state insurance commissioner who oversees a regulatory body responsible for the supervision of the business of insurance. State regulatory authorities have broad regulatory, supervisory and administrative powers relating to: solvency standards; corporate conduct; market conduct activities; regulating unfair trade and claims practices; licensing of insurers; licensing and appointment of agents; approval of forms and policies used; the nature of, and limitations on, policies writteninsurers' investments; the form and content of annual statements and other reports on the financial condition of insurers; and establishment of loss reserves. States also regulate various aspects of the contractual relationships between insurers and independent agents. In addition, the NAIC, comprised of the insurance commissioners of each U.S. jurisdiction, develops or amends model statutes and regulations that, in defined geographical zones, limiting program sizeturn, most states adopt.
Risk Based Capital Requirements. The NAIC uses a risk based capital (RBC) formula to measure the capital of an insurer, taking into account the company's investments and products. For property and casualty insurance companies, RBC requirements establish capital thresholds for each client, establishing perfour categories of risk: asset risk, insurance risk, interest rate risk and per occurrence limitationsbusiness risk.
Financial Exams. State insurance regulators also prescribe the form and content of statutory financial statements, perform periodic financial examinations of insurers regarding activities in their respective states, set minimum reserve and loss ratio requirements, establish standards for permissible types and amounts of investments and require minimum capital and surplus levels. These statutory capital and surplus requirements include RBC rules promulgated by the NAIC.
Statutory Accounting Principles. Each of our U.S. insurance companies is required to file detailed quarterly and annual reports, including financial statements, in accordance with prescribed statutory accounting rules. The quarterly and annual financial reports utilize statutory accounting principles (SAP) that are different from U.S. GAAP. In developing SAP, insurance regulators were primarily concerned with monitoring the solvency of insurance companies to assure an insurer's ability to pay all its current and future obligations to policyholders.
Rates and Form Filings. The policy forms and various premium rates of our U.S. admitted insurance subsidiaries are subject to regulation in every state in which they conduct business. In many states, rates and policy forms must be filed with the applicable insurance regulator prior to their use, and in some states, rates and forms must be affirmatively approved by the applicable insurance regulator prior to use.
Dividends. The laws of the domicile states of our U.S. insurance subsidiaries govern the amount of dividends that may be paid to our holding company, Markel Group. Generally, statutes in the domicile states of our insurance subsidiaries require prior approval for payment of extraordinary, as opposed to ordinary, dividends. See note 22 of the notes to consolidated financial statements included under Item 8.
Market Conduct. State insurance laws and regulations include numerous provisions governing trade practices and the marketplace activities of insurers, including provisions governing marketing and sales practices, data security, compliance of underwriting services to policyholders, confirmation of licensing and appointment of producers, claims management, anti-fraud controls and complaint handling. State regulatory authorities generally enforce these provisions through periodic market conduct examinations.
Investment Regulation. Investments by our U.S. insurance companies must comply with applicable laws and regulations that prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate and certain other investments, subject to specified limits and certain other qualifications.
Cybersecurity; Data Privacy. Several states have enacted laws establishing cybersecurity requirements for financial services companies, including insurance companies, that require implementation of security measures for the monitoring, detection, prevention, mitigation and management of cybersecurity incidents. Several states also have enacted laws addressing data privacy concerns and the protection of consumer data.
Federal Regulation
The U.S. federal government and its regulatory agencies generally do not directly regulate the business of insurance. However, two federal government bodies, the Federal Insurance Office (FIO) and the Financial Stability Oversight Council (FSOC), each created under The Dodd Frank Wall Street Reform and Consumer Protection Act, may impact the regulation of insurance. Although the FIO is prohibited from directly regulating the business of insurance, it has authority to represent the U.S. in international insurance matters and has limited powers to preempt certain types of state insurance laws. The FIO also can recommend to the FSOC that it designate an insurer as an entity posing risks to the U.S. financial stability in the event employing coverageof the insurer's material financial distress or failure. We have not been so designated. The U.S. federal laws that most affect our day-to-day insurance operations are: the Gramm-Leach-Bliley Act; the Fair Credit Reporting Act; the Health Insurance Portability and Accountability Act of 1996; the Terrorism Risk Insurance Act of 2002; anti-money laundering laws and regulations; the Nonadmitted and Reinsurance Reform Act of 2010; the Foreign Corrupt Practices Act, and the rules and regulations of the Office of Foreign Assets Control.
International Insurance Regulation
Overview.Our international insurance operations are subject to regulation and supervision in various jurisdictions. These regulations, which vary depending on the jurisdiction, include, among others, solvency and market conduct regulations; anti-corruption, anti-money laundering, and anti-terrorism financing guidelines, laws and regulations; various privacy, insurance, tax, tariff, trade and sanctions laws and regulations; and corporate, competition, employment, intellectual property and investment laws and regulations. Our international insurance operations are domiciled in the U.K., Europe and Bermuda and are subject to regulation in those jurisdictions. In addition, we conduct business in Canada, Asia, Australia and the Middle East, where our businesses also are supervised by local regulatory authorities.
U.K. and European Regulation. We are subject to regulation by the Prudential Regulatory Authority and Financial Conduct Authority in respect of our U.K. insurance businesses. We are also subject to regulation by the Federal Financial Supervisory Authority, better known by its abbreviation BaFin, in respect of our German insurance carrier.
Our U.K. and German insurance businesses are subject to both the E.U.'s General Data Protection Regulation (GDPR) and the Solvency II Directive (Solvency II).
GDPR requires businesses operating in the E.U., and businesses transacting with E.U. citizens, to comply with conditions for processing personal data. Following the U.K.'s exit from the E.U., GDPR was transposed into U.K. law. The E.U. has granted adequacy status to the U.K.'s data protection laws, valid until June 2025 with the possibility of renewal, meaning that they are deemed essentially equivalent to E.U. data protection laws.
Solvency II requires our U.K. and German businesses to maintain certain capital standards and publish risk-related information in the form of a Solvency and Financial Condition Report. Following the U.K.'s exit from the E.U., Solvency II also was transposed into U.K. law as retained law. The U.K. government, under the Financial Services and Markets Act 2023, has opted to repeal certain portions of retained E.U. law. This repeal will occur in stages and, where necessary, after replacement regulations designed for the U.K. are in place. This repeal of retained E.U. law includes reforms to Solvency II. The Prudential Regulation Authority has consulted on the reforms, to be known as Solvency UK, which are expected to be implemented in 2024.
Bermuda Regulation. The insurance industry in Bermuda is regulated by the Bermuda Monetary Authority (BMA). Under the Bermuda Insurance Act 1978, and related regulations and standards of the BMA, each Bermuda insurance company is subject to, among other things: licensing, capital, surplus and liquidity requirements; solvency standards; restrictions on dividends and distributions; and periodic examinations of the company and its financial condition. In addition, each insurance company must obtain prior approval of ownership and transfer of shares and maintain a principal office and appoint and maintain a principal representative in Bermuda. The BMA also requires that each insurance company contract for local services, such as corporate secretary and registered representative services, at market rates.
ILS Regulation
Our Nephila insurance-linked securities operations are subject to regulation and supervision by various regulatory authorities, both in the U.S. and internationally. Certain of our ILS subsidiaries are organized and regulated as follows:
•registered with the SEC as an investment adviser under the Investment Advisers Act of 1940,
•registered with the U.S. Commodity Futures Trading Commission as a commodity pool operator or a commodity trading advisor under the Commodity Exchange Act, and/or
•registered with the BMA as an insurance manager under the Bermuda Insurance Act 1978.
Certain other ILS subsidiaries serve as the investment manager to one or more private funds that are registered with the BMA under the Investment Funds Act 2006, as amended, or the Segregated Accounts Companies Act 2000, as amended. In addition, these operations include business relationships with certain U.S., U.K. and Bermuda insurance companies that are subject to U.S. and international insurance regulation as previously described in this "Regulatory Environment" section.
As a result, subsidiaries involved in our ILS operations are subject to regulations that may impose substantive and material restrictions and requirements on their operations, including, among other things: a broader fiduciary duty to act in the best interests of their clients; disclosure of information about our businesses and conflicts of interests to clients; maintenance of written policies and procedures; maintenance of extensive books and records; restrictions on the types of fees we may charge, including performance fees; restrictions on solicitation arrangements; requirements regarding engaging in transactions with clients; maintenance of an effective compliance program; and other restrictions and requirements applicable to custody of client assets, client privacy, advertising, pay-to-play prohibitions and cybersecurity; as well as possible sanctions, disciplinary actions or other penalties for non-compliance.
Markel Ventures Regulation
Our Markel Ventures businesses are subject to a wide variety of U.S. federal, state, and local laws and regulations, as well as international laws and regulations applicable to their international operations. Specifically, the most significant of these laws and regulations cover the following prudent underwriting guidelinesareas: safety, health, employment, the environment, transportation, U.S. and international trade, anti-corruption, data privacy and security and government contracts.
Human Capital
Our culture is our greatest asset and is defined by the Markel Style. Written in 1986, in preparation for each program written.our initial public offering, the Markel Style memorialized how we seek to operate our businesses and treat one another. It continues to provide our guiding principles across our diverse group of businesses. Key within the Markel Style is the encouragement to look for a better way to do things, to challenge management. We also seek spontaneity and flexibility and have a respect for authority, but disdain for bureaucracy. Our holding company and each of our businesses is managed in a way to manageaccomplish these principles. Each of our loss exposures through geographic diversification. Underwritingbusinesses operates with a high degree of autonomy so long as they operate within the principles of the Markel Style. This allows our managers to make decisions that are best for their employees and customers, as well as our shareholders. We believe this high degree of empowerment leads to the satisfaction that comes from being trusted in the responsibilities one has been given.
Further outlined in the Markel Style is our creed of honesty and fairness in all our dealings; holding the individual's right to self-determination in the highest light; putting aside individual concerns in the spirit of teamwork; and providing an atmosphere in which people can reach their full potential. We greatly value our employees, encourage their career development and reward their pursuit of excellence, while also celebrating a diverse workforce.
At December 31, 2023, we had approximately 21,600 employees, of whom approximately 5,400 were employed within our insurance operations and approximately 16,200 were employed within our Markel Ventures operations.
Insurance
Our specialty insurance business, Markel, markets and underwrites specialty insurance products. Markel has a well-developed process to ensure effective performance management, including an embedded annual review process that enables goal setting, development planning and performance assessment. Markel has also established global leadership development programs for different levels of leadership at Markel, partnering with various schools to create leading-edge curricula in this area.
With the Markel Style as the foundation, Markel has identified five pillars of focus that relate to today's challenges and opportunities—diversity and inclusion, community, innovation, well-being, and recognition. This program is both company and employee led—collectively, we want to bring the values of the Markel Style to life with our actions, not just our words. The intent is to create an environment where employees are able to authentically bring their true selves to work, a place where all ideas are heard and diverse perspectives are valued, a culture that prioritizes innovation, the ability to make a difference for our local communities and the wider world, and a foundation for holding ourselves accountable for our own well-being and of those around us.
Employee health and overall well-being is a matterkey priority, and we provide a range of judgment, involving assumptions about mattersemployee and eligible partner plans and programs, including health and voluntary benefits. These offerings include a variety of financial protection programs to help our employees meet their unique investment and savings needs including life insurance, retirement savings with company contributions in most situations and an employee stock purchase plan. Comprehensive employee assistance programs are available in all of our major markets along with other well-being and fitness resources.
We rely on our employees' ideas and input to help make Markel a great place to work. For example, senior leadership conducts regular employee communication meetings, inclusive of question and answer sessions, across our insurance operations and provides opportunities for employees to share their ideas on how we can improve employee engagement. In addition, every two years we conduct a major, global employee engagement survey, which in early 2022 garnered 88% participation, and which enables us to identify, focus on and track progress against key engagement drivers and external norms for high performing companies. This survey has generated additional ideas for employee engagement, and we have made meaningful changes and improvements in our human capital practices based on this feedback. Plans are underway to conduct an employee engagement survey in early 2024. Additionally, Markel conducts regular pulse and employee net promoter score surveys on a departmental level across the organization throughout the year.
We are committed to embracing all aspects of diversity, including diversity of perspective, which we believe is crucial to sustainable success. Markel accordingly supports and encourages focused efforts to continue to build the diversity of our employee population and the inclusiveness of our culture. Our diversity and inclusion efforts seek to cultivate an inclusive environment in which every employee feels valued, respected and accepted. We believe this environment helps us increase creativity and innovation, foster business connections, serve our customers and maintain our market leadership.
Markel's global Diversity and Inclusion (D&I) Steering Committee comprises more than 15 senior managers who are charged with advising on D&I strategy and providing leadership support and advocacy for our D&I efforts. Our Human Resources leadership team works to further shape the D&I strategy for our global workforce, and to ensure the integration of our D&I efforts with our global talent acquisition and development processes. We have various early career programs open to a diverse range of applicants and a regional scholarship program that is focused on underrepresented groups.
Markel supports a range of employee-led D&I networks and resource groups, including our Markel Women's Network, BEAM (Black Engagement at Markel), PRISM (LGBTQ+), Jitneys (Young Professionals), Markel Asian Professionals Network, Markel Veterans Network, UN1DOS (Latin and Hispanic Network), and across our international operations, an Inclusion Network with connections to a number of the London market partner networks. All of these networks and organizations have put in place goals and programming that are inherently unpredictablefocused on education and beyonddevelopment, community engagement, talent acquisition and networking/support. Additionally, we continue our control,global sponsorship of Dive-In, the insurance industry's annual diversity and forinclusion festival.
Markel Ventures
Our Markel Ventures operations are comprised of a diverse portfolio of businesses from different industries through which historical experiencewe own controlling interests. The Markel Ventures operations are viewed by management as separate and probability analysis may not provide sufficient guidance. distinct from our insurance operations with local management teams that direct the strategy and day-to-day operations of their respective companies, including human capital matters. When making these acquisitions, we seek, among other things, businesses whose leadership teams demonstrate equal measures of both integrity and talent. As a result, each Markel Ventures business fosters a culture within their operations, and with their employees, that aligns with the principles of the Markel Style.
Item 1A. RISK FACTORS
A wide range of factors could materially affect our future prospects and performance. The matters addressed in Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations, including under "Safe Harbor and Cautionary Statement" and "Critical Accounting Estimates", and Item 7A Quantitative and Qualitative Disclosures About Market Risk, as well as other information included or incorporated in this report, describe many of the significant risks that could affect our businesses, results of operations and financial condition. We are also subject to the risks discussed below.
One or more future eventsof the risks discussed in this Item 1A. Risk Factors, and others we cannot anticipate, could resulthave material adverse effects on our results of operations and financial condition; and the extent of these effects will depend, at least in claims that substantially exceed our expectations, which couldpart, on the scope, severity, frequency or duration of the specific event or circumstance. In addition, we may take steps to prevent, mitigate or manage potential risks or liabilities, and related developments, and some of those steps may have a material adverse effect on our results of operations and financial condition. In addition,Even if an unfavorable outcome does not materialize, these factors, and actions we seek to manage our loss exposures by policy terms, coverage exclusions and choice of legal forum. Disputes relating to coverage and choice of legal forum also arise. As a result, various provisions of our policies, such as choice of forum, or coverage limitations or exclusions, may not be enforceabletake in the manner we intend and some or all of our methods to manage loss exposures may prove ineffective.
The effects of emerging claim and coverage issues on our business are uncertain. As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issuesresponse, may have a material adverse effectimpact on our business either by broadening coverage beyond our underwriting intentreputation or by increasing the frequency and/or severity of claims. In some instances, these changes may not become apparent until after we have issued insurance or reinsurance contracts that are affected by the changes. As a result the full extent of liability under our insurance or reinsurance contracts may not be known for many years after a contract is issued. For example, many states have extended the statute of limitations for certain victims of sexual abuse, resulting in a higher frequency of claims over a more extended reporting period than originally expected.substantial expense and disruption.
We use analytical modelsHeadings and sub-headings for the Risk Factors below are for reference purposes only and are not intended to assist our decision makinglimit or affect in key areas such as pricing, reserving and capital modeling and actual results may differ materially fromany way the model outputs and related analyses. We use various modeling techniques and data analytics (e.g., scenarios, predictive and stochastic modeling, and forecasting) to analyze and estimate exposures, loss trends and other risks associated with our insurance and ILS businesses. This includes both proprietary and third-party modeled outputs and related analyses to assist us in, among other things, decision-making related to underwriting, pricing, capital allocation, reserving, investing, reinsurance and catastrophe risk. We incorporate numerous assumptions and forecasts about the future level and variabilitymeaning or scope of policyholder behavior, loss frequency and severity, interest rates, equity markets, inflation, capital requirements, and currency exchange rates, among others. The modeled outputs and related analyses from both proprietary models and third party models are subject to various assumptions, uncertainties, model design errors, complexities and the inherent limitations of any statistical analysis, including those arising from the use of historical internal and industry data and assumptions.each Risk Factor.
In addition, the modeled outputs and related analyses may from time to time contain inaccuracies, perhaps in material respects, including as a result of inaccurate inputs or applications thereof (whether due to data error, human error or otherwise). Consequently, actual results may differ materially from our modeled results. Our profitability and financial condition substantially depend on the extent to which our actual experience is consistent with assumptions we use in our models and ultimate model outputs. If, based upon these models or other factors, we misprice our products or fail to appropriately estimate the risks we are exposed to, our business, results of operations and financial condition may be materially adversely affected.
Loss Reserves
Our results may be affected because actual insured or reinsured losses differ from our loss reserves. Significant periods of time often elapse between the occurrence of an insured or reinsured loss, the reporting of the loss to us and our payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the related loss adjustment expenses. The process of estimating loss reserves is a difficult and complex exercise involving many variables and subjective judgments. This process may also become more difficult if we experience a period of rising inflation, as has been the case since early 2021.
As part of the reserving process, we review historical data and consider the impact of such factors as:
•trends in claim frequency and severity,
•changes in operations,
•emerging economic and social trends,
•trends in insurance rates,
•inflation or deflation, and
•changes in the regulatory and litigation environments.
This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves, and actual results will differ from original estimates. As part of the reserving process, we regularly review our loss reserves and make adjustments as necessary. Future increases in loss reserves for our underwriting operations will, and for our programs services operations may, result in additional charges to earnings, which may be material.
There is generally greater variability in estimating reserves for long-tail coverages, such as general liability, professional liability and workers' compensation, as they require a longer period of time for claims to be reported and settled. The impact of changes in inflation and medical costs are also more pronounced for long-tail coverages due to the longer settlement period. In addition, reinsurance reserves are subject to greater uncertainty than insurance reserves primarily because a reinsurer relies on (i) the original underwriting decisions and claims decisions made by ceding companies and (ii) information and data from ceding companies. As a result, we are subject to the risk that our ceding companies may not have adequately evaluated the risks reinsured by us and the premiums ceded may not adequately compensate us for the risks we assume. In addition, reinsurance reserves may be less reliable than insurance reserves because there is generally a longer lapse of time from the occurrence of the event to the reporting of the loss or benefit to the reinsurer and ultimate resolution or settlement of the loss.
Changes in the assumptions and estimates used in establishing reserves for our life and annuity reinsurance book could result in material increases in our estimated loss reserves for such business. Our run-off life and annuity reinsurance book exposes us to mortality risk, which is the risk that the level of death claims may differ from that which we assumed in establishing the reserves for our life and annuity reinsurance contracts. Some of our life and annuity reinsurance contracts expose us to longevity risk, which is the risk that an insured person will live longer than expected when the reserves were established, or morbidity risk, which is the risk that an insured person will become critically ill or disabled. Our reserving process for the life and annuity reinsurance book is designed with the objective of establishing appropriate reserves for the risks we assumed. Among other things, this process relies heavily on analysis of mortality, longevity and morbidity trends, lapse rates, interest rates and expenses. As of December 31, 2021, our reserves for life and annuity benefits totaled $903.0 million.
We expect mortality, morbidity, longevity, and lapse experience to fluctuate somewhat from period to period, but believe they should remain reasonably predictable over a period of many years. Mortality, longevity, morbidity or lapse experience that is less favorable than the mortality, longevity, morbidity or lapse rates that we used in establishing the reserves for a reinsurance agreement will negatively affect our net income because the reserves we originally set for the risks we assumed may not be sufficient to cover the future claims and expense payments. Furthermore, even if the total benefits paid over the life of the contract do not exceed the expected amount, unexpected increases in the incidence of deaths or illness can result in changes to our assumptions in a given reporting period, adversely affecting our net income in any particular reporting period. If there are changes to any of the above factors to the point where a reserve deficiency exists, a charge to earnings will be recorded, which may have a material adverse effect on our results of operations and financial condition.
Ceded Reinsurance
In a reinsurance transaction, an insurance company transfers, or cedes, all or part of its exposure in return for a premium. In a retrocessional reinsurance transaction, a reinsured exposure is further ceded to another reinsurer. Within our underwriting operations, we seek to retain as much of our profitable business as possible while managing volatility within our underwriting results and capital requirements at our insurance subsidiaries. We purchase reinsurance and retrocessional reinsurance to manage our net retention on individual risks and overall exposure to losses, while providing us with the ability to offer policies with sufficient limits to meet policyholder needs. This includes purchasing sufficient coverage for our catastrophe-exposed policies to ensure that our net retained catastrophe risk is within our corporate tolerances. The structure of our reinsurance purchases may vary from year to year depending on our risk tolerance and the availability and cost of reinsurance, as determined by current market conditions. In such instances, we may in turn modify our gross premium writings to manage our overall net loss exposures. Net retention of gross premium volume in our underwriting segments was 82% in 2023.
Ceded reinsurance and retrocessional contracts do not legally discharge us from our primary liability for the full amount of the policies, and we will be required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. We attempt to minimize credit exposure to reinsurers through adherence to internal ceded reinsurance guidelines. We manage our exposures so that no unsecured exposure to any one reinsurer is material to our ongoing business. Treaties typically contain provisions that allow us to demand that a reinsurer post letters of credit or assets as collateral if a reinsurer becomes an unauthorized reinsurer under applicable regulations or if its rating falls below an acceptable level.
2Market Segment Report - Global Reinsurance, A.M. Best (August 22, 2023)
3Offshore Reinsurance in the U.S. Market, Reinsurance Association of America (2022)
See note 12 of the notes to consolidated financial statements included under Item 8 and Item 7A Quantitative and Qualitative Disclosures About Market Risk for additional information about our ceded reinsurance programs and exposures.
Competition and Underwriting Philosophy
We compete with numerous domestic and international insurance companies and reinsurers, Lloyd's syndicates, risk retention groups, insurance buying groups, risk securitization programs, alternative capital sources, such as that provided through ILS, and alternative self-insurance mechanisms. We also compete with new companies that continue to be formed to enter the insurance and reinsurance markets, particularly companies with new or "disruptive" technologies or business models. Competition may take the form of lower prices, broader coverages, greater product flexibility, enhanced digital capabilities for distribution of insurance products, higher coverage limits, higher quality services or higher ratings by independent rating agencies. In all of our markets, we compete on the basis of overall financial strength, ratings assigned by independent rating agencies, development of specialty products to satisfy well-defined market needs and by maintaining relationships with agents, brokers and insureds who rely on our expertise. This expertise is our principal means of competing. We offer a diverse portfolio of products, each with its own distinct competitive environment, which requires us to be responsive to changes in market conditions for individual product lines. With each of our products, we seek to write business that produces consistent underwriting profits by maintaining adequate rates for our premium writings in relation to expected loss cost trends.
Few barriers exist to prevent competition from entering our markets within the property and casualty industry. Market conditions, risk tolerance and capital capacity influence the degree of competition at any point in time. During periods of excess underwriting capacity, as defined by availability of capital, competition can result in lower pricing and less favorable policy terms and conditions for insurers. During periods of reduced underwriting capacity, pricing and policy terms and conditions are generally more favorable for insurers. Historically, the performance of the property and casualty insurance and reinsurance industries has tended to fluctuate in cyclical periods of price competition and excess underwriting capacity, followed by periods of high premium rates and shortages of underwriting capacity. At any given time, our portfolio of insurance products could be experiencing varying combinations of these characteristics.
Within our underwriting operations, we seek to earn an underwriting profit every year. The property and casualty insurance industry commonly defines underwriting profit or loss as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. We believe that the ability to achieve consistent underwriting profits demonstrates knowledge and expertise, commitment to superior customer service and the ability to manage insurance risk. We use underwriting profit or loss as a basis for evaluating our underwriting performance. The 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. A combined ratio less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. In 2023, our combined ratio was 98%. See Item 7 Management's Discussion & Analysis of Financial Condition and Results of Operations for a discussion of our underwriting results.
We routinely review the pricing for all of our product lines. When we believe the prevailing market price will not support our underwriting profit targets, the business is not written. As a result of our underwriting discipline, gross premium volume may vary when we alter our product offerings to maintain or improve underwriting profitability. For example, in 2023, we adjusted our writings within our U.S. and Bermuda directors and officers and errors and omissions product lines in our Insurance segment in response to unfavorable loss cost trends and downward pressure on rates.
Underwriting Segments
We monitor and assess the performance of our ongoing underwriting operations on a global basis in the following two segments: Insurance and Reinsurance. See note 2 of the notes to consolidated financial statements included under Item 8 for additional segment reporting disclosures.
Insurance Segment
Our Insurance segment reported gross premium volume of $9.2 billion, earned premiums of $7.3 billion and an underwriting profit of $162.2 million in 2023. The following chart presents the composition of our Insurance segment by division based on 2023 gross premium volume.
The Markel Specialty division is comprised of our U.S. and Bermuda based insurance underwriting operations and writes business for insureds ranging from individuals and small businesses to Fortune 1000 companies in the U.S., the U.K., the E.U., Asia and Australia. The Markel Specialty platform provides easy access to our diverse portfolio of products and capabilities. The Markel International division writes business worldwide from our London and Munich-based platforms, which include branch offices in Canada, Asia, Australia and across the E.U. The State National division writes collateral protection insurance for automobile and other vehicle loans in the U.S.
The following chart displays the types of products written in our Insurance segment based on 2023 gross premium volume.
General liability product offerings include a variety of primary and excess liability coverages. We focus on businesses in the construction, life sciences, energy, medical, healthcare, pharmaceutical, professional services, social welfare, recreational, transportation, heavy industrial and hospitality industries. Specific products include primary general liability, excess and umbrella products, products liability products, environmental liability products and casualty facultative reinsurance written for individual casualty risks.
Our professional liability product lines provide insurance solutions for small, middle market and risk management accounts with coverage that is tailored to their exposures and needs. Professional liability coverages include errors and omissions, directors and officers, cyber, employment practices liability, professional indemnity, transaction liability, intellectual property and union liability. Errors and omissions coverage provides solutions for specialized professions including lawyers, accountants, agents and brokers, service technicians and consultants, as well as other less-specialized professionals. Directors and officers coverage is provided for publicly-traded, private and non-profit companies, including financial institutions and Fortune 1000 companies. We also offer claims-made professional liability coverage for individual healthcare providers and coverages for medical facilities.
Personal lines products provide first and third-party coverages in the U.S. for classic cars, motorcycles and a variety of personal watercraft, including vintage boats, high-performance boats and yachts and recreational vehicles, such as motorcycles, snowmobiles and ATVs. Additionally, property coverages are offered for homeowners that do not qualify for standard homeowner's coverage, as well as personal umbrella coverage.
Marine and energy products include a portfolio of coverages for cargo, energy, hull, liability, war and terrorism risks worldwide. The cargo product line is an international transit-based book providing coverage for many types of cargo. Energy coverage includes all aspects of oil, gas and renewable energy activities. Our renewable energy activities include coverages for onshore and offshore wind farms, as well as alternative energy generation and storage technology projects. Hull coverages consist of coverage for physical damage to ocean-going tonnage, yachts and mortgagees' interests. Liability coverage provides coverage for a broad range of energy liabilities, as well as traditional marine exposures including charterers, terminal operators and ship repairers. Marine war coverage includes protections for the hulls of ships, and other related interests, against war and associated perils. Terrorism coverage includes coverage for property damage and business interruption related to political and civil violence and war on land.
Property coverages consist principally of fire, allied lines (including windstorm, hail and water damage) and other specialized property coverages, including catastrophe-exposed property risks such as earthquake and wind on both a primary and excess basis. Catastrophe-exposed property risks can present higher severity than more standard property risks due to the impacts from earthquakes and severe weather events such as hurricanes, convective storms and wildfires. Our property coverages are exposed to windstorm losses that, based on the seasonal nature of those events, are more likely to occur in the third and fourth quarters of the year. Our property risks range from small, single-location accounts to large, multi-state, multi-location, multi-national accounts on a worldwide basis. Other types of property products include inland marine products, railroad-related products and specie coverage for fine art on exhibition and in private collections.
Specialty programs business is offered in the U.S. on a standalone or package basis and generally targets specialized commercial markets and various customer groups, such as amateur sports and fitness clubs. Certain specialty programs written in this segment use managing general agents to offer single source admitted and non-admitted programs for a specific industry, class or line of business.
Workers' compensation products are offered in the U.S. and provide wage replacement and medical benefits to employees injured in the course of employment and target main-street, service and artisan contractor businesses, retail stores and restaurants.
Credit and surety products consist primarily of trade credit and prepayment coverage and a range of bonds and guarantees that support contractual obligations, as well as other coverages for specific credit risks, markets and contingencies. Key credit risks covered include those of counterparty insolvency and defaults by government-owned entities. The key coverages under surety products include contractual performance and payment risks, commercial license and permit obligations and obligations related to judicial proceedings such as court and fiduciary bonds.
Other product lines within the Insurance segment primarily include collateral protection insurance, which insures personal automobiles and other vehicles held as collateral for loans made by credit unions, banks and specialty finance companies.
Reinsurance Segment
Our Reinsurance segment product offerings are underwritten primarily by our Global Reinsurance division, which operates from platforms in the U.S., Bermuda and the U.K. We write quota share and excess of loss reinsurance on a local, national and global basis. Our Reinsurance segment reported gross premium volume of $1.0 billion, earned premiums of $1.0 billion and an underwriting loss of $19.3 million in 2023. The following chart displays the types of products written in our Reinsurance segment based on 2023 gross premium volume.
General liability reinsurance primarily consists of umbrella and excess casualty products, as well as environmental liability products covering pollution legal liability and contractors' pollution exposures.
Our specialty treaty reinsurance products are written across a wide range of specialty product lines, primarily consisting of the following:
•Credit and surety products, including structured and whole turnover credit, political risk and contract and commercial surety reinsurance programs covering worldwide exposures;
•Workers' compensation and accident and health products covering both standard and catastrophe-exposed business in the U.S. and worldwide;
•Marine and energy products covering both offshore and onshore marine, energy and renewable energy risks on a worldwide basis, including hull, cargo and liability;
•Public entity reinsurance products offering casualty coverage for municipalities, schools, special districts, public housing authorities and public entity affiliated non-profits;
•Mortgage default insurance offering coverage for private mortgage insurers predominantly located in the U.S. and Australia;
•Aviation and space coverage, including major risk, general aviation, satellite launch and orbit;
•Agriculture reinsurance covering multi-peril crop insurance, hail and related exposures for risks located in the U.S. and Canada; and
•Discrete political violence and national terror pools in select jurisdictions globally.
Professional liability reinsurance primarily consists of the following:
•Transaction liability, which provides representation, warranty and indemnity coverage for mergers and acquisitions, including coverage for tax and contingent liability;
•Directors and officers liability for publicly-traded, private and non-profit companies;
•Cyber and technology errors and omissions covering both first and third-party exposures;
•Errors and omissions for lawyers, accountants, agents and brokers, services technicians and consultants; and
•Healthcare liability for physicians, hospitals, long-term care and other medical facilities.
Program Services and Other Fronting
Our program services and other fronting business generates fee income in the form of ceding fees in exchange for fronting insurance and reinsurance business for other insurance carriers (capacity providers). In general, fronting refers to business in which we write insurance on behalf of a general agent or capacity provider and then cede all, or substantially all, of the risk under these policies to the capacity provider in exchange for ceding fees. The results of our program services and other fronting operations are not included in a reportable segment.
Our program services business, which is provided through our State National division, offers issuing carrier capacity to both specialty managing general agents and other producers who sell, control and administer books of insurance business that are supported by third parties that assume reinsurance risk, including the Nephila Reinsurers. These reinsurers include domestic and foreign insurers and institutional risk investors that want to access specific lines of U.S. property and casualty insurance business but may not have the required licenses, filings or financial strength ratings to do so.
Beginning in 2024, our State National division is expanding internationally through a partnership with our Markel International division to create an international program services division to serve managing general agents in the U.K. market. The new division is another example of how we can leverage our array of capabilities to effectively and efficiently connect capital with risk.
Through our program services business, we write a wide variety of insurance and reinsurance products, principally including general liability, commercial liability, commercial multi-peril, property and workers' compensation. Program services business written through our State National division is separately managed from our underwriting divisions, which may write similar products, in order to protect our program services customers.
The following table summarizes the subsidiaries through which our program services business is written.
| | | | | | | | | | | | | | |
Legal Entity | | Abbreviation | | State of Domicile |
City National Insurance Company | | CNIC | | Texas |
National Specialty Insurance Company | | NSIC | | Texas |
Pinnacle National Insurance Company | | PNIC | | Texas |
State National Insurance Company, Inc. | | SNIC | | Texas |
Superior Specialty Insurance Company | | SSIC | | Delaware |
United Specialty Insurance Company | | USIC | | Delaware |
Through these subsidiaries, our program services business is licensed or authorized to write business in all 50 states and the District of Columbia. Many of our programs are arranged with the assistance of brokers that are seeking to provide customized insurance solutions for specialty insurance business that requires a carrier rated "A" by A.M. Best Company (A.M. Best). Our specialized business model relies on third-party producers or capacity providers to provide policy administration, claims handling, cash handling, underwriting, or other traditional insurance company services. We compete primarily on the basis of price, customer service, financial strength ratings, licenses, reputation, business model and experience.
Total revenues attributed to our program services business for the year ended December 31, 2023 were $151.8 million. Our program services business generated $2.9 billion of gross written premium volume for the year ended December 31, 2023.
In our program services business, we enter into reinsurance agreements whereby we cede to the capacity providers 100% of the premium written and substantially all of our gross liability under all policies issued by and on behalf of us by the producer. As a result of our contract design, substantially all of the underwriting risk and operational risk inherent in the arrangement is borne by the capacity providers.
Our contracts with capacity providers do not legally discharge us from our primary liability for the full amount of the policies, and we will be required to pay the loss and bear collection risk if a capacity provider fails to meet its obligations under the reinsurance agreement. As a result, we remain exposed to the credit risk of capacity providers, including the risk that one of our capacity providers becomes insolvent or is otherwise unable or unwilling to pay policyholder claims. We mitigate this credit risk generally by either selecting well capitalized, highly rated authorized capacity providers or requiring that the capacity provider post substantial collateral to secure the reinsured risks, which, in some instances, exceeds the related reinsurance recoverable.
In our other fronting business, we leverage the strength of our underwriting platform, including our highly rated insurance subsidiaries, to write business on behalf of our Nephila ILS operations, in exchange for ceding fees, to support its business plans and assist in meeting its desired return objectives. Our other fronting business is managed separately from our program services business. The results of our other fronting business are not included in a reportable segment. Total revenues attributed to our other fronting business for the year ended December 31, 2023 were $20.7 million. Our other fronting business generated $840.9 million of gross written premium volume for the year ended December 31, 2023.
Business written on behalf of our Nephila ILS operations within both our program services and other fronting operations primarily consists of catastrophe-exposed property insurance and reinsurance business, as well as specialty and climate reinsurance business. The business written is ceded to the Nephila Reinsurers, whose investors ultimately assume the risk. To mitigate credit risk for this business, we require collateral up to a specified level of annual aggregate agreement year losses, which is held in a trust for which we are the beneficiary. See note 18 of the notes to consolidated financial statements included under Item 8 for further details regarding our programs with Nephila Reinsurers.
Although we reinsure substantially all of the risks inherent in our program services and other fronting businesses, we have certain programs that contain limits on our reinsurers' obligations to us that expose us to underwriting risk, including loss ratio caps, aggregate reinsurance limits or exclusion of the credit risk of producers. Under certain programs, including programs and contracts with Nephila Reinsurers, we also bear underwriting risk for annual aggregate agreement year losses in excess of a limit that we believe is unlikely to be exceeded.
Insurance-Linked Securities
Our insurance-linked securities operations are primarily comprised of our Nephila operations and are not included in a reportable segment. Nephila Holdings Ltd. (together with its subsidiaries, Nephila) provides investment and insurance management services through which we offer alternative capital to the insurance and reinsurance markets while providing investors with investment strategies that typically are uncorrelated with traditional asset classes. We receive management fees for investment and insurance management services provided through these operations, and for certain funds, incentive fees based on their annual performance. Our management fees are based on the net asset value of the accounts managed for most of our funds and gross premium volume for the remaining funds. Total revenues from our insurance-linked securities operations for the year ended December 31, 2023 were $99.5 million. As of December 31, 2023, Nephila's net assets under management were $6.8 billion.
Our fund management operations provide insurance and investment management services for a broad range of investment products for insurance and reinsurance companies, government entities, banks, hedge funds, pension funds and institutional investors, including insurance-linked securities such as catastrophe bonds, insurance swaps, traditional reinsurance contracts, industry loss warranties and other financial instruments. Nephila serves as the investment manager to several Bermuda based private funds (the Nephila Funds). To provide access for the Nephila Funds to a variety of insurance-linked securities in the property catastrophe, climate and specialty markets, Nephila acts as an insurance manager to certain Bermuda Class 3, collateralized and special purpose reinsurance companies, Lloyd's Syndicate 2357 and Lloyd's Syndicate 2358 (collectively, the Nephila Reinsurers). The results of the Nephila Reinsurers are attributed to the Nephila Funds primarily through derivative transactions between these entities. Neither the Nephila Funds nor the Nephila Reinsurers are subsidiaries of Markel Group, and as such, these entities are not included in our consolidated financial statements.
The Nephila Reinsurers subscribe to various property, climate and specialty reinsurance contracts based on their investors' risk profiles, which include business ceded by our underwriting and program services and other fronting platforms. We write this business on behalf of our Nephila ILS operations to the extent it fits Nephila investors' risk profile and cede substantially all of the risk to Nephila Reinsurers. See note 18 of the notes to consolidated financial statements included under Item 8 for further details regarding transactions with entities managed through our Nephila operations.
Ratings
Financial stability and strength are important considerations of policyholders, cedents and insurance agents and brokers. Because an insurance premium paid today purchases coverage for losses that might not be paid for many years, the financial viability of the insurer is of critical concern. Various independent rating agencies provide information and assign ratings to assist buyers in their search for financially sound insurers. Rating agencies periodically re-evaluate assigned ratings based upon changes in the insurer's operating results, financial condition or other significant factors influencing the insurer's business. Downgrades in assigned ratings and other negative actions could have an adverse impact on an insurer's ability to write new business.
Rating agencies assign financial strength ratings (FSRs) to property and casualty insurance companies, or group of companies, based on quantitative criteria such as profitability, leverage and liquidity, as well as qualitative assessments such as market placement, business profile, adequacy and soundness of ceded reinsurance, quality and estimated market value of assets, adequacy of loss reserves and surplus and competence, experience and integrity of management.
Sixteen of our seventeen insurance subsidiaries are rated by A.M. Best, while our Lloyd's syndicate is part of a group rating for the Lloyd's overall market. All sixteen of our insurance subsidiaries rated by A.M. Best have been assigned an FSR of "A" (excellent). The Lloyd's group has been assigned an FSR of "A" (excellent) by A.M. Best.
Nine of our seventeen insurance subsidiaries are rated by Standard & Poor's (S&P), while our Lloyd's syndicate is part of a group rating for the Lloyd's overall market. All nine of our insurance subsidiaries rated by S&P have been assigned an FSR of "A" (strong). The Lloyd's group has been assigned an FSR of "A+" (strong) by S&P.
Five of our seventeen insurance subsidiaries are rated by Moody's Corporation (Moody's). All five insurance subsidiaries rated by Moody's have been assigned an FSR of "A2" (good).
Investments
Our investment operations manage the capital held within our underwriting operations, as well as capital allocated by Markel Group. Invested assets managed through our investment operations includes our portfolio of publicly traded fixed maturity and equity securities, as well as cash and short-term investments.
Our underwriting operations provide our investment operations with steady inflows of premiums. These funds are invested predominantly in high-quality government and municipal bonds and mortgage-backed securities that generally match the duration and currency of our loss reserves. We typically hold these investments until maturity. As a result, unrealized holding gains and losses on these securities are generally expected to reverse as the securities mature. Premiums collected through our underwriting operations may also be held as short-term investments or cash and cash equivalents to provide short-term liquidity for projected claims payments, reinsurance costs and operating expenses.
Our investments in equity securities are predominantly held within our regulated insurance subsidiaries to support capital requirements. Capital held by our insurance subsidiaries beyond that which we anticipate will be needed to cover claims payments and operating expenses is available to be invested in equity securities, along with additional capital allocated for investment purposes by Markel Group. We allocate a higher percentage of capital to equity securities than most other insurance companies. Over the long run, equity securities have produced higher returns relative to fixed maturity securities and short-term investments.
When purchasing equity securities, we seek to invest in profitable companies with high returns on capital and low debt, with honest and talented management and significant reinvestment opportunities and capital discipline, all while paying reasonable prices for those securities. We intend to hold these equity investments over the long-term. We believe our long-term time horizon and internal sourcing of capital for investment provides us with a distinct competitive advantage compared to other companies. Substantially all of our investment portfolio is managed by company employees, which helps minimize costs in our investment operations. The breadth of our operating businesses, and the experience we garner from supporting them, also informs and enhances the efficacy of our investment activities.
Invested assets, comprised of fixed maturity securities, equity securities, short-term investments, cash and cash equivalents and restricted cash and cash equivalents, were $30.9 billion at December 31, 2023. The following chart displays the composition of our invested assets as of December 31, 2023.
![1784](https://capedge.com/proxy/10-K/0001096343-24-000025/mkl-20231231_g6.jpg)
We measure our investment performance by analyzing net investment income earned on our investment portfolio, which reflects the recurring interest and dividend earnings on our investment portfolio. In 2023, our net investment income was $734.5 million. We also analyze net investment gains, which include unrealized gains and losses on our equity portfolio. Based on the potential for volatility in the financial markets, we understand that the level of gains or losses may vary from one period to the next, and therefore believe that our investment performance is best analyzed over longer periods of time. Our annual return on equity securities for the five-year period ended December 31, 2023 was 14.6%.
Markel Ventures
Through our wholly owned subsidiary Markel Ventures, Inc. (Markel Ventures), we own controlling interests in high-quality businesses that operate in a variety of different industries with shared values and the shared goal of positively contributing to the long-term financial performance of Markel Group. Management teams for each business operate autonomously and are responsible for developing strategic initiatives, managing day-to-day operations and making investment and capital allocation decisions for their respective companies. Our Markel Ventures management team is responsible for decisions regarding allocation of capital for acquisitions and new investments. Our strategy in making these acquisitions is similar to our strategy for purchasing equity securities. We seek to invest in profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline, at reasonable prices. We intend to own the businesses acquired for a long period of time.
Our chief operating decision maker allocates resources to and assesses the performance of these various businesses in the aggregate as the Markel Ventures segment. See note 2 of the notes to consolidated financial statements included under Item 8 for additional segment reporting disclosures. The Markel Ventures segment includes a diverse portfolio of specialized businesses from different industries that offer various types of products and services to businesses and consumers across many markets. All of our businesses in this segment are headquartered in the U.S., with subsidiaries of certain businesses located outside of the U.S. In 2021, our Markel Ventures operations expanded through acquisitions of majority interests in Metromont LLC and Buckner HeavyLift Cranes. See note 3 of the notes to consolidated financial statements included under Item 8 for additional details related to these acquisitions. This follows the acquisition of Lansing Building Products, LLC in 2020 and VSC Fire & Security, Inc. in 2019. We continue to look for acquisition opportunities that align with our investment criteria and strategic objectives around diversification and specialization.
In 2023, our Markel Ventures operations reported revenues of $5.0 billion, operating income of $437.5 million and earnings before interest, income taxes, depreciation and amortization (EBITDA) of $628.5 million. We use Markel Ventures EBITDA, which is a non-GAAP financial measure, as an operating performance measure in conjunction with operating income. See "Markel Ventures" under Item 7 Management's Discussion & Analysis of Financial Condition and Results of Operations for more information on our Markel Ventures results, including EBITDA.
The following chart displays the types of businesses within our Markel Ventures segment based on 2023 operating revenues. Our Markel Ventures management team does not manage the Markel Ventures portfolio of businesses at this level of aggregation due to the distinct characteristics of each business and the autonomy with which local management operates each business.
The following table provides summary information about our portfolio of Markel Ventures companies by type of business.
| | | | | | | | | | | | | | | | | | | | |
Company | | Category | | Year Founded | | Joined Markel Group Family |
Markel Food Group - Global manufacturer and designer of industrial food equipment | | Equipment manufacturing | | 1915 | | 2005 |
ParkLand Ventures - Operator of manufactured housing communities in the U.S. | | Other | | 2008 | | 2008 |
Panel Specialists - Manufacturer of dorm room furniture and wall panel systems | | Consumer and building products | | 1990 | | 2009 |
Ellicott Dredges - Manufacturer and designer of cutter suction dredges | | Equipment manufacturing | | 1885 | | 2009 |
RetailData - Provider of retail intelligence solutions | | Consulting services | | 1988 | | 2010 |
PartnerMD - Concierge healthcare membership provider offering personalized primary care, advanced physicals, and wellness services | | Other | | 2003 | | 2011 |
Weldship - Manufacturer of industrial and specialty gas transportation and storage equipment | | Transportation-related products | | 1946 | | 2011 |
Havco - Manufacturer of laminated wood flooring for dry-van trailers, truck bodies and containers | | Transportation-related products | | 1978 | | 2012 |
Eagle - Designer and builder of single family attached and detached homes | | Consumer and building products | | 1984 | | 2013 |
Cottrell - Manufacturer of over-the-road auto hauler equipment | | Transportation-related products | | 1975 | | 2014 |
CapTech - Management and information technology consulting firm | | Consulting services | | 1997 | | 2015 |
Costa Farms - Largest producer of ornamental plants in the U.S. 4 | | Consumer and building products | | 1961 | | 2017 |
Rosemont Investment Group - Specialist investor in asset and wealth management companies | | Other | | 2018 | | 2018 |
Brahmin - Creator of fashion leather handbags | | Consumer and building products | | 1982 | | 2018 |
VSC Fire & Security - Distributor of comprehensive fire protection, life safety, and low voltage solutions | | Construction services | | 1958 | | 2019 |
Lansing Building Products - Supplier of exterior building products and materials to professional contractors | | Construction services | | 1955 | | 2020 |
Buckner Heavylift Cranes - Provider of heavylift crane rental solutions | | Construction services | | 1947 | | 2021 |
Metromont - Manufacturer of highly engineered precast concrete solutions | | Consumer and building products | | 1925 | | 2021 |
Markel Ventures businesses encounter a variety of competitors that vary by industry, end market and geographic area. Each Markel Ventures business has several main competitors and numerous smaller ones in most of its respective end markets and geographic areas.
Many of the businesses in this segment experience revenue fluctuations over time due to the cyclical nature of supply and demand in their particular industry. For example, the construction industry is cyclical based on certain larger economic trends and factors, including the inflationary and interest rate environment and, for some businesses, the level of government investment. Additionally, many of our businesses experience fluctuation in demand throughout the year based on the seasonality of the products they sell or services they provide. For example, the demand for ornamental plants is particularly high during the spring and summer seasons as compared to the rest of the year.
4Measured by 2023 square footage of production. Greenhouse Grower's 2023 Top 100 Growers, Greenhouse Grower (May 11, 2023)
Businesses in this segment are reliant on inputs, such as raw materials and labor, to manufacture products and deliver services, and the operating results of these businesses could be impacted by the ability or inability to source these inputs and obtain price increases from customers in response to increases in the price of these inputs, including the cost of shipping. For example, shipping costs at some of our businesses increased significantly in 2022 before reverting to more typical levels in 2023, which has resulted in higher margins in 2023 compared to 2022 at the impacted businesses.
Management teams for each of our businesses proactively manage the risks and challenges posed by cyclicality, seasonality and inflation, among other things, in a variety of ways as appropriate and as needed for their business.
Regulatory Environment
We are subject to extensive U.S. state and federal, as well as international, regulation and supervision in the jurisdictions in which we do business. Regulations vary from jurisdiction to jurisdiction. Additionally, as a company with publicly traded securities, we are also subject to certain legal and regulatory requirements applicable generally to public companies, including the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and the New York Stock Exchange relating to reporting and disclosure, accounting and financial reporting, corporate governance and other matters.
The following is a summary of significant regulations that apply to our businesses, but it is not intended to be a comprehensive review of every regulation to which we are subject. For information regarding certain risks associated with regulations applicable to our businesses, see Item 1A Risk Factors.
Group Insurance Regulation and Supervision
Group Supervision - Global Supervisory College; Global Common Framework. Regulators within and outside the U.S. are increasingly coordinating the regulation of multinational insurers by conducting a supervisory college. A supervisory college is a forum of the regulators having jurisdictional authority over an insurance holding company's worldwide insurance subsidiaries. The supervisory college meets with executive management to evaluate the insurance group on both a group-wide and legal-entity basis, particularly with respect to its financial data, business strategies, enterprise risk management and corporate governance. The Illinois Department of Insurance is our lead insurance regulator for purposes of conducting our supervisory college.
In 2020, the International Association of Insurance Supervisors adopted its Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame). ComFrame establishes a comprehensive framework for supervisors to address group-wide activities and risks of internationally active insurance groups (IAIGs) and lays the groundwork for better supervisory cooperation and coordination. ComFrame requires the designation of a group-wide supervisor (regulator) for each IAIG and imposes a group capital requirement that will be applied to an IAIG in addition to the current legal entity capital requirements imposed by state and international insurance regulators. In response to ComFrame, the National Association of Insurance Commissioners (NAIC) revised the model Insurance Holding Company System Regulatory Act to allow state insurance regulators in the U.S. to be designated as group-wide supervisors for U.S. based IAIGs. In 2023, it was determined that we meet the criteria to be identified as an IAIG. The Illinois Department of Insurance has been designated as our group-wide supervisor.
Holding Company Statutes. We also are subject to state statutes governing insurance holding company systems, which typically require that we periodically file information with the appropriate state insurance commissioner, including information concerning our capital structure, ownership, financial condition, dividend payments and other material transactions with affiliates, and general business operations. These statutes also require approval of changes in control of an insurer or an insurance holding company. Generally, "control" for these purposes is defined as ownership or voting power of 10% or more of a company's voting shares. We also must submit an annual group-level enterprise risk report, which provides information regarding material risks within the insurance holding company system that could pose enterprise risk to its U.S. insurance subsidiaries.
Own Risk and Solvency Assessment and Enterprise Risk Management. We must submit an Own Risk and Solvency Assessment Summary Report (ORSA) annually to our lead insurance regulator. The ORSA is a confidential internal assessment of the material and relevant risks associated with an insurer's current business plan and the sufficiency of capital resources to support those risks. In addition, we must file an annual enterprise risk report with our lead insurance regulator. The report must identify the material risks within the insurance holding company system that could pose enterprise risk to our U.S. insurance subsidiaries.
U.S. Insurance Regulation
State Regulation
Overview. Our U.S. insurance company subsidiaries are subject to varying degrees of regulation and supervision by the states and other jurisdictions in which they do business. In the U.S., authority for the regulation, supervision and administration of the business of insurance in each state is generally delegated to a state insurance commissioner who oversees a regulatory body responsible for the supervision of the business of insurance. State regulatory authorities have broad regulatory, supervisory and administrative powers relating to: solvency standards; corporate conduct; market conduct activities; regulating unfair trade and claims practices; licensing of insurers; licensing and appointment of agents; approval of forms and policies used; the nature of, and limitations on, insurers' investments; the form and content of annual statements and other reports on the financial condition of insurers; and establishment of loss reserves. States also regulate various aspects of the contractual relationships between insurers and independent agents. In addition, the NAIC, comprised of the insurance commissioners of each U.S. jurisdiction, develops or amends model statutes and regulations that, in turn, most states adopt.
Risk Based Capital Requirements. The NAIC uses a risk based capital (RBC) formula to measure the capital of an insurer, taking into account the company's investments and products. For property and casualty insurance companies, RBC requirements establish capital thresholds for four categories of risk: asset risk, insurance risk, interest rate risk and business risk.
Financial Exams. State insurance regulators also prescribe the form and content of statutory financial statements, perform periodic financial examinations of insurers regarding activities in their respective states, set minimum reserve and loss ratio requirements, establish standards for permissible types and amounts of investments and require minimum capital and surplus levels. These statutory capital and surplus requirements include RBC rules promulgated by the NAIC.
Statutory Accounting Principles. Each of our U.S. insurance companies is required to file detailed quarterly and annual reports, including financial statements, in accordance with prescribed statutory accounting rules. The quarterly and annual financial reports utilize statutory accounting principles (SAP) that are different from U.S. GAAP. In developing SAP, insurance regulators were primarily concerned with monitoring the solvency of insurance companies to assure an insurer's ability to pay all its current and future obligations to policyholders.
Rates and Form Filings. The policy forms and various premium rates of our U.S. admitted insurance subsidiaries are subject to regulation in every state in which they conduct business. In many states, rates and policy forms must be filed with the applicable insurance regulator prior to their use, and in some states, rates and forms must be affirmatively approved by the applicable insurance regulator prior to use.
Dividends. The laws of the domicile states of our U.S. insurance subsidiaries govern the amount of dividends that may be paid to our holding company, Markel Group. Generally, statutes in the domicile states of our insurance subsidiaries require prior approval for payment of extraordinary, as opposed to ordinary, dividends. See note 22 of the notes to consolidated financial statements included under Item 8.
Market Conduct. State insurance laws and regulations include numerous provisions governing trade practices and the marketplace activities of insurers, including provisions governing marketing and sales practices, data security, compliance of underwriting services to policyholders, confirmation of licensing and appointment of producers, claims management, anti-fraud controls and complaint handling. State regulatory authorities generally enforce these provisions through periodic market conduct examinations.
Investment Regulation. Investments by our U.S. insurance companies must comply with applicable laws and regulations that prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate and certain other investments, subject to specified limits and certain other qualifications.
Cybersecurity; Data Privacy. Several states have enacted laws establishing cybersecurity requirements for financial services companies, including insurance companies, that require implementation of security measures for the monitoring, detection, prevention, mitigation and management of cybersecurity incidents. Several states also have enacted laws addressing data privacy concerns and the protection of consumer data.
Federal Regulation
The U.S. federal government and its regulatory agencies generally do not directly regulate the business of insurance. However, two federal government bodies, the Federal Insurance Office (FIO) and the Financial Stability Oversight Council (FSOC), each created under The Dodd Frank Wall Street Reform and Consumer Protection Act, may impact the regulation of insurance. Although the FIO is prohibited from directly regulating the business of insurance, it has authority to represent the U.S. in international insurance matters and has limited powers to preempt certain types of state insurance laws. The FIO also can recommend to the FSOC that it designate an insurer as an entity posing risks to the U.S. financial stability in the event of the insurer's material financial distress or failure. We have not been so designated. The U.S. federal laws that most affect our day-to-day insurance operations are: the Gramm-Leach-Bliley Act; the Fair Credit Reporting Act; the Health Insurance Portability and Accountability Act of 1996; the Terrorism Risk Insurance Act of 2002; anti-money laundering laws and regulations; the Nonadmitted and Reinsurance Reform Act of 2010; the Foreign Corrupt Practices Act, and the rules and regulations of the Office of Foreign Assets Control.
International Insurance Regulation
Overview.Our international insurance operations are subject to regulation and supervision in various jurisdictions. These regulations, which vary depending on the jurisdiction, include, among others, solvency and market conduct regulations; anti-corruption, anti-money laundering, and anti-terrorism financing guidelines, laws and regulations; various privacy, insurance, tax, tariff, trade and sanctions laws and regulations; and corporate, competition, employment, intellectual property and investment laws and regulations. Our international insurance operations are domiciled in the U.K., Europe and Bermuda and are subject to regulation in those jurisdictions. In addition, we conduct business in Canada, Asia, Australia and the Middle East, where our businesses also are supervised by local regulatory authorities.
U.K. and European Regulation. We are subject to regulation by the Prudential Regulatory Authority and Financial Conduct Authority in respect of our U.K. insurance businesses. We are also subject to regulation by the Federal Financial Supervisory Authority, better known by its abbreviation BaFin, in respect of our German insurance carrier.
Our U.K. and German insurance businesses are subject to both the E.U.'s General Data Protection Regulation (GDPR) and the Solvency II Directive (Solvency II).
GDPR requires businesses operating in the E.U., and businesses transacting with E.U. citizens, to comply with conditions for processing personal data. Following the U.K.'s exit from the E.U., GDPR was transposed into U.K. law. The E.U. has granted adequacy status to the U.K.'s data protection laws, valid until June 2025 with the possibility of renewal, meaning that they are deemed essentially equivalent to E.U. data protection laws.
Solvency II requires our U.K. and German businesses to maintain certain capital standards and publish risk-related information in the form of a Solvency and Financial Condition Report. Following the U.K.'s exit from the E.U., Solvency II also was transposed into U.K. law as retained law. The U.K. government, under the Financial Services and Markets Act 2023, has opted to repeal certain portions of retained E.U. law. This repeal will occur in stages and, where necessary, after replacement regulations designed for the U.K. are in place. This repeal of retained E.U. law includes reforms to Solvency II. The Prudential Regulation Authority has consulted on the reforms, to be known as Solvency UK, which are expected to be implemented in 2024.
Bermuda Regulation. The insurance industry in Bermuda is regulated by the Bermuda Monetary Authority (BMA). Under the Bermuda Insurance Act 1978, and related regulations and standards of the BMA, each Bermuda insurance company is subject to, among other things: licensing, capital, surplus and liquidity requirements; solvency standards; restrictions on dividends and distributions; and periodic examinations of the company and its financial condition. In addition, each insurance company must obtain prior approval of ownership and transfer of shares and maintain a principal office and appoint and maintain a principal representative in Bermuda. The BMA also requires that each insurance company contract for local services, such as corporate secretary and registered representative services, at market rates.
ILS Regulation
Our Nephila insurance-linked securities operations are subject to regulation and supervision by various regulatory authorities, both in the U.S. and internationally. Certain of our ILS subsidiaries are organized and regulated as follows:
•registered with the SEC as an investment adviser under the Investment Advisers Act of 1940,
•registered with the U.S. Commodity Futures Trading Commission as a commodity pool operator or a commodity trading advisor under the Commodity Exchange Act, and/or
•registered with the BMA as an insurance manager under the Bermuda Insurance Act 1978.
Certain other ILS subsidiaries serve as the investment manager to one or more private funds that are registered with the BMA under the Investment Funds Act 2006, as amended, or the Segregated Accounts Companies Act 2000, as amended. In addition, these operations include business relationships with certain U.S., U.K. and Bermuda insurance companies that are subject to U.S. and international insurance regulation as previously described in this "Regulatory Environment" section.
As a result, subsidiaries involved in our ILS operations are subject to regulations that may impose substantive and material restrictions and requirements on their operations, including, among other things: a broader fiduciary duty to act in the best interests of their clients; disclosure of information about our businesses and conflicts of interests to clients; maintenance of written policies and procedures; maintenance of extensive books and records; restrictions on the types of fees we may charge, including performance fees; restrictions on solicitation arrangements; requirements regarding engaging in transactions with clients; maintenance of an effective compliance program; and other restrictions and requirements applicable to custody of client assets, client privacy, advertising, pay-to-play prohibitions and cybersecurity; as well as possible sanctions, disciplinary actions or other penalties for non-compliance.
Markel Ventures Regulation
Our Markel Ventures businesses are subject to a wide variety of U.S. federal, state, and local laws and regulations, as well as international laws and regulations applicable to their international operations. Specifically, the most significant of these laws and regulations cover the following areas: safety, health, employment, the environment, transportation, U.S. and international trade, anti-corruption, data privacy and security and government contracts.
Human Capital
Our culture is our greatest asset and is defined by the Markel Style. Written in 1986, in preparation for our initial public offering, the Markel Style memorialized how we seek to operate our businesses and treat one another. It continues to provide our guiding principles across our diverse group of businesses. Key within the Markel Style is the encouragement to look for a better way to do things, to challenge management. We also seek spontaneity and flexibility and have a respect for authority, but disdain for bureaucracy. Our holding company and each of our businesses is managed in a way to accomplish these principles. Each of our businesses operates with a high degree of autonomy so long as they operate within the principles of the Markel Style. This allows our managers to make decisions that are best for their employees and customers, as well as our shareholders. We believe this high degree of empowerment leads to the satisfaction that comes from being trusted in the responsibilities one has been given.
Further outlined in the Markel Style is our creed of honesty and fairness in all our dealings; holding the individual's right to self-determination in the highest light; putting aside individual concerns in the spirit of teamwork; and providing an atmosphere in which people can reach their full potential. We greatly value our employees, encourage their career development and reward their pursuit of excellence, while also celebrating a diverse workforce.
At December 31, 2023, we had approximately 21,600 employees, of whom approximately 5,400 were employed within our insurance operations and approximately 16,200 were employed within our Markel Ventures operations.
Insurance
Our specialty insurance business, Markel, markets and underwrites specialty insurance products. Markel has a well-developed process to ensure effective performance management, including an embedded annual review process that enables goal setting, development planning and performance assessment. Markel has also established global leadership development programs for different levels of leadership at Markel, partnering with various schools to create leading-edge curricula in this area.
With the Markel Style as the foundation, Markel has identified five pillars of focus that relate to today's challenges and opportunities—diversity and inclusion, community, innovation, well-being, and recognition. This program is both company and employee led—collectively, we want to bring the values of the Markel Style to life with our actions, not just our words. The intent is to create an environment where employees are able to authentically bring their true selves to work, a place where all ideas are heard and diverse perspectives are valued, a culture that prioritizes innovation, the ability to make a difference for our local communities and the wider world, and a foundation for holding ourselves accountable for our own well-being and of those around us.
Employee health and overall well-being is a key priority, and we provide a range of employee and eligible partner plans and programs, including health and voluntary benefits. These offerings include a variety of financial protection programs to help our employees meet their unique investment and savings needs including life insurance, retirement savings with company contributions in most situations and an employee stock purchase plan. Comprehensive employee assistance programs are available in all of our major markets along with other well-being and fitness resources.
We rely on our employees' ideas and input to help make Markel a great place to work. For example, senior leadership conducts regular employee communication meetings, inclusive of question and answer sessions, across our insurance operations and provides opportunities for employees to share their ideas on how we can improve employee engagement. In addition, every two years we conduct a major, global employee engagement survey, which in early 2022 garnered 88% participation, and which enables us to identify, focus on and track progress against key engagement drivers and external norms for high performing companies. This survey has generated additional ideas for employee engagement, and we have made meaningful changes and improvements in our human capital practices based on this feedback. Plans are underway to conduct an employee engagement survey in early 2024. Additionally, Markel conducts regular pulse and employee net promoter score surveys on a departmental level across the organization throughout the year.
We are committed to embracing all aspects of diversity, including diversity of perspective, which we believe is crucial to sustainable success. Markel accordingly supports and encourages focused efforts to continue to build the diversity of our employee population and the inclusiveness of our culture. Our diversity and inclusion efforts seek to cultivate an inclusive environment in which every employee feels valued, respected and accepted. We believe this environment helps us increase creativity and innovation, foster business connections, serve our customers and maintain our market leadership.
Markel's global Diversity and Inclusion (D&I) Steering Committee comprises more than 15 senior managers who are charged with advising on D&I strategy and providing leadership support and advocacy for our D&I efforts. Our Human Resources leadership team works to further shape the D&I strategy for our global workforce, and to ensure the integration of our D&I efforts with our global talent acquisition and development processes. We have various early career programs open to a diverse range of applicants and a regional scholarship program that is focused on underrepresented groups.
Markel supports a range of employee-led D&I networks and resource groups, including our Markel Women's Network, BEAM (Black Engagement at Markel), PRISM (LGBTQ+), Jitneys (Young Professionals), Markel Asian Professionals Network, Markel Veterans Network, UN1DOS (Latin and Hispanic Network), and across our international operations, an Inclusion Network with connections to a number of the London market partner networks. All of these networks and organizations have put in place goals and programming that are focused on education and development, community engagement, talent acquisition and networking/support. Additionally, we continue our global sponsorship of Dive-In, the insurance industry's annual diversity and inclusion festival.
Markel Ventures
Our Markel Ventures operations are comprised of a diverse portfolio of businesses from different industries through which we own controlling interests. The Markel Ventures operations are viewed by management as separate and distinct from our insurance operations with local management teams that direct the strategy and day-to-day operations of their respective companies, including human capital matters. When making these acquisitions, we seek, among other things, businesses whose leadership teams demonstrate equal measures of both integrity and talent. As a result, each Markel Ventures business fosters a culture within their operations, and with their employees, that aligns with the principles of the Markel Style.
Item 1A. RISK FACTORS
A wide range of factors could materially affect our future prospects and performance. The matters addressed in Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations, including under "Safe Harbor and Cautionary Statement" and "Critical Accounting Estimates", and Item 7A Quantitative and Qualitative Disclosures About Market Risk, as well as other information included or incorporated in this report, describe many of the significant risks that could affect our businesses, results of operations and financial condition. We are also subject to the risks discussed below.
One or more of the risks discussed in this Item 1A. Risk Factors, and others we cannot anticipate, could have material adverse effects on our results of operations and financial condition; and the extent of these effects will depend, at least in part, on the scope, severity, frequency or duration of the specific event or circumstance. In addition, we may take steps to prevent, mitigate or manage potential risks or liabilities, and related developments, and some of those steps may have a material adverse effect on our results of operations and financial condition. Even if an unfavorable outcome does not materialize, these factors, and actions we may take in response, may have a material adverse impact on our reputation or result in substantial expense and disruption.
Headings and sub-headings for the Risk Factors below are for reference purposes only and are not intended to limit or affect in any way the meaning or scope of each Risk Factor.
Risks Primarily Related to Our Insurance Operations
Loss Exposures
We may experience losses or disruptions from catastrophes. As a company with significant property and casualty insurance underwriting operations, we may experience losses from man-made or natural catastrophes. Catastrophes include, but are not limited to, windstorms, hurricanes, earthquakes, tornadoes, derechos, hail, severe winter weather, floods and wildfires and may include pandemics and events related to terrorism, broad reaching cyberattacks, riots and political and civil unrest. While we employ catastrophe modeling tools in our underwriting process, we cannot predict how severe a potential catastrophe will be before it occurs. The extent of losses from catastrophes is a function of the total amount of losses incurred, the number of insureds affected, the frequency and severity of the events, the effectiveness of our catastrophe risk management program and the adequacy of our reinsurance coverage. Catastrophes can occur over numerous geographic areas; however, some catastrophes may produce significant damage in large, heavily populated areas. We offer insurance and reinsurance coverage against terrorist acts in connection with some of our programs, and in other instances we are legally required to offer terrorism insurance; in both circumstances, we actively manage our exposure, but if there is a covered terrorist attack, we could sustain material losses. In addition, catastrophes may have a material adverse effect on the investment management and incentive fees earned by our insurance-linked securities (ILS) operations and returns on our investments in ILS funds. Catastrophes also may result in significant disruptions in our insurance and other operations, as well as loss of income and assets. The impacts of climate change may increase the frequency and/or severity of weather-related catastrophes, which may result in elevated catastrophe-related losses or disruptions, which may be material.
The failure of any of the methods we employ to manage our loss exposures could have a material adverse effect on us. We seek to manage our loss exposures in a variety of ways, including adhering to maximum limitations on policies written in defined geographical zones, implementing maximum gross limits by coverage for each insured, establishing per risk and per occurrence limitations for each event, employing coverage restrictions and following prudent underwriting guidelines for each program written. We also seek to manage our loss exposures through geographic and industry diversification. Underwriting is a matter of judgment, involving assumptions about matters that are inherently unpredictable and beyond our control, and for which historical experience and probability analysis may not provide sufficient guidance. One or more future events could result in claims that substantially exceed our expectations, which could have a material adverse effect on our results of operations and financial condition. In addition, we seek to manage our loss exposures by policy terms, coverage exclusions and choice of legal forum. Disputes relating to coverage and choice of legal forum also arise. As a result, various provisions of our policies, such as choice of forum, or coverage limitations or exclusions, may not be enforceable in the manner we intend and some or all of our methods to manage loss exposures may prove ineffective.
The effects of emerging claim and coverage issues on our business are uncertain. As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues could have a material adverse effect on our results of operations or financial condition by either broadening coverage beyond our underwriting intent or increasing the frequency and/or severity of claims. For example, rising costs, litigation funding, social inflation, including new or expanded theories of liability, higher adverse verdicts, and
legislative changes, such as extended statutes of limitations, may result in higher and more frequent claims over a longer reporting period than originally expected. In some instances, these changes may not become apparent until after we have issued insurance or reinsurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance or reinsurance contracts may not be known for many years after a contract is issued.
We use analytical models to assist our decision making in key areas such as pricing, reserving and capital modeling and actual results may differ materially from the model outputs and related analyses. We use various modeling techniques and data analytics (e.g., scenarios, predictive and stochastic modeling, and forecasting) to analyze and estimate exposures, loss trends and other risks associated with our insurance and ILS businesses. This includes both proprietary and third-party modeled outputs and related analyses to assist us in, among other things, decision-making related to underwriting, pricing, capital allocation, reserving, investing, reinsurance and catastrophe risk. We incorporate numerous assumptions and forecasts about the future level and variability of policyholder behavior, loss frequency and severity, interest rates, equity markets, inflation, capital requirements, and currency exchange rates, among others. The modeled outputs and related analyses from both proprietary models and third-party models are subject to various assumptions, uncertainties, model design errors, complexities and the inherent limitations of any statistical analysis, including those arising from the use of historical internal and industry data and assumptions.
In addition, the modeled outputs and related analyses may from time to time contain inaccuracies, perhaps in material respects, including as a result of inaccurate inputs or applications thereof (whether due to data error, human error or otherwise). Consequently, actual results may differ materially from our modeled results. Our profitability and financial condition substantially depend on the extent to which our actual experience is consistent with assumptions we use in our models and ultimate model outputs. If, based upon these models or other factors, we misprice our products or fail to appropriately estimate the risks we are exposed to, our business, results of operations and financial condition may be materially adversely affected.
Loss Reserves
Our results may be affected because actual insured or reinsured losses differ from our loss reserves. Significant periods of time often elapse between the occurrence of an insured or reinsured loss, the reporting of the loss to us and our payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the related loss adjustment expenses. The process of estimating loss reserves is a difficult and complex exercise involving analytical models with many variables and subjective judgments. This process may also become more difficult if we experience a period of rising inflation, as has been the case since early 2021.
As part of the reserving process, we review historical data and consider the impact of various factors, such as:
•trends in claim frequency and severity;
•changes in operations;
•changes to mix of business, terms and conditions, limits and layers;
•emerging economic and social trends;
•trends in insurance rates;
•inflation or deflation; and
•changes in the regulatory and litigation environments.
This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves, and actual results will differ from original estimates. As part of the reserving process, we regularly review our loss reserves and make adjustments as necessary. Future increases in loss reserves for our underwriting operations will, and for our programs services operations may, result in additional charges to earnings, which may be material.
In addition, as discussed above, we use analytical models to assist our decision making in loss reserving, and actual results may differ materially from the model outputs and related analyses.
There is generally greater uncertainty in estimating reserves for long-tail coverages, such as general liability, professional liability and workers' compensation, as they require a longer period of time for claims to be reported and settled. The impact of changes in economic and social inflation and medical costs are also more pronounced for long-tail coverages due to the longer settlement period. In addition, reinsurance reserves are subject to greater uncertainty than insurance reserves primarily because a reinsurer relies on (i) the original underwriting decisions and claims decisions made by ceding companies and (ii)
information and data from ceding companies. As a result, we are subject to the risk that our ceding companies may not have adequately evaluated the risks reinsured by us and the premiums ceded may not adequately compensate us for the risks we assume. In addition, reinsurance reserves may be less reliable than insurance reserves because there is generally a longer lapse of time from the occurrence of the event to the reporting of the loss or benefit to the reinsurer and ultimate resolution or settlement of the loss. Reserves for contracts for which we are not the primary insurer, and participate only in excess layers of loss, are also subject to greater uncertainty than insurance reserves for contracts for which we are the primary insurer for many of the same reasons as reinsurance reserves.
Changes in the assumptions and estimates used in establishing reserves for our life and annuity reinsurance book could result in material increases in our estimated loss reserves for such business. Our run-off life and annuity reinsurance book exposes us to mortality risk, which is the risk that the level of death claims may differ from that which we assumed in establishing the reserves for our life and annuity reinsurance contracts. Some of our life and annuity reinsurance contracts expose us to longevity risk, which is the risk that an insured person will live longer than expected when the reserves were established, or morbidity risk, which is the risk that an insured person will become critically ill or disabled. Our reserving process for the life and annuity reinsurance book is designed with the objective of establishing appropriate reserves for the risks we assumed. Among other things, this process relies heavily on analysis of mortality, longevity and morbidity trends, lapse rates, interest rates and expenses. As of December 31, 2023, our reserves for life and annuity benefits totaled $649.1 million.
We expect mortality, morbidity, longevity, and lapse experience to fluctuate somewhat from period to period, but believe they should remain reasonably predictable over a period of many years. Mortality, longevity, morbidity or lapse experience that is less favorable than the mortality, longevity, morbidity or lapse rates that we used in establishing the reserves for a reinsurance agreement will negatively affect our net income because the reserves we originally set for the risks we assumed may not be sufficient to cover the future claims and expense payments. Furthermore, even if the total benefits paid over the life of the contract do not exceed the expected amount, unexpected increases in the incidence of deaths or illness can result in changes to our assumptions in a given reporting period, adversely affecting our net income in any particular reporting period. If there are adverse changes to any of the above factors, a charge to earnings may be recorded, which may have a material adverse effect on our results of operations and financial condition.
Ceded Reinsurance
We may be unable to purchase reinsurance protection on terms acceptable to us, or we may be unable to collect on reinsurance we purchase.loss recoveries from reinsurers. Our underwriting operations purchase reinsurance and retrocessional reinsurance to manage our net retention on individual risks and mitigate the volatility of losses on our results of operations and financial condition, while providing us with the ability to offer policies with sufficient limits to meet policyholder needs. In addition, we reinsure substantially all of the risks inherent in our program services business,and other fronting businesses, however, we have certain programs that contain limits on our reinsurers' obligations to us that expose us to underwriting risk, including loss ratio caps, aggregate reinsurance limits or exclusion of the credit risk of producers. See note 1012 of the notes to consolidated financial statements included under Item 8 for information about ceded reinsurance for our program services and other fronting businesses.
The ceding of insurance does not legally discharge us from our primary liability for the full amount of the policies. Reliance on reinsurance recoveries may create credit risk as a result of the reinsurer's inability or unwillingness to pay reinsurance claims when due. We generally select well capitalized and highly rated reinsurers and in certain instances we require reinsurers to post substantial collateral to secure the reinsured risks. Deterioration in the credit quality of existing reinsurers or disputes over the terms of reinsurance could result in charges to earnings, which may have a material adverse effect on our results of operations and financial condition. In addition, collateral may not be sufficient to cover the reinsurer's obligation to us, and we may not be able to cause the reinsurer to deliver additional collateral.
As of December 31, 2021,2023, we were the beneficiary of letters of credit, trust accounts and funds withheld in the aggregate amount of $3.7$5.1 billion, collateralizing $7.3$9.2 billion in reinsurance recoverables. The remaining unsecured reinsurance recoverables are ceded to highly-rated, well capitalized reinsurers. Our reinsurance recoverables are based on estimates, and our actual liabilities may exceed the amount we are able to recover from our reinsurers or any collateral securing the reinsurance recoverables. The failure of a reinsurer to meet its obligations to us, whether due to insolvency, dispute or other unwillingness or inability to pay, or due to our inability to access sufficient collateral to cover our liabilities, could have a material adverse effect on our results of operations and financial condition.
The availability and cost of reinsurance are determined by market conditions beyond our control. There is no guarantee that our desired amounts of reinsurance or retrocessional reinsurance will be available in the marketplace in the future. In addition, available capacity may not be on terms we deem appropriate or acceptable or with companies with whom we want to do business. This could impact our ability to write certain products and have a material adverse effect on our results of operations and financial condition.
Market Competition and Broker Reliance
Competition in the insurance and reinsurance markets could reduce profits from our insurance operations. Insurance and reinsurance markets are highly competitive. We compete on an international and regional basis with major United States (U.S.), Bermuda, United Kingdom (U.K.), European, and other international insurers and reinsurers and with underwriting syndicates, some of which have greater financial, marketing, and management resources than we do, have greater access to "big data," and may be able to offer a wider range of, or more sophisticated, commercial and personal lines products. Recent industry consolidation, including business combinations among insurance and other financial services companies, has resulted in larger competitors with even greater financial resources. In addition, capital market participants have created alternative products that are intended to compete with reinsurance products.
Similar to other industries, the insurance industry is undergoing rapid and significant technological and other changes. There is increasing focus by traditional insurance industry participants, technology companies, "InsurTech" start-up companies and others on using technology and innovation to simplify and improve the customer experience, increase efficiencies, redesign products, alter business models and effect other potentially disruptive changes in the insurance industry. If we do not anticipate, keep pace with and adapt to technological and other changes impacting the insurance industry, it will harm our ability to compete, decrease the value of our products to customers, and materially and adversely affect our business. Furthermore, innovation, technological change and changing customer preferences in the markets in which we operate also pose other risks to our businesses. For example, they could result in increasing our service, administrative, policy acquisition or general expenses as we seek to distinguish our products and services from those of our competitors or otherwise keep up with such innovation and changes.
Increased competition could result in fewer submissions, lower premium rates, and less favorable policy terms and conditions, which could reduce our underwriting profits, or within our program services and other fronting operations, our operating profits, and have a material adverse effect on our results of operations and financial condition.
The historical cyclicality in the property and casualty insurance industry could have a material adverse effect on our ability to improve or maintain underwriting profits or to grow or maintain premium volume. The insurance and reinsurance markets have historically been cyclical, characterized by extended periods of intense price competition due to excessive underwriting capacity, and more recently alternative sources of capital, as well as brief periods when shortages of capacity permitted more favorable rate levels. Among our competitive strengths have been our specialty product focus and our niche market strategy. These strengths also make us vulnerable in periods of intense competition to actions by other insurance companies who seek to write additional premiums without appropriate regard for underwriting profitability. At times it could be very difficult for us to grow or maintain premium volume levels without sacrificing underwriting profits. If we are not successful in maintaining rates or achieving rate increases, it may be difficult for us to improve or maintain underwriting profits or to grow or maintain premium volume levels.
Insurance Operations
Our efforts to develop new products, expand in targeted markets or improve business processes and workflows may not be successful and may increase or create new risks. From time to time, to protect and grow market share or improve our efficiency, we invest in strategic initiatives to:
•develop products that insure risks we have not previously insured, include new coverages or change coverage terms;
•change commission terms;
•change our underwriting processes;
•improve business processes and workflow to increase efficiencies and productivity and to enhance the experience of our customers and producers;
•expand distribution channels; and
•enter geographic markets where we previously have had relatively little or no market share.
We may not be successful in these efforts, and even if we are successful, they may increase or create the following risks, among others:
•demand for new products or expansion into new markets may not meet our expectations;
•new products and expansion into new markets may increase or change our risk exposures, and the data and models we use to manage those exposures may not be as effective as those we use in existing markets or with existing products;
•models underlying automated underwriting and pricing decisions may not be effective;
•efforts to develop new products or markets or to change commission terms may create or increase distribution channel conflicts;
•in connection with the conversion of existing policyholders to a new product, some policyholders' pricing may increase while the pricing for other policyholders may decrease, the net impact of which could negatively impact retention and profit margins; and
•changes to our business processes or workflow, including the use of new technologies, may give rise to execution risk.risk; and
•increased usage of artificial intelligence by us and third parties and the evolving regulatory landscape may increase underwriting and regulatory risk, while also presenting opportunity risk if we do not leverage artificial intelligence appropriately.
These efforts may require us to make substantial expenditures, which may negatively impact results in the near term, and if not successful, could materially and adversely affect our results of operations.
We depend on a few brokers for a large portion of our revenues and the loss of business provided by any one of them could have a material adverse effect on us. We market our insurance and reinsurance worldwide through insurance and reinsurance brokers. For the year ended December 31, 2021,2023, our top threefive independent brokers represented 28%37% of the gross premiums written by our underwriting operations. Loss of all or a substantial portion of the business provided by one or more of these brokers could have a material adverse effect on our business.
Financial Strength and Credit Ratings
Our insurance companies and senior debt are rated by various rating agencies, and a downgrade or potential downgrade in one or more of these ratings could have a material adverse effect on us. Financial strength ratings are an important factor in establishing the competitive position of insurance and reinsurance companies. Our senior debt ratings also affect the availability and cost of capital. Certain of our insurance and reinsurance company subsidiaries and our senior debt securities are rated by various rating agencies. Our financial strength and debt ratings are subject to periodic review, and are subject to revision or withdrawal at any time. The financial strength ratings of our insurance subsidiaries are significantly influenced by their statutory surplus amounts and leverage and capital adequacy ratios and other financial metrics. Rating agencies may implement changes to their ratings methodologies or internal models that have the effect of increasing or decreasing the amount of capital our insurance subsidiaries must hold or restrict how the company may deploy its capital in order to maintain its current ratings. For example, for certain of our insurance subsidiaries, rating agencies may take into account in their calculations the collateral provided to us by reinsurers. A change in this practice could adversely impact our ratings. We cannot be sure that we will be able to retain our current, or any future, ratings. If our ratings are reduced from their current levels by one or more rating agencies, our competitive position in our target markets within the insurance industry could suffer and it would be more difficult for us to market our products. A ratings downgrade could result in a substantial loss of business as policyholders and ceding company clients move to other companies with higher claims-paying and financial strength ratings. In addition, a downgrade could trigger contract provisions that allow cedents to terminate their reinsurance contracts on terms disadvantageous to us or require us to collateralize our obligations through trusts or letters of credit. A ratings downgrade could also have a material adverse effect on our liquidity, including the availability of our letter of credit
facilities, and limit our access to capital markets, increase our cost of borrowing or issuing debt and require us to post collateral.
The amount of capital that our insurance subsidiaries have and must hold to maintain their financial strength and credit ratings and meet other requirements can vary significantly from time to time and is sensitive to a number of factors, some of which are outside of our control. Capital requirements for our insurance subsidiaries are prescribed by the applicable insurance regulators, while rating agencies establish requirements that inform ratings for our insurance subsidiaries and senior debt securities. Projecting surplus and the related capital requirements is complex and requires making assumptions regarding how our business will perform within the broader macroeconomic environment. Insurance regulators and rating
agencies evaluate company capital through financial models that calculate minimum capitalization requirements based on risk-based capital formulas for property and casualty insurance groups and their subsidiaries. In any particular year, capital levels and risk-based capital requirements may increase or decrease depending on a variety of factors including the mix of business written by our insurance subsidiaries and correlation or diversification in the business profile, the amount of additional capital our insurance subsidiaries must hold to support business growth, the value of securities in our investment portfolio, changes in interest rates and foreign currency exchange rates, as well as changes to the regulatory and rating agency models used to determine our required capital.
Insurance Regulation
Our insurance subsidiaries are subject to supervision and regulation that may have a material adverse effect on our operations and financial condition. Our insurance subsidiaries are subject to supervision and regulation by the regulatory authorities in the various jurisdictions in which they conduct business, including foreign and U.S. state insurance regulators. Regulatory authorities have broad regulatory, supervisory and administrative powers relating to, among other things, data protection and data privacy, cybersecurity, solvency standards, licensing, coverage requirements, product terms and conditions, policy rates and forms, business and claims practices, disclosures to consumers, and the form and content of financial reports. In some instances, we follow practices based on our interpretations of regulations or practices that we believe may be generally followed by the industry. These practices may turn out to be different from the interpretations of regulatory authorities. Insurance regulatory authorities have broad authority to initiate investigations or other proceedings, and, in connection with a failure to comply with applicable laws and regulations, could impose adverse consequences, including fines, penalties, injunctions, denial or revocation of an operating license or approval, increased scrutiny or oversight, limitations on engaging in a particular business, or redress to clients. These actions also could result in negative publicity, reputational damage or harm to client, employee or other relationships. Additionally, regulatory and legislative authorities continue to implement enhanced or new regulatory requirements to assure the stability of insurance companies or enhance policyholder protections or, in certain instances, intended to prevent or mitigate future financial crises or otherwise assure the stability of financial institutions.crises. Regulatory authorities also may seek to exercise their supervisory or enforcement authority in new or more extensive ways, such as increased capital requirements. These actions, if they occur, could affect the competitive market, andas well as the way we conduct our business andor manage our capital, and could result in lower revenues and higher costs. As a result, such actions could have a material adverse effect on our results of operations and financial condition.
Regulators may challenge our use of fronting arrangements in states in which our capacity providers are not licensed. Our program services and other fronting business enters into fronting arrangements with general agents and domestic and foreign insurers that want to access specific U.S. property and casualty insurance business in states in which the capacity providers are not licensed or are not authorized to write particular lines of insurance. Some state insurance regulators may object to these fronting arrangements. In certain states, an insurance commissioner has the authority to prohibit an authorized insurer from acting as an issuing carrier for an unauthorized insurer. In addition, insurance departments in states in which there is no such statutory or regulatory prohibition, could deem the assuming insurer to be transacting insurance business without a license and the issuing carrier to be aiding and abetting the unauthorized sale of insurance.
If regulators in any of the states where we conduct our fronting business were to prohibit or limit those arrangements, we would be prevented or limited from conducting that business for which a capacity provider is not authorized in those states, unless and until the capacity provider is able to obtain the necessary licenses. This could have a material adverse effect on our results of operations and financial condition.
Insurance-Linked Securities
Our ILS operations and our management of third-party capital may expose us to risks. Some of our operating subsidiaries may owe certain legal duties and obligations to third-party investors. A failure to fulfill any of those duties or obligations could result in significant liabilities, penalties or other losses, and harm our businesses and results of operations. In addition, third-party investors may decide not to renew their investments in the funds we manage, which could materially impact the financial condition of those funds, and could, in turn, have a material adverse effect on our results of operations and financial condition. Moreover, we may not be able to maintain or raise additional third-party capital for the funds we manage or for potential new funds and therefore we may forego existing or potential fee income and other income generating opportunities. For example, investment performance at Nephila, as well as the broader ILS market, has been adversely impacted by consecutive years of elevated catastrophe losses, as well as by the COVID-19 pandemic in 2020. These events, as well as volatility in the capital markets, also have impacted investor decisions around allocation of capital to ILS, which in turn have impacted, and may continue to impact, our capital raises and redemptions within the funds we manage, as well as new funds, resulting in a decline in assets under management. See "Critical Accounting Estimates - Goodwill and Intangible
Assets" under Item 7. Management's Discussion & Analysis of Financial Condition and Results of Operations for discussion and considerations of these impacts on the valuation of goodwill and intangible assets attributed to our Nephila ILS operations.
Risks Primarily Related to Our Investments and Access to Capital
Changes in Economic Conditions
Our investment results may be impacted by changes in interest rates, U.S. and international monetary and fiscal policies as well as broader economic conditions. We receive premiums from customers for insuring their risks. We invest
these funds until they are needed to pay policyholder claims. Fluctuations in the value of our investment portfolio can occur as a result of changes in interest rates and U.S. and international fiscal, monetary and trade policies as well as broader economic conditions (including, for example, equity market conditions and significant or prolonged inflation or deflation). Although we attempt to take measures to manage the risks of investing in these changing environments, we may not be able to mitigate our sensitivity to them effectively. Despite our mitigation efforts, which include duration and currency targets for asset portfolios, compliance monitoring of these targets and means to reasonably and effectively match asset duration and currency to the duration and currency of the loss reserves, changes in interest rates and U.S. and international fiscal, monetary and trade policies as well as broader economic conditions could have a material adverse effect on our investment results and, consequently, our results of operations and financial condition.
We invest a significant portion of our shareholders' equity in equity securities, which may result in significant variability in our investment results and net income and may have a material adverse effect on shareholders' equity. Additionally, our equity investment portfolio is concentrated, and declines in the value of these significant investments could have a material adverse effect on our financial results and on our ability to carry out our business plans. Equity securities were 61%64% and 55%58% of our shareholders' equity at December 31, 20212023 and 2020,2022, respectively. Equity securities have historically produced higher returns than fixed maturity securities over long periods of time; however, investing in equity securities may result in significant variability in investment returns from one period to the next. In volatile financial markets, we could experience significant declines in the fair value of our equity investment portfolio, which would result in a material decrease in net income and shareholders' equity. Our equity portfolio is concentrated in particular issuers and industries and, as a result, a decline in the fair value of these concentrated investments also could result in a material decrease in net income and shareholders' equity. A material decrease in shareholders' equity may have a material adverse effect on our ability to carry out our business plans.
Access to Capital
We may require additional capital in the future, which may not be available or may only be available on unfavorable terms. To the extent that cash flows generated by our operations are insufficient to fund future operating requirements, or that our capital position is adversely impacted by a decline in the fair value of our investment portfolio, losses from catastrophe events or otherwise, we may need to raise additional funds through financings or curtail our growth. We also may be required to liquidate fixed maturity securities or equity securities, which may result in realized investment losses. Any further sources of capital, including capacity needed for letters of credit, if available at all, may be on terms that are unfavorable to us. Our access to additional sources of capital will depend on a variety of factors, such as market conditions, the general availability of credit, the availability of credit to the industries in which we operate, our results of operations, financial condition, credit ratings and credit capacity, as well as pending litigation or regulatory investigations. Our ability to borrow under our revolving credit facility and letter of credit facilities is contingent on our compliance with the covenants and other requirements under those facilities. Similarly, our access to capital may be impaired if regulatory authorities or rating agencies take negative actions against us. Our inability to obtain adequate capital when needed could have a negative impact on our ability to invest in, or take advantage of opportunities to expand, our businesses, such as possible acquisitions or the creation of new ventures, and inhibit our ability to refinance our existing indebtedness on terms acceptable to us. Any of these effects could have a material adverse effect on our results of operations and financial condition.
OurA failure to comply with covenants and other requirements under our revolving credit facility,facilities, senior debt and other indebtedness could have a material adverse effect on us. The agreements and indentures relating to our revolving credit facility,facilities, senior debt and other indebtedness, including letter of credit facilities used by certain of our insurance subsidiaries, contain covenants and other requirements. If we fail to comply with those covenants or requirements, the lenders, noteholders or counterparties under those agreements and indentures could declare a default and demand immediate repayment of all amounts owed to them. In addition, where applicable, our lenders may cancel their commitments to lend or issue letters of credit or require us to pledge additional or a different type of collateral. A default under one debt agreement may also put us at risk of a cross-default
under other debt agreements or other arrangements. Any of these effects could have a material adverse effect on our results of operations and financial condition.
Our liquidity and our ability to meet our debt and other obligations, and pay dividends on our preferred stock, depend on the receipt of funds from our subsidiaries. We are a holding company, and as a result, our cash flow and our ability to meet our debt and other obligations, and pay dividends on our preferred stock, depend upon the earnings of our subsidiaries and on the distribution of earnings, loans or other payments by our subsidiaries to us. The payment of dividends by our insurance subsidiaries, which account for a significant portion of our operating cash flows, may require prior regulatory notice or approval or may be restricted by capital requirements imposed by regulatory authorities. Similarly, our insurance subsidiaries may require capital contributions from us to satisfy their capital requirements. In addition, our reinsurance
contracts typically allow the cedent, upon a reduction in an insurance company's capital in excess of specified amounts, to terminate its contract on terms disadvantageous to us or to exercise other remedies that may adversely affect us. Those contract provisions may have the effect of limiting distributions by our insurance subsidiaries to us.
Risks Primarily Related to Our ILS Operations
Our ILS operations and our management of third party capital may expose us to risks. Some of our operating subsidiaries may owe certain legal duties and obligations to third party investors. A failure to fulfill any of those duties or obligations could result in significant liabilities, penalties or other losses, and harm our businesses and results of operations. In addition, third party investors may decide not to renew their investments in the funds we manage, which could materially impact the financial condition of those funds, and could, in turn, have a material adverse effect on our results of operations and financial condition. Moreover, we may not be able to maintain or raise additional third party capital for the funds we manage or for potential new funds and therefore we may forego existing or potential fee income and other income generating opportunities. For example, investment performance at Nephila, as well as the broader ILS market, has been adversely impacted by consecutive years of elevated catastrophe losses, as well as by the COVID-19 pandemic in 2020. These events, as well as volatility in the capital markets, also have impacted investor decisions around allocation of capital to ILS, which in turn have impacted, and may continue to impact, our capital raises and redemptions within the funds we manage, as well as new funds, resulting in a decline in assets under management. See "Critical Accounting Estimates - Goodwill and Intangible Assets" under Item 7. Management's Discussion & Analysis of Financial Condition and Results of Operations for discussion and considerations of these impacts on the valuation of goodwill and intangible assets attributed to our Nephila ILS operations.
Developments at our Markel CATCo operations could have a material adverse effect on us. In December 2018, the U.S. Department of Justice (DOJ), U.S. Securities and Exchange Commission (SEC) and Bermuda Monetary Authority (BMA) initiated inquiries into loss reserves recorded in late 2017 and early 2018 at Markel CATCo Re (the Markel CATCo Inquiries). In September 2021, each of the SEC and DOJ notified us that it has concluded its investigation and does not intend to take any action against MCIM. There are currently no pending requests from the BMA, and it has been over a year since the BMA has contacted the Company in relation to the Markel CATCo Inquiries. See Item 3 Legal Proceedings and note 19 of the notes to consolidated financial statements included under Item 8 for more information regarding the Markel CATCo Inquiries and other matters related to Markel CATCo.
Matters related to or arising from our Markel CATCo operations, including matters of which we are currently unaware, could result in additional claims, litigation, investigations, enforcement actions or proceedings. For example, litigation has been, and may be, filed by investors in the Markel CATCo Funds. We also could become subject to increased regulatory scrutiny, investigations or proceedings in any of the jurisdictions where we operate. If any regulatory authority takes action against us or we enter into an agreement to settle a matter, we may incur sanctions or be required to pay substantial fines or implement remedial measures that could prove costly or disruptive to our businesses and operations. An unfavorable outcome in one or more of these matters, and others we cannot anticipate, could have a material adverse effect on our results of operations and financial condition. Even if an unfavorable outcome does not materialize, these matters, and actions we may take in response, could have an adverse impact on our reputation, limit our access to capital markets and result in substantial expense and disruption.
In addition, we may take steps to mitigate potential risks or liabilities related to or arising from our Markel CATCo operations. For example, see note 19 of the notes to consolidated financial statements included under Item 8 for information regarding a proposed transaction that would allow the acceleration of a full return of remaining capital to investors in the Markel CATCo Funds, which are currently in run-off. Other steps we may take to mitigate potential risks or liabilities related to or arising from our Markel CATCo operations could have a material impact on our results of operations or financial condition.
Risks Related to All of Our Operations
Legal and Regulatory Risks
The legal and regulatory requirements applicable to our businesses are extensive. Failure to comply could have a material adverse effect on us. Each of our businesses is highly dependent on the ability to engage on a daily basis in a large number of financial and operational activities, including, among others, insurance underwriting, claim processing, investment activities, the management of third partythird-party capital and providing products and services to businesses and consumers, many of which are highly complex. These activities are subject to internal guidelines and policies, as well as legal and regulatory requirements, including, among others, those related to privacy and data security, economic and trade sanctions, anti-corruption, anti-bribery and global finance and investments, customer protection and insurance matters. Our continued expansion into new
businesses, distribution channels and markets has broughtbrings about additional requirements. While we believe that we have adopted adequate and effective risk management and compliance programs, compliance risks remain, particularly as we become subject to additional rules and regulations. Failure to comply with, or to obtain, appropriate authorizations or exemptions under any applicable laws and regulations could result in restrictions on our ability to do business or undertake activities that are regulated in one or more of the jurisdictions in which we conduct business. Any such failure could also subject us to fines, penalties, equitable relief and changes to our business practices. In addition, a failure to comply could result in defaults under our senior unsecured debt agreements or credit facilities or damage our businesses or our reputation.
Compliance with applicable laws and regulations is time consuming and personnel- and systems-intensive. Shareholder activism, the current political environment, and the current high level of government intervention and regulatory reform may lead to substantial and complex new regulations and compliance obligations. Any changes in, or the enactment of new, applicable laws and regulations may increase the complexity of the regulatory environment in which we operate, which could materially increase our direct and indirect costs for compliance costs and other expenses of doing business, and have a material adverse effect on our results of operations and financial condition. For example, failure to implement data management and security controls in the use of artificial intelligence by us or third party providers may subject us to data privacy, intellectual property and general regulatory risk, particularly in light of emerging regulation on the use of artificial intelligence.
Losses from legal and regulatory actions may have a material adverse effect on us. From time to time we may be involved in various legal actions, including at times multi-party or class action litigation, some of which involve claims for substantial or indeterminate amounts. A significant unfavorable outcome in one or more of these actions could have a material adverse effect on our results of operations and financial condition. We are also involved from time to time in various regulatory actions, investigations and inquiries, including market conduct exams by insurance regulatory authorities. If a regulatory authority takes action against us or we enter into a consent order or agreement to settle a matter, a regulatory authority has the option to require us to pay substantial fines or implement remedial measures that could prove costly or disruptive to our businesses and operations. Even if an unfavorable outcome does not materialize, these matters could have an adverse impact on our reputation and result in substantial expense and disruption. See note 1921 of the notes to consolidated financial statements included under Item 8 and Item 3 Legal Proceedings.
We are subject to laws and regulations relating to economic and trade sanctions and bribery and corruption, the violation of which could have a material adverse effect on us. We are required to comply with the economic and trade sanctions and embargo programs administered by the U.S. Department of the Treasury's Office of Foreign Assets Control and similar multi-national bodies and governmental agencies worldwide, as well as applicable anti-corruption laws and anti-bribery laws and regulations of the U.S. and other jurisdictions where we operate. In some cases, we must comply with many new
economic, financial and trade sanctions that are imposed over a short period of time, as occurred with the Russia-Ukraine conflict. A violation of a sanction, embargo program, or anti-corruption law could subject us, and individual employees, to a regulatory enforcement action as well as significant civil and criminal penalties. In addition, a violation could result in defaults under our outstanding indebtedness or credit facilities or damage our businesses or our reputation. Those penalties or defaults, or damage to our businesses or reputation, could have a material adverse effect on our results of operations and financial condition. In some cases, the requirements and limitations applicable to the global operations of U.S. companies and their affiliates are more restrictive than, and may even conflict with, those applicable to non-U.S. companies and their affiliates, which also could have a material adverse effect on our results of operations and financial condition.
Employee error and misconduct may be difficult to detect and prevent and may result in significant losses. There have been a number of cases involving misconduct by employees in a broad range of industries in recent years, and weWe run the risk of misconduct by employees across our employees.businesses. Instances of misconduct, fraud, illegal acts, errors, failure to document transactions properly or to obtain proper internal authorization, or failure to comply with regulatory requirements or our internal policies may result in losses.losses or reputational damage. It is not always possible to detect, deter or prevent employee errors or misconduct or fraud, and the controls and trainings that we have in place to prevent and detect this activitymitigate these activities may not be sufficient or effective in all cases.
Global Operations
We manage our global operations through a network of business entities, which could result in inconsistent management, governance and oversight practices. We manage our global operations through a network of business entities throughoutlocated in the U.S., Bermuda, the U.K., Europe, Canada, the Middle East, Asia and the Middle East.Australia. These business entities are managed by executives, and supported by shared and centralized services, primarily at the holding company level;services; however, for certain of our businesses, subsidiary-level management is responsible for day-to-day operations, profitability, personnel decisions, the growth of the business, and legal and regulatory compliance, including adherence to applicable local laws. Operating through subsidiary-level management can make it difficult for us to implement strategic decisions and coordinated procedures throughout our global operations. In addition, some of our business entities operate with management, sales, and support personnel that may be insufficient to support growth in their respective locations and industries, without significant central oversight and coordination. We continue to enhance our operating,management, governance and oversight procedures to effectively
support, and improve transparency throughout, our global operations and network of business entities; however, our operating strategy nonetheless could result in inconsistent management, governance, and oversight practices, which may have a material adverse effect on our results of operations and financial condition.
We have substantial international operations and investments, which expose us to increased political, civil, operational and economic risks. A substantial portion of our revenues and income is derived from our operations and investments outside the U.S., including from the U.K., Bermuda, Europe, Canada, the Middle East, Asia and the Middle East.Australia. Our international operations and investments expose us to increased political, civil, operational and economic risks. Deterioration or volatility in foreign and international financial markets or general economic and political and civil conditions could adversely affect our operating results, financial condition and liquidity. Concerns about the economic conditions, capital markets, political, civil and economic stability and solvency of certain countries may contribute to global market volatility. Political and civil changes in the jurisdictions where we operate and elsewhere, some of which may be disruptive, can also interfere with our customers and our activities in a particular location. Our international operations also may be subject to a number of additional risks, particularly in emerging economies, including restrictions such as price controls, capital controls, currency exchange limits, ownership limits and other restrictive or anti-competitive governmental actions or requirements, which could have a material adverse effect on our businesses.
General economic, market or industry conditions could lead to investment losses, adverse effects on our businesses and limit our access to the capital markets. General economic and market conditions and industry specific conditions, including extended economic recessions or expansions; prolonged periods of slow economic growth; inflation or deflation; fluctuations and volatility in foreign currency exchange rates, commodity and energy prices and interest rates; volatility in the credit and capital markets; changes in U.S. government debt ratings; the imposition of tariffs and other changes in international trade regulation and other factors, could lead to: substantial realized and unrealized investment losses in future periods; declines in demand for, or increased frequency and severity of claims made under, our insurance products; disruptions in global supply chains and increased costs of inputs for our products and services; reduced demand for our services and the products we sell and distribute; changes in the carrying value of our other assets and liabilities; and limited or no access to the capital markets. Any of these impacts could have a material adverse effect on our results of operations, financial condition, debt and financial strength ratings or our insurance subsidiaries' capital. Results for many of our Markel Ventures businesses have been, and may continue to be, adversely affected by increased costs of labor and materials including, with respect to increased materials costs,and declines in demand for certain products and services due to shortages in the availability of certain products, higher shipping costs
economic and inflation.industry specific conditions. Our efforts to mitigate the impact of these cost increasesimpacts may not be successful and, even when they are successful, there may be a time lag before the impacts of these efforts are reflected in our results.
Our businesses, results of operations and financial condition could be adversely affected by ongoing regional or military conflicts and related disruptions in the global economy. The global economy has been, and may in the future be, negatively impacted by regional or military conflicts, for example, the on-going conflicts between Russia and Ukraine and between Israel and Hamas. We may have operations in areas affected by a conflict, and some of our businesses may be adversely affected by a conflict and its effects. Within our underwriting operations, we may have insurance contracts with exposure to losses attributed to a conflict. Our other operations also may have direct exposure to customers and vendors in an affected area. Certain of our businesses may experience shortages in materials and increased costs for transportation, energy, and raw materials due in part to the negative impact of a conflict on the global economy.
The exitFurthermore, governments in the U.S., U.K., and European Union, among others, may impose export controls on certain products and financial and economic sanctions on certain industry sectors and parties in affected areas. These export controls and sanctions, or our failure to comply with them, could result in restrictions on our ability to do business in one or more of the United Kingdom fromjurisdictions in which we conduct business or have the European Unionother adverse effects discussed above under this Item 1A. Risk Factors under "We are subject to laws and regulations relating to economic and trade sanctions and bribery and corruption, the violation of which could have a material adverse effect on us."
We are unable to predict the impact an ongoing conflict may have on our businesses or the global economy. The U.K. left the European Union (E.U.), (Brexit) on January 31, 2020. The U.K. and the E.U. now exist as separate markets, with distinct legal and regulatory regimes. While certain aspectsimpact of the relationship between the U.K. and the E.U. have been agreed, including under the Trade and Cooperation Agreement that took effect January 1, 2021, many issuesgeopolitical tensions related to the provision of services between the U.K.these conflicts, including increased trade barriers or restrictions on global trade, is unknown and the E.U. have not been addressed, particularly for financial services.
The U.K.'s exit from the E.U. could continue to contribute to instabilityresult in, globalamong other things, heightened cybersecurity threats, supply disruptions, protracted or increased inflation, increased energy costs, lower consumer demand, fluctuations in interest and foreign exchange rates and increased volatility in financial markets, including foreign currency markets, and adversely affect European and worldwide economic or market conditions. Significant uncertainties remain related to the ultimate political, monetary and economic impactsany of Brexit, including related tax, accounting and financial reporting implications. Brexitwhich could also lead to legal and regulatory uncertainty and, a number, potentially large, of new and divergent national laws and regulations, including new tax rules, as the U.K. and E.U. regulatory environments evolve. These impacts, combined with the legal and regulatory uncertainty, may adversely affect our operations and also may result in increased claims arising from the impact on our policyholders.
Any of these effects of Brexit, and others we cannot anticipate, could have a material adverse effect on ourbusinesses, results of operations and financial condition. In addition, an ongoing conflict may have the effect of triggering or intensifying many of the risks described under this Item 1A Risk Factors under Risks Primarily Related to Our Insurance Operations, Risks Primarily Related to Our Investments and Access to Capital, and Risks Related to All of Our Operations.
Acquisitions, Integration and RetentionReliance on Management and Personnel
The integration of acquired companiesbusinesses may not be as successful as we anticipate. We have completed, and expect to complete, acquisitions in an effort to achieve profitable growth in our underwriting and other insurance operations and to create additional value on a diversified basis in our Markel Ventures operations. Acquisitions present operational, regulatory, strategic and financial risks, as well as risks associated with liabilities arising from the previous operations of the acquired companies.businesses. We also must make decisions about the degree to which we integrate acquisitions into our existing businesses, operations and systems, and over what timeframe. Those decisions may adversely affect how successfully the acquired businesses perform, both in the short-term and in the long-term. All of these risks are magnified in the case of a large
acquisition. Integration of the operations, systems and personnel of acquired companiesbusinesses may prove more difficult than anticipated, which may result in failure to achieve financial objectives associated with the acquisition or diversion of management attention.attention and other resources. In addition, integration of formerly privately-held companies into the management and internal control and financial reporting systems of a publicly-held company presents additional risks. See note 3 of the notes to consolidated financial statements included under Item 8 for information about our recent acquisitions.
Impairment in the value of our goodwill or other intangible assets could have a material adverse effect on our operating results and financial condition. As of December 31, 2021,2023, goodwill and intangible assets totaled $4.7$4.2 billion and represented 32%28% of shareholders' equity. We record goodwill and intangible assets at fair value upon the acquisition of a business. Goodwill represents the excess of amounts paid to acquire businesses over the fair value of the net assets acquired. Goodwill and indefinite-lived intangible assets are evaluated for impairment annually, or more frequently if events or circumstances indicate that their carrying value may not be recoverable. Declines in operating results, divestitures, sustained market declines and other factors that impact the fair value of a reporting unit could result in an impairment of goodwill or intangible assets and, in turn, a charge to net income. Such a charge could have a material adverse effect on our results of operations or financial condition. Developments that adversely affect the future cash flows or earnings of an acquired business may cause the goodwill or intangible assets recorded for it to be impaired. See "Critical Accounting Estimates - Goodwill and Intangible Assets" included under Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations and note 68 of the notes to consolidated financial statements included under Item 8 for information about our goodwill and intangible assets.
The loss of, or failure to successfully implement succession planning for, one or more key executives or an inability to attract and retain qualified personnel in our various businesses could have a material adverse effect on us. Our success depends on our ability to retain the services of our existing key executives, implement successful succession planning and to attract and retain additional qualified personnel in the future. The temporary or permanent loss of the services of any of our key executives or the inability to hire and retain other highly qualified personnel in the future could have a material adverse effect on our ability to conduct or grow our business.
Additionally, in our decentralized business model, we rely on qualified personnel to manage and operate our various businesses.In our decentralized business model, we need qualified and competent management to direct day-to-day business activities of our operating subsidiaries and to manage changes in future business operations due to changing business or regulatory environments. Our operating subsidiaries also need qualified and competent personnel to execute business plans and serve their customers, suppliers and other stakeholders. Our inability to recruit, train and retain qualified and competent managers and personnel could negatively affect the operating results, financial condition and liquidity of our subsidiaries and Markel Group as a whole.
Information Technology Systems and Third-Party Systems and Service Providers
Information technology systems that we use could fail or suffer a security breach or cyber-attack,cyberattack, which could have a material adverse effect on us or result in the loss of regulated or sensitive information. Our businesses are dependent upon the operational effectiveness and security of our enterprise systems and those maintained by third parties. Among other things, we rely on these systems to interact with producers, insureds, customers, clients, and other third parties, to perform actuarial and other modeling functions, to underwrite business, to prepare policies and process premiums, to process claims and make claims payments, to prepare internal and external financial statements and information, as well as to engage in a wide variety of other business activities. A significant failure of our enterprise systems, or those of third parties upon which we may rely, whether because of a natural disaster, network outage or a cyber-attackcyberattack on those systems, including ransomware, could compromise our personal, confidential and proprietary information as well as that of our customers and business partners, impede or interrupt our business operations and could result in other negative consequences, including remediation costs, loss of revenue, additional regulatory scrutiny and fines, litigation and monetary and reputational damages. AlthoughIn addition, if we are unable to innovate, develop and acquire new technology, it may leave us more susceptible to these attacks. Like other companies, we have implementedbeen subject to cyberattacks, malicious viruses and malware, and denial of service attacks and expect that this will continue in the future with greater sophistication and frequency. Despite any controls and takeor protective actions to reduce the risk of an enterprise failure and protectwe take against a security breach or cyber-attack, such attacks, those measures may be insufficient to prevent, or mitigate the effects of, a natural disaster, network outage or a cyber-attackcyberattack on our systems thatsystems. This could result in liability to us, cause our data to be corrupted or stolen and cause us to commit resources management time and money to prevent or correct those failures.
In addition, we are subject to numerous data privacy and securitycybersecurity laws and regulations enacted in the jurisdictions in which we do business. A misuse or mishandling of personal, confidential or proprietary information being sent to or received from a client,customer, business partner, employee or third party could damage our businesses or our reputation or result in significant monetary damages, regulatory enforcement actions, fines and criminal prosecution in one or more jurisdictions. For example, under the European General Data Protection Regulation there are significant punishments for non-compliance which could result in a penalty of up to 4% of a firm's global annual revenue. In addition, a violation of data privacy laws and regulations could result in defaults under our outstanding indebtedness or credit facilities. Those monetary damages, penalties, regulatory or legal actions or defaults, or the damage to our businesses or reputation, could have a material adverse effect on our results of operations and financial condition. Third parties who we utilize to perform certain functions are also subject to these risks, and their failure to adhere to these laws and regulations also could damage our businesses or reputation or result in regulatory intervention, which could have a material adverse effect on our results of operations and financial condition.
Further, we routinely transmit, receive and store personal, confidential and proprietary information by email and other electronicdigital means. Although we attempt to protect this personal, confidential and proprietary information, we may be unable to
do so in all cases, especially with customers, business partners and other third parties who may not have or use appropriate controls to protect personal, confidential and proprietary information.
While we maintain cyber risk insurance providing first-party and third-party coverages, that insurance may not cover all costs associated with the consequences of personal, confidentialan enterprise failure, cyberattack, or proprietary information being compromised.breach of systems. A material cyber security breach could have a material adverse effect on our results of operations and financial condition.
Third-party providers may perform poorly, breach their obligations to us or expose us to enhanced risks. Certain of our business functions are performed by third-party providers, and these providers may not perform as anticipatedexpected or may fail to adhere to the obligations owed to us. For example, certain of our business units rely on relationships with a number of third-party administrators under contracts pursuant to which these third-party administrators manage and pay claims on our behalf and advise us with respect to case reserves. In these relationships, we rely on controls incorporated in the provisions of the administration agreement, as well as on the administrator's internal controls, to manage the claims process within our prescribed parameters. In addition, certain of our business units use managing general agents, general agents and other producers to write and administer business on our behalf within prescribed underwriting authorities. Although we monitor these administrators, agents, producers and other service providers on an ongoing basis, our monitoring efforts may not be adequate, or our service providers could exceed their authorities or otherwise breach obligations owed to us, which could result in operational disruption, reputational damage and regulatory intervention and otherwise have a material adverse effect on our results of operation and financial condition.
In addition, we utilize third parties to perform certain technology and business process functions, such as data center hosting, cloud based operating environments, human resources and may do so increasingly in the future.other outsourced services. If we do not effectively develop and implement our outsourcing strategy, third partythese third-party providers do not perform as anticipated orexpected, we experience technological or other problems with a transition, we may not realize productivity improvements or cost efficiencies and may experience operational difficulties, increased costs and a loss of business.business, or we may not realize expected productivity improvements or cost efficiencies. Our use of third parties to perform certain technology and business process functions may expose us to enhanced riskrisks related to privacy and data security, including through their use of artificial intelligence without our knowledge or below our standards, which could result in monetary and reputational damages. We may be further exposed to risks associated with artificial intelligence and machine learning technology if third-party service providers or any counterparts, where known or unknown to us, use such technology in their business activities. In addition, our ability to receive services from third-party providers might be impacted by a wide variety of factors, including cultural differences, political and civil instability, pandemics,supply chain disruptions, volatility or disruptions in the financial markets, wide-spread health issues, unanticipated or additional regulatory requirements or policies. As a result, our ability to conduct our businesses may be adversely affected.
Pandemics
Pandemics such as COVID-19 and its variants, have had, and could have, material adverse effects on us. The COVID-19effects of a pandemic, has had, and its variants or future pandemics could have,related governmental responses, may be wide-ranging, costly, disruptive and rapidly changing, resulting in material adverse effects on our underwriting, investment, Markel Ventures and other operations, and on our results of operations and financial condition. The effects of a pandemic, and related governmental responses, may be wide-ranging, costly, disruptive and rapidly changing.condition, as was the case with COVID-19. Factors that give rise, or may give rise, to those effects include, or may include, the following, as well as others that we cannot predict:
•Insured or reinsured losses from pandemic-related claims that are different, or more extensive, than we expect;
•Government actions or judicial decisions related to insurance or reinsurance coverages or rates, including, for example, requiring retroactive coverage of claims or expanding the scope of coverage;
•Disputes, lawsuits and other legal actions challenging the promptness of coverage determinations, or the coverage determinations themselves, under applicable insurance or reinsurance policies, resulting in increased claims, litigation and related expenses;
•Disruptions, delays and increased costs and risks related to having limited or no access to our facilities, workplace re-entry, employee safety concerns and reductions or interruptions of critical or essential services;
•Continually changing business conditions and compliance obligations; and
•ImpactsShort or long-term impacts on the cost, availability or timeliness of required raw materials, supplies or services provided by third-parties,third parties, including services provided by state, federal or foreign governments or government agencies.
In addition, a pandemic may, as has been the case with COVID-19, have the effect of triggering or intensifying many of the risks described elsewhere under this Item 1A. Risk Factors under Risks Primarily Related to Our Insurance Operations, Risks Primarily Related to Our Investments and Access to Capital, Risks Primarily Related to Our ILS Operations, and Risks Related to All of Our Operations.
Climate Change
The impacts of climate change, and legal or regulatory measures to address climate change, may adversely affect our results of operations or financial condition.Our businesses, results of operations, and financial condition could be impacted by risks associated with climate change, including:
•changes from legislation, regulation and court decisions that:
◦create economic and regulatory uncertainty,
◦increase our compliance costs,
◦impose liability on or increase exposure for our policyholders not contemplated during our underwriting,
◦change our ability to provide insurance coverage to certain policyholders, or
◦impose new or additional requirements that increase the costs associated with, or disrupt, sourcing, manufacturing, and distribution of, our products and services,
•changes in the frequency, severity, and location of weather-related catastrophes, such as hurricanes, tornados, windstorms, floods, wildfires, and other extreme weather events, which may:
◦result in insured losses that exceed our expectations or make it more difficult for us to predict and model catastrophic events, reducing our ability to accurately price our exposure to such events and mitigate our risks,
◦make it more difficult or expensive for us to obtain reinsurance at desired levels, or
◦increase physical risks to and impacts on our operations,
•changing demand for insurance coverage we provide, such as demand from industries that produce or use carbon-based energy including those transitioning from those energy sources, decreased availability of reinsurance available for coverages we provide for carbon intensive industries, or increased claims and losses related to those industries, and
•losses on our invested assets, including from:
◦changes in supply and demand,
◦advances in low-carbon technology and renewable energy development,
◦effects of extreme weather events on the physical and operational exposure of industries and issuers, and
◦the transition that companies make towards addressing climate risk in their own businesses.
Item 1C. CYBERSECURITY
Markel Group is a holding company comprised of a diverse group of companies and investments. Our specialty insurance business, Markel, sits at the core of our company. Markel Group utilizes information technology systems and services, including cybersecurity, provided and/or administered by Markel. Through Markel Group's wholly owned subsidiary, Markel Ventures, Inc. (Markel Ventures), Markel Group owns controlling interests in businesses that operate in a variety of industries. The Markel Ventures businesses are independently managed with respect to their information security and data protection programs.
Insurance
In order to maintain a strong cybersecurity program, Markel uses a variety of controls and technology tools designed to identify, detect, prevent, respond to, and recover from security threats. Markel undergoes regular security audits including a System and Organization Controls (SOC) audit for Cybersecurity conducted annually by independent auditors in which cybersecurity threats are identified and assessed. Markel regularly tests aspects of its internal security and conducts security risk interviews and assessments on third parties with whom it does business, depending on the nature of the relationship. Markel has invested in technology that assists its risk management teams in measuring and addressing weaknesses in its third-party and supply chain community. Markel performs continuous monitoring of all its third parties to ensure they are maintaining acceptable levels of security controls and remediating any known weaknesses.
Item 3. LEGAL PROCEEDINGSMarkel participates in the Financial Services Information Sharing and Analysis Center to share information about the latest cyber threats and preparedness measures. Markel also shares threat intelligence information with other partners. Markel has a cybersecurity incident response plan, as well as a crisis management plan, that cover cyber events, including a process for determining the materiality of cyber events that includes evaluation by a cross functional crisis management group including security, information technology, finance, legal and business and escalation to Markel Group senior management as warranted by the severity of the situation. An internal team engages in tabletop exercises several times each year to enhance preparedness for such situations.
Information security and data protection risks are the responsibility of all employees. Markel has a mandatory training program covering a variety of security and data protection disciplines. In addition, all Markel employees are required to acknowledge annually policies on acceptable use of Markel's technology resources and enterprise information security. Contractors are required to provide certain representations and certifications relating to information security.
The Markel information security and data protection program is led by a Chief Information Security Officer (CISO) who supervises a team of security and data protection professionals across the globe. Markel's global information security and data protection program leverages the Cybersecurity Framework from the National Institutes of Standards and Technology as well as industry best practices. Markel also is able to map to both ISO (International Organization for Standardization) and BSI (British Standards Institution) among other cybersecurity standards. Markel's CISO has been with Markel 13 years and has 22 years' experience in information technology, with 17 years in information technology security, and is a certified Information Systems Security Professional (CISSP).
Markel CATCo InquiriesVentures
Each of our Markel Ventures businesses maintains its own, separate IT infrastructure, that often includes third-party providers, to support the needs of its business. As a result, cybersecurity risk for the Markel Ventures businesses is not concentrated in one system or service provider. Further, given the disparate nature of the businesses, systems, and providers, there is no single, uniform approach to managing cybersecurity risk at the Markel Ventures businesses – each is tailored to its unique needs. As is the case with all risks, management for each Markel Ventures business is responsible for evaluating and managing cybersecurity risks for its business. Therefore, each business determines the appropriate IT systems and providers needed to do so. Management for each business shares information on material risks from cybersecurity incidents with Markel Ventures management.
Markel Ventures has established processes for the Markel Ventures businesses to share information about how they assess, identify, and manage cybersecurity risk and shares information on material risks from cybersecurity incidents with Markel Group management, as appropriate. Each Markel Ventures business has a board that meets quarterly. Material matters regarding cybersecurity risk management and cybersecurity incidents are discussed at these meetings. In addition, Markel Ventures management regularly meets with the businesses to discuss their risk identification, assessment, and management approach. These discussions include how the business assesses, identifies, and manages key risks, including cybersecurity risks.
Markel Ventures requires real-time reporting of material cybersecurity incidents to understand how the matters are being managed, assess whether public disclosure is required and inform Markel Group senior management of relevant matters. Depending on the cybersecurity incident, third parties may be engaged by the Markel Ventures businesses to assist them in understanding and managing the event.
Given the varying size and complexity of the Markel Ventures businesses, a diverse array of individuals assume responsibility for managing cybersecurity risks within them. In some instances, primary responsibility may be with a member of the executive management team. In other instances, primary responsibility may land with information technology professionals. In all instances, however, ultimate responsibility rests with each business' Chief Executive Officer.
Markel Group Board Oversight
The Markel Group Board of Directors oversees Markel Group's risk management framework on an enterprise-wide basis, which includes cybersecurity risks. Periodic reports are provided to the Markel Group Board of Directors by members of management which, among other things, seek to systematically identify the principal risks facing our businesses and the manner in which such risks are addressed. For cybersecurity, this includes a review of the cybersecurity program and its governance, active and planned initiatives, protection and prevention matters, detection and response measures, and the threat landscape.
Cybersecurity Risks
No previous cybersecurity incident has had, or is reasonably likely to have, a material adverse effect on Markel Group, its business strategy, results of operations, or financial condition. For risks related to cybersecurity threats, see Item 1A Risk Factors, including under "Information technology systems that we use could fail or suffer a security breach or cyberattack, which could have a material adverse effect on us or result in the loss of regulated or sensitive information."
Item 2. PROPERTIES
We previously reported thatlease office space in December 2018Glen Allen, Virginia for our Markel Group corporate headquarters, which also serves as the headquarters for our insurance and Markel Ventures operations. Our insurance operations lease office space throughout the U.S. Department of Justice (DOJ), U.S. Securities and Exchange Commission (SEC) and Bermuda Monetary Authority (BMA) (together, the Governmental Authorities) initiated inquiries into loss reserves recorded in late 2017 and early 2018 atvarious locations in other countries. In total, we have 64 insurance offices in 17 countries. Additionally, our Markel CATCoVentures businesses maintain office space, factories and warehouses, both through leased and owned properties, throughout the U.S. and in certain international locations. The property needs of our Markel Ventures businesses vary based on the nature of the operations of each business. We believe our properties are suitable and adequate for our current operations. Those reserves are held at Markel CATCo Reinsurance Ltd., an unconsolidated subsidiary of Markel CATCo Investment Management Ltd. (MCIM), which has been in runoff since July 2019. The Markel CATCo Inquiries are limited to MCIM and its subsidiaries (together, Markel CATCo) and do not involve other Markel subsidiaries.
We retained outside counsel to conduct an internal review of Markel CATCo's loss reserving in late 2017 and early 2018. The internal review was completed in April 2019 and found no evidence that Markel CATCo personnel acted in bad faith in exercising business judgment in the setting of reserves and making related disclosures during late 2017 and early 2018. Our outside counsel met with the Governmental Authorities and reported the findings from the internal review.
On September 27, 2021, the SEC notified us that it has concluded its investigation and it does not intend to recommend an enforcement action against MCIM. On September 28, 2021, we were advised by the DOJ that it has concluded its investigation and will not take any action against MCIM. Throughout the inquiries, we have proactively kept the BMA informed of the status of the SEC and DOJ investigations, including the recent conclusion of those investigations. There are currently no pending requests from the BMA, and it has been over a year since the BMA has contacted us in relation to the governmental inquiries.Item 3. LEGAL PROCEEDINGS
Thomas Yeransian v. Markel Corporation
In October 2010, we completed the acquisition of Aspen Holdings, Inc. (Aspen). As part of the consideration for that acquisition, Aspen shareholders received contingent value rights (CVRs). Prior to the December 31, 2017 CVR maturity date, the CVR holder representative, Thomas Yeransian, disputed our prior estimation of the value of the CVRs. On September 15, 2016, Mr. Yeransian filed a suit, Thomas Yeransian v. Markel Corporation (U.S. District Court for the District of Delaware), alleging, among other things, that we are in default under the CVR agreement. The suit seeks: $47.3 million in damages, which represents the unadjusted value of the CVRs; plus interest ($20.829.1 million through December 31, 2021)2023) and default interest (up to an additional $18.3$24.4 million through December 31, 2021,2023, depending on the date any default occurred); and an unspecified amount of punitive damages, costs, and attorneys' fees.
At the initial hearing held February 21, 2017, the court stayed the proceedings and ordered the parties to discuss resolving the dispute pursuant to the independent CVR valuation procedure under the CVR agreement. The parties met on April 5, 2017, but were unsuccessful in reaching agreement on a process for resolving the dispute. We subsequently filed a motion to stay the litigation and compel arbitration, and, on July 31, 2017, the court issued an order granting that motion.
On November 13, 2018, Mr. Yeransian filed a second suit, Thomas Yeransian v. Markel Corporation (U.S. District Court for the District of Delaware), which also alleges that the Company is in default under the CVR agreement. The second suit seeks the same monetary damages and relief as the original suit. We filed a motion to stay this suit until the arbitration for the original suit hashad concluded and the CVR holders have received the final amount due under the CVR Agreement. The court granted that motion on August 6, 2019.
On June 5, 2020, Mr. Yeransian filed a third suit, Thomas Yeransian v. Markel Corporation (U.S. District Court for the District of Delaware). Similar to the first and second suits, the third suit alleges that the Company is in default under the CVR agreement and, in addition, has interfered with the arbitration for the CVR valuation. The third suit seeks the same monetary damages and relief as the original suit and the second suit, as well as other declaratory and non-monetary judgments and orders. We filed a motion to stay this suit, which the court granted on March 16, 2021.
Under the arbitration terms of the CVR Agreement, independent experts were appointed to determine the final value of the CVRs. On September 20, 2021, the experts delivered their report indicating a final CVR valuation of $22.4 million, excluding interest. We had previously paid $8.0 million to the CVR holders, representing 90% of the undisputed value of the CVRs, plus interest of $1.9 million. On September 20, 2021, we paid $20.1 million, which represents $14.1 million for the unpaid portion of the final CVR amount (excluding fees payable to a third-party)third party), plus $6.0 million in additional interest.
The stay has beenwas lifted on each pending suit, and the three suits have beenwere consolidated. We have askedOn June 8, 2023, the court to dismiss, or grant us summary judgmentruled in favor of the Company and against Mr. Yeransian on all counts. Mr. Yeransian has appealed the court's decision.
We believe Mr. Yeransian's suits to be without merit. We further believe that any material loss resulting from the suits to be remote.
Information About Our Executive Officers
Thomas S. Gayner
Co-ChiefChief Executive Officer since January 2016.2023. Co-Chief Executive Officer from January 2016 to December 2022. President and Chief Investment Officer from May 2010 to December 2015. Chief Investment Officer from January 2001 to December 2015. President, Markel-Gayner Asset Management Corporation, a subsidiary, since December 1990. Director from 1998 to 2004. Director since August 2016. Age 60.62.
RichardMichael R. Whitt, IIIHeaton
Co-ChiefExecutive Vice President and Chief Operating Officer since February 2024 and Executive Vice President since May 2022. President, Markel Ventures from January 2016 to May 2022. President and Chief Executive Officer, since January 2016.Markel Ventures, Inc., a subsidiary, from May 2020 to May 2022; President and Co-ChiefChief Operating Officer, Markel Ventures, Inc., from January 2016 to May 20102020. Chief Operating Officer, Markel Ventures, Inc., from September 2013 to December 2015. Age 47.
Andrew G. Crowley
President, Markel Ventures since May 2022. President, Markel Ventures, Inc., a subsidiary, since May 2022. Executive Vice President, Markel Ventures, Inc., from May 2020 to May 2022. Managing Director, Markel Ventures, Inc., from January 2017 to May 2020. Age 41.
Jeremy A. Noble
President, Insurance since January 2023. Senior Vice President and Chief Financial Officer from May 2005September 2018 to May 2010. Director since August 2016. Age 58.
Robert C. Cox
President and Chief Operating Officer, Insurance Operations since September 2018. Executive Vice President of Chubb Ltd. (a public company) and Division Chairman of Chubb Ltd.'s North American Financial Lines from January 2016 until retirement in July 2016; Executive Vice President of Chubb & Son and Chief Operating Officer of Chubb Specialty Insurance from June 2013 to January 2016. Age 63.
Michael R. Heaton
President, Markel Ventures since January 2016; President and Chief Operating Officer, Markel Ventures, Inc., a subsidiary, since January 2016 and September 2013, respectively. Age 45.
Bradley J. Kiscaden
President and Chief Administrative Officer, Insurance Operations since September 2018. Executive Vice President and Chief Actuarial Officer from July 2012 to September 2018. Chief Actuarial Officer from March 1999 to September 2018. Age 59.
Jeremy A. Noble
Senior Vice President and Chief Financial Officer since September 2018.December 2022. Senior Vice President, Finance from June 2018 to September 2018. Finance Director, Markel International from July 2015 to June 2018. Managing Director, Internal Audit from September 2011 to July 2015. Age 46.48.
Richard R. Grinnan
Senior Vice President, Chief Legal Officer and Secretary of Markel Group since February 2020.2020 and of Markel since October 2022. General Counsel and Secretary from June 2014 to February 2020. Assistant General Counsel from August 2012 to June 2014. Age 53.55.
Susan L. DaviesBrian J. Costanzo
Chief Human ResourcesFinancial Officer of Markel InsuranceGroup and of Markel since September 2018. Managing Executive, Human ResourcesDecember 2023. Senior Vice President, Finance, Chief Accounting Officer and Controller from October 2022 to December 2023. Principal financial officer (on an interim basis) from January 20182023 to August 2020. Senior Director Global Organization EffectivenessMarch 2023. Chief Accounting Officer and StrategyController from October 2016 to January 2018. Associate Vice President Talent Management of CarMax, Inc. (a public company) from September 2015June 2021 to October 2016.2022. Controller from December 2019 to June 2021. Segment Controller - U.S. Insurance from March 2014 to December 2019. Age 57.45.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Performance Graph
The following graph compares the cumulative total return (based on share price) on our common stock with the cumulative total return of companies included in the Standard & Poor's (S&P) 500 Index and the Dow Jones U.S. Property & Casualty Insurance Companies Index. We are a holding company comprised of a diverse group of businesses and investments, and we believe there are few companies with a mix of business operations comparable to ours. Our principal business markets and underwrites specialty insurance products, and therefore, we have used the Dow Jones U.S. Property & Casualty Insurance Companies Index as our peer group. However, we also own controlling interests in a diverse portfolio of businesses that operate in a variety of other industries. This information is not necessarily indicative of future results.
![mkl-20211231_g7.jpg](https://capedge.com/proxy/10-K/0001096343-22-000039/mkl-20211231_g7.jpg)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2016 (1) | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 |
Markel Corporation | $ | 100 | | | $ | 126 | | | $ | 115 | | | $ | 126 | | | $ | 114 | | | $ | 136 | |
S&P 500 | 100 | | | 122 | | | 116 | | | 153 | | | 181 | | | 233 | |
Dow Jones U.S. Property & Casualty Insurance | 100 | | | 117 | | | 113 | | | 144 | | | 149 | | | 181 | |
![881](https://capedge.com/proxy/10-K/0001096343-24-000025/mkl-20231231_g8.jpg)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2018 (1) | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 |
Markel Group Inc. | $ | 100 | | | $ | 110 | | | $ | 100 | | | $ | 119 | | | $ | 127 | | | $ | 137 | |
S&P 500 Index | 100 | | | 131 | | | 156 | | | 200 | | | 164 | | | 207 | |
Dow Jones U.S. Property & Casualty Insurance Index | 100 | | | 127 | | | 131 | | | 160 | | | 184 | | | 209 | |
(1)$100 invested on December 31, 20162018 in our common stock or the listed index. Includes reinvestment of dividends.
Common Stock and Dividend Information
Our common stock trades on the New York Stock Exchange under the symbol MKL. The number of shareholders of record as of February 2, 2022January 31, 2024 was approximately 300.260. The total number of shareholders, including those holding shares in street name or in brokerage accounts, is estimated to be in excess of 190,000.220,000. Our current strategy is to retain earnings and, consequently, we have not paid and do not expect to pay a cash dividend on our common stock.
Common Share Repurchases
The following table summarizes our common share repurchases for the quarter ended December 31, 2021.2023.
| | | | | | | | | | | | | | | | | | | | | | | |
Issuer Purchases of Equity Securities |
| (a) | | (b) | | (c) | | (d) |
| Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) |
October 1, 2021 through October 31, 2021 | 19,038 | | | $ | 1,260.62 | | | 19,038 | | | $ | 95,809 | |
November 1, 2021 through November 30, 2021 | 15,749 | | | $ | 1,289.96 | | | 15,749 | | | $ | 490,012 | |
December 1, 2021 through December 31, 2021 | 27,746 | | | $ | 1,227.35 | | | 27,746 | | | $ | 455,958 | |
Total | 62,533 | | | $ | 1,253.24 | | | 62,533 | | | $ | 455,958 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Issuer Purchases of Equity Securities |
| (a) | | (b) | | (c) | | (d) |
| Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) |
October 1, 2023 through October 31, 2023 | 16,635 | | | $ | 1,470.02 | | | 16,635 | | | $ | 221,111 | |
November 1, 2023 through November 30, 2023 | 75,841 | | | $ | 1,400.09 | | | 75,841 | | | $ | 748,196 | |
December 1, 2023 through December 31, 2023 | 25,200 | | | $ | 1,396.70 | | | 25,200 | | | $ | 712,999 | |
Total | 117,676 | | | $ | 1,409.25 | | | 117,676 | | | $ | 712,999 | |
(1) The Board of Directors approved the repurchase of up to $500$750 million of our common shares pursuant to a share repurchase program publicly announced onin November 16, 2021 (the 2021 Program).2023. The 2021 Programnew program terminated and replaced a similar $300$750 million share repurchase program authorized in August 2019 (the 2019 Program).February 2022. Under our share repurchase programs,program, we may repurchase outstanding common shares of our stock from time to time in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934. In February 2022, we announced that the Board of Directors approved a similar $750 millionThe share repurchase program thathas no expiration date but may be terminated and replacedby the 2021 Program.Board at any time.
Securities Authorized for Issuance Under Equity Compensation Plans
See Part III for information on securities authorized for issuance under our equity compensation plans.
Available Information
This document represents Markel Corporation'sGroup's Annual Report on Form 10-K, which is filed with the U.S. Securities and Exchange Commission. We make available free of charge on or through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the U.S. Securities and Exchange Commission. Our website address is www.markel.com.www.mklgroup.com.
Transfer Agent
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Annual Shareholders Meeting
Our annual shareholders meeting will take place on May 22, 2024 at the University of Richmond Robins Center in Richmond, Virginia at 2:00 p.m. (Eastern Time). The shareholders meeting will be part of a two-day event we are calling the 2024 Reunion, which is open to shareholders, employees, and friends of Markel Group. More information on the agenda and registration for the 2024 Reunion is available at www.mklreunion.com.
Item 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis includes discussion of changes in our results of operations and financial condition from 20202022 to 20212023 and should be read in conjunction with the consolidated financial statements and related notes included under Item 8, Item 1 Business, Item 1A Risk Factors and "Safe Harbor and Cautionary Statement" under Item 7. The accompanying consolidated financial statements and related notes have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) and include the accounts of our holding company, Markel CorporationGroup Inc. (Markel Group), and its consolidated subsidiaries, as well as any variable interest entities that meet the requirements for consolidation (the Company). A discussion of changes in our results of operations and financial condition from 20192021 to 20202022 may be found in Part II Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations in our 20202022 Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission on February 19, 2021.17, 2023.
Item 7 is divided into the following sections:
•Results of Operations
•Liquidity and Capital Resources
•Critical Accounting Estimates
•Safe Harbor and Cautionary Statement
In March 2020, COVID-19, a novel coronavirus outbreak, was declared a pandemic by the World Health Organization causing unprecedented social and economic disruption, increased volatility of capital markets and intervention by various governments and central banks around the world. Details regarding the impacts of the pandemic on our results of operations, financial condition and liquidity in 2020, and certain actions we took in response, are included in the following discussion and analysis. The most significant impacts included losses incurred in our underwriting operations, decreased demand for certain products and services within our Markel Ventures operations and volatility within our investment portfolio.
For a discussion of our significant accounting policies, as well as recently issued accounting pronouncements that we have not yet adopted and their expected effects on our consolidated financial position, results of operations and cash flows, see note 1 of the notes to consolidated financial statements included under Item 8.
Results of Operations
The following table presents the components of netoperating revenues.
| | | | | | | | | | | |
| Years Ended December 31, |
(dollars in thousands) | 2023 | | 2022 |
Insurance segment | $ | 7,282,705 | | | $ | 6,528,263 | |
Reinsurance segment | 1,014,294 | | | 1,063,347 | |
Program services and other fronting, insurance-linked securities and other insurance | 280,131 | | | 493,746 | |
Insurance operations | 8,577,130 | | | 8,085,356 | |
Net investment income | 729,219 | | | 445,846 | |
Net investment gains (losses) | 1,524,054 | | | (1,595,733) | |
Other | (11,854) | | | (17,661) | |
Investing segment | 2,241,419 | | | (1,167,548) | |
Markel Ventures segment | 4,985,081 | | | 4,757,527 | |
Total operating revenues | $ | 15,803,630 | | | $ | 11,675,335 | |
The following table presents the components of comprehensive income to shareholders, net income to common shareholders and comprehensive income(loss) to shareholders.
| | | | | | | | | | | |
| Years Ended December 31, |
(dollars in thousands) | 2021 | | 2020 |
Insurance segment profit | $ | 696,413 | | | $ | 169,001 | |
Reinsurance segment loss | (55,129) | | | (75,470) | |
Investing segment profit (1) | 2,353,124 | | | 989,564 | |
Markel Ventures segment profit (2) | 272,552 | | | 254,078 | |
Other operations (3) | (23,459) | | | (63,289) | |
Interest expense | (183,579) | | | (177,582) | |
Net foreign exchange gains (losses) | 72,271 | | | (95,853) | |
| | | |
Income tax expense | (684,458) | | | (168,682) | |
Net income attributable to noncontrolling interests | (22,732) | | | (15,737) | |
Net income to shareholders | 2,425,003 | | | 816,030 | |
Preferred stock dividends | (36,000) | | | (18,400) | |
| | | |
Net income to common shareholders | 2,389,003 | | | 797,630 | |
Other comprehensive income (loss) to shareholders | (346,759) | | | 375,604 | |
Comprehensive income to shareholders | $ | 2,078,244 | | | $ | 1,191,634 | |
| | | | | | | | | | | |
| Years Ended December 31, |
(dollars in thousands) | 2023 | | 2022 |
Insurance segment profit | $ | 162,176 | | | $ | 549,871 | |
Reinsurance segment profit (loss) | (19,265) | | | 83,859 | |
Program services and other fronting, insurance-linked securities and other insurance | 205,234 | | | 294,979 | |
Amortization of intangible assets (1) | (98,244) | | | (99,735) | |
Impairment of goodwill (2) | — | | | (80,000) | |
Insurance operations | 249,901 | | | 748,974 | |
Investing segment profit (loss) | 2,241,419 | | | (1,167,548) | |
Markel Ventures segment profit (3) | 437,508 | | | 325,238 | |
Operating income (loss) | 2,928,828 | | | (93,336) | |
Interest expense | (185,077) | | | (196,062) | |
Net foreign exchange gains (losses) | (90,045) | | | 137,832 | |
| | | |
Income tax (expense) benefit | (552,616) | | | 48,209 | |
Net income attributable to noncontrolling interests | (105,030) | | | (112,920) | |
Net income (loss) to shareholders | 1,996,060 | | | (216,277) | |
Preferred stock dividends | (36,000) | | | (36,000) | |
| | | |
Net income (loss) to common shareholders | 1,960,060 | | | (252,277) | |
Other comprehensive income (loss) to shareholders | 289,284 | | | (989,502) | |
Comprehensive income (loss) to shareholders | $ | 2,285,344 | | | $ | (1,205,779) | |
(1) Net investment income and net investment gains, if any, Amortization of intangible assets includes all amortization attributable to Markel Ventures are included in segment profitour insurance operations. Amortization of intangible assets attributable to our underwriting segments was $37.1 million and $38.5 million for Markel Ventures. Allthe years ended December 31, 2023 and 2022, respectively; however, we do not allocate amortization of intangible assets between the Insurance and Reinsurance segments. Amortization of intangible assets attributable to our program services and other net investment incomefronting, insurance-linked securities and net investment gains are included in Investing segment profit.other insurance operations was $61.2 million for the years ended December 31, 2023 and 2022.
(2) Impairment of goodwill for the year ended December 31, 2022 was attributable to our Nephila ILS operations.
(3) Segment profit for the Markel Ventures segment includes amortization of intangible assets attributable to Markel Ventures.
(3) Other operations include the results attributable to our operations that are not included in a reportable segment, as well as any amortization of intangible assets that is not allocated to a reportable segment. Amortization of intangible assets attributable to our underwriting segments was $41.2 million and $41.9 million for the years ended December 31, 2021 and 2020, respectively; however, we do not allocate amortization of intangible assets between the Insurance and Reinsurance segments.
The increasechange in comprehensive income (loss) to shareholders in 20212023 compared to 20202022 was primarily due to an increase in pre-tax net investment gains from $618.0 million in 2020 to $2.0of $1.5 billion in 2021,2023 compared to pre-tax net investment losses of $1.6 billion in 2022, as well as a meaningful increase in underwriting profits in 2021 compared to 2020, which included $358.3 million of pre-tax net losses and loss adjustment expenses attributed to COVID-19. Partially offsetting these increases to comprehensive income to shareholders, other comprehensive income reflected a decrease in net unrealized gains on our fixed maturity investment portfoliosecurities of $389.5 million in 20212023 compared to an increasepre-tax net unrealized losses of $1.5 billion in 2020.2022.
The components of net income (loss) to shareholders and comprehensive income (loss) to shareholders are discussed in further detail under "Underwriting"Insurance Results," "Investing Results," "Markel Ventures" "Other Operations, Results," "Interest Expense, Net Foreign Exchange Gains (Losses) and Income Taxes" and "Comprehensive Income (Loss) to Shareholders and Book Value per Common Share."
Insurance Results
Our Insurance engine includes our underwriting, program services and other fronting and insurance-linked securities (ILS) operations. We have a suite of capabilities through which we can access capital to support our customers' risks, which includes our own capital through our underwriting operations and third-party capital through our program services and other fronting and ILS operations. Our underwriting operations, which are primarily comprised of our Insurance and Reinsurance segments, produce revenues primarily by underwriting insurance contracts and earning premiums in the specialty insurance market. Our program services and other fronting and insurance-linked securities operations produce revenues primarily through fees earned for fronting services and investment management services, respectively. Our insurance operations also include the underwriting results of run-off lines of business that were discontinued prior to, or in conjunction with, insurance acquisitions,
and the results of our run-off life and annuity reinsurance business. The following table presents the components of our Insurance engine gross premium volume and operating revenues.
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(dollars in thousands) | 2023 | | 2022 | | % Change |
Gross premium volume: | | | | | |
Underwriting | $ | 10,277,632 | | | $ | 9,847,538 | | | 4 | % |
Program services and other fronting (1) | 3,724,605 | | | 3,354,144 | | | 11 | % |
Insurance operations | $ | 14,002,237 | | | $ | 13,201,682 | | | 6 | % |
| | | | | |
Operating revenues: | | | | | |
Insurance segment | $ | 7,282,705 | | | $ | 6,528,263 | | | 12 | % |
Reinsurance segment | 1,014,294 | | | 1,063,347 | | | (5) | % |
Program services and other fronting, insurance-linked securities and other insurance | 280,131 | | | 493,746 | | | (43) | % |
Insurance operations | $ | 8,577,130 | | | $ | 8,085,356 | | | 6 | % |
(1) Substantially all gross premiums from our program services and other fronting operations were ceded to third parties for the years ended December 31, 2023 and 2022.
Underwriting ResultsInsurance Segment
Underwriting profits are a key componentOur Insurance segment reported gross premium volume of $9.2 billion, earned premiums of $7.3 billion and an underwriting profit of $162.2 million in 2023. The following chart presents the composition of our strategyInsurance segment by division based on 2023 gross premium volume.
![567](https://capedge.com/proxy/10-K/0001096343-24-000025/mkl-20231231_g3.jpg)
The Markel Specialty division is comprised of our U.S. and Bermuda based insurance underwriting operations and writes business for insureds ranging from individuals and small businesses to build shareholder value.Fortune 1000 companies in the U.S., the U.K., the E.U., Asia and Australia. The Markel Specialty platform provides easy access to our diverse portfolio of products and capabilities. The Markel International division writes business worldwide from our London and Munich-based platforms, which include branch offices in Canada, Asia, Australia and across the E.U. The State National division writes collateral protection insurance for automobile and other vehicle loans in the U.S.
The following chart displays the types of products written in our Insurance segment based on 2023 gross premium volume.
General liability product offerings include a variety of primary and excess liability coverages. We believefocus on businesses in the construction, life sciences, energy, medical, healthcare, pharmaceutical, professional services, social welfare, recreational, transportation, heavy industrial and hospitality industries. Specific products include primary general liability, excess and umbrella products, products liability products, environmental liability products and casualty facultative reinsurance written for individual casualty risks.
Our professional liability product lines provide insurance solutions for small, middle market and risk management accounts with coverage that is tailored to their exposures and needs. Professional liability coverages include errors and omissions, directors and officers, cyber, employment practices liability, professional indemnity, transaction liability, intellectual property and union liability. Errors and omissions coverage provides solutions for specialized professions including lawyers, accountants, agents and brokers, service technicians and consultants, as well as other less-specialized professionals. Directors and officers coverage is provided for publicly-traded, private and non-profit companies, including financial institutions and Fortune 1000 companies. We also offer claims-made professional liability coverage for individual healthcare providers and coverages for medical facilities.
Personal lines products provide first and third-party coverages in the abilityU.S. for classic cars, motorcycles and a variety of personal watercraft, including vintage boats, high-performance boats and yachts and recreational vehicles, such as motorcycles, snowmobiles and ATVs. Additionally, property coverages are offered for homeowners that do not qualify for standard homeowner's coverage, as well as personal umbrella coverage.
Marine and energy products include a portfolio of coverages for cargo, energy, hull, liability, war and terrorism risks worldwide. The cargo product line is an international transit-based book providing coverage for many types of cargo. Energy coverage includes all aspects of oil, gas and renewable energy activities. Our renewable energy activities include coverages for onshore and offshore wind farms, as well as alternative energy generation and storage technology projects. Hull coverages consist of coverage for physical damage to achieve consistent underwriting profits demonstrates knowledgeocean-going tonnage, yachts and expertise, commitmentmortgagees' interests. Liability coverage provides coverage for a broad range of energy liabilities, as well as traditional marine exposures including charterers, terminal operators and ship repairers. Marine war coverage includes protections for the hulls of ships, and other related interests, against war and associated perils. Terrorism coverage includes coverage for property damage and business interruption related to superiorpolitical and civil violence and war on land.
Property coverages consist principally of fire, allied lines (including windstorm, hail and water damage) and other specialized property coverages, including catastrophe-exposed property risks such as earthquake and wind on both a primary and excess basis. Catastrophe-exposed property risks can present higher severity than more standard property risks due to the impacts from earthquakes and severe weather events such as hurricanes, convective storms and wildfires. Our property coverages are exposed to windstorm losses that, based on the seasonal nature of those events, are more likely to occur in the third and fourth quarters of the year. Our property risks range from small, single-location accounts to large, multi-state, multi-location, multi-national accounts on a worldwide basis. Other types of property products include inland marine products, railroad-related products and specie coverage for fine art on exhibition and in private collections.
Specialty programs business is offered in the U.S. on a standalone or package basis and generally targets specialized commercial markets and various customer groups, such as amateur sports and fitness clubs. Certain specialty programs written in this segment use managing general agents to offer single source admitted and non-admitted programs for a specific industry, class or line of business.
Workers' compensation products are offered in the U.S. and provide wage replacement and medical benefits to employees injured in the course of employment and target main-street, service and artisan contractor businesses, retail stores and restaurants.
Credit and surety products consist primarily of trade credit and prepayment coverage and a range of bonds and guarantees that support contractual obligations, as well as other coverages for specific credit risks, markets and contingencies. Key credit risks covered include those of counterparty insolvency and defaults by government-owned entities. The key coverages under surety products include contractual performance and payment risks, commercial license and permit obligations and obligations related to judicial proceedings such as court and fiduciary bonds.
Other product lines within the abilityInsurance segment primarily include collateral protection insurance, which insures personal automobiles and other vehicles held as collateral for loans made by credit unions, banks and specialty finance companies.
Reinsurance Segment
Our Reinsurance segment product offerings are underwritten primarily by our Global Reinsurance division, which operates from platforms in the U.S., Bermuda and the U.K. We write quota share and excess of loss reinsurance on a local, national and global basis. Our Reinsurance segment reported gross premium volume of $1.0 billion, earned premiums of $1.0 billion and an underwriting loss of $19.3 million in 2023. The following chart displays the types of products written in our Reinsurance segment based on 2023 gross premium volume.
General liability reinsurance primarily consists of umbrella and excess casualty products, as well as environmental liability products covering pollution legal liability and contractors' pollution exposures.
Our specialty treaty reinsurance products are written across a wide range of specialty product lines, primarily consisting of the following:
•Credit and surety products, including structured and whole turnover credit, political risk and contract and commercial surety reinsurance programs covering worldwide exposures;
•Workers' compensation and accident and health products covering both standard and catastrophe-exposed business in the U.S. and worldwide;
•Marine and energy products covering both offshore and onshore marine, energy and renewable energy risks on a worldwide basis, including hull, cargo and liability;
•Public entity reinsurance products offering casualty coverage for municipalities, schools, special districts, public housing authorities and public entity affiliated non-profits;
•Mortgage default insurance offering coverage for private mortgage insurers predominantly located in the U.S. and Australia;
•Aviation and space coverage, including major risk, general aviation, satellite launch and orbit;
•Agriculture reinsurance covering multi-peril crop insurance, hail and related exposures for risks located in the U.S. and Canada; and
•Discrete political violence and national terror pools in select jurisdictions globally.
Professional liability reinsurance primarily consists of the following:
•Transaction liability, which provides representation, warranty and indemnity coverage for mergers and acquisitions, including coverage for tax and contingent liability;
•Directors and officers liability for publicly-traded, private and non-profit companies;
•Cyber and technology errors and omissions covering both first and third-party exposures;
•Errors and omissions for lawyers, accountants, agents and brokers, services technicians and consultants; and
•Healthcare liability for physicians, hospitals, long-term care and other medical facilities.
Program Services and Other Fronting
Our program services and other fronting business generates fee income in the form of ceding fees in exchange for fronting insurance and reinsurance business for other insurance carriers (capacity providers). In general, fronting refers to managebusiness in which we write insurance risk.on behalf of a general agent or capacity provider and then cede all, or substantially all, of the risk under these policies to the capacity provider in exchange for ceding fees. The results of our program services and other fronting operations are not included in a reportable segment.
Our program services business, which is provided through our State National division, offers issuing carrier capacity to both specialty managing general agents and other producers who sell, control and administer books of insurance business that are supported by third parties that assume reinsurance risk, including the Nephila Reinsurers. These reinsurers include domestic and foreign insurers and institutional risk investors that want to access specific lines of U.S. property and casualty insurance industry commonly definesbusiness but may not have the required licenses, filings or financial strength ratings to do so.
Beginning in 2024, our State National division is expanding internationally through a partnership with our Markel International division to create an international program services division to serve managing general agents in the U.K. market. The new division is another example of how we can leverage our array of capabilities to effectively and efficiently connect capital with risk.
Through our program services business, we write a wide variety of insurance and reinsurance products, principally including general liability, commercial liability, commercial multi-peril, property and workers' compensation. Program services business written through our State National division is separately managed from our underwriting profitdivisions, which may write similar products, in order to protect our program services customers.
The following table summarizes the subsidiaries through which our program services business is written.
| | | | | | | | | | | | | | |
Legal Entity | | Abbreviation | | State of Domicile |
City National Insurance Company | | CNIC | | Texas |
National Specialty Insurance Company | | NSIC | | Texas |
Pinnacle National Insurance Company | | PNIC | | Texas |
State National Insurance Company, Inc. | | SNIC | | Texas |
Superior Specialty Insurance Company | | SSIC | | Delaware |
United Specialty Insurance Company | | USIC | | Delaware |
Through these subsidiaries, our program services business is licensed or loss as earned premiums netauthorized to write business in all 50 states and the District of lossesColumbia. Many of our programs are arranged with the assistance of brokers that are seeking to provide customized insurance solutions for specialty insurance business that requires a carrier rated "A" by A.M. Best Company (A.M. Best). Our specialized business model relies on third-party producers or capacity providers to provide policy administration, claims handling, cash handling, underwriting, or other traditional insurance company services. We compete primarily on the basis of price, customer service, financial strength ratings, licenses, reputation, business model and loss adjustment expensesexperience.
Total revenues attributed to our program services business for the year ended December 31, 2023 were $151.8 million. Our program services business generated $2.9 billion of gross written premium volume for the year ended December 31, 2023.
In our program services business, we enter into reinsurance agreements whereby we cede to the capacity providers 100% of the premium written and substantially all of our gross liability under all policies issued by and on behalf of us by the producer. As a result of our contract design, substantially all of the underwriting acquisitionrisk and insurance expenses. We use underwriting profit oroperational risk inherent in the arrangement is borne by the capacity providers.
Our contracts with capacity providers do not legally discharge us from our primary liability for the full amount of the policies, and we will be required to pay the loss and bear collection risk if a capacity provider fails to meet its obligations under the combined ratio asreinsurance agreement. As a basis for evaluatingresult, we remain exposed to the credit risk of capacity providers, including the risk that one of our underwriting performance. The U.S. GAAP combined ratiocapacity providers becomes insolvent or is a measure of underwriting performance and representsotherwise unable or unwilling to pay policyholder claims. We mitigate this credit risk generally by either selecting well capitalized, highly rated authorized capacity providers or requiring that the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expensescapacity provider post substantial collateral to earned premiums. The combined ratio issecure the sum ofreinsured risks, which, in some instances, exceeds the loss ratio and the expense ratio. The loss ratio represents the relationship of incurred losses and loss adjustment expenses to earned premiums. The expense ratio represents the relationship of underwriting, acquisition and insurance expenses to earned premiums. A combined ratio less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. Segment profit for our underwriting segments may also include other revenues and expenses that are attributable to our underwriting operations that are not captured in underwriting profit.related reinsurance recoverable.
In addition toour other fronting business, we leverage the U.S. GAAP combined ratio, loss ratio and expense ratio, we also evaluatestrength of our underwriting performance using measures that excludeplatform, including our highly rated insurance subsidiaries, to write business on behalf of our Nephila ILS operations, in exchange for ceding fees, to support its business plans and assist in meeting its desired return objectives. Our other fronting business is managed separately from our program services business. The results of our other fronting business are not included in a reportable segment. Total revenues attributed to our other fronting business for the impactsyear ended December 31, 2023 were $20.7 million. Our other fronting business generated $840.9 million of certain items on these ratios. We believe these adjusted measures, which are non-GAAP measures, provide financial statement users with a better understanding ofgross written premium volume for the significant factors that comprise our underwriting results and how management evaluates underwriting performance.year ended December 31, 2023.
When analyzingBusiness written on behalf of our combined ratio,Nephila ILS operations within both our program services and other fronting operations primarily consists of catastrophe-exposed property insurance and reinsurance business, as well as specialty and climate reinsurance business. The business written is ceded to the Nephila Reinsurers, whose investors ultimately assume the risk. To mitigate credit risk for this business, we exclude current accidentrequire collateral up to a specified level of annual aggregate agreement year losses, and loss adjustment expenses attributedwhich is held in a trust for which we are the beneficiary. See note 18 of the notes to natural catastrophes. We also exclude losses and loss adjustment expenses attributed to certain significant, infrequent loss events,consolidated financial statements included under Item 8 for example, the COVID-19 pandemic. Due to the unique characteristics of a catastrophe loss, there is inherent variability as to the timing or loss amount, which cannot be predicted in advance. The same is true for the COVID-19 pandemic, as there are no events in recent historyfurther details regarding our programs with similar characteristics. We believe measures that exclude the effects of catastrophe events and COVID-19 are meaningful to understand the underlying trends and variability in our underwriting results that may be obscured by these items.Nephila Reinsurers.
When analyzingAlthough we reinsure substantially all of the risks inherent in our program services and other fronting businesses, we have certain programs that contain limits on our reinsurers' obligations to us that expose us to underwriting risk, including loss ratio caps, aggregate reinsurance limits or exclusion of the credit risk of producers. Under certain programs, including programs and contracts with Nephila Reinsurers, we evaluatealso bear underwriting risk for annual aggregate agreement year losses in excess of a limit that we believe is unlikely to be exceeded.
Insurance-Linked Securities
Our insurance-linked securities operations are primarily comprised of our Nephila operations and loss adjustment expenses attributableare not included in a reportable segment. Nephila Holdings Ltd. (together with its subsidiaries, Nephila) provides investment and insurance management services through which we offer alternative capital to the current accidentinsurance and reinsurance markets while providing investors with investment strategies that typically are uncorrelated with traditional asset classes. We receive management fees for investment and insurance management services provided through these operations, and for certain funds, incentive fees based on their annual performance. Our management fees are based on the net asset value of the accounts managed for most of our funds and gross premium volume for the remaining funds. Total revenues from our insurance-linked securities operations for the year separate fromended December 31, 2023 were $99.5 million. As of December 31, 2023, Nephila's net assets under management were $6.8 billion.
Our fund management operations provide insurance and investment management services for a broad range of investment products for insurance and reinsurance companies, government entities, banks, hedge funds, pension funds and institutional investors, including insurance-linked securities such as catastrophe bonds, insurance swaps, traditional reinsurance contracts, industry loss warranties and other financial instruments. Nephila serves as the investment manager to several Bermuda based private funds (the Nephila Funds). To provide access for the Nephila Funds to a variety of insurance-linked securities in the property catastrophe, climate and specialty markets, Nephila acts as an insurance manager to certain Bermuda Class 3, collateralized and special purpose reinsurance companies, Lloyd's Syndicate 2357 and Lloyd's Syndicate 2358 (collectively, the Nephila Reinsurers). The results of the Nephila Reinsurers are attributed to the Nephila Funds primarily through derivative transactions between these entities. Neither the Nephila Funds nor the Nephila Reinsurers are subsidiaries of Markel Group, and as such, these entities are not included in our consolidated financial statements.
The Nephila Reinsurers subscribe to various property, climate and specialty reinsurance contracts based on their investors' risk profiles, which include business ceded by our underwriting and program services and other fronting platforms. We write this business on behalf of our Nephila ILS operations to the extent it fits Nephila investors' risk profile and cede substantially all of the risk to Nephila Reinsurers. See note 18 of the notes to consolidated financial statements included under Item 8 for further details regarding transactions with entities managed through our Nephila operations.
Ratings
Financial stability and strength are important considerations of policyholders, cedents and insurance agents and brokers. Because an insurance premium paid today purchases coverage for losses that might not be paid for many years, the financial viability of the insurer is of critical concern. Various independent rating agencies provide information and loss adjustment expenses attributableassign ratings to prior accident years. Prior accident year reserve development, which can either be favorable or unfavorable, representsassist buyers in their search for financially sound insurers. Rating agencies periodically re-evaluate assigned ratings based upon changes in our estimates of lossesthe insurer's operating results, financial condition or other significant factors influencing the insurer's business. Downgrades in assigned ratings and loss adjustment expenses relatedother negative actions could have an adverse impact on an insurer's ability to loss events that occurred in prior years. We believe a discussion of current accident year loss ratios, which exclude prior accident year reserve development, is helpful since it provides more insight into estimates of current underwriting performance and excludes changes in estimates relatedwrite new business.
Rating agencies assign financial strength ratings (FSRs) to prior year loss reserves. We also analyze our current accident year loss ratio excluding losses and loss adjustment expenses attributable to catastrophes and, in 2020, the COVID-19 pandemic, for the reasons previously discussed. The current accident year loss ratio excluding the impact of catastrophes and significant, infrequent loss events is also commonly referred to as an attritional loss ratio within the property and casualty insurance industry.companies, or group of companies, based on quantitative criteria such as profitability, leverage and liquidity, as well as qualitative assessments such as market placement, business profile, adequacy and soundness of ceded reinsurance, quality and estimated market value of assets, adequacy of loss reserves and surplus and competence, experience and integrity of management.
ConsolidatedSixteen of our seventeen insurance subsidiaries are rated by A.M. Best, while our Lloyd's syndicate is part of a group rating for the Lloyd's overall market. All sixteen of our insurance subsidiaries rated by A.M. Best have been assigned an FSR of "A" (excellent). The Lloyd's group has been assigned an FSR of "A" (excellent) by A.M. Best.
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(dollars in thousands) | 2021 | | 2020 | | % Change |
Gross premium volume (1) | $ | 8,480,494 | | | $ | 7,154,628 | | | 19 | % |
Net written premiums | $ | 7,119,731 | | | $ | 5,932,238 | | | 20 | % |
Earned premiums | $ | 6,503,029 | | | $ | 5,612,205 | | | 16 | % |
Underwriting profit | $ | 628,085 | | | $ | 127,617 | | | 392 | % |
Disposal loss | $ | 109 | | | $ | (41,461) | | | NM (2) |
| | | | | |
Underwriting Ratios (3) | | | | | Point Change |
Loss ratio | | | | | |
Current accident year loss ratio | 62.4 | % | | 72.6 | % | | (10.2) | |
Prior accident years loss ratio | (7.4) | % | | (10.8) | % | | 3.4 | |
Loss ratio | 55.1 | % | | 61.8 | % | | (6.7) | |
Expense ratio | 35.3 | % | | 36.0 | % | | (0.7) | |
Combined ratio | 90.3 | % | | 97.7 | % | | (7.4) | |
| | | | | |
Current accident year loss ratio catastrophe impact (4) | 3.0 | % | | 3.1 | % | | (0.1) | |
Current accident year loss ratio COVID-19 impact (4) | — | % | | 6.4 | % | | (6.4) | |
Prior accident years loss ratio COVID-19 impact (4) | 0.2 | % | | — | % | | 0.2 | |
| | | | | |
Current accident year loss ratio, excluding COVID-19 and catastrophes | 59.4 | % | | 63.1 | % | | (3.7) | |
Combined ratio, excluding COVID-19 and current year catastrophes | 87.1 | % | | 88.3 | % | | (1.2) | |
(1) Gross premium volume excludes $3.0 billion and $2.1 billionNine of our seventeen insurance subsidiaries are rated by Standard & Poor's (S&P), while our Lloyd's syndicate is part of a group rating for the yearsLloyd's overall market. All nine of our insurance subsidiaries rated by S&P have been assigned an FSR of "A" (strong). The Lloyd's group has been assigned an FSR of "A+" (strong) by S&P.
Five of our seventeen insurance subsidiaries are rated by Moody's Corporation (Moody's). All five insurance subsidiaries rated by Moody's have been assigned an FSR of "A2" (good).
Investments
Our investment operations manage the capital held within our underwriting operations, as well as capital allocated by Markel Group. Invested assets managed through our investment operations includes our portfolio of publicly traded fixed maturity and equity securities, as well as cash and short-term investments.
Our underwriting operations provide our investment operations with steady inflows of premiums. These funds are invested predominantly in high-quality government and municipal bonds and mortgage-backed securities that generally match the duration and currency of our loss reserves. We typically hold these investments until maturity. As a result, unrealized holding gains and losses on these securities are generally expected to reverse as the securities mature. Premiums collected through our underwriting operations may also be held as short-term investments or cash and cash equivalents to provide short-term liquidity for projected claims payments, reinsurance costs and operating expenses.
Our investments in equity securities are predominantly held within our regulated insurance subsidiaries to support capital requirements. Capital held by our insurance subsidiaries beyond that which we anticipate will be needed to cover claims payments and operating expenses is available to be invested in equity securities, along with additional capital allocated for investment purposes by Markel Group. We allocate a higher percentage of capital to equity securities than most other insurance companies. Over the long run, equity securities have produced higher returns relative to fixed maturity securities and short-term investments.
When purchasing equity securities, we seek to invest in profitable companies with high returns on capital and low debt, with honest and talented management and significant reinvestment opportunities and capital discipline, all while paying reasonable prices for those securities. We intend to hold these equity investments over the long-term. We believe our long-term time horizon and internal sourcing of capital for investment provides us with a distinct competitive advantage compared to other companies. Substantially all of our investment portfolio is managed by company employees, which helps minimize costs in our investment operations. The breadth of our operating businesses, and the experience we garner from supporting them, also informs and enhances the efficacy of our investment activities.
Invested assets, comprised of fixed maturity securities, equity securities, short-term investments, cash and cash equivalents and restricted cash and cash equivalents, were $30.9 billion at December 31, 2023. The following chart displays the composition of our invested assets as of December 31, 2023.
![1784](https://capedge.com/proxy/10-K/0001096343-24-000025/mkl-20231231_g6.jpg)
We measure our investment performance by analyzing net investment income earned on our investment portfolio, which reflects the recurring interest and dividend earnings on our investment portfolio. In 2023, our net investment income was $734.5 million. We also analyze net investment gains, which include unrealized gains and losses on our equity portfolio. Based on the potential for volatility in the financial markets, we understand that the level of gains or losses may vary from one period to the next, and therefore believe that our investment performance is best analyzed over longer periods of time. Our annual return on equity securities for the five-year period ended December 31, 20212023 was 14.6%.
Markel Ventures
Through our wholly owned subsidiary Markel Ventures, Inc. (Markel Ventures), we own controlling interests in high-quality businesses that operate in a variety of different industries with shared values and 2020, respectively,the shared goal of written premiums attributablepositively contributing to the long-term financial performance of Markel Group. Management teams for each business operate autonomously and are responsible for developing strategic initiatives, managing day-to-day operations and making investment and capital allocation decisions for their respective companies. Our Markel Ventures management team is responsible for decisions regarding allocation of capital for acquisitions and new investments. Our strategy in making these acquisitions is similar to our programstrategy for purchasing equity securities. We seek to invest in profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline, at reasonable prices. We intend to own the businesses acquired for a long period of time.
Our chief operating decision maker allocates resources to and assesses the performance of these various businesses in the aggregate as the Markel Ventures segment. See note 2 of the notes to consolidated financial statements included under Item 8 for additional segment reporting disclosures. The Markel Ventures segment includes a diverse portfolio of specialized businesses from different industries that offer various types of products and services to businesses and consumers across many markets. All of our businesses in this segment are headquartered in the U.S., with subsidiaries of certain businesses located outside of the U.S. In 2021, our Markel Ventures operations expanded through acquisitions of majority interests in Metromont LLC and Buckner HeavyLift Cranes. See note 3 of the notes to consolidated financial statements included under Item 8 for additional details related to these acquisitions. This follows the acquisition of Lansing Building Products, LLC in 2020 and VSC Fire & Security, Inc. in 2019. We continue to look for acquisition opportunities that align with our investment criteria and strategic objectives around diversification and specialization.
In 2023, our Markel Ventures operations reported revenues of $5.0 billion, operating income of $437.5 million and earnings before interest, income taxes, depreciation and amortization (EBITDA) of $628.5 million. We use Markel Ventures EBITDA, which is a non-GAAP financial measure, as an operating performance measure in conjunction with operating income. See "Markel Ventures" under Item 7 Management's Discussion & Analysis of Financial Condition and Results of Operations for more information on our Markel Ventures results, including EBITDA.
The following chart displays the types of businesses within our Markel Ventures segment based on 2023 operating revenues. Our Markel Ventures management team does not manage the Markel Ventures portfolio of businesses at this level of aggregation due to the distinct characteristics of each business and other fronting arrangements that were ceded.the autonomy with which local management operates each business.
(2) NM - Ratio is not meaningful
(3) Amounts may not reconcile due to rounding.
(4) The point impact of catastrophes and COVID-19 is calculated as the associated net losses and loss adjustment expenses divided by total earned premiums.
PremiumsThe following table provides summary information about our portfolio of Markel Ventures companies by type of business.
| | | | | | | | | | | | | | | | | | | | |
Company | | Category | | Year Founded | | Joined Markel Group Family |
Markel Food Group - Global manufacturer and designer of industrial food equipment | | Equipment manufacturing | | 1915 | | 2005 |
ParkLand Ventures - Operator of manufactured housing communities in the U.S. | | Other | | 2008 | | 2008 |
Panel Specialists - Manufacturer of dorm room furniture and wall panel systems | | Consumer and building products | | 1990 | | 2009 |
Ellicott Dredges - Manufacturer and designer of cutter suction dredges | | Equipment manufacturing | | 1885 | | 2009 |
RetailData - Provider of retail intelligence solutions | | Consulting services | | 1988 | | 2010 |
PartnerMD - Concierge healthcare membership provider offering personalized primary care, advanced physicals, and wellness services | | Other | | 2003 | | 2011 |
Weldship - Manufacturer of industrial and specialty gas transportation and storage equipment | | Transportation-related products | | 1946 | | 2011 |
Havco - Manufacturer of laminated wood flooring for dry-van trailers, truck bodies and containers | | Transportation-related products | | 1978 | | 2012 |
Eagle - Designer and builder of single family attached and detached homes | | Consumer and building products | | 1984 | | 2013 |
Cottrell - Manufacturer of over-the-road auto hauler equipment | | Transportation-related products | | 1975 | | 2014 |
CapTech - Management and information technology consulting firm | | Consulting services | | 1997 | | 2015 |
Costa Farms - Largest producer of ornamental plants in the U.S. 4 | | Consumer and building products | | 1961 | | 2017 |
Rosemont Investment Group - Specialist investor in asset and wealth management companies | | Other | | 2018 | | 2018 |
Brahmin - Creator of fashion leather handbags | | Consumer and building products | | 1982 | | 2018 |
VSC Fire & Security - Distributor of comprehensive fire protection, life safety, and low voltage solutions | | Construction services | | 1958 | | 2019 |
Lansing Building Products - Supplier of exterior building products and materials to professional contractors | | Construction services | | 1955 | | 2020 |
Buckner Heavylift Cranes - Provider of heavylift crane rental solutions | | Construction services | | 1947 | | 2021 |
Metromont - Manufacturer of highly engineered precast concrete solutions | | Consumer and building products | | 1925 | | 2021 |
Markel Ventures businesses encounter a variety of competitors that vary by industry, end market and geographic area. Each Markel Ventures business has several main competitors and numerous smaller ones in most of its respective end markets and geographic areas.
Many of the businesses in this segment experience revenue fluctuations over time due to the cyclical nature of supply and demand in their particular industry. For example, the construction industry is cyclical based on certain larger economic trends and factors, including the inflationary and interest rate environment and, for some businesses, the level of government investment. Additionally, many of our businesses experience fluctuation in demand throughout the year based on the seasonality of the products they sell or services they provide. For example, the demand for ornamental plants is particularly high during the spring and summer seasons as compared to the rest of the year.
4Measured by 2023 square footage of production. Greenhouse Grower's 2023 Top 100 Growers, Greenhouse Grower (May 11, 2023)
Businesses in this segment are reliant on inputs, such as raw materials and labor, to manufacture products and deliver services, and the operating results of these businesses could be impacted by the ability or inability to source these inputs and obtain price increases from customers in response to increases in the price of these inputs, including the cost of shipping. For example, shipping costs at some of our businesses increased significantly in 2022 before reverting to more typical levels in 2023, which has resulted in higher margins in 2023 compared to 2022 at the impacted businesses.
Management teams for each of our businesses proactively manage the risks and challenges posed by cyclicality, seasonality and inflation, among other things, in a variety of ways as appropriate and as needed for their business.
Regulatory Environment
We are subject to extensive U.S. state and federal, as well as international, regulation and supervision in the jurisdictions in which we do business. Regulations vary from jurisdiction to jurisdiction. Additionally, as a company with publicly traded securities, we are also subject to certain legal and regulatory requirements applicable generally to public companies, including the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and the New York Stock Exchange relating to reporting and disclosure, accounting and financial reporting, corporate governance and other matters.
The following is a summary of significant regulations that apply to our businesses, but it is not intended to be a comprehensive review of every regulation to which we are subject. For information regarding certain risks associated with regulations applicable to our businesses, see Item 1A Risk Factors.
Group Insurance Regulation and Supervision
Group Supervision - Global Supervisory College; Global Common Framework. Regulators within and outside the U.S. are increasingly coordinating the regulation of multinational insurers by conducting a supervisory college. A supervisory college is a forum of the regulators having jurisdictional authority over an insurance holding company's worldwide insurance subsidiaries. The supervisory college meets with executive management to evaluate the insurance group on both a group-wide and legal-entity basis, particularly with respect to its financial data, business strategies, enterprise risk management and corporate governance. The Illinois Department of Insurance is our lead insurance regulator for purposes of conducting our supervisory college.
In 2020, the International Association of Insurance Supervisors adopted its Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame). ComFrame establishes a comprehensive framework for supervisors to address group-wide activities and risks of internationally active insurance groups (IAIGs) and lays the groundwork for better supervisory cooperation and coordination. ComFrame requires the designation of a group-wide supervisor (regulator) for each IAIG and imposes a group capital requirement that will be applied to an IAIG in addition to the current legal entity capital requirements imposed by state and international insurance regulators. In response to ComFrame, the National Association of Insurance Commissioners (NAIC) revised the model Insurance Holding Company System Regulatory Act to allow state insurance regulators in the U.S. to be designated as group-wide supervisors for U.S. based IAIGs. In 2023, it was determined that we meet the criteria to be identified as an IAIG. The Illinois Department of Insurance has been designated as our group-wide supervisor.
Holding Company Statutes. We also are subject to state statutes governing insurance holding company systems, which typically require that we periodically file information with the appropriate state insurance commissioner, including information concerning our capital structure, ownership, financial condition, dividend payments and other material transactions with affiliates, and general business operations. These statutes also require approval of changes in control of an insurer or an insurance holding company. Generally, "control" for these purposes is defined as ownership or voting power of 10% or more of a company's voting shares. We also must submit an annual group-level enterprise risk report, which provides information regarding material risks within the insurance holding company system that could pose enterprise risk to its U.S. insurance subsidiaries.
Own Risk and Solvency Assessment and Enterprise Risk Management. We must submit an Own Risk and Solvency Assessment Summary Report (ORSA) annually to our lead insurance regulator. The ORSA is a confidential internal assessment of the material and relevant risks associated with an insurer's current business plan and the sufficiency of capital resources to support those risks. In addition, we must file an annual enterprise risk report with our lead insurance regulator. The report must identify the material risks within the insurance holding company system that could pose enterprise risk to our U.S. insurance subsidiaries.
U.S. Insurance Regulation
State Regulation
Overview. Our U.S. insurance company subsidiaries are subject to varying degrees of regulation and supervision by the states and other jurisdictions in which they do business. In the U.S., authority for the regulation, supervision and administration of the business of insurance in each state is generally delegated to a state insurance commissioner who oversees a regulatory body responsible for the supervision of the business of insurance. State regulatory authorities have broad regulatory, supervisory and administrative powers relating to: solvency standards; corporate conduct; market conduct activities; regulating unfair trade and claims practices; licensing of insurers; licensing and appointment of agents; approval of forms and policies used; the nature of, and limitations on, insurers' investments; the form and content of annual statements and other reports on the financial condition of insurers; and establishment of loss reserves. States also regulate various aspects of the contractual relationships between insurers and independent agents. In addition, the NAIC, comprised of the insurance commissioners of each U.S. jurisdiction, develops or amends model statutes and regulations that, in turn, most states adopt.
Risk Based Capital Requirements. The NAIC uses a risk based capital (RBC) formula to measure the capital of an insurer, taking into account the company's investments and products. For property and casualty insurance companies, RBC requirements establish capital thresholds for four categories of risk: asset risk, insurance risk, interest rate risk and business risk.
Financial Exams. State insurance regulators also prescribe the form and content of statutory financial statements, perform periodic financial examinations of insurers regarding activities in their respective states, set minimum reserve and loss ratio requirements, establish standards for permissible types and amounts of investments and require minimum capital and surplus levels. These statutory capital and surplus requirements include RBC rules promulgated by the NAIC.
Statutory Accounting Principles. Each of our U.S. insurance companies is required to file detailed quarterly and annual reports, including financial statements, in accordance with prescribed statutory accounting rules. The quarterly and annual financial reports utilize statutory accounting principles (SAP) that are different from U.S. GAAP. In developing SAP, insurance regulators were primarily concerned with monitoring the solvency of insurance companies to assure an insurer's ability to pay all its current and future obligations to policyholders.
Rates and Form Filings. The policy forms and various premium rates of our U.S. admitted insurance subsidiaries are subject to regulation in every state in which they conduct business. In many states, rates and policy forms must be filed with the applicable insurance regulator prior to their use, and in some states, rates and forms must be affirmatively approved by the applicable insurance regulator prior to use.
Dividends. The laws of the domicile states of our U.S. insurance subsidiaries govern the amount of dividends that may be paid to our holding company, Markel Group. Generally, statutes in the domicile states of our insurance subsidiaries require prior approval for payment of extraordinary, as opposed to ordinary, dividends. See note 22 of the notes to consolidated financial statements included under Item 8.
Market Conduct. State insurance laws and regulations include numerous provisions governing trade practices and the marketplace activities of insurers, including provisions governing marketing and sales practices, data security, compliance of underwriting services to policyholders, confirmation of licensing and appointment of producers, claims management, anti-fraud controls and complaint handling. State regulatory authorities generally enforce these provisions through periodic market conduct examinations.
Investment Regulation. Investments by our U.S. insurance companies must comply with applicable laws and regulations that prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate and certain other investments, subject to specified limits and certain other qualifications.
Cybersecurity; Data Privacy. Several states have enacted laws establishing cybersecurity requirements for financial services companies, including insurance companies, that require implementation of security measures for the monitoring, detection, prevention, mitigation and management of cybersecurity incidents. Several states also have enacted laws addressing data privacy concerns and the protection of consumer data.
Federal Regulation
The U.S. federal government and its regulatory agencies generally do not directly regulate the business of insurance. However, two federal government bodies, the Federal Insurance Office (FIO) and the Financial Stability Oversight Council (FSOC), each created under The Dodd Frank Wall Street Reform and Consumer Protection Act, may impact the regulation of insurance. Although the FIO is prohibited from directly regulating the business of insurance, it has authority to represent the U.S. in international insurance matters and has limited powers to preempt certain types of state insurance laws. The FIO also can recommend to the FSOC that it designate an insurer as an entity posing risks to the U.S. financial stability in the event of the insurer's material financial distress or failure. We have not been so designated. The U.S. federal laws that most affect our day-to-day insurance operations are: the Gramm-Leach-Bliley Act; the Fair Credit Reporting Act; the Health Insurance Portability and Accountability Act of 1996; the Terrorism Risk Insurance Act of 2002; anti-money laundering laws and regulations; the Nonadmitted and Reinsurance Reform Act of 2010; the Foreign Corrupt Practices Act, and the rules and regulations of the Office of Foreign Assets Control.
International Insurance Regulation
Overview.Our international insurance operations are subject to regulation and supervision in various jurisdictions. These regulations, which vary depending on the jurisdiction, include, among others, solvency and market conduct regulations; anti-corruption, anti-money laundering, and anti-terrorism financing guidelines, laws and regulations; various privacy, insurance, tax, tariff, trade and sanctions laws and regulations; and corporate, competition, employment, intellectual property and investment laws and regulations. Our international insurance operations are domiciled in the U.K., Europe and Bermuda and are subject to regulation in those jurisdictions. In addition, we conduct business in Canada, Asia, Australia and the Middle East, where our businesses also are supervised by local regulatory authorities.
U.K. and European Regulation. We are subject to regulation by the Prudential Regulatory Authority and Financial Conduct Authority in respect of our U.K. insurance businesses. We are also subject to regulation by the Federal Financial Supervisory Authority, better known by its abbreviation BaFin, in respect of our German insurance carrier.
Our U.K. and German insurance businesses are subject to both the E.U.'s General Data Protection Regulation (GDPR) and the Solvency II Directive (Solvency II).
GDPR requires businesses operating in the E.U., and businesses transacting with E.U. citizens, to comply with conditions for processing personal data. Following the U.K.'s exit from the E.U., GDPR was transposed into U.K. law. The E.U. has granted adequacy status to the U.K.'s data protection laws, valid until June 2025 with the possibility of renewal, meaning that they are deemed essentially equivalent to E.U. data protection laws.
Solvency II requires our U.K. and German businesses to maintain certain capital standards and publish risk-related information in the form of a Solvency and Financial Condition Report. Following the U.K.'s exit from the E.U., Solvency II also was transposed into U.K. law as retained law. The U.K. government, under the Financial Services and Markets Act 2023, has opted to repeal certain portions of retained E.U. law. This repeal will occur in stages and, where necessary, after replacement regulations designed for the U.K. are in place. This repeal of retained E.U. law includes reforms to Solvency II. The Prudential Regulation Authority has consulted on the reforms, to be known as Solvency UK, which are expected to be implemented in 2024.
Bermuda Regulation. The insurance industry in Bermuda is regulated by the Bermuda Monetary Authority (BMA). Under the Bermuda Insurance Act 1978, and related regulations and standards of the BMA, each Bermuda insurance company is subject to, among other things: licensing, capital, surplus and liquidity requirements; solvency standards; restrictions on dividends and distributions; and periodic examinations of the company and its financial condition. In addition, each insurance company must obtain prior approval of ownership and transfer of shares and maintain a principal office and appoint and maintain a principal representative in Bermuda. The BMA also requires that each insurance company contract for local services, such as corporate secretary and registered representative services, at market rates.
ILS Regulation
Our Nephila insurance-linked securities operations are subject to regulation and supervision by various regulatory authorities, both in the U.S. and internationally. Certain of our ILS subsidiaries are organized and regulated as follows:
•registered with the SEC as an investment adviser under the Investment Advisers Act of 1940,
•registered with the U.S. Commodity Futures Trading Commission as a commodity pool operator or a commodity trading advisor under the Commodity Exchange Act, and/or
•registered with the BMA as an insurance manager under the Bermuda Insurance Act 1978.
Certain other ILS subsidiaries serve as the investment manager to one or more private funds that are registered with the BMA under the Investment Funds Act 2006, as amended, or the Segregated Accounts Companies Act 2000, as amended. In addition, these operations include business relationships with certain U.S., U.K. and Bermuda insurance companies that are subject to U.S. and international insurance regulation as previously described in this "Regulatory Environment" section.
As a result, subsidiaries involved in our ILS operations are subject to regulations that may impose substantive and material restrictions and requirements on their operations, including, among other things: a broader fiduciary duty to act in the best interests of their clients; disclosure of information about our businesses and conflicts of interests to clients; maintenance of written policies and procedures; maintenance of extensive books and records; restrictions on the types of fees we may charge, including performance fees; restrictions on solicitation arrangements; requirements regarding engaging in transactions with clients; maintenance of an effective compliance program; and other restrictions and requirements applicable to custody of client assets, client privacy, advertising, pay-to-play prohibitions and cybersecurity; as well as possible sanctions, disciplinary actions or other penalties for non-compliance.
Markel Ventures Regulation
Our Markel Ventures businesses are subject to a wide variety of U.S. federal, state, and local laws and regulations, as well as international laws and regulations applicable to their international operations. Specifically, the most significant of these laws and regulations cover the following areas: safety, health, employment, the environment, transportation, U.S. and international trade, anti-corruption, data privacy and security and government contracts.
Human Capital
Our culture is our greatest asset and is defined by the Markel Style. Written in 1986, in preparation for our initial public offering, the Markel Style memorialized how we seek to operate our businesses and treat one another. It continues to provide our guiding principles across our diverse group of businesses. Key within the Markel Style is the encouragement to look for a better way to do things, to challenge management. We also seek spontaneity and flexibility and have a respect for authority, but disdain for bureaucracy. Our holding company and each of our businesses is managed in a way to accomplish these principles. Each of our businesses operates with a high degree of autonomy so long as they operate within the principles of the Markel Style. This allows our managers to make decisions that are best for their employees and customers, as well as our shareholders. We believe this high degree of empowerment leads to the satisfaction that comes from being trusted in the responsibilities one has been given.
Further outlined in the Markel Style is our creed of honesty and fairness in all our dealings; holding the individual's right to self-determination in the highest light; putting aside individual concerns in the spirit of teamwork; and providing an atmosphere in which people can reach their full potential. We greatly value our employees, encourage their career development and reward their pursuit of excellence, while also celebrating a diverse workforce.
At December 31, 2023, we had approximately 21,600 employees, of whom approximately 5,400 were employed within our insurance operations and approximately 16,200 were employed within our Markel Ventures operations.
Insurance
Our specialty insurance business, Markel, markets and underwrites specialty insurance products. Markel has a well-developed process to ensure effective performance management, including an embedded annual review process that enables goal setting, development planning and performance assessment. Markel has also established global leadership development programs for different levels of leadership at Markel, partnering with various schools to create leading-edge curricula in this area.
With the Markel Style as the foundation, Markel has identified five pillars of focus that relate to today's challenges and opportunities—diversity and inclusion, community, innovation, well-being, and recognition. This program is both company and employee led—collectively, we want to bring the values of the Markel Style to life with our actions, not just our words. The intent is to create an environment where employees are able to authentically bring their true selves to work, a place where all ideas are heard and diverse perspectives are valued, a culture that prioritizes innovation, the ability to make a difference for our local communities and the wider world, and a foundation for holding ourselves accountable for our own well-being and of those around us.
Employee health and overall well-being is a key priority, and we provide a range of employee and eligible partner plans and programs, including health and voluntary benefits. These offerings include a variety of financial protection programs to help our employees meet their unique investment and savings needs including life insurance, retirement savings with company contributions in most situations and an employee stock purchase plan. Comprehensive employee assistance programs are available in all of our major markets along with other well-being and fitness resources.
We rely on our employees' ideas and input to help make Markel a great place to work. For example, senior leadership conducts regular employee communication meetings, inclusive of question and answer sessions, across our insurance operations and provides opportunities for employees to share their ideas on how we can improve employee engagement. In addition, every two years we conduct a major, global employee engagement survey, which in early 2022 garnered 88% participation, and which enables us to identify, focus on and track progress against key engagement drivers and external norms for high performing companies. This survey has generated additional ideas for employee engagement, and we have made meaningful changes and improvements in our human capital practices based on this feedback. Plans are underway to conduct an employee engagement survey in early 2024. Additionally, Markel conducts regular pulse and employee net promoter score surveys on a departmental level across the organization throughout the year.
We are committed to embracing all aspects of diversity, including diversity of perspective, which we believe is crucial to sustainable success. Markel accordingly supports and encourages focused efforts to continue to build the diversity of our employee population and the inclusiveness of our culture. Our diversity and inclusion efforts seek to cultivate an inclusive environment in which every employee feels valued, respected and accepted. We believe this environment helps us increase creativity and innovation, foster business connections, serve our customers and maintain our market leadership.
Markel's global Diversity and Inclusion (D&I) Steering Committee comprises more than 15 senior managers who are charged with advising on D&I strategy and providing leadership support and advocacy for our D&I efforts. Our Human Resources leadership team works to further shape the D&I strategy for our global workforce, and to ensure the integration of our D&I efforts with our global talent acquisition and development processes. We have various early career programs open to a diverse range of applicants and a regional scholarship program that is focused on underrepresented groups.
Markel supports a range of employee-led D&I networks and resource groups, including our Markel Women's Network, BEAM (Black Engagement at Markel), PRISM (LGBTQ+), Jitneys (Young Professionals), Markel Asian Professionals Network, Markel Veterans Network, UN1DOS (Latin and Hispanic Network), and across our international operations, an Inclusion Network with connections to a number of the London market partner networks. All of these networks and organizations have put in gross premium volumeplace goals and programming that are focused on education and development, community engagement, talent acquisition and networking/support. Additionally, we continue our global sponsorship of Dive-In, the insurance industry's annual diversity and inclusion festival.
Markel Ventures
Our Markel Ventures operations are comprised of a diverse portfolio of businesses from different industries through which we own controlling interests. The Markel Ventures operations are viewed by management as separate and distinct from our insurance operations with local management teams that direct the strategy and day-to-day operations of their respective companies, including human capital matters. When making these acquisitions, we seek, among other things, businesses whose leadership teams demonstrate equal measures of both integrity and talent. As a result, each Markel Ventures business fosters a culture within their operations, and with their employees, that aligns with the principles of the Markel Style.
Item 1A. RISK FACTORS
A wide range of factors could materially affect our future prospects and performance. The matters addressed in Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations, including under "Safe Harbor and Cautionary Statement" and "Critical Accounting Estimates", and Item 7A Quantitative and Qualitative Disclosures About Market Risk, as well as other information included or incorporated in this report, describe many of the significant risks that could affect our businesses, results of operations and financial condition. We are also subject to the risks discussed below.
One or more of the risks discussed in this Item 1A. Risk Factors, and others we cannot anticipate, could have material adverse effects on our results of operations and financial condition; and the extent of these effects will depend, at least in part, on the scope, severity, frequency or duration of the specific event or circumstance. In addition, we may take steps to prevent, mitigate or manage potential risks or liabilities, and related developments, and some of those steps may have a material adverse effect on our results of operations and financial condition. Even if an unfavorable outcome does not materialize, these factors, and actions we may take in response, may have a material adverse impact on our reputation or result in substantial expense and disruption.
Headings and sub-headings for the Risk Factors below are for reference purposes only and are not intended to limit or affect in any way the meaning or scope of each Risk Factor.
Risks Primarily Related to Our Insurance Operations
Loss Exposures
We may experience losses or disruptions from catastrophes. As a company with significant property and casualty insurance underwriting operations, we may experience losses from man-made or natural catastrophes. Catastrophes include, but are not limited to, windstorms, hurricanes, earthquakes, tornadoes, derechos, hail, severe winter weather, floods and wildfires and may include pandemics and events related to terrorism, broad reaching cyberattacks, riots and political and civil unrest. While we employ catastrophe modeling tools in our underwriting process, we cannot predict how severe a potential catastrophe will be before it occurs. The extent of losses from catastrophes is a function of the total amount of losses incurred, the number of insureds affected, the frequency and severity of the events, the effectiveness of our catastrophe risk management program and the adequacy of our reinsurance coverage. Catastrophes can occur over numerous geographic areas; however, some catastrophes may produce significant damage in large, heavily populated areas. We offer insurance and reinsurance coverage against terrorist acts in connection with some of our programs, and in other instances we are legally required to offer terrorism insurance; in both circumstances, we actively manage our exposure, but if there is a covered terrorist attack, we could sustain material losses. In addition, catastrophes may have a material adverse effect on the investment management and incentive fees earned by our insurance-linked securities (ILS) operations and returns on our investments in 2021 was drivenILS funds. Catastrophes also may result in significant disruptions in our insurance and other operations, as well as loss of income and assets. The impacts of climate change may increase the frequency and/or severity of weather-related catastrophes, which may result in elevated catastrophe-related losses or disruptions, which may be material.
The failure of any of the methods we employ to manage our loss exposures could have a material adverse effect on us. We seek to manage our loss exposures in a variety of ways, including adhering to maximum limitations on policies written in defined geographical zones, implementing maximum gross limits by coverage for each insured, establishing per risk and per occurrence limitations for each event, employing coverage restrictions and following prudent underwriting guidelines for each program written. We also seek to manage our loss exposures through geographic and industry diversification. Underwriting is a matter of judgment, involving assumptions about matters that are inherently unpredictable and beyond our control, and for which historical experience and probability analysis may not provide sufficient guidance. One or more future events could result in claims that substantially exceed our expectations, which could have a material adverse effect on our results of operations and financial condition. In addition, we seek to manage our loss exposures by policy terms, coverage exclusions and choice of legal forum. Disputes relating to coverage and choice of legal forum also arise. As a result, various provisions of our policies, such as choice of forum, or coverage limitations or exclusions, may not be enforceable in the manner we intend and some or all of our methods to manage loss exposures may prove ineffective.
The effects of emerging claim and coverage issues on our business are uncertain. As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues could have a material adverse effect on our results of operations or financial condition by either broadening coverage beyond our underwriting intent or increasing the frequency and/or severity of claims. For example, rising costs, litigation funding, social inflation, including new businessor expanded theories of liability, higher adverse verdicts, and
legislative changes, such as extended statutes of limitations, may result in higher and more favorablefrequent claims over a longer reporting period than originally expected. In some instances, these changes may not become apparent until after we have issued insurance or reinsurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance or reinsurance contracts may not be known for many years after a contract is issued.
We use analytical models to assist our decision making in key areas such as pricing, reserving and capital modeling and actual results may differ materially from the model outputs and related analyses. We use various modeling techniques and data analytics (e.g., scenarios, predictive and stochastic modeling, and forecasting) to analyze and estimate exposures, loss trends and other risks associated with our insurance and ILS businesses. This includes both proprietary and third-party modeled outputs and related analyses to assist us in, among other things, decision-making related to underwriting, pricing, capital allocation, reserving, investing, reinsurance and catastrophe risk. We incorporate numerous assumptions and forecasts about the future level and variability of policyholder behavior, loss frequency and severity, interest rates, withinequity markets, inflation, capital requirements, and currency exchange rates, among others. The modeled outputs and related analyses from both proprietary models and third-party models are subject to various assumptions, uncertainties, model design errors, complexities and the inherent limitations of any statistical analysis, including those arising from the use of historical internal and industry data and assumptions.
In addition, the modeled outputs and related analyses may from time to time contain inaccuracies, perhaps in material respects, including as a result of inaccurate inputs or applications thereof (whether due to data error, human error or otherwise). Consequently, actual results may differ materially from our professional liabilitymodeled results. Our profitability and general liability product lines across bothfinancial condition substantially depend on the extent to which our actual experience is consistent with assumptions we use in our models and ultimate model outputs. If, based upon these models or other factors, we misprice our products or fail to appropriately estimate the risks we are exposed to, our business, results of operations and financial condition may be materially adversely affected.
Loss Reserves
Our results may be affected because actual insured or reinsured losses differ from our underwriting segments. Net retentionloss reserves. Significant periods of gross premium volumetime often elapse between the occurrence of an insured or reinsured loss, the reporting of the loss to us and our payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the related loss adjustment expenses. The process of estimating loss reserves is a difficult and complex exercise involving analytical models with many variables and subjective judgments. This process may also become more difficult if we experience a period of rising inflation, as has been the case since early 2021.
As part of the reserving process, we review historical data and consider the impact of various factors, such as:
•trends in claim frequency and severity;
•changes in operations;
•changes to mix of business, terms and conditions, limits and layers;
•emerging economic and social trends;
•trends in insurance rates;
•inflation or deflation; and
•changes in the regulatory and litigation environments.
This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves, and actual results will differ from original estimates. As part of the reserving process, we regularly review our loss reserves and make adjustments as necessary. Future increases in loss reserves for our underwriting operations was 84%will, and for our programs services operations may, result in 2021 comparedadditional charges to 83%earnings, which may be material.
In addition, as discussed above, we use analytical models to assist our decision making in 2020. Withinloss reserving, and actual results may differ materially from the model outputs and related analyses.
There is generally greater uncertainty in estimating reserves for long-tail coverages, such as general liability, professional liability and workers' compensation, as they require a longer period of time for claims to be reported and settled. The impact of changes in economic and social inflation and medical costs are also more pronounced for long-tail coverages due to the longer settlement period. In addition, reinsurance reserves are subject to greater uncertainty than insurance reserves primarily because a reinsurer relies on (i) the original underwriting decisions and claims decisions made by ceding companies and (ii)
information and data from ceding companies. As a result, we are subject to the risk that our ceding companies may not have adequately evaluated the risks reinsured by us and the premiums ceded may not adequately compensate us for the risks we assume. In addition, reinsurance reserves may be less reliable than insurance reserves because there is generally a longer lapse of time from the occurrence of the event to the reporting of the loss or benefit to the reinsurer and ultimate resolution or settlement of the loss. Reserves for contracts for which we are not the primary insurer, and participate only in excess layers of loss, are also subject to greater uncertainty than insurance reserves for contracts for which we are the primary insurer for many of the same reasons as reinsurance reserves.
Changes in the assumptions and estimates used in establishing reserves for our life and annuity reinsurance book could result in material increases in our estimated loss reserves for such business. Our run-off life and annuity reinsurance book exposes us to mortality risk, which is the risk that the level of death claims may differ from that which we assumed in establishing the reserves for our life and annuity reinsurance contracts. Some of our life and annuity reinsurance contracts expose us to longevity risk, which is the risk that an insured person will live longer than expected when the reserves were established, or morbidity risk, which is the risk that an insured person will become critically ill or disabled. Our reserving process for the life and annuity reinsurance book is designed with the objective of establishing appropriate reserves for the risks we assumed. Among other things, this process relies heavily on analysis of mortality, longevity and morbidity trends, lapse rates, interest rates and expenses. As of December 31, 2023, our reserves for life and annuity benefits totaled $649.1 million.
We expect mortality, morbidity, longevity, and lapse experience to fluctuate somewhat from period to period, but believe they should remain reasonably predictable over a period of many years. Mortality, longevity, morbidity or lapse experience that is less favorable than the mortality, longevity, morbidity or lapse rates that we used in establishing the reserves for a reinsurance agreement will negatively affect our net income because the reserves we originally set for the risks we assumed may not be sufficient to cover the future claims and expense payments. Furthermore, even if the total benefits paid over the life of the contract do not exceed the expected amount, unexpected increases in the incidence of deaths or illness can result in changes to our assumptions in a given reporting period, adversely affecting our net income in any particular reporting period. If there are adverse changes to any of the above factors, a charge to earnings may be recorded, which may have a material adverse effect on our results of operations and financial condition.
Ceded Reinsurance
We may be unable to purchase reinsurance protection on terms acceptable to us, or we may be unable to collect on loss recoveries from reinsurers. Our underwriting operations we purchase reinsurance and retrocessional reinsurance to manage our net retention on individual risks and overall exposuremitigate the volatility of losses on our results of operations and financial condition, while providing us with the ability to losses and to enable us to writeoffer policies with sufficient limits to meet policyholder needs. The increase in earned premiumsIn addition, we reinsure substantially all of the risks inherent in our underwriting operations in 2021 was primarily attributable to higher gross premium volume within our professional liabilityprogram services and general liability product lines.
Since 2018,other fronting businesses, however, we have seen favorable rates across most product lines, which further strengthened in 2020 and 2021 following continued high levels of natural catastrophes and significant losses attributedcertain programs that contain limits on our reinsurers' obligations to the COVID-19 pandemic. In 2020 and 2021, the favorable rate environment was most prominent within our professional liability and general liability product lines, based on general market conditions, the impacts of social inflation,us that expose us to underwriting risk, including increased litigation, as well as an increase in the severity of losses in these product lines. Additionally, recent increases in economic inflation, and an expectation that this trend will continue, have created more uncertainty around the ultimate losses that will be incurred to settle claims on these longer-tail product lines. These factors, as well as the current and expected impactsloss ratio caps, aggregate reinsurance limits or exclusion of the sustained low interest rate environment on net investment income, have resulted in higher rates. The primary exception to the favorable rate environment is workers' compensation, where we continue to see low single digit rate decreases given generally favorable loss experience in recent years. When we believe the prevailing market price will not support our underwriting profit targets, the business is not written. As a resultcredit risk of our underwriting discipline, gross premium volume may vary when we alter our product offerings to maintain or improve underwriting profitability.
Combined Ratio
In 2021, underwriting results included $195.0 million of net losses and loss adjustment expenses attributed to natural catastrophes, including Winter Storm Uri, the floods in Europe and Hurricane Ida (2021 Catastrophes), as well as $15.7 million of net losses and loss adjustment expenses resulting from an increase in our estimate of our ultimate losses and loss adjustment expenses attributed to COVID-19. The net losses and loss adjustment expenses from the 2021 Catastrophes were net of ceded losses of $221.7 million. In 2020, underwriting results included $358.3 million of net losses and loss adjustment expenses attributed to COVID-19 and $172.2 million of net losses and loss adjustment expenses from natural catastrophes, including Hurricanes Laura, Sally and Isaias, as well as the derecho in Iowa and wildfires in the western U.S. (2020 Catastrophes). The net losses and loss adjustment expenses from COVID-19 and the 2020 Catastrophes were net of ceded losses of $106.2 million and $125.7 million, respectively. Excluding losses attributed to catastrophes and COVID-19, the decrease in our consolidated combined ratio in 2021 compared to 2020 was driven by a lower current accident year loss ratio within our Insurance segment, partially offset by the impact of less favorable development on prior accident years loss reserves in 2021 compared to 2020. Higher earned premiums in 2021 compared to 2020 had a favorable impact on our expense ratio and an unfavorable impact on the prior accident years loss ratio.
The gross and net losses and loss adjustment expenses attributed to the 2021 Catastrophes as of December 31, 2021 represent our best estimates based upon information currently available. Our estimates for these losses are based on claims received to date, detailed policy and reinsurance contract level reviews, preliminary industry loss estimates and output from both industry and proprietary models, as well as analysis of our ceded reinsurance contracts. These estimates are based on various assumptions about coverage, liability and reinsurance and are subject to change. While we believe our reserves for the 2021 Catastrophes as of December 31, 2021 are adequate, we continue to closely monitor reported claims and may adjust our estimates of gross and net losses as new information becomes available.
Our losses from COVID-19 were primarily attributed to business written within our international insurance operations and were primarily associated with coverages for event cancellation and business interruption losses on policies where no specific pandemic exclusions existed. Our estimate of ultimate gross and net losses and loss adjustment expenses attributed to COVID-19 is based on assumptions about coverage, liability and ceded reinsurance contract attachment, for which significant uncertainty still exists, and represents our best estimate as of December 31, 2021 based upon information currently available. We continue to closely monitor reported claims, ceded reinsurance contract attachment, government actions, judicial decisions and changes in the levels of worldwide social disruption and economic activity arising from the pandemic and may adjust our estimates of gross and net losses as new information becomes available. Such adjustments to our reserves for COVID-19 losses and loss adjustment expenses may be material to our results of operations, financial condition and cash flows.producers. See note 912 of the notes to consolidated financial statements included under Item 8 for further detailsinformation about ceded reinsurance for our program services and other fronting businesses.
The ceding of insurance does not legally discharge us from our primary liability for the full amount of the policies. Reliance on reinsurance recoveries may create credit risk as a result of the reinsurer's inability or unwillingness to pay reinsurance claims when due. We generally select well capitalized and highly rated reinsurers and in certain instances we require reinsurers to post substantial collateral to secure the reinsured risks. Deterioration in the credit quality of existing reinsurers or disputes over the terms of reinsurance could result in charges to earnings, which may have a material adverse effect on our estimateresults of ultimateoperations and financial condition. In addition, collateral may not be sufficient to cover the reinsurer's obligation to us, and we may not be able to cause the reinsurer to deliver additional collateral.
As of December 31, 2023, we were the beneficiary of letters of credit, trust accounts and funds withheld in the aggregate amount of $5.1 billion, collateralizing $9.2 billion in reinsurance recoverables. The remaining unsecured reinsurance recoverables are ceded to highly-rated, well capitalized reinsurers. Our reinsurance recoverables are based on estimates, and our actual liabilities may exceed the amount we are able to recover from our reinsurers or any collateral securing the reinsurance recoverables. The failure of a reinsurer to meet its obligations to us, whether due to insolvency, dispute or other unwillingness or inability to pay, or due to our inability to access sufficient collateral to cover our liabilities, could have a material adverse effect on our results of operations and financial condition.
The availability and cost of reinsurance are determined by market conditions beyond our control. There is no guarantee that our desired amounts of reinsurance or retrocessional reinsurance will be available in the marketplace in the future. In addition, available capacity may not be on terms we deem appropriate or acceptable or with companies with whom we want to do business. This could impact our ability to write certain products and have a material adverse effect on our results of operations and financial condition.
Market Competition and Broker Reliance
Competition in the insurance and reinsurance markets could reduce profits from our insurance operations. Insurance and reinsurance markets are highly competitive. We compete on an international and regional basis with major United States (U.S.), Bermuda, United Kingdom (U.K.), European, and other international insurers and reinsurers and with underwriting syndicates, some of which have greater financial, marketing, and management resources than we do, have greater access to "big data," and may be able to offer a wider range of, or more sophisticated, commercial and personal lines products. Recent industry consolidation, including business combinations among insurance and other financial services companies, has resulted in larger competitors with even greater financial resources. In addition, capital market participants have created alternative products that are intended to compete with reinsurance products.
Similar to other industries, the insurance industry is undergoing rapid and significant technological and other changes. There is increasing focus by traditional insurance industry participants, technology companies, "InsurTech" start-up companies and others on using technology and innovation to simplify and improve the customer experience, increase efficiencies, redesign products, alter business models and effect other potentially disruptive changes in the insurance industry. If we do not anticipate, keep pace with and adapt to technological and other changes impacting the insurance industry, it will harm our ability to compete, decrease the value of our products to customers, and materially and adversely affect our business. Furthermore, innovation, technological change and changing customer preferences in the markets in which we operate also pose other risks to our businesses. For example, they could result in increasing our service, administrative, policy acquisition or general expenses as we seek to distinguish our products and services from those of our competitors or otherwise keep up with such innovation and changes.
Increased competition could result in fewer submissions, lower premium rates, and less favorable policy terms and conditions, which could reduce our underwriting profits, or within our program services and other fronting operations, our operating profits, and have a material adverse effect on our results of operations and financial condition.
The historical cyclicality in the property and casualty insurance industry could have a material adverse effect on our ability to improve or maintain underwriting profits or to grow or maintain premium volume. The insurance and reinsurance markets have historically been cyclical, characterized by extended periods of intense price competition due to excessive underwriting capacity, and more recently alternative sources of capital, as well as periods when shortages of capacity permitted more favorable rate levels. Among our competitive strengths have been our specialty product focus and our niche market strategy. These strengths also make us vulnerable in periods of intense competition to actions by other insurance companies who seek to write additional premiums without appropriate regard for underwriting profitability. At times it could be very difficult for us to grow or maintain premium volume levels without sacrificing underwriting profits. If we are not successful in maintaining rates or achieving rate increases, it may be difficult for us to improve or maintain underwriting profits or to grow or maintain premium volume levels.
Our efforts to develop new products, expand in targeted markets or improve business processes and workflows may not be successful and may increase or create new risks. From time to time, to protect and grow market share or improve our efficiency, we invest in strategic initiatives to:
•develop products that insure risks we have not previously insured, include new coverages or change coverage terms;
•change commission terms;
•change our underwriting processes;
•improve business processes and workflow to increase efficiencies and productivity and to enhance the experience of our customers and producers;
•expand distribution channels; and
•enter geographic markets where we previously have had relatively little or no market share.
We may not be successful in these efforts, and even if we are successful, they may increase or create the following risks, among others:
•demand for new products or expansion into new markets may not meet our expectations;
•new products and expansion into new markets may increase or change our risk exposures, and the data and models we use to manage those exposures may not be as effective as those we use in existing markets or with existing products;
•models underlying automated underwriting and pricing decisions may not be effective;
•efforts to develop new products or markets or to change commission terms may create or increase distribution channel conflicts;
•in connection with the conversion of existing policyholders to a new product, some policyholders' pricing may increase while the pricing for other policyholders may decrease, the net impact of which could negatively impact retention and profit margins;
•changes to our business processes or workflow, including the use of new technologies, may give rise to execution risk; and
•increased usage of artificial intelligence by us and third parties and the evolving regulatory landscape may increase underwriting and regulatory risk, while also presenting opportunity risk if we do not leverage artificial intelligence appropriately.
These efforts may require us to make substantial expenditures, which may negatively impact results in the near term, and if not successful, could materially and adversely affect our results of operations.
We depend on a few brokers for a large portion of our revenues and the loss of business provided by any one of them could have a material adverse effect on us. We market our insurance and reinsurance worldwide through insurance and reinsurance brokers. For the year ended December 31, 2023, our top five independent brokers represented 37% of the gross premiums written by our underwriting operations. Loss of all or a substantial portion of the business provided by one or more of these brokers could have a material adverse effect on our business.
Financial Strength and Credit Ratings
Our insurance companies and senior debt are rated by various rating agencies, and a downgrade or potential downgrade in one or more of these ratings could have a material adverse effect on us. Financial strength ratings are an important factor in establishing the competitive position of insurance and reinsurance companies. Our senior debt ratings also affect the availability and cost of capital. Certain of our insurance and reinsurance company subsidiaries and our senior debt securities are rated by various rating agencies. Our financial strength and debt ratings are subject to periodic review, and are subject to revision or withdrawal at any time. The financial strength ratings of our insurance subsidiaries are significantly influenced by their statutory surplus amounts and leverage and capital adequacy ratios and other financial metrics. Rating agencies may implement changes to their ratings methodologies or internal models that have the effect of increasing or decreasing the amount of capital our insurance subsidiaries must hold or restrict how the company may deploy its capital in order to maintain its current ratings. For example, for certain of our insurance subsidiaries, rating agencies may take into account in their calculations the collateral provided to us by reinsurers. A change in this practice could adversely impact our ratings. We cannot be sure that we will be able to retain our current, or any future, ratings. If our ratings are reduced from their current levels by one or more rating agencies, our competitive position in our target markets within the insurance industry could suffer and it would be more difficult for us to market our products. A ratings downgrade could result in a substantial loss of business as policyholders and ceding company clients move to other companies with higher claims-paying and financial strength ratings. In addition, a downgrade could trigger contract provisions that allow cedents to terminate their reinsurance contracts on terms disadvantageous to us or require us to collateralize our obligations through trusts or letters of credit. A ratings downgrade could also have a material adverse effect on our liquidity, including the availability of our letter of credit facilities, and limit our access to capital markets, increase our cost of borrowing or issuing debt and require us to post collateral.
The amount of capital that our insurance subsidiaries have and must hold to maintain their financial strength and credit ratings and meet other requirements can vary significantly from time to time and is sensitive to a number of factors, some of which are outside of our control. Capital requirements for our insurance subsidiaries are prescribed by the applicable insurance regulators, while rating agencies establish requirements that inform ratings for our insurance subsidiaries and senior debt securities. Projecting surplus and the related capital requirements is complex and requires making assumptions regarding how our business will perform within the broader macroeconomic environment. Insurance regulators and rating
agencies evaluate company capital through financial models that calculate minimum capitalization requirements based on risk-based capital formulas for property and casualty insurance groups and their subsidiaries. In any particular year, capital levels and risk-based capital requirements may increase or decrease depending on a variety of factors including the mix of business written by our insurance subsidiaries and correlation or diversification in the business profile, the amount of additional capital our insurance subsidiaries must hold to support business growth, the value of securities in our investment portfolio, changes in interest rates and foreign currency exchange rates, as well as changes to the regulatory and rating agency models used to determine our required capital.
Insurance Regulation
Our insurance subsidiaries are subject to supervision and regulation that may have a material adverse effect on our operations and financial condition. Our insurance subsidiaries are subject to supervision and regulation by the regulatory authorities in the various jurisdictions in which they conduct business, including foreign and U.S. state insurance regulators. Regulatory authorities have broad regulatory, supervisory and administrative powers relating to, among other things, data protection and data privacy, cybersecurity, solvency standards, licensing, coverage requirements, product terms and conditions, policy rates and forms, business and claims practices, disclosures to consumers, and the form and content of financial reports. In some instances, we follow practices based on our interpretations of regulations or practices that we believe may be generally followed by the industry. These practices may turn out to be different from the interpretations of regulatory authorities. Insurance regulatory authorities have broad authority to initiate investigations or other proceedings, and, in connection with a failure to comply with applicable laws and regulations, could impose adverse consequences, including fines, penalties, injunctions, denial or revocation of an operating license or approval, increased scrutiny or oversight, limitations on engaging in a particular business, or redress to clients. These actions also could result in negative publicity, reputational damage or harm to client, employee or other relationships. Additionally, regulatory and legislative authorities continue to implement enhanced or new regulatory requirements to assure the stability of insurance companies or enhance policyholder protections or, in certain instances, intended to prevent or mitigate future financial crises. Regulatory authorities also may seek to exercise their supervisory or enforcement authority in new or more extensive ways, such as increased capital requirements. These actions, if they occur, could affect the competitive market, as well as the way we conduct our business or manage our capital, and could result in lower revenues and higher costs. As a result, such actions could have a material adverse effect on our results of operations and financial condition.
Regulators may challenge our use of fronting arrangements in states in which our capacity providers are not licensed. Our program services and other fronting business enters into fronting arrangements with general agents and domestic and foreign insurers that want to access specific U.S. property and casualty insurance business in states in which the capacity providers are not licensed or are not authorized to write particular lines of insurance. Some state insurance regulators may object to these fronting arrangements. In certain states, an insurance commissioner has the authority to prohibit an authorized insurer from acting as an issuing carrier for an unauthorized insurer. In addition, insurance departments in states in which there is no such statutory or regulatory prohibition, could deem the assuming insurer to be transacting insurance business without a license and the issuing carrier to be aiding and abetting the unauthorized sale of insurance.
If regulators in any of the states where we conduct our fronting business were to prohibit or limit those arrangements, we would be prevented or limited from conducting that business for which a capacity provider is not authorized in those states, unless and until the capacity provider is able to obtain the necessary licenses. This could have a material adverse effect on our results of operations and financial condition.
Insurance-Linked Securities
Our ILS operations and our management of third-party capital may expose us to risks. Some of our operating subsidiaries may owe certain legal duties and obligations to third-party investors. A failure to fulfill any of those duties or obligations could result in significant liabilities, penalties or other losses, and harm our businesses and results of operations. In addition, third-party investors may decide not to renew their investments in the funds we manage, which could materially impact the financial condition of those funds, and could, in turn, have a material adverse effect on our results of operations and financial condition. Moreover, we may not be able to maintain or raise additional third-party capital for the funds we manage or for potential new funds and therefore we may forego existing or potential fee income and other income generating opportunities. For example, investment performance at Nephila, as well as the broader ILS market, has been adversely impacted by consecutive years of elevated catastrophe losses, as well as by the COVID-19 pandemic in 2020. These events, as well as volatility in the capital markets, also have impacted investor decisions around allocation of capital to ILS, which in turn have impacted, and may continue to impact, our capital raises and redemptions within the funds we manage, as well as new funds, resulting in a decline in assets under management. See "Critical Accounting Estimates - Goodwill and Intangible
Assets" under Item 7. Management's Discussion & Analysis of Financial Condition and Results of Operations for discussion and considerations of these impacts on the valuation of goodwill and intangible assets attributed to our Nephila ILS operations.
Risks Primarily Related to Our Investments and Access to Capital
Changes in Economic Conditions
Our investment results may be impacted by changes in interest rates, U.S. and international monetary and fiscal policies as well as broader economic conditions. We receive premiums from customers for insuring their risks. We invest these funds until they are needed to pay policyholder claims. Fluctuations in the value of our investment portfolio can occur as a result of changes in interest rates and U.S. and international fiscal, monetary and trade policies as well as broader economic conditions (including, for example, equity market conditions and significant or prolonged inflation or deflation). Although we attempt to take measures to manage the risks of investing in these changing environments, we may not be able to mitigate our sensitivity to them effectively. Despite our mitigation efforts, which include duration and currency targets for asset portfolios, compliance monitoring of these targets and means to reasonably and effectively match asset duration and currency to the duration and currency of the loss reserves, changes in interest rates and U.S. and international fiscal, monetary and trade policies as well as broader economic conditions could have a material adverse effect on our investment results and, consequently, our results of operations and financial condition.
We invest a significant portion of our shareholders' equity in equity securities, which may result in significant variability in our investment results and net income and may have a material adverse effect on shareholders' equity. Additionally, our equity investment portfolio is concentrated, and declines in the value of these significant investments could have a material adverse effect on our financial results and on our ability to carry out our business plans. Equity securities were 64% and 58% of our shareholders' equity at December 31, 2023 and 2022, respectively. Equity securities have historically produced higher returns than fixed maturity securities over long periods of time; however, investing in equity securities may result in significant variability in investment returns from one period to the next. In volatile financial markets, we could experience significant declines in the fair value of our equity investment portfolio, which would result in a material decrease in net income and shareholders' equity. Our equity portfolio is concentrated in particular issuers and industries and, as a result, a decline in the fair value of these concentrated investments also could result in a material decrease in net income and shareholders' equity. A material decrease in shareholders' equity may have a material adverse effect on our ability to carry out our business plans.
Access to Capital
We may require additional capital in the future, which may not be available or may only be available on unfavorable terms. To the extent that cash flows generated by our operations are insufficient to fund future operating requirements, or that our capital position is adversely impacted by a decline in the fair value of our investment portfolio, losses from catastrophe events or otherwise, we may need to raise additional funds through financings or curtail our growth. We also may be required to liquidate fixed maturity securities or equity securities, which may result in realized investment losses. Any further sources of capital, including capacity needed for letters of credit, if available at all, may be on terms that are unfavorable to us. Our access to additional sources of capital will depend on a variety of factors, such as market conditions, the general availability of credit, the availability of credit to the industries in which we operate, our results of operations, financial condition, credit ratings and loss adjustmentcredit capacity, as well as pending litigation or regulatory investigations. Our ability to borrow under our revolving credit facility and letter of credit facilities is contingent on our compliance with the covenants and other requirements under those facilities. Similarly, our access to capital may be impaired if regulatory authorities or rating agencies take negative actions against us. Our inability to obtain adequate capital when needed could have a negative impact on our ability to invest in, or take advantage of opportunities to expand, our businesses, such as possible acquisitions or the creation of new ventures, and inhibit our ability to refinance our existing indebtedness on terms acceptable to us. Any of these effects could have a material adverse effect on our results of operations and financial condition.
A failure to comply with covenants and other requirements under our credit facilities, senior debt and other indebtedness could have a material adverse effect on us. The agreements and indentures relating to our credit facilities, senior debt and other indebtedness, including letter of credit facilities used by certain of our subsidiaries, contain covenants and other requirements. If we fail to comply with those covenants or requirements, the lenders, noteholders or counterparties under those agreements and indentures could declare a default and demand immediate repayment of all amounts owed to them. In addition, where applicable, our lenders may cancel their commitments to lend or issue letters of credit or require us to pledge additional or a different type of collateral. A default under one debt agreement may also put us at risk of a cross-default
under other debt agreements or other arrangements. Any of these effects could have a material adverse effect on our results of operations and financial condition.
Our liquidity and our ability to meet our debt and other obligations, and pay dividends on our preferred stock, depend on the receipt of funds from our subsidiaries. We are a holding company, and as a result, our cash flow and our ability to meet our debt and other obligations, and pay dividends on our preferred stock, depend upon the earnings of our subsidiaries and on the distribution of earnings, loans or other payments by our subsidiaries to us. The payment of dividends by our insurance subsidiaries, which account for a significant portion of our operating cash flows, may require prior regulatory notice or approval or may be restricted by capital requirements imposed by regulatory authorities. Similarly, our insurance subsidiaries may require capital contributions from us to satisfy their capital requirements. In addition, our reinsurance contracts typically allow the cedent, upon a reduction in an insurance company's capital in excess of specified amounts, to terminate its contract on terms disadvantageous to us or to exercise other remedies that may adversely affect us. Those contract provisions may have the effect of limiting distributions by our insurance subsidiaries to us.
Risks Related to All of Our Operations
Legal and Regulatory Risks
The legal and regulatory requirements applicable to our businesses are extensive. Failure to comply could have a material adverse effect on us. Each of our businesses is highly dependent on the ability to engage on a daily basis in a large number of financial and operational activities, including, among others, insurance underwriting, claim processing, investment activities, the management of third-party capital and providing products and services to businesses and consumers, many of which are highly complex. These activities are subject to internal guidelines and policies, as well as legal and regulatory requirements, including, among others, those related to privacy and data security, economic and trade sanctions, anti-corruption, anti-bribery and global finance and investments, customer protection and insurance matters. Our continued expansion into new businesses, distribution channels and markets brings about additional requirements. While we believe that we have adopted adequate and effective risk management and compliance programs, compliance risks remain, particularly as we become subject to additional rules and regulations. Failure to comply with, or to obtain, appropriate authorizations or exemptions under any applicable laws and regulations could result in restrictions on our ability to do business or undertake activities that are regulated in one or more of the jurisdictions in which we conduct business. Any such failure could also subject us to fines, penalties, equitable relief and changes to our business practices. In addition, a failure to comply could result in defaults under our senior unsecured debt agreements or credit facilities or damage our businesses or our reputation.
Compliance with applicable laws and regulations is personnel- and systems-intensive. Shareholder activism, the current political environment, and the current high level of government intervention and regulatory reform may lead to substantial and complex new regulations and compliance obligations. Any changes in, or the enactment of new, laws and regulations may increase the complexity of the regulatory environment in which we operate, which could materially increase our direct and indirect costs for compliance and other expenses of doing business, and have a material adverse effect on our results of operations and financial condition. For example, failure to implement data management and security controls in the use of artificial intelligence by us or third party providers may subject us to data privacy, intellectual property and general regulatory risk, particularly in light of emerging regulation on the use of artificial intelligence.
Losses from legal and regulatory actions may have a material adverse effect on us. From time to time we may be involved in various legal actions, including at times multi-party or class action litigation, some of which involve claims for substantial or indeterminate amounts. A significant unfavorable outcome in one or more of these actions could have a material adverse effect on our results of operations and financial condition. We are also involved from time to time in various regulatory actions, investigations and inquiries, including market conduct exams by insurance regulatory authorities. If a regulatory authority takes action against us or we enter into a consent order or agreement to settle a matter, a regulatory authority has the option to require us to pay substantial fines or implement remedial measures that could prove costly or disruptive to our businesses and operations. Even if an unfavorable outcome does not materialize, these matters could have an adverse impact on our reputation and result in substantial expense and disruption. See note 21 of the notes to consolidated financial statements included under Item 8 and Item 3 Legal Proceedings.
We are subject to laws and regulations relating to economic and trade sanctions and bribery and corruption, the violation of which could have a material adverse effect on us. We are required to comply with the economic and trade sanctions and embargo programs administered by the U.S. Department of the Treasury's Office of Foreign Assets Control and similar multi-national bodies and governmental agencies worldwide, as well as applicable anti-corruption and anti-bribery laws and regulations of the U.S. and other jurisdictions where we operate. In some cases, we must comply with many new
economic, financial and trade sanctions that are imposed over a short period of time, as occurred with the Russia-Ukraine conflict. A violation of a sanction, embargo program, or anti-corruption law could subject us, and individual employees, to a regulatory enforcement action as well as significant civil and criminal penalties. In addition, a violation could result in defaults under our outstanding indebtedness or credit facilities or damage our businesses or our reputation. Those penalties or defaults, or damage to our businesses or reputation, could have a material adverse effect on our results of operations and financial condition. In some cases, the requirements and limitations applicable to the global operations of U.S. companies and their affiliates are more restrictive than, and may even conflict with, those applicable to non-U.S. companies and their affiliates, which also could have a material adverse effect on our results of operations and financial condition.
Employee error and misconduct may be difficult to detect and prevent and may result in significant losses. We run the risk of misconduct by employees across our businesses. Instances of misconduct, fraud, illegal acts, errors, failure to document transactions properly or to obtain proper internal authorization, or failure to comply with regulatory requirements or our internal policies may result in losses or reputational damage. It is not always possible to detect, deter or prevent employee errors or misconduct or fraud, and the controls and trainings that we have in place to mitigate these activities may not be sufficient or effective in all cases.
Global Operations
We manage our global operations through a network of business entities, which could result in inconsistent management, governance and oversight practices. We manage our global operations through a network of business entities located in the U.S., Bermuda, the U.K., Europe, Canada, the Middle East, Asia and Australia. These business entities are managed by executives, and supported by shared and centralized services; however, for certain of our businesses, subsidiary-level management is responsible for day-to-day operations, profitability, personnel decisions, the growth of the business, and legal and regulatory compliance, including adherence to applicable local laws. Operating through subsidiary-level management can make it difficult for us to implement strategic decisions and coordinated procedures throughout our global operations. In addition, some of our business entities operate with management, sales, and support personnel that may be insufficient to support growth in their respective locations and industries, without significant central oversight and coordination. We continue to enhance our management, governance and oversight procedures to effectively support, and improve transparency throughout, our global operations and network of business entities; however, our operating strategy nonetheless could result in inconsistent management, governance, and oversight practices, which may have a material adverse effect on our results of operations and financial condition.
We have substantial international operations and investments, which expose us to increased political, civil, operational and economic risks. A substantial portion of our revenues and income is derived from our operations and investments outside the U.S., including from the U.K., Bermuda, Europe, Canada, the Middle East, Asia and Australia. Our international operations and investments expose us to increased political, civil, operational and economic risks. Deterioration or volatility in foreign and international financial markets or general economic and political and civil conditions could adversely affect our operating results, financial condition and liquidity. Concerns about the economic conditions, capital markets, political, civil and economic stability and solvency of certain countries may contribute to global market volatility. Political and civil changes in the jurisdictions where we operate and elsewhere, some of which may be disruptive, can also interfere with our customers and our activities in a particular location. Our international operations also may be subject to a number of additional risks, particularly in emerging economies, including restrictions such as price controls, capital controls, currency exchange limits, ownership limits and other restrictive or anti-competitive governmental actions or requirements, which could have a material adverse effect on our businesses.
General economic, market or industry conditions could lead to investment losses, adverse effects on our businesses and limit our access to the capital markets. General economic and market conditions and industry specific conditions, including extended economic recessions or expansions; prolonged periods of slow economic growth; inflation or deflation; fluctuations and volatility in foreign currency exchange rates, commodity and energy prices and interest rates; volatility in the credit and capital markets; changes in U.S. government debt ratings; the imposition of tariffs and other changes in international trade regulation and other factors, could lead to: substantial realized and unrealized investment losses in future periods; declines in demand for, or increased frequency and severity of claims made under, our insurance products; disruptions in global supply chains and increased costs of inputs for our products and services; reduced demand for our services and the products we sell and distribute; changes in the carrying value of our other assets and liabilities; and limited or no access to the capital markets. Any of these impacts could have a material adverse effect on our results of operations, financial condition, debt and financial strength ratings or our insurance subsidiaries' capital. Markel Ventures businesses have been, and may continue to be, adversely affected by increased costs of labor and materials and declines in demand for certain products and services due to
economic and industry specific conditions. Our efforts to mitigate these impacts may not be successful and, even when they are successful, there may be a time lag before the impacts of these efforts are reflected in our results.
Our businesses, results of operations and financial condition could be adversely affected by ongoing regional or military conflicts and related disruptions in the global economy. The global economy has been, and may in the future be, negatively impacted by regional or military conflicts, for example, the on-going conflicts between Russia and Ukraine and between Israel and Hamas. We may have operations in areas affected by a conflict, and some of our businesses may be adversely affected by a conflict and its effects. Within our underwriting operations, we may have insurance contracts with exposure to losses attributed to a conflict. Our other operations also may have direct exposure to customers and vendors in an affected area. Certain of our businesses may experience shortages in materials and increased costs for transportation, energy, and raw materials due in part to the negative impact of a conflict on the global economy.
Furthermore, governments in the U.S., U.K., and European Union, among others, may impose export controls on certain products and financial and economic sanctions on certain industry sectors and parties in affected areas. These export controls and sanctions, or our failure to comply with them, could result in restrictions on our ability to do business in one or more of the jurisdictions in which we conduct business or have the other adverse effects discussed above under this Item 1A. Risk Factors under "We are subject to laws and regulations relating to economic and trade sanctions and bribery and corruption, the violation of which could have a material adverse effect on us."
We are unable to predict the impact an ongoing conflict may have on our businesses or the global economy. The impact of geopolitical tensions related to these conflicts, including increased trade barriers or restrictions on global trade, is unknown and could result in, among other things, heightened cybersecurity threats, supply disruptions, protracted or increased inflation, increased energy costs, lower consumer demand, fluctuations in interest and foreign exchange rates and increased volatility in financial markets, any of which could adversely affect our businesses, results of operations and financial condition. In addition, an ongoing conflict may have the effect of triggering or intensifying many of the risks described under this Item 1A Risk Factors under Risks Primarily Related to Our Insurance Operations, Risks Primarily Related to Our Investments and Access to Capital, and Risks Related to All of Our Operations.
Acquisitions, Integration and Reliance on Management and Personnel
The integration of acquired businesses may not be as successful as we anticipate. We have completed, and expect to complete, acquisitions in an effort to achieve profitable growth in our underwriting and other insurance operations and to create additional value on a diversified basis in our Markel Ventures operations. Acquisitions present operational, regulatory, strategic and financial risks, as well as risks associated with liabilities arising from the previous operations of the acquired businesses. We also must make decisions about the degree to which we integrate acquisitions into our existing businesses, operations and systems, and over what timeframe. Those decisions may adversely affect how successfully the acquired businesses perform, both in the short-term and in the long-term. All of these risks are magnified in the case of a large acquisition. Integration of the operations, systems and personnel of acquired businesses may prove more difficult than anticipated, which may result in failure to achieve financial objectives associated with the acquisition or diversion of management attention and other resources. In addition, integration of formerly privately-held companies into the management and internal control and financial reporting systems of a publicly-held company presents additional risks. See note 3of the notes to consolidated financial statements included under Item 8 for information about our recent acquisitions.
Impairment in the value of our goodwill or other intangible assets could have a material adverse effect on our operating results and financial condition. As of December 31, 2023, goodwill and intangible assets totaled $4.2 billion and represented 28% of shareholders' equity. We record goodwill and intangible assets at fair value upon the acquisition of a business. Goodwill represents the excess of amounts paid to acquire businesses over the fair value of the net assets acquired. Goodwill and indefinite-lived intangible assets are evaluated for impairment annually, or more frequently if events or circumstances indicate that their carrying value may not be recoverable. Declines in operating results, divestitures, sustained market declines and other factors that impact the fair value of a reporting unit could result in an impairment of goodwill or intangible assets and, in turn, a charge to net income. Such a charge could have a material adverse effect on our results of operations or financial condition. Developments that adversely affect the future cash flows or earnings of an acquired business may cause the goodwill or intangible assets recorded for it to be impaired. See "Critical Accounting Estimates - Goodwill and Intangible Assets" included under Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations and note 8 of the notes to consolidated financial statements included under Item 8 for information about our goodwill and intangible assets.
The loss of, or failure to successfully implement succession planning for, one or more key executives or an inability to attract and retain qualified personnel in our various businesses could have a material adverse effect on us. Our success depends on our ability to retain the services of our existing key executives, implement successful succession planning and attract and retain additional qualified personnel in the future. The temporary or permanent loss of the services of any of our key executives or the inability to hire and retain other highly qualified personnel in the future could have a material adverse effect on our ability to conduct or grow our business.
Additionally, in our decentralized business model, we rely on qualified personnel to manage and operate our various businesses.In our decentralized business model, we need qualified and competent management to direct day-to-day business activities of our operating subsidiaries and to manage changes in future business operations due to changing business or regulatory environments. Our operating subsidiaries also need qualified and competent personnel to execute business plans and serve their customers, suppliers and other stakeholders. Our inability to recruit, train and retain qualified and competent managers and personnel could negatively affect the operating results, financial condition and liquidity of our subsidiaries and Markel Group as a whole.
Information Technology Systems and Third-Party Systems and Service Providers
Information technology systems that we use could fail or suffer a security breach or cyberattack, which could have a material adverse effect on us or result in the loss of regulated or sensitive information. Our businesses are dependent upon the operational effectiveness and security of our enterprise systems and those maintained by third parties. Among other things, we rely on these systems to interact with producers, insureds, customers, clients, and other third parties, to perform actuarial and other modeling functions, to underwrite business, to prepare policies and process premiums, to process claims and make claims payments, to prepare internal and external financial statements and information, as well as to engage in a wide variety of other business activities. A significant failure of our enterprise systems, or those of third parties upon which we may rely, whether because of a natural disaster, network outage or a cyberattack on those systems, including ransomware, could compromise our personal, confidential and proprietary information as well as that of our customers and business partners, impede or interrupt our business operations and could result in other negative consequences, including remediation costs, loss of revenue, additional regulatory scrutiny and fines, litigation and monetary and reputational damages. In addition, if we are unable to innovate, develop and acquire new technology, it may leave us more susceptible to these attacks. Like other companies, we have been subject to cyberattacks, malicious viruses and malware, and denial of service attacks and expect that this will continue in the future with greater sophistication and frequency. Despite any controls or protective actions we take against such attacks, those measures may be insufficient to prevent, or mitigate the effects of, a natural disaster, network outage or a cyberattack on our systems. This could result in liability to us, cause our data to be corrupted or stolen and cause us to commit resources to correct those failures.
In addition, we are subject to numerous data privacy and cybersecurity laws and regulations enacted in the jurisdictions in which we do business. A misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer, business partner, employee or third party could damage our businesses or our reputation or result in significant monetary damages, regulatory enforcement actions, fines and criminal prosecution in one or more jurisdictions. For example, under the European General Data Protection Regulation there are significant punishments for non-compliance which could result in a penalty of up to 4% of a firm's global annual revenue. In addition, a violation of data privacy laws and regulations could result in defaults under our outstanding indebtedness or credit facilities. Those monetary damages, penalties, regulatory or legal actions or defaults, or the damage to our businesses or reputation, could have a material adverse effect on our results of operations and financial condition. Third parties who we utilize to perform certain functions are also subject to these risks, and their failure to adhere to these laws and regulations also could damage our businesses or reputation or result in regulatory intervention, which could have a material adverse effect on our results of operations and financial condition.
Further, we routinely transmit, receive and store personal, confidential and proprietary information by email and other digital means. Although we attempt to protect this personal, confidential and proprietary information, we may be unable to do so in all cases, especially with business partners and other third parties who may not have or use appropriate controls to protect personal, confidential and proprietary information.
While we maintain cyber risk insurance providing first-party and third-party coverages, that insurance may not cover all costs associated with the consequences of an enterprise failure, cyberattack, or breach of systems. A material cyber security breach could have a material adverse effect on our results of operations and financial condition.
Third-party providers may perform poorly, breach their obligations to us or expose us to enhanced risks. Certain of our business functions are performed by third-party providers, and these providers may not perform as expected or may fail to adhere to the obligations owed to us. For example, certain of our business units rely on relationships with a number of third-party administrators under contracts pursuant to which these third-party administrators manage and pay claims on our behalf and advise us with respect to case reserves. In these relationships, we rely on controls incorporated in the provisions of the administration agreement, as well as on the administrator's internal controls, to manage the claims process within our prescribed parameters. In addition, certain of our business units use managing general agents, general agents and other producers to write and administer business on our behalf within prescribed underwriting authorities. Although we monitor these administrators, agents, producers and other service providers on an ongoing basis, our monitoring efforts may not be adequate, or our service providers could exceed their authorities or otherwise breach obligations owed to us, which could result in operational disruption, reputational damage and regulatory intervention and otherwise have a material adverse effect on our results of operation and financial condition.
In addition, we utilize third parties to perform certain technology and business process functions, such as data center hosting, cloud based operating environments, human resources and other outsourced services. If these third-party providers do not perform as expected, we may experience operational difficulties, increased costs and a loss of business, or we may not realize expected productivity improvements or cost efficiencies. Our use of third parties to perform certain technology and business process functions may expose us to risks related to privacy and data security, including through their use of artificial intelligence without our knowledge or below our standards, which could result in monetary and reputational damages. We may be further exposed to risks associated with artificial intelligence and machine learning technology if third-party service providers or any counterparts, where known or unknown to us, use such technology in their business activities. In addition, our ability to receive services from third-party providers might be impacted by a wide variety of factors, including political and civil instability, supply chain disruptions, volatility or disruptions in the financial markets, wide-spread health issues, unanticipated or additional regulatory requirements or policies. As a result, our ability to conduct our businesses may be adversely affected.
Pandemics
Pandemics have had, and could have, material adverse effects on us. The effects of a pandemic, and related governmental responses, may be wide-ranging, costly, disruptive and rapidly changing, resulting in material adverse effects on our underwriting, investment, Markel Ventures and other operations, and on our results of operations and financial condition, as was the case with COVID-19. Factors that give rise, or may give rise, to those effects include, or may include, the following, as well as others that we cannot predict:
•Insured or reinsured losses from pandemic-related claims that are different, or more extensive, than we expect;
•Government actions or judicial decisions related to insurance or reinsurance coverages or rates, including, for example, requiring retroactive coverage of claims or expanding the scope of coverage;
•Disputes, lawsuits and other legal actions challenging the promptness of coverage determinations, or the coverage determinations themselves, under applicable insurance or reinsurance policies, resulting in increased claims, litigation and related expenses;
•Disruptions, delays and increased costs and risks related to having limited or no access to our facilities, workplace re-entry, employee safety concerns and reductions or interruptions of critical or essential services;
•Continually changing business conditions and compliance obligations; and
•Short or long-term impacts on the cost, availability or timeliness of required raw materials, supplies or services provided by third parties, including services provided by state, federal or foreign governments or government agencies.
In addition, a pandemic may, as has been the case with COVID-19, have the effect of triggering or intensifying many of the risks described elsewhere under this Item 1A. Risk Factors under Risks Primarily Related to Our Insurance Operations, Risks Primarily Related to Our Investments and Access to Capital, and Risks Related to All of Our Operations.
Climate Change
The impacts of climate change, and legal or regulatory measures to address climate change, may adversely affect our results of operations or financial condition.Our businesses, results of operations, and financial condition could be impacted by risks associated with climate change, including:
•changes from legislation, regulation and court decisions that:
◦create economic and regulatory uncertainty,
◦increase our compliance costs,
◦impose liability on or increase exposure for our policyholders not contemplated during our underwriting,
◦change our ability to provide insurance coverage to certain policyholders, or
◦impose new or additional requirements that increase the costs associated with, or disrupt, sourcing, manufacturing, and distribution of, our products and services,
•changes in the frequency, severity, and location of weather-related catastrophes, such as hurricanes, tornados, windstorms, floods, wildfires, and other extreme weather events, which may:
◦result in insured losses that exceed our expectations or make it more difficult for us to predict and model catastrophic events, reducing our ability to accurately price our exposure to such events and mitigate our risks,
◦make it more difficult or expensive for us to obtain reinsurance at desired levels, or
◦increase physical risks to and impacts on our operations,
•changing demand for insurance coverage we provide, such as demand from industries that produce or use carbon-based energy including those transitioning from those energy sources, decreased availability of reinsurance available for coverages we provide for carbon intensive industries, or increased claims and losses related to those industries, and
•losses on our invested assets, including from:
◦changes in supply and demand,
◦advances in low-carbon technology and renewable energy development,
◦effects of extreme weather events on the physical and operational exposure of industries and issuers, and
◦the transition that companies make towards addressing climate risk in their own businesses.
Item 1C. CYBERSECURITY
Markel Group is a holding company comprised of a diverse group of companies and investments. Our specialty insurance business, Markel, sits at the core of our company. Markel Group utilizes information technology systems and services, including cybersecurity, provided and/or administered by Markel. Through Markel Group's wholly owned subsidiary, Markel Ventures, Inc. (Markel Ventures), Markel Group owns controlling interests in businesses that operate in a variety of industries. The Markel Ventures businesses are independently managed with respect to their information security and data protection programs.
Insurance
In order to maintain a strong cybersecurity program, Markel uses a variety of controls and technology tools designed to identify, detect, prevent, respond to, and recover from security threats. Markel undergoes regular security audits including a System and Organization Controls (SOC) audit for Cybersecurity conducted annually by independent auditors in which cybersecurity threats are identified and assessed. Markel regularly tests aspects of its internal security and conducts security risk interviews and assessments on third parties with whom it does business, depending on the nature of the relationship. Markel has invested in technology that assists its risk management teams in measuring and addressing weaknesses in its third-party and supply chain community. Markel performs continuous monitoring of all its third parties to ensure they are maintaining acceptable levels of security controls and remediating any known weaknesses.
Markel participates in the Financial Services Information Sharing and Analysis Center to share information about the latest cyber threats and preparedness measures. Markel also shares threat intelligence information with other partners. Markel has a cybersecurity incident response plan, as well as a crisis management plan, that cover cyber events, including a process for determining the materiality of cyber events that includes evaluation by a cross functional crisis management group including security, information technology, finance, legal and business and escalation to Markel Group senior management as warranted by the severity of the situation. An internal team engages in tabletop exercises several times each year to enhance preparedness for such situations.
Information security and data protection risks are the responsibility of all employees. Markel has a mandatory training program covering a variety of security and data protection disciplines. In addition, all Markel employees are required to acknowledge annually policies on acceptable use of Markel's technology resources and enterprise information security. Contractors are required to provide certain representations and certifications relating to information security.
The Markel information security and data protection program is led by a Chief Information Security Officer (CISO) who supervises a team of security and data protection professionals across the globe. Markel's global information security and data protection program leverages the Cybersecurity Framework from the National Institutes of Standards and Technology as well as industry best practices. Markel also is able to map to both ISO (International Organization for Standardization) and BSI (British Standards Institution) among other cybersecurity standards. Markel's CISO has been with Markel 13 years and has 22 years' experience in information technology, with 17 years in information technology security, and is a certified Information Systems Security Professional (CISSP).
Markel Ventures
Each of our Markel Ventures businesses maintains its own, separate IT infrastructure, that often includes third-party providers, to support the needs of its business. As a result, cybersecurity risk for the Markel Ventures businesses is not concentrated in one system or service provider. Further, given the disparate nature of the businesses, systems, and providers, there is no single, uniform approach to managing cybersecurity risk at the Markel Ventures businesses – each is tailored to its unique needs. As is the case with all risks, management for each Markel Ventures business is responsible for evaluating and managing cybersecurity risks for its business. Therefore, each business determines the appropriate IT systems and providers needed to do so. Management for each business shares information on material risks from cybersecurity incidents with Markel Ventures management.
Markel Ventures has established processes for the Markel Ventures businesses to share information about how they assess, identify, and manage cybersecurity risk and shares information on material risks from cybersecurity incidents with Markel Group management, as appropriate. Each Markel Ventures business has a board that meets quarterly. Material matters regarding cybersecurity risk management and cybersecurity incidents are discussed at these meetings. In addition, Markel Ventures management regularly meets with the businesses to discuss their risk identification, assessment, and management approach. These discussions include how the business assesses, identifies, and manages key risks, including cybersecurity risks.
Markel Ventures requires real-time reporting of material cybersecurity incidents to understand how the matters are being managed, assess whether public disclosure is required and inform Markel Group senior management of relevant matters. Depending on the cybersecurity incident, third parties may be engaged by the Markel Ventures businesses to assist them in understanding and managing the event.
Given the varying size and complexity of the Markel Ventures businesses, a diverse array of individuals assume responsibility for managing cybersecurity risks within them. In some instances, primary responsibility may be with a member of the executive management team. In other instances, primary responsibility may land with information technology professionals. In all instances, however, ultimate responsibility rests with each business' Chief Executive Officer.
Markel Group Board Oversight
The Markel Group Board of Directors oversees Markel Group's risk management framework on an enterprise-wide basis, which includes cybersecurity risks. Periodic reports are provided to the Markel Group Board of Directors by members of management which, among other things, seek to systematically identify the principal risks facing our businesses and the manner in which such risks are addressed. For cybersecurity, this includes a review of the cybersecurity program and its governance, active and planned initiatives, protection and prevention matters, detection and response measures, and the threat landscape.
Cybersecurity Risks
No previous cybersecurity incident has had, or is reasonably likely to have, a material adverse effect on Markel Group, its business strategy, results of operations, or financial condition. For risks related to cybersecurity threats, see Item 1A Risk Factors, including under "Information technology systems that we use could fail or suffer a security breach or cyberattack, which could have a material adverse effect on us or result in the loss of regulated or sensitive information."
Item 2. PROPERTIES
We lease office space in Glen Allen, Virginia for our Markel Group corporate headquarters, which also serves as the headquarters for our insurance and Markel Ventures operations. Our insurance operations lease office space throughout the U.S. and in various locations in other countries. In total, we have 64 insurance offices in 17 countries. Additionally, our Markel Ventures businesses maintain office space, factories and warehouses, both through leased and owned properties, throughout the U.S. and in certain international locations. The property needs of our Markel Ventures businesses vary based on the nature of the operations of each business. We believe our properties are suitable and adequate for our current operations.
Item 3. LEGAL PROCEEDINGS
Thomas Yeransian v. Markel Corporation
In October 2010, we completed the acquisition of Aspen Holdings, Inc. (Aspen). As part of the consideration for that acquisition, Aspen shareholders received contingent value rights (CVRs). Prior to the December 31, 2017 CVR maturity date, the CVR holder representative, Thomas Yeransian, disputed our prior estimation of the value of the CVRs. On September 15, 2016, Mr. Yeransian filed a suit, Thomas Yeransian v. Markel Corporation (U.S. District Court for the District of Delaware), alleging, among other things, that we are in default under the CVR agreement. The suit seeks: $47.3 million in damages, which represents the unadjusted value of the CVRs; plus interest ($29.1 million through December 31, 2023) and default interest (up to an additional $24.4 million through December 31, 2023, depending on the date any default occurred); and an unspecified amount of punitive damages, costs, and attorneys' fees.
At the initial hearing held February 21, 2017, the court stayed the proceedings and ordered the parties to discuss resolving the dispute pursuant to the independent CVR valuation procedure under the CVR agreement. The parties met on April 5, 2017, but were unsuccessful in reaching agreement on a process for resolving the dispute. We subsequently filed a motion to stay the litigation and compel arbitration, and, on July 31, 2017, the court issued an order granting that motion.
On November 13, 2018, Mr. Yeransian filed a second suit, Thomas Yeransian v. Markel Corporation (U.S. District Court for the District of Delaware), which also alleges that the Company is in default under the CVR agreement. The second suit seeks the same monetary damages and relief as the original suit. We filed a motion to stay this suit until the arbitration for the original suit had concluded and the CVR holders received the final amount due under the CVR Agreement. The court granted that motion on August 6, 2019.
On June 5, 2020, Mr. Yeransian filed a third suit, Thomas Yeransian v. Markel Corporation (U.S. District Court for the District of Delaware). Similar to the first and second suits, the third suit alleges that the Company is in default under the CVR agreement and, in addition, has interfered with the arbitration for the CVR valuation. The third suit seeks the same monetary damages and relief as the original suit and the second suit, as well as other declaratory and non-monetary judgments and orders. We filed a motion to stay this suit, which the court granted on March 16, 2021.
Under the arbitration terms of the CVR Agreement, independent experts were appointed to determine the final value of the CVRs. On September 20, 2021, the experts delivered their report indicating a final CVR valuation of $22.4 million, excluding interest. We had previously paid $8.0 million to the CVR holders, representing 90% of the undisputed value of the CVRs, plus interest of $1.9 million. On September 20, 2021, we paid $20.1 million, which represents $14.1 million for the unpaid portion of the final CVR amount (excluding fees payable to a third party), plus $6.0 million in additional interest.
The stay was lifted on each pending suit, and the three suits were consolidated. On June 8, 2023, the court ruled in favor of the Company and against Mr. Yeransian on all counts. Mr. Yeransian has appealed the court's decision.
We believe Mr. Yeransian's suits to be without merit. We further believe that any material loss resulting from the suits to be remote.
Information About Our Executive Officers
Thomas S. Gayner
Chief Executive Officer since January 2023. Co-Chief Executive Officer from January 2016 to December 2022. President and Chief Investment Officer from May 2010 to December 2015. Chief Investment Officer from January 2001 to December 2015. Director from 1998 to 2004. Director since August 2016. Age 62.
Michael R. Heaton
Executive Vice President and Chief Operating Officer since February 2024 and Executive Vice President since May 2022. President, Markel Ventures from January 2016 to May 2022. President and Chief Executive Officer, Markel Ventures, Inc., a subsidiary, from May 2020 to May 2022; President and Chief Operating Officer, Markel Ventures, Inc., from January 2016 to May 2020. Chief Operating Officer, Markel Ventures, Inc., from September 2013 to December 2015. Age 47.
Andrew G. Crowley
President, Markel Ventures since May 2022. President, Markel Ventures, Inc., a subsidiary, since May 2022. Executive Vice President, Markel Ventures, Inc., from May 2020 to May 2022. Managing Director, Markel Ventures, Inc., from January 2017 to May 2020. Age 41.
Jeremy A. Noble
President, Insurance since January 2023. Senior Vice President and Chief Financial Officer from September 2018 to December 2022. Senior Vice President, Finance from June 2018 to September 2018. Finance Director, Markel International from July 2015 to June 2018. Managing Director, Internal Audit from September 2011 to July 2015. Age 48.
Richard R. Grinnan
Senior Vice President, Chief Legal Officer and Secretary of Markel Group since February 2020 and of Markel since October 2022. General Counsel and Secretary from June 2014 to February 2020. Assistant General Counsel from August 2012 to June 2014. Age 55.
Brian J. Costanzo
Chief Financial Officer of Markel Group and of Markel since December 2023. Senior Vice President, Finance, Chief Accounting Officer and Controller from October 2022 to December 2023. Principal financial officer (on an interim basis) from January 2023 to March 2023. Chief Accounting Officer and Controller from June 2021 to October 2022. Controller from December 2019 to June 2021. Segment Controller - U.S. Insurance from March 2014 to December 2019. Age 45.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Performance Graph
The following graph compares the cumulative total return (based on share price) on our common stock with the cumulative total return of companies included in the Standard & Poor's (S&P) 500 Index and the Dow Jones U.S. Property & Casualty Insurance Companies Index. We are a holding company comprised of a diverse group of businesses and investments, and we believe there are few companies with a mix of business operations comparable to ours. Our principal business markets and underwrites specialty insurance products, and therefore, we have used the Dow Jones U.S. Property & Casualty Insurance Companies Index as our peer group. However, we also own controlling interests in a diverse portfolio of businesses that operate in a variety of other industries. This information is not necessarily indicative of future results.
![881](https://capedge.com/proxy/10-K/0001096343-24-000025/mkl-20231231_g8.jpg)
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| Years Ended December 31, |
| 2018 (1) | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 |
Markel Group Inc. | $ | 100 | | | $ | 110 | | | $ | 100 | | | $ | 119 | | | $ | 127 | | | $ | 137 | |
S&P 500 Index | 100 | | | 131 | | | 156 | | | 200 | | | 164 | | | 207 | |
Dow Jones U.S. Property & Casualty Insurance Index | 100 | | | 127 | | | 131 | | | 160 | | | 184 | | | 209 | |
(1) $100 invested on December 31, 2018 in our common stock or the listed index. Includes reinvestment of dividends.
Common Stock and Dividend Information
Our common stock trades on the New York Stock Exchange under the symbol MKL. The number of shareholders of record as of January 31, 2024 was approximately 260. The total number of shareholders, including those holding shares in street name or in brokerage accounts, is estimated to be in excess of 220,000. Our current strategy is to retain earnings and, consequently, we have not paid and do not expect to pay a cash dividend on our common stock.
Common Share Repurchases
The following table summarizes our common share repurchases for the quarter ended December 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | |
Issuer Purchases of Equity Securities |
| (a) | | (b) | | (c) | | (d) |
| Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) |
October 1, 2023 through October 31, 2023 | 16,635 | | | $ | 1,470.02 | | | 16,635 | | | $ | 221,111 | |
November 1, 2023 through November 30, 2023 | 75,841 | | | $ | 1,400.09 | | | 75,841 | | | $ | 748,196 | |
December 1, 2023 through December 31, 2023 | 25,200 | | | $ | 1,396.70 | | | 25,200 | | | $ | 712,999 | |
Total | 117,676 | | | $ | 1,409.25 | | | 117,676 | | | $ | 712,999 | |
(1) The Board of Directors approved the repurchase of up to $750 million of our common shares pursuant to a share repurchase program publicly announced in November 2023. The new program terminated and replaced a similar $750 million share repurchase program authorized in February 2022. Under our share repurchase program, we may repurchase outstanding common shares of our stock from time to time in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934. The share repurchase program has no expiration date but may be terminated by the Board at any time.
Securities Authorized for Issuance Under Equity Compensation Plans
See Part III for information on securities authorized for issuance under our equity compensation plans.
Available Information
This document represents Markel Group's Annual Report on Form 10-K, which is filed with the U.S. Securities and Exchange Commission. We make available free of charge on or through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the U.S. Securities and Exchange Commission. Our website address is www.mklgroup.com.
Transfer Agent
Equiniti Trust Company, LLC, 48 Wall Street, Floor 23, New York, NY 10005
(800) 937-5449 helpast@equiniti.com
Annual Shareholders Meeting
Our annual shareholders meeting will take place on May 22, 2024 at the University of Richmond Robins Center in Richmond, Virginia at 2:00 p.m. (Eastern Time). The shareholders meeting will be part of a two-day event we are calling the 2024 Reunion, which is open to shareholders, employees, and friends of Markel Group. More information on the agenda and registration for the 2024 Reunion is available at www.mklreunion.com.
Item 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis includes discussion of changes in our results of operations and financial condition from 2022 to 2023 and should be read in conjunction with the consolidated financial statements and related notes included under Item 8, Item 1 Business, Item 1A Risk Factors and "Safe Harbor and Cautionary Statement" under Item 7. The accompanying consolidated financial statements and related notes have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) and include the accounts of our holding company, Markel Group Inc. (Markel Group), and its consolidated subsidiaries, as well as any variable interest entities that meet the requirements for consolidation (the Company). A discussion of changes in our results of operations and financial condition from 2021 to 2022 may be found in Part II Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission on February 17, 2023.
Item 7 is divided into the following sections:
•Results of Operations
•Liquidity and Capital Resources
•Critical Accounting Estimates
•Safe Harbor and Cautionary Statement
For a discussion of our significant accounting policies, as well as recently issued accounting pronouncements that we have not yet adopted and their expected effects on our consolidated financial position, results of operations and cash flows, see note 1 of the notes to consolidated financial statements included under Item 8.
Results of Operations
The following table presents the components of operating revenues.
| | | | | | | | | | | |
| Years Ended December 31, |
(dollars in thousands) | 2023 | | 2022 |
Insurance segment | $ | 7,282,705 | | | $ | 6,528,263 | |
Reinsurance segment | 1,014,294 | | | 1,063,347 | |
Program services and other fronting, insurance-linked securities and other insurance | 280,131 | | | 493,746 | |
Insurance operations | 8,577,130 | | | 8,085,356 | |
Net investment income | 729,219 | | | 445,846 | |
Net investment gains (losses) | 1,524,054 | | | (1,595,733) | |
Other | (11,854) | | | (17,661) | |
Investing segment | 2,241,419 | | | (1,167,548) | |
Markel Ventures segment | 4,985,081 | | | 4,757,527 | |
Total operating revenues | $ | 15,803,630 | | | $ | 11,675,335 | |
The following table presents the components of comprehensive income (loss) to shareholders.
| | | | | | | | | | | |
| Years Ended December 31, |
(dollars in thousands) | 2023 | | 2022 |
Insurance segment profit | $ | 162,176 | | | $ | 549,871 | |
Reinsurance segment profit (loss) | (19,265) | | | 83,859 | |
Program services and other fronting, insurance-linked securities and other insurance | 205,234 | | | 294,979 | |
Amortization of intangible assets (1) | (98,244) | | | (99,735) | |
Impairment of goodwill (2) | — | | | (80,000) | |
Insurance operations | 249,901 | | | 748,974 | |
Investing segment profit (loss) | 2,241,419 | | | (1,167,548) | |
Markel Ventures segment profit (3) | 437,508 | | | 325,238 | |
Operating income (loss) | 2,928,828 | | | (93,336) | |
Interest expense | (185,077) | | | (196,062) | |
Net foreign exchange gains (losses) | (90,045) | | | 137,832 | |
| | | |
Income tax (expense) benefit | (552,616) | | | 48,209 | |
Net income attributable to noncontrolling interests | (105,030) | | | (112,920) | |
Net income (loss) to shareholders | 1,996,060 | | | (216,277) | |
Preferred stock dividends | (36,000) | | | (36,000) | |
| | | |
Net income (loss) to common shareholders | 1,960,060 | | | (252,277) | |
Other comprehensive income (loss) to shareholders | 289,284 | | | (989,502) | |
Comprehensive income (loss) to shareholders | $ | 2,285,344 | | | $ | (1,205,779) | |
(1) Amortization of intangible assets includes all amortization attributable to our insurance operations. Amortization of intangible assets attributable to our underwriting segments was $37.1 million and $38.5 million for the years ended December 31, 2023 and 2022, respectively; however, we do not allocate amortization of intangible assets between the Insurance and Reinsurance segments. Amortization of intangible assets attributable to our program services and other fronting, insurance-linked securities and other insurance operations was $61.2 million for the years ended December 31, 2023 and 2022.
(2) Impairment of goodwill for the year ended December 31, 2022 was attributable to our Nephila ILS operations.
(3) Segment profit for the Markel Ventures segment includes amortization of intangible assets attributable to Markel Ventures.
The change in comprehensive income (loss) to shareholders in 2023 compared to 2022 was primarily due to pre-tax net investment gains of $1.5 billion in 2023 compared to pre-tax net investment losses of $1.6 billion in 2022, as well as pre-tax net unrealized gains on our fixed maturity securities of $389.5 million in 2023 compared to pre-tax net unrealized losses of $1.5 billion in 2022.
The components of net income (loss) to shareholders and comprehensive income (loss) to shareholders are discussed in further detail under "Insurance Results," "Investing Results," "Markel Ventures Results," "Interest Expense, Net Foreign Exchange Gains (Losses) and Income Taxes" and "Comprehensive Income (Loss) to Shareholders and Book Value per Common Share."
Insurance Results
Our Insurance engine includes our underwriting, program services and other fronting and insurance-linked securities (ILS) operations. We have a suite of capabilities through which we can access capital to support our customers' risks, which includes our own capital through our underwriting operations and third-party capital through our program services and other fronting and ILS operations. Our underwriting operations, which are primarily comprised of our Insurance and Reinsurance segments, produce revenues primarily by underwriting insurance contracts and earning premiums in the specialty insurance market. Our program services and other fronting and insurance-linked securities operations produce revenues primarily through fees earned for fronting services and investment management services, respectively. Our insurance operations also include the underwriting results of run-off lines of business that were discontinued prior to, or in conjunction with, insurance acquisitions,
and the results of our run-off life and annuity reinsurance business. The following table presents the components of our Insurance engine gross premium volume and operating revenues.
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(dollars in thousands) | 2023 | | 2022 | | % Change |
Gross premium volume: | | | | | |
Underwriting | $ | 10,277,632 | | | $ | 9,847,538 | | | 4 | % |
Program services and other fronting (1) | 3,724,605 | | | 3,354,144 | | | 11 | % |
Insurance operations | $ | 14,002,237 | | | $ | 13,201,682 | | | 6 | % |
| | | | | |
Operating revenues: | | | | | |
Insurance segment | $ | 7,282,705 | | | $ | 6,528,263 | | | 12 | % |
Reinsurance segment | 1,014,294 | | | 1,063,347 | | | (5) | % |
Program services and other fronting, insurance-linked securities and other insurance | 280,131 | | | 493,746 | | | (43) | % |
Insurance operations | $ | 8,577,130 | | | $ | 8,085,356 | | | 6 | % |
(1) Substantially all gross premiums from our program services and other fronting operations were ceded to third parties for the years ended December 31, 2023 and 2022.
Insurance Segment
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(dollars in thousands) | 2021 | | 2020 | | % Change |
Gross premium volume | $ | 7,239,676 | | | $ | 6,029,024 | | | 20 | % |
Net written premiums | $ | 5,998,890 | | | $ | 4,977,662 | | | 21 | % |
Earned premiums | $ | 5,465,284 | | | $ | 4,688,448 | | | 17 | % |
Underwriting profit | $ | 696,413 | | | $ | 169,001 | | | 312 | % |
| | | | | |
Underwriting Ratios (1) | | | | | Point Change |
Loss ratio | | | | | |
Current accident year loss ratio | 60.6 | % | | 71.9 | % | | (11.3) | |
Prior accident years loss ratio | (9.3) | % | | (11.8) | % | | 2.5 | |
Loss ratio | 51.3 | % | | 60.1 | % | | (8.8) | |
Expense ratio | 35.9 | % | | 36.3 | % | | (0.4) | |
Combined ratio | 87.3 | % | | 96.4 | % | | (9.1) | |
| | | | | |
Current accident year loss ratio catastrophe impact (2) | 1.7 | % | | 2.7 | % | | (1.0) | |
Current accident year loss ratio COVID-19 impact (2) | — | % | | 6.3 | % | | (6.3) | |
Prior accident years loss ratio COVID-19 impact (2) | (0.1) | % | | — | % | | (0.1) | |
| | | | | |
Current accident year loss ratio, excluding COVID-19 and catastrophes | 58.9 | % | | 63.0 | % | | (4.1) | |
Combined ratio, excluding COVID-19 and current year catastrophes | 85.6 | % | | 87.4 | % | | (1.8) | |
Our Insurance segment reported gross premium volume of $9.2 billion, earned premiums of $7.3 billion and an underwriting profit of $162.2 million in 2023. The following chart presents the composition of our Insurance segment by division based on 2023 gross premium volume.(1) Amounts may not reconcile due![567](https://capedge.com/proxy/10-K/0001096343-24-000025/mkl-20231231_g3.jpg)
The Markel Specialty division is comprised of our U.S. and Bermuda based insurance underwriting operations and writes business for insureds ranging from individuals and small businesses to rounding.
(2)Fortune 1000 companies in the U.S., the U.K., the E.U., Asia and Australia. The point impactMarkel Specialty platform provides easy access to our diverse portfolio of catastrophesproducts and COVID-19 is calculated ascapabilities. The Markel International division writes business worldwide from our London and Munich-based platforms, which include branch offices in Canada, Asia, Australia and across the associated net lossesE.U. The State National division writes collateral protection insurance for automobile and loss adjustment expenses divided by total earned premiums.
Premiumsother vehicle loans in the U.S.
The increase in gross premium volumefollowing chart displays the types of products written in our Insurance segment in 2021 was driven by growth across all of our product lines, most notably within our professional liability and general liability product lines, which experienced higher new business volume and benefited from more favorable rates and higher retention of renewals. Additionally, our personal lines product lines experienced significant growth in 2021, primarily attributable to the continued expansion of our classic cars business. Net retention of gross premium volume was 83% in both 2021 and 2020. The increase in earned premiums in 2021 was primarily due to the higherbased on 2023 gross premium volume.
Combined Ratio
The Insurance segment's current accident year losses and loss adjustment expenses in 2021 included $94.7 million of net losses and loss adjustment expenses from the 2021 Catastrophes. Current accident year losses in 2020 included $296.4 million and $124.4 million of net losses and loss adjustment expenses attributed to COVID-19 and the 2020 Catastrophes, respectively. Excluding losses attributed to catastrophes and COVID-19, the decrease in the current accident year loss ratio in 2021 compared to 2020 was primarily attributable to lower attritional loss ratios within our professional liability, general liability and property product lines, primarily due to the benefit of achieving higher premium rates.
The Insurance segment's 2021 combined ratio included $506.3 million of favorable development on prior accident years loss reserves compared to $554.6 million in 2020. The decrease in favorable development was primarily due to less favorable development on our professional liability product lines in 2021 compared to 2020, partially offset by more favorable development on our property product lines in 2021 compared to 2020. Additionally, higher earned premiums in 2021 compared to 2020 had an unfavorable impact on the prior accident years loss ratio. In 2021 and 2020, favorable development was most significant on our general liability, workers' compensation, marine and energy and professional liability product lines. In 2021, we also had significant favorable development on our property product lines. See note 9 of the notes to consolidated financial statements included under Item 8 for more information on the Insurance segment's prior year loss reserve development.![1450](https://capedge.com/proxy/10-K/0001096343-24-000025/mkl-20231231_g4.jpg)
General liability product offerings include a variety of primary and excess liability coverages. We focus on businesses in the construction, life sciences, energy, medical, healthcare, pharmaceutical, professional services, social welfare, recreational, transportation, heavy industrial and hospitality industries. Specific products include primary general liability, excess and umbrella products, products liability products, environmental liability products and casualty facultative reinsurance written for individual casualty risks.
The modest decreaseOur professional liability product lines provide insurance solutions for small, middle market and risk management accounts with coverage that is tailored to their exposures and needs. Professional liability coverages include errors and omissions, directors and officers, cyber, employment practices liability, professional indemnity, transaction liability, intellectual property and union liability. Errors and omissions coverage provides solutions for specialized professions including lawyers, accountants, agents and brokers, service technicians and consultants, as well as other less-specialized professionals. Directors and officers coverage is provided for publicly-traded, private and non-profit companies, including financial institutions and Fortune 1000 companies. We also offer claims-made professional liability coverage for individual healthcare providers and coverages for medical facilities.
Personal lines products provide first and third-party coverages in the Insurance segment's expense ratio in 2021 was primarilyU.S. for classic cars, motorcycles and a variety of personal watercraft, including vintage boats, high-performance boats and yachts and recreational vehicles, such as motorcycles, snowmobiles and ATVs. Additionally, property coverages are offered for homeowners that do not qualify for standard homeowner's coverage, as well as personal umbrella coverage.
Marine and energy products include a portfolio of coverages for cargo, energy, hull, liability, war and terrorism risks worldwide. The cargo product line is an international transit-based book providing coverage for many types of cargo. Energy coverage includes all aspects of oil, gas and renewable energy activities. Our renewable energy activities include coverages for onshore and offshore wind farms, as well as alternative energy generation and storage technology projects. Hull coverages consist of coverage for physical damage to ocean-going tonnage, yachts and mortgagees' interests. Liability coverage provides coverage for a broad range of energy liabilities, as well as traditional marine exposures including charterers, terminal operators and ship repairers. Marine war coverage includes protections for the hulls of ships, and other related interests, against war and associated perils. Terrorism coverage includes coverage for property damage and business interruption related to political and civil violence and war on land.
Property coverages consist principally of fire, allied lines (including windstorm, hail and water damage) and other specialized property coverages, including catastrophe-exposed property risks such as earthquake and wind on both a primary and excess basis. Catastrophe-exposed property risks can present higher severity than more standard property risks due to the favorable impactimpacts from earthquakes and severe weather events such as hurricanes, convective storms and wildfires. Our property coverages are exposed to windstorm losses that, based on the seasonal nature of higher earned premiums, partially offset by higher profit sharing expensesthose events, are more likely to occur in 2021 comparedthe third and fourth quarters of the year. Our property risks range from small, single-location accounts to 2020 aslarge, multi-state, multi-location, multi-national accounts on a resultworldwide basis. Other types of improved profitability.property products include inland marine products, railroad-related products and specie coverage for fine art on exhibition and in private collections.
Specialty programs business is offered in the U.S. on a standalone or package basis and generally targets specialized commercial markets and various customer groups, such as amateur sports and fitness clubs. Certain specialty programs written in this segment use managing general agents to offer single source admitted and non-admitted programs for a specific industry, class or line of business.
Workers' compensation products are offered in the U.S. and provide wage replacement and medical benefits to employees injured in the course of employment and target main-street, service and artisan contractor businesses, retail stores and restaurants.
Credit and surety products consist primarily of trade credit and prepayment coverage and a range of bonds and guarantees that support contractual obligations, as well as other coverages for specific credit risks, markets and contingencies. Key credit risks covered include those of counterparty insolvency and defaults by government-owned entities. The key coverages under surety products include contractual performance and payment risks, commercial license and permit obligations and obligations related to judicial proceedings such as court and fiduciary bonds.
Other product lines within the Insurance segment primarily include collateral protection insurance, which insures personal automobiles and other vehicles held as collateral for loans made by credit unions, banks and specialty finance companies.
Reinsurance Segment
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(dollars in thousands) | 2021 | | 2020 | | % Change |
Gross premium volume | $ | 1,246,143 | | | $ | 1,130,923 | | | 10 | % |
Net written premiums | $ | 1,126,167 | | | $ | 960,123 | | | 17 | % |
Earned premiums | $ | 1,042,048 | | | $ | 929,348 | | | 12 | % |
Underwriting loss | $ | (55,238) | | | $ | (34,009) | | | (62) | % |
Disposal loss | $ | 109 | | | $ | (41,461) | | | NM (1) |
| | | | | |
Underwriting Ratios (2) | | | | | Point Change |
| | | | | |
Current accident year loss ratio | 72.0 | % | | 75.3 | % | | (3.3) | |
Prior accident years loss ratio | 1.9 | % | | (5.6) | % | | 7.5 | |
Loss ratio | 73.9 | % | | 69.8 | % | | 4.1 | |
Expense ratio | 31.4 | % | | 33.9 | % | | (2.5) | |
Combined ratio | 105.3 | % | | 103.7 | % | | 1.6 | |
| | | | | |
Current accident year loss ratio catastrophe impact (3) (4) | 9.6 | % | | 5.1 | % | | 4.5 | |
Current accident year loss ratio COVID-19 impact (3) | — | % | | 6.7 | % | | (6.7) | |
Prior accident years loss ratio COVID-19 impact (3) | 2.1 | % | | — | % | | 2.1 | |
| | | | | |
Current accident year loss ratio, excluding COVID-19 and catastrophes | 62.3 | % | | 63.5 | % | | (1.2) | |
Combined ratio, excluding COVID-19 and current year catastrophes | 93.6 | % | | 91.9 | % | | 1.7 | |
Our Reinsurance segment product offerings are underwritten primarily by our Global Reinsurance division, which operates from platforms in the U.S., Bermuda and the U.K. We write quota share and excess of loss reinsurance on a local, national and global basis. Our Reinsurance segment reported gross premium volume of $1.0 billion, earned premiums of $1.0 billion and an underwriting loss of $19.3 million in 2023. The following chart displays the types of products written in our Reinsurance segment based on 2023 gross premium volume.![7567](https://capedge.com/proxy/10-K/0001096343-24-000025/mkl-20231231_g5.jpg)
General liability reinsurance primarily consists of umbrella and excess casualty products, as well as environmental liability products covering pollution legal liability and contractors' pollution exposures.
Our specialty treaty reinsurance products are written across a wide range of specialty product lines, primarily consisting of the following:
•Credit and surety products, including structured and whole turnover credit, political risk and contract and commercial surety reinsurance programs covering worldwide exposures;
•Workers' compensation and accident and health products covering both standard and catastrophe-exposed business in the U.S. and worldwide;
•Marine and energy products covering both offshore and onshore marine, energy and renewable energy risks on a worldwide basis, including hull, cargo and liability;
•Public entity reinsurance products offering casualty coverage for municipalities, schools, special districts, public housing authorities and public entity affiliated non-profits;
•Mortgage default insurance offering coverage for private mortgage insurers predominantly located in the U.S. and Australia;
•Aviation and space coverage, including major risk, general aviation, satellite launch and orbit;
•Agriculture reinsurance covering multi-peril crop insurance, hail and related exposures for risks located in the U.S. and Canada; and
•Discrete political violence and national terror pools in select jurisdictions globally.
Professional liability reinsurance primarily consists of the following:
•Transaction liability, which provides representation, warranty and indemnity coverage for mergers and acquisitions, including coverage for tax and contingent liability;
•Directors and officers liability for publicly-traded, private and non-profit companies;
•Cyber and technology errors and omissions covering both first and third-party exposures;
•Errors and omissions for lawyers, accountants, agents and brokers, services technicians and consultants; and
•Healthcare liability for physicians, hospitals, long-term care and other medical facilities.
Program Services and Other Fronting
Our program services and other fronting business generates fee income in the form of ceding fees in exchange for fronting insurance and reinsurance business for other insurance carriers (capacity providers). In general, fronting refers to business in which we write insurance on behalf of a general agent or capacity provider and then cede all, or substantially all, of the risk under these policies to the capacity provider in exchange for ceding fees. The results of our program services and other fronting operations are not included in a reportable segment.
Our program services business, which is provided through our State National division, offers issuing carrier capacity to both specialty managing general agents and other producers who sell, control and administer books of insurance business that are supported by third parties that assume reinsurance risk, including the Nephila Reinsurers. These reinsurers include domestic and foreign insurers and institutional risk investors that want to access specific lines of U.S. property and casualty insurance business but may not have the required licenses, filings or financial strength ratings to do so.
Beginning in 2024, our State National division is expanding internationally through a partnership with our Markel International division to create an international program services division to serve managing general agents in the U.K. market. The new division is another example of how we can leverage our array of capabilities to effectively and efficiently connect capital with risk.
Through our program services business, we write a wide variety of insurance and reinsurance products, principally including general liability, commercial liability, commercial multi-peril, property and workers' compensation. Program services business written through our State National division is separately managed from our underwriting divisions, which may write similar products, in order to protect our program services customers.
The following table summarizes the subsidiaries through which our program services business is written.
| | | | | | | | | | | | | | |
Legal Entity | | Abbreviation | | State of Domicile |
City National Insurance Company | | CNIC | | Texas |
National Specialty Insurance Company | | NSIC | | Texas |
Pinnacle National Insurance Company | | PNIC | | Texas |
State National Insurance Company, Inc. | | SNIC | | Texas |
Superior Specialty Insurance Company | | SSIC | | Delaware |
United Specialty Insurance Company | | USIC | | Delaware |
Through these subsidiaries, our program services business is licensed or authorized to write business in all 50 states and the District of Columbia. Many of our programs are arranged with the assistance of brokers that are seeking to provide customized insurance solutions for specialty insurance business that requires a carrier rated "A" by A.M. Best Company (A.M. Best). Our specialized business model relies on third-party producers or capacity providers to provide policy administration, claims handling, cash handling, underwriting, or other traditional insurance company services. We compete primarily on the basis of price, customer service, financial strength ratings, licenses, reputation, business model and experience.
Total revenues attributed to our program services business for the year ended December 31, 2023 were $151.8 million. Our program services business generated $2.9 billion of gross written premium volume for the year ended December 31, 2023.
In our program services business, we enter into reinsurance agreements whereby we cede to the capacity providers 100% of the premium written and substantially all of our gross liability under all policies issued by and on behalf of us by the producer. As a result of our contract design, substantially all of the underwriting risk and operational risk inherent in the arrangement is borne by the capacity providers.
Our contracts with capacity providers do not legally discharge us from our primary liability for the full amount of the policies, and we will be required to pay the loss and bear collection risk if a capacity provider fails to meet its obligations under the reinsurance agreement. As a result, we remain exposed to the credit risk of capacity providers, including the risk that one of our capacity providers becomes insolvent or is otherwise unable or unwilling to pay policyholder claims. We mitigate this credit risk generally by either selecting well capitalized, highly rated authorized capacity providers or requiring that the capacity provider post substantial collateral to secure the reinsured risks, which, in some instances, exceeds the related reinsurance recoverable.
In our other fronting business, we leverage the strength of our underwriting platform, including our highly rated insurance subsidiaries, to write business on behalf of our Nephila ILS operations, in exchange for ceding fees, to support its business plans and assist in meeting its desired return objectives. Our other fronting business is managed separately from our program services business. The results of our other fronting business are not included in a reportable segment. Total revenues attributed to our other fronting business for the year ended December 31, 2023 were $20.7 million. Our other fronting business generated $840.9 million of gross written premium volume for the year ended December 31, 2023.
Business written on behalf of our Nephila ILS operations within both our program services and other fronting operations primarily consists of catastrophe-exposed property insurance and reinsurance business, as well as specialty and climate reinsurance business. The business written is ceded to the Nephila Reinsurers, whose investors ultimately assume the risk. To mitigate credit risk for this business, we require collateral up to a specified level of annual aggregate agreement year losses, which is held in a trust for which we are the beneficiary. See note 18 of the notes to consolidated financial statements included under Item 8 for further details regarding our programs with Nephila Reinsurers.
Although we reinsure substantially all of the risks inherent in our program services and other fronting businesses, we have certain programs that contain limits on our reinsurers' obligations to us that expose us to underwriting risk, including loss ratio caps, aggregate reinsurance limits or exclusion of the credit risk of producers. Under certain programs, including programs and contracts with Nephila Reinsurers, we also bear underwriting risk for annual aggregate agreement year losses in excess of a limit that we believe is unlikely to be exceeded.
Insurance-Linked Securities
Our insurance-linked securities operations are primarily comprised of our Nephila operations and are not included in a reportable segment. Nephila Holdings Ltd. (together with its subsidiaries, Nephila) provides investment and insurance management services through which we offer alternative capital to the insurance and reinsurance markets while providing investors with investment strategies that typically are uncorrelated with traditional asset classes. We receive management fees for investment and insurance management services provided through these operations, and for certain funds, incentive fees based on their annual performance. Our management fees are based on the net asset value of the accounts managed for most of our funds and gross premium volume for the remaining funds. Total revenues from our insurance-linked securities operations for the year ended December 31, 2023 were $99.5 million. As of December 31, 2023, Nephila's net assets under management were $6.8 billion.
Our fund management operations provide insurance and investment management services for a broad range of investment products for insurance and reinsurance companies, government entities, banks, hedge funds, pension funds and institutional investors, including insurance-linked securities such as catastrophe bonds, insurance swaps, traditional reinsurance contracts, industry loss warranties and other financial instruments. Nephila serves as the investment manager to several Bermuda based private funds (the Nephila Funds). To provide access for the Nephila Funds to a variety of insurance-linked securities in the property catastrophe, climate and specialty markets, Nephila acts as an insurance manager to certain Bermuda Class 3, collateralized and special purpose reinsurance companies, Lloyd's Syndicate 2357 and Lloyd's Syndicate 2358 (collectively, the Nephila Reinsurers). The results of the Nephila Reinsurers are attributed to the Nephila Funds primarily through derivative transactions between these entities. Neither the Nephila Funds nor the Nephila Reinsurers are subsidiaries of Markel Group, and as such, these entities are not included in our consolidated financial statements.
The Nephila Reinsurers subscribe to various property, climate and specialty reinsurance contracts based on their investors' risk profiles, which include business ceded by our underwriting and program services and other fronting platforms. We write this business on behalf of our Nephila ILS operations to the extent it fits Nephila investors' risk profile and cede substantially all of the risk to Nephila Reinsurers. See note 18 of the notes to consolidated financial statements included under Item 8 for further details regarding transactions with entities managed through our Nephila operations.
Ratings
Financial stability and strength are important considerations of policyholders, cedents and insurance agents and brokers. Because an insurance premium paid today purchases coverage for losses that might not be paid for many years, the financial viability of the insurer is of critical concern. Various independent rating agencies provide information and assign ratings to assist buyers in their search for financially sound insurers. Rating agencies periodically re-evaluate assigned ratings based upon changes in the insurer's operating results, financial condition or other significant factors influencing the insurer's business. Downgrades in assigned ratings and other negative actions could have an adverse impact on an insurer's ability to write new business.
Rating agencies assign financial strength ratings (FSRs) to property and casualty insurance companies, or group of companies, based on quantitative criteria such as profitability, leverage and liquidity, as well as qualitative assessments such as market placement, business profile, adequacy and soundness of ceded reinsurance, quality and estimated market value of assets, adequacy of loss reserves and surplus and competence, experience and integrity of management.
Sixteen of our seventeen insurance subsidiaries are rated by A.M. Best, while our Lloyd's syndicate is part of a group rating for the Lloyd's overall market. All sixteen of our insurance subsidiaries rated by A.M. Best have been assigned an FSR of "A" (excellent). The Lloyd's group has been assigned an FSR of "A" (excellent) by A.M. Best.
Nine of our seventeen insurance subsidiaries are rated by Standard & Poor's (S&P), while our Lloyd's syndicate is part of a group rating for the Lloyd's overall market. All nine of our insurance subsidiaries rated by S&P have been assigned an FSR of "A" (strong). The Lloyd's group has been assigned an FSR of "A+" (strong) by S&P.
Five of our seventeen insurance subsidiaries are rated by Moody's Corporation (Moody's). All five insurance subsidiaries rated by Moody's have been assigned an FSR of "A2" (good).
Investments
Our investment operations manage the capital held within our underwriting operations, as well as capital allocated by Markel Group. Invested assets managed through our investment operations includes our portfolio of publicly traded fixed maturity and equity securities, as well as cash and short-term investments.
Our underwriting operations provide our investment operations with steady inflows of premiums. These funds are invested predominantly in high-quality government and municipal bonds and mortgage-backed securities that generally match the duration and currency of our loss reserves. We typically hold these investments until maturity. As a result, unrealized holding gains and losses on these securities are generally expected to reverse as the securities mature. Premiums collected through our underwriting operations may also be held as short-term investments or cash and cash equivalents to provide short-term liquidity for projected claims payments, reinsurance costs and operating expenses.
Our investments in equity securities are predominantly held within our regulated insurance subsidiaries to support capital requirements. Capital held by our insurance subsidiaries beyond that which we anticipate will be needed to cover claims payments and operating expenses is available to be invested in equity securities, along with additional capital allocated for investment purposes by Markel Group. We allocate a higher percentage of capital to equity securities than most other insurance companies. Over the long run, equity securities have produced higher returns relative to fixed maturity securities and short-term investments.
When purchasing equity securities, we seek to invest in profitable companies with high returns on capital and low debt, with honest and talented management and significant reinvestment opportunities and capital discipline, all while paying reasonable prices for those securities. We intend to hold these equity investments over the long-term. We believe our long-term time horizon and internal sourcing of capital for investment provides us with a distinct competitive advantage compared to other companies. Substantially all of our investment portfolio is managed by company employees, which helps minimize costs in our investment operations. The breadth of our operating businesses, and the experience we garner from supporting them, also informs and enhances the efficacy of our investment activities.
Invested assets, comprised of fixed maturity securities, equity securities, short-term investments, cash and cash equivalents and restricted cash and cash equivalents, were $30.9 billion at December 31, 2023. The following chart displays the composition of our invested assets as of December 31, 2023.
![1784](https://capedge.com/proxy/10-K/0001096343-24-000025/mkl-20231231_g6.jpg)
We measure our investment performance by analyzing net investment income earned on our investment portfolio, which reflects the recurring interest and dividend earnings on our investment portfolio. In 2023, our net investment income was $734.5 million. We also analyze net investment gains, which include unrealized gains and losses on our equity portfolio. Based on the potential for volatility in the financial markets, we understand that the level of gains or losses may vary from one period to the next, and therefore believe that our investment performance is best analyzed over longer periods of time. Our annual return on equity securities for the five-year period ended December 31, 2023 was 14.6%.
Markel Ventures
Through our wholly owned subsidiary Markel Ventures, Inc. (Markel Ventures), we own controlling interests in high-quality businesses that operate in a variety of different industries with shared values and the shared goal of positively contributing to the long-term financial performance of Markel Group. Management teams for each business operate autonomously and are responsible for developing strategic initiatives, managing day-to-day operations and making investment and capital allocation decisions for their respective companies. Our Markel Ventures management team is responsible for decisions regarding allocation of capital for acquisitions and new investments. Our strategy in making these acquisitions is similar to our strategy for purchasing equity securities. We seek to invest in profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline, at reasonable prices. We intend to own the businesses acquired for a long period of time.
Our chief operating decision maker allocates resources to and assesses the performance of these various businesses in the aggregate as the Markel Ventures segment. See note 2 of the notes to consolidated financial statements included under Item 8 for additional segment reporting disclosures. The Markel Ventures segment includes a diverse portfolio of specialized businesses from different industries that offer various types of products and services to businesses and consumers across many markets. All of our businesses in this segment are headquartered in the U.S., with subsidiaries of certain businesses located outside of the U.S. In 2021, our Markel Ventures operations expanded through acquisitions of majority interests in Metromont LLC and Buckner HeavyLift Cranes. See note 3 of the notes to consolidated financial statements included under Item 8 for additional details related to these acquisitions. This follows the acquisition of Lansing Building Products, LLC in 2020 and VSC Fire & Security, Inc. in 2019. We continue to look for acquisition opportunities that align with our investment criteria and strategic objectives around diversification and specialization.
In 2023, our Markel Ventures operations reported revenues of $5.0 billion, operating income of $437.5 million and earnings before interest, income taxes, depreciation and amortization (EBITDA) of $628.5 million. We use Markel Ventures EBITDA, which is a non-GAAP financial measure, as an operating performance measure in conjunction with operating income. See "Markel Ventures" under Item 7 Management's Discussion & Analysis of Financial Condition and Results of Operations for more information on our Markel Ventures results, including EBITDA.
The following chart displays the types of businesses within our Markel Ventures segment based on 2023 operating revenues. Our Markel Ventures management team does not manage the Markel Ventures portfolio of businesses at this level of aggregation due to the distinct characteristics of each business and the autonomy with which local management operates each business.
The following table provides summary information about our portfolio of Markel Ventures companies by type of business.
| | | | | | | | | | | | | | | | | | | | |
Company | | Category | | Year Founded | | Joined Markel Group Family |
Markel Food Group - Global manufacturer and designer of industrial food equipment | | Equipment manufacturing | | 1915 | | 2005 |
ParkLand Ventures - Operator of manufactured housing communities in the U.S. | | Other | | 2008 | | 2008 |
Panel Specialists - Manufacturer of dorm room furniture and wall panel systems | | Consumer and building products | | 1990 | | 2009 |
Ellicott Dredges - Manufacturer and designer of cutter suction dredges | | Equipment manufacturing | | 1885 | | 2009 |
RetailData - Provider of retail intelligence solutions | | Consulting services | | 1988 | | 2010 |
PartnerMD - Concierge healthcare membership provider offering personalized primary care, advanced physicals, and wellness services | | Other | | 2003 | | 2011 |
Weldship - Manufacturer of industrial and specialty gas transportation and storage equipment | | Transportation-related products | | 1946 | | 2011 |
Havco - Manufacturer of laminated wood flooring for dry-van trailers, truck bodies and containers | | Transportation-related products | | 1978 | | 2012 |
Eagle - Designer and builder of single family attached and detached homes | | Consumer and building products | | 1984 | | 2013 |
Cottrell - Manufacturer of over-the-road auto hauler equipment | | Transportation-related products | | 1975 | | 2014 |
CapTech - Management and information technology consulting firm | | Consulting services | | 1997 | | 2015 |
Costa Farms - Largest producer of ornamental plants in the U.S. 4 | | Consumer and building products | | 1961 | | 2017 |
Rosemont Investment Group - Specialist investor in asset and wealth management companies | | Other | | 2018 | | 2018 |
Brahmin - Creator of fashion leather handbags | | Consumer and building products | | 1982 | | 2018 |
VSC Fire & Security - Distributor of comprehensive fire protection, life safety, and low voltage solutions | | Construction services | | 1958 | | 2019 |
Lansing Building Products - Supplier of exterior building products and materials to professional contractors | | Construction services | | 1955 | | 2020 |
Buckner Heavylift Cranes - Provider of heavylift crane rental solutions | | Construction services | | 1947 | | 2021 |
Metromont - Manufacturer of highly engineered precast concrete solutions | | Consumer and building products | | 1925 | | 2021 |
Markel Ventures businesses encounter a variety of competitors that vary by industry, end market and geographic area. Each Markel Ventures business has several main competitors and numerous smaller ones in most of its respective end markets and geographic areas.
Many of the businesses in this segment experience revenue fluctuations over time due to the cyclical nature of supply and demand in their particular industry. For example, the construction industry is cyclical based on certain larger economic trends and factors, including the inflationary and interest rate environment and, for some businesses, the level of government investment. Additionally, many of our businesses experience fluctuation in demand throughout the year based on the seasonality of the products they sell or services they provide. For example, the demand for ornamental plants is particularly high during the spring and summer seasons as compared to the rest of the year.
4Measured by 2023 square footage of production. Greenhouse Grower's 2023 Top 100 Growers, Greenhouse Grower (May 11, 2023)
Businesses in this segment are reliant on inputs, such as raw materials and labor, to manufacture products and deliver services, and the operating results of these businesses could be impacted by the ability or inability to source these inputs and obtain price increases from customers in response to increases in the price of these inputs, including the cost of shipping. For example, shipping costs at some of our businesses increased significantly in 2022 before reverting to more typical levels in 2023, which has resulted in higher margins in 2023 compared to 2022 at the impacted businesses.
Management teams for each of our businesses proactively manage the risks and challenges posed by cyclicality, seasonality and inflation, among other things, in a variety of ways as appropriate and as needed for their business.
Regulatory Environment
We are subject to extensive U.S. state and federal, as well as international, regulation and supervision in the jurisdictions in which we do business. Regulations vary from jurisdiction to jurisdiction. Additionally, as a company with publicly traded securities, we are also subject to certain legal and regulatory requirements applicable generally to public companies, including the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and the New York Stock Exchange relating to reporting and disclosure, accounting and financial reporting, corporate governance and other matters.
The following is a summary of significant regulations that apply to our businesses, but it is not intended to be a comprehensive review of every regulation to which we are subject. For information regarding certain risks associated with regulations applicable to our businesses, see Item 1A Risk Factors.
Group Insurance Regulation and Supervision
Group Supervision - Global Supervisory College; Global Common Framework. Regulators within and outside the U.S. are increasingly coordinating the regulation of multinational insurers by conducting a supervisory college. A supervisory college is a forum of the regulators having jurisdictional authority over an insurance holding company's worldwide insurance subsidiaries. The supervisory college meets with executive management to evaluate the insurance group on both a group-wide and legal-entity basis, particularly with respect to its financial data, business strategies, enterprise risk management and corporate governance. The Illinois Department of Insurance is our lead insurance regulator for purposes of conducting our supervisory college.
In 2020, the International Association of Insurance Supervisors adopted its Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame). ComFrame establishes a comprehensive framework for supervisors to address group-wide activities and risks of internationally active insurance groups (IAIGs) and lays the groundwork for better supervisory cooperation and coordination. ComFrame requires the designation of a group-wide supervisor (regulator) for each IAIG and imposes a group capital requirement that will be applied to an IAIG in addition to the current legal entity capital requirements imposed by state and international insurance regulators. In response to ComFrame, the National Association of Insurance Commissioners (NAIC) revised the model Insurance Holding Company System Regulatory Act to allow state insurance regulators in the U.S. to be designated as group-wide supervisors for U.S. based IAIGs. In 2023, it was determined that we meet the criteria to be identified as an IAIG. The Illinois Department of Insurance has been designated as our group-wide supervisor.
Holding Company Statutes. We also are subject to state statutes governing insurance holding company systems, which typically require that we periodically file information with the appropriate state insurance commissioner, including information concerning our capital structure, ownership, financial condition, dividend payments and other material transactions with affiliates, and general business operations. These statutes also require approval of changes in control of an insurer or an insurance holding company. Generally, "control" for these purposes is defined as ownership or voting power of 10% or more of a company's voting shares. We also must submit an annual group-level enterprise risk report, which provides information regarding material risks within the insurance holding company system that could pose enterprise risk to its U.S. insurance subsidiaries.
Own Risk and Solvency Assessment and Enterprise Risk Management. We must submit an Own Risk and Solvency Assessment Summary Report (ORSA) annually to our lead insurance regulator. The ORSA is a confidential internal assessment of the material and relevant risks associated with an insurer's current business plan and the sufficiency of capital resources to support those risks. In addition, we must file an annual enterprise risk report with our lead insurance regulator. The report must identify the material risks within the insurance holding company system that could pose enterprise risk to our U.S. insurance subsidiaries.
U.S. Insurance Regulation
State Regulation
Overview. Our U.S. insurance company subsidiaries are subject to varying degrees of regulation and supervision by the states and other jurisdictions in which they do business. In the U.S., authority for the regulation, supervision and administration of the business of insurance in each state is generally delegated to a state insurance commissioner who oversees a regulatory body responsible for the supervision of the business of insurance. State regulatory authorities have broad regulatory, supervisory and administrative powers relating to: solvency standards; corporate conduct; market conduct activities; regulating unfair trade and claims practices; licensing of insurers; licensing and appointment of agents; approval of forms and policies used; the nature of, and limitations on, insurers' investments; the form and content of annual statements and other reports on the financial condition of insurers; and establishment of loss reserves. States also regulate various aspects of the contractual relationships between insurers and independent agents. In addition, the NAIC, comprised of the insurance commissioners of each U.S. jurisdiction, develops or amends model statutes and regulations that, in turn, most states adopt.
Risk Based Capital Requirements. The NAIC uses a risk based capital (RBC) formula to measure the capital of an insurer, taking into account the company's investments and products. For property and casualty insurance companies, RBC requirements establish capital thresholds for four categories of risk: asset risk, insurance risk, interest rate risk and business risk.
Financial Exams. State insurance regulators also prescribe the form and content of statutory financial statements, perform periodic financial examinations of insurers regarding activities in their respective states, set minimum reserve and loss ratio requirements, establish standards for permissible types and amounts of investments and require minimum capital and surplus levels. These statutory capital and surplus requirements include RBC rules promulgated by the NAIC.
Statutory Accounting Principles. Each of our U.S. insurance companies is required to file detailed quarterly and annual reports, including financial statements, in accordance with prescribed statutory accounting rules. The quarterly and annual financial reports utilize statutory accounting principles (SAP) that are different from U.S. GAAP. In developing SAP, insurance regulators were primarily concerned with monitoring the solvency of insurance companies to assure an insurer's ability to pay all its current and future obligations to policyholders.
Rates and Form Filings. The policy forms and various premium rates of our U.S. admitted insurance subsidiaries are subject to regulation in every state in which they conduct business. In many states, rates and policy forms must be filed with the applicable insurance regulator prior to their use, and in some states, rates and forms must be affirmatively approved by the applicable insurance regulator prior to use.
Dividends. The laws of the domicile states of our U.S. insurance subsidiaries govern the amount of dividends that may be paid to our holding company, Markel Group. Generally, statutes in the domicile states of our insurance subsidiaries require prior approval for payment of extraordinary, as opposed to ordinary, dividends. See note 22 of the notes to consolidated financial statements included under Item 8.
Market Conduct. State insurance laws and regulations include numerous provisions governing trade practices and the marketplace activities of insurers, including provisions governing marketing and sales practices, data security, compliance of underwriting services to policyholders, confirmation of licensing and appointment of producers, claims management, anti-fraud controls and complaint handling. State regulatory authorities generally enforce these provisions through periodic market conduct examinations.
Investment Regulation. Investments by our U.S. insurance companies must comply with applicable laws and regulations that prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate and certain other investments, subject to specified limits and certain other qualifications.
Cybersecurity; Data Privacy. Several states have enacted laws establishing cybersecurity requirements for financial services companies, including insurance companies, that require implementation of security measures for the monitoring, detection, prevention, mitigation and management of cybersecurity incidents. Several states also have enacted laws addressing data privacy concerns and the protection of consumer data.
Federal Regulation
The U.S. federal government and its regulatory agencies generally do not directly regulate the business of insurance. However, two federal government bodies, the Federal Insurance Office (FIO) and the Financial Stability Oversight Council (FSOC), each created under The Dodd Frank Wall Street Reform and Consumer Protection Act, may impact the regulation of insurance. Although the FIO is prohibited from directly regulating the business of insurance, it has authority to represent the U.S. in international insurance matters and has limited powers to preempt certain types of state insurance laws. The FIO also can recommend to the FSOC that it designate an insurer as an entity posing risks to the U.S. financial stability in the event of the insurer's material financial distress or failure. We have not been so designated. The U.S. federal laws that most affect our day-to-day insurance operations are: the Gramm-Leach-Bliley Act; the Fair Credit Reporting Act; the Health Insurance Portability and Accountability Act of 1996; the Terrorism Risk Insurance Act of 2002; anti-money laundering laws and regulations; the Nonadmitted and Reinsurance Reform Act of 2010; the Foreign Corrupt Practices Act, and the rules and regulations of the Office of Foreign Assets Control.
International Insurance Regulation
Overview.Our international insurance operations are subject to regulation and supervision in various jurisdictions. These regulations, which vary depending on the jurisdiction, include, among others, solvency and market conduct regulations; anti-corruption, anti-money laundering, and anti-terrorism financing guidelines, laws and regulations; various privacy, insurance, tax, tariff, trade and sanctions laws and regulations; and corporate, competition, employment, intellectual property and investment laws and regulations. Our international insurance operations are domiciled in the U.K., Europe and Bermuda and are subject to regulation in those jurisdictions. In addition, we conduct business in Canada, Asia, Australia and the Middle East, where our businesses also are supervised by local regulatory authorities.
U.K. and European Regulation. We are subject to regulation by the Prudential Regulatory Authority and Financial Conduct Authority in respect of our U.K. insurance businesses. We are also subject to regulation by the Federal Financial Supervisory Authority, better known by its abbreviation BaFin, in respect of our German insurance carrier.
Our U.K. and German insurance businesses are subject to both the E.U.'s General Data Protection Regulation (GDPR) and the Solvency II Directive (Solvency II).
GDPR requires businesses operating in the E.U., and businesses transacting with E.U. citizens, to comply with conditions for processing personal data. Following the U.K.'s exit from the E.U., GDPR was transposed into U.K. law. The E.U. has granted adequacy status to the U.K.'s data protection laws, valid until June 2025 with the possibility of renewal, meaning that they are deemed essentially equivalent to E.U. data protection laws.
Solvency II requires our U.K. and German businesses to maintain certain capital standards and publish risk-related information in the form of a Solvency and Financial Condition Report. Following the U.K.'s exit from the E.U., Solvency II also was transposed into U.K. law as retained law. The U.K. government, under the Financial Services and Markets Act 2023, has opted to repeal certain portions of retained E.U. law. This repeal will occur in stages and, where necessary, after replacement regulations designed for the U.K. are in place. This repeal of retained E.U. law includes reforms to Solvency II. The Prudential Regulation Authority has consulted on the reforms, to be known as Solvency UK, which are expected to be implemented in 2024.
Bermuda Regulation. The insurance industry in Bermuda is regulated by the Bermuda Monetary Authority (BMA). Under the Bermuda Insurance Act 1978, and related regulations and standards of the BMA, each Bermuda insurance company is subject to, among other things: licensing, capital, surplus and liquidity requirements; solvency standards; restrictions on dividends and distributions; and periodic examinations of the company and its financial condition. In addition, each insurance company must obtain prior approval of ownership and transfer of shares and maintain a principal office and appoint and maintain a principal representative in Bermuda. The BMA also requires that each insurance company contract for local services, such as corporate secretary and registered representative services, at market rates.
ILS Regulation
Our Nephila insurance-linked securities operations are subject to regulation and supervision by various regulatory authorities, both in the U.S. and internationally. Certain of our ILS subsidiaries are organized and regulated as follows:
•registered with the SEC as an investment adviser under the Investment Advisers Act of 1940,
•registered with the U.S. Commodity Futures Trading Commission as a commodity pool operator or a commodity trading advisor under the Commodity Exchange Act, and/or
•registered with the BMA as an insurance manager under the Bermuda Insurance Act 1978.
Certain other ILS subsidiaries serve as the investment manager to one or more private funds that are registered with the BMA under the Investment Funds Act 2006, as amended, or the Segregated Accounts Companies Act 2000, as amended. In addition, these operations include business relationships with certain U.S., U.K. and Bermuda insurance companies that are subject to U.S. and international insurance regulation as previously described in this "Regulatory Environment" section.
As a result, subsidiaries involved in our ILS operations are subject to regulations that may impose substantive and material restrictions and requirements on their operations, including, among other things: a broader fiduciary duty to act in the best interests of their clients; disclosure of information about our businesses and conflicts of interests to clients; maintenance of written policies and procedures; maintenance of extensive books and records; restrictions on the types of fees we may charge, including performance fees; restrictions on solicitation arrangements; requirements regarding engaging in transactions with clients; maintenance of an effective compliance program; and other restrictions and requirements applicable to custody of client assets, client privacy, advertising, pay-to-play prohibitions and cybersecurity; as well as possible sanctions, disciplinary actions or other penalties for non-compliance.
Markel Ventures Regulation
Our Markel Ventures businesses are subject to a wide variety of U.S. federal, state, and local laws and regulations, as well as international laws and regulations applicable to their international operations. Specifically, the most significant of these laws and regulations cover the following areas: safety, health, employment, the environment, transportation, U.S. and international trade, anti-corruption, data privacy and security and government contracts.
Human Capital
Our culture is our greatest asset and is defined by the Markel Style. Written in 1986, in preparation for our initial public offering, the Markel Style memorialized how we seek to operate our businesses and treat one another. It continues to provide our guiding principles across our diverse group of businesses. Key within the Markel Style is the encouragement to look for a better way to do things, to challenge management. We also seek spontaneity and flexibility and have a respect for authority, but disdain for bureaucracy. Our holding company and each of our businesses is managed in a way to accomplish these principles. Each of our businesses operates with a high degree of autonomy so long as they operate within the principles of the Markel Style. This allows our managers to make decisions that are best for their employees and customers, as well as our shareholders. We believe this high degree of empowerment leads to the satisfaction that comes from being trusted in the responsibilities one has been given.
Further outlined in the Markel Style is our creed of honesty and fairness in all our dealings; holding the individual's right to self-determination in the highest light; putting aside individual concerns in the spirit of teamwork; and providing an atmosphere in which people can reach their full potential. We greatly value our employees, encourage their career development and reward their pursuit of excellence, while also celebrating a diverse workforce.
At December 31, 2023, we had approximately 21,600 employees, of whom approximately 5,400 were employed within our insurance operations and approximately 16,200 were employed within our Markel Ventures operations.
Insurance
Our specialty insurance business, Markel, markets and underwrites specialty insurance products. Markel has a well-developed process to ensure effective performance management, including an embedded annual review process that enables goal setting, development planning and performance assessment. Markel has also established global leadership development programs for different levels of leadership at Markel, partnering with various schools to create leading-edge curricula in this area.
With the Markel Style as the foundation, Markel has identified five pillars of focus that relate to today's challenges and opportunities—diversity and inclusion, community, innovation, well-being, and recognition. This program is both company and employee led—collectively, we want to bring the values of the Markel Style to life with our actions, not just our words. The intent is to create an environment where employees are able to authentically bring their true selves to work, a place where all ideas are heard and diverse perspectives are valued, a culture that prioritizes innovation, the ability to make a difference for our local communities and the wider world, and a foundation for holding ourselves accountable for our own well-being and of those around us.
Employee health and overall well-being is a key priority, and we provide a range of employee and eligible partner plans and programs, including health and voluntary benefits. These offerings include a variety of financial protection programs to help our employees meet their unique investment and savings needs including life insurance, retirement savings with company contributions in most situations and an employee stock purchase plan. Comprehensive employee assistance programs are available in all of our major markets along with other well-being and fitness resources.
We rely on our employees' ideas and input to help make Markel a great place to work. For example, senior leadership conducts regular employee communication meetings, inclusive of question and answer sessions, across our insurance operations and provides opportunities for employees to share their ideas on how we can improve employee engagement. In addition, every two years we conduct a major, global employee engagement survey, which in early 2022 garnered 88% participation, and which enables us to identify, focus on and track progress against key engagement drivers and external norms for high performing companies. This survey has generated additional ideas for employee engagement, and we have made meaningful changes and improvements in our human capital practices based on this feedback. Plans are underway to conduct an employee engagement survey in early 2024. Additionally, Markel conducts regular pulse and employee net promoter score surveys on a departmental level across the organization throughout the year.
We are committed to embracing all aspects of diversity, including diversity of perspective, which we believe is crucial to sustainable success. Markel accordingly supports and encourages focused efforts to continue to build the diversity of our employee population and the inclusiveness of our culture. Our diversity and inclusion efforts seek to cultivate an inclusive environment in which every employee feels valued, respected and accepted. We believe this environment helps us increase creativity and innovation, foster business connections, serve our customers and maintain our market leadership.
Markel's global Diversity and Inclusion (D&I) Steering Committee comprises more than 15 senior managers who are charged with advising on D&I strategy and providing leadership support and advocacy for our D&I efforts. Our Human Resources leadership team works to further shape the D&I strategy for our global workforce, and to ensure the integration of our D&I efforts with our global talent acquisition and development processes. We have various early career programs open to a diverse range of applicants and a regional scholarship program that is focused on underrepresented groups.
Markel supports a range of employee-led D&I networks and resource groups, including our Markel Women's Network, BEAM (Black Engagement at Markel), PRISM (LGBTQ+), Jitneys (Young Professionals), Markel Asian Professionals Network, Markel Veterans Network, UN1DOS (Latin and Hispanic Network), and across our international operations, an Inclusion Network with connections to a number of the London market partner networks. All of these networks and organizations have put in place goals and programming that are focused on education and development, community engagement, talent acquisition and networking/support. Additionally, we continue our global sponsorship of Dive-In, the insurance industry's annual diversity and inclusion festival.
Markel Ventures
Our Markel Ventures operations are comprised of a diverse portfolio of businesses from different industries through which we own controlling interests. The Markel Ventures operations are viewed by management as separate and distinct from our insurance operations with local management teams that direct the strategy and day-to-day operations of their respective companies, including human capital matters. When making these acquisitions, we seek, among other things, businesses whose leadership teams demonstrate equal measures of both integrity and talent. As a result, each Markel Ventures business fosters a culture within their operations, and with their employees, that aligns with the principles of the Markel Style.
Item 1A. RISK FACTORS
A wide range of factors could materially affect our future prospects and performance. The matters addressed in Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations, including under "Safe Harbor and Cautionary Statement" and "Critical Accounting Estimates", and Item 7A Quantitative and Qualitative Disclosures About Market Risk, as well as other information included or incorporated in this report, describe many of the significant risks that could affect our businesses, results of operations and financial condition. We are also subject to the risks discussed below.
One or more of the risks discussed in this Item 1A. Risk Factors, and others we cannot anticipate, could have material adverse effects on our results of operations and financial condition; and the extent of these effects will depend, at least in part, on the scope, severity, frequency or duration of the specific event or circumstance. In addition, we may take steps to prevent, mitigate or manage potential risks or liabilities, and related developments, and some of those steps may have a material adverse effect on our results of operations and financial condition. Even if an unfavorable outcome does not materialize, these factors, and actions we may take in response, may have a material adverse impact on our reputation or result in substantial expense and disruption.
Headings and sub-headings for the Risk Factors below are for reference purposes only and are not intended to limit or affect in any way the meaning or scope of each Risk Factor.
Risks Primarily Related to Our Insurance Operations
Loss Exposures
We may experience losses or disruptions from catastrophes. As a company with significant property and casualty insurance underwriting operations, we may experience losses from man-made or natural catastrophes. Catastrophes include, but are not limited to, windstorms, hurricanes, earthquakes, tornadoes, derechos, hail, severe winter weather, floods and wildfires and may include pandemics and events related to terrorism, broad reaching cyberattacks, riots and political and civil unrest. While we employ catastrophe modeling tools in our underwriting process, we cannot predict how severe a potential catastrophe will be before it occurs. The extent of losses from catastrophes is a function of the total amount of losses incurred, the number of insureds affected, the frequency and severity of the events, the effectiveness of our catastrophe risk management program and the adequacy of our reinsurance coverage. Catastrophes can occur over numerous geographic areas; however, some catastrophes may produce significant damage in large, heavily populated areas. We offer insurance and reinsurance coverage against terrorist acts in connection with some of our programs, and in other instances we are legally required to offer terrorism insurance; in both circumstances, we actively manage our exposure, but if there is a covered terrorist attack, we could sustain material losses. In addition, catastrophes may have a material adverse effect on the investment management and incentive fees earned by our insurance-linked securities (ILS) operations and returns on our investments in ILS funds. Catastrophes also may result in significant disruptions in our insurance and other operations, as well as loss of income and assets. The impacts of climate change may increase the frequency and/or severity of weather-related catastrophes, which may result in elevated catastrophe-related losses or disruptions, which may be material.
The failure of any of the methods we employ to manage our loss exposures could have a material adverse effect on us. We seek to manage our loss exposures in a variety of ways, including adhering to maximum limitations on policies written in defined geographical zones, implementing maximum gross limits by coverage for each insured, establishing per risk and per occurrence limitations for each event, employing coverage restrictions and following prudent underwriting guidelines for each program written. We also seek to manage our loss exposures through geographic and industry diversification. Underwriting is a matter of judgment, involving assumptions about matters that are inherently unpredictable and beyond our control, and for which historical experience and probability analysis may not provide sufficient guidance. One or more future events could result in claims that substantially exceed our expectations, which could have a material adverse effect on our results of operations and financial condition. In addition, we seek to manage our loss exposures by policy terms, coverage exclusions and choice of legal forum. Disputes relating to coverage and choice of legal forum also arise. As a result, various provisions of our policies, such as choice of forum, or coverage limitations or exclusions, may not be enforceable in the manner we intend and some or all of our methods to manage loss exposures may prove ineffective.
The effects of emerging claim and coverage issues on our business are uncertain. As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues could have a material adverse effect on our results of operations or financial condition by either broadening coverage beyond our underwriting intent or increasing the frequency and/or severity of claims. For example, rising costs, litigation funding, social inflation, including new or expanded theories of liability, higher adverse verdicts, and
legislative changes, such as extended statutes of limitations, may result in higher and more frequent claims over a longer reporting period than originally expected. In some instances, these changes may not become apparent until after we have issued insurance or reinsurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance or reinsurance contracts may not be known for many years after a contract is issued.
We use analytical models to assist our decision making in key areas such as pricing, reserving and capital modeling and actual results may differ materially from the model outputs and related analyses. We use various modeling techniques and data analytics (e.g., scenarios, predictive and stochastic modeling, and forecasting) to analyze and estimate exposures, loss trends and other risks associated with our insurance and ILS businesses. This includes both proprietary and third-party modeled outputs and related analyses to assist us in, among other things, decision-making related to underwriting, pricing, capital allocation, reserving, investing, reinsurance and catastrophe risk. We incorporate numerous assumptions and forecasts about the future level and variability of policyholder behavior, loss frequency and severity, interest rates, equity markets, inflation, capital requirements, and currency exchange rates, among others. The modeled outputs and related analyses from both proprietary models and third-party models are subject to various assumptions, uncertainties, model design errors, complexities and the inherent limitations of any statistical analysis, including those arising from the use of historical internal and industry data and assumptions.
In addition, the modeled outputs and related analyses may from time to time contain inaccuracies, perhaps in material respects, including as a result of inaccurate inputs or applications thereof (whether due to data error, human error or otherwise). Consequently, actual results may differ materially from our modeled results. Our profitability and financial condition substantially depend on the extent to which our actual experience is consistent with assumptions we use in our models and ultimate model outputs. If, based upon these models or other factors, we misprice our products or fail to appropriately estimate the risks we are exposed to, our business, results of operations and financial condition may be materially adversely affected.
Loss Reserves
Our results may be affected because actual insured or reinsured losses differ from our loss reserves. Significant periods of time often elapse between the occurrence of an insured or reinsured loss, the reporting of the loss to us and our payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the related loss adjustment expenses. The process of estimating loss reserves is a difficult and complex exercise involving analytical models with many variables and subjective judgments. This process may also become more difficult if we experience a period of rising inflation, as has been the case since early 2021.
As part of the reserving process, we review historical data and consider the impact of various factors, such as:
•trends in claim frequency and severity;
•changes in operations;
•changes to mix of business, terms and conditions, limits and layers;
•emerging economic and social trends;
•trends in insurance rates;
•inflation or deflation; and
•changes in the regulatory and litigation environments.
This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves, and actual results will differ from original estimates. As part of the reserving process, we regularly review our loss reserves and make adjustments as necessary. Future increases in loss reserves for our underwriting operations will, and for our programs services operations may, result in additional charges to earnings, which may be material.
In addition, as discussed above, we use analytical models to assist our decision making in loss reserving, and actual results may differ materially from the model outputs and related analyses.
There is generally greater uncertainty in estimating reserves for long-tail coverages, such as general liability, professional liability and workers' compensation, as they require a longer period of time for claims to be reported and settled. The impact of changes in economic and social inflation and medical costs are also more pronounced for long-tail coverages due to the longer settlement period. In addition, reinsurance reserves are subject to greater uncertainty than insurance reserves primarily because a reinsurer relies on (i) the original underwriting decisions and claims decisions made by ceding companies and (ii)
information and data from ceding companies. As a result, we are subject to the risk that our ceding companies may not have adequately evaluated the risks reinsured by us and the premiums ceded may not adequately compensate us for the risks we assume. In addition, reinsurance reserves may be less reliable than insurance reserves because there is generally a longer lapse of time from the occurrence of the event to the reporting of the loss or benefit to the reinsurer and ultimate resolution or settlement of the loss. Reserves for contracts for which we are not the primary insurer, and participate only in excess layers of loss, are also subject to greater uncertainty than insurance reserves for contracts for which we are the primary insurer for many of the same reasons as reinsurance reserves.
Changes in the assumptions and estimates used in establishing reserves for our life and annuity reinsurance book could result in material increases in our estimated loss reserves for such business. Our run-off life and annuity reinsurance book exposes us to mortality risk, which is the risk that the level of death claims may differ from that which we assumed in establishing the reserves for our life and annuity reinsurance contracts. Some of our life and annuity reinsurance contracts expose us to longevity risk, which is the risk that an insured person will live longer than expected when the reserves were established, or morbidity risk, which is the risk that an insured person will become critically ill or disabled. Our reserving process for the life and annuity reinsurance book is designed with the objective of establishing appropriate reserves for the risks we assumed. Among other things, this process relies heavily on analysis of mortality, longevity and morbidity trends, lapse rates, interest rates and expenses. As of December 31, 2023, our reserves for life and annuity benefits totaled $649.1 million.
We expect mortality, morbidity, longevity, and lapse experience to fluctuate somewhat from period to period, but believe they should remain reasonably predictable over a period of many years. Mortality, longevity, morbidity or lapse experience that is less favorable than the mortality, longevity, morbidity or lapse rates that we used in establishing the reserves for a reinsurance agreement will negatively affect our net income because the reserves we originally set for the risks we assumed may not be sufficient to cover the future claims and expense payments. Furthermore, even if the total benefits paid over the life of the contract do not exceed the expected amount, unexpected increases in the incidence of deaths or illness can result in changes to our assumptions in a given reporting period, adversely affecting our net income in any particular reporting period. If there are adverse changes to any of the above factors, a charge to earnings may be recorded, which may have a material adverse effect on our results of operations and financial condition.
Ceded Reinsurance
We may be unable to purchase reinsurance protection on terms acceptable to us, or we may be unable to collect on loss recoveries from reinsurers. Our underwriting operations purchase reinsurance and retrocessional reinsurance to manage our net retention on individual risks and mitigate the volatility of losses on our results of operations and financial condition, while providing us with the ability to offer policies with sufficient limits to meet policyholder needs. In addition, we reinsure substantially all of the risks inherent in our program services and other fronting businesses, however, we have certain programs that contain limits on our reinsurers' obligations to us that expose us to underwriting risk, including loss ratio caps, aggregate reinsurance limits or exclusion of the credit risk of producers. See note 12 of the notes to consolidated financial statements included under Item 8 for information about ceded reinsurance for our program services and other fronting businesses.
The ceding of insurance does not legally discharge us from our primary liability for the full amount of the policies. Reliance on reinsurance recoveries may create credit risk as a result of the reinsurer's inability or unwillingness to pay reinsurance claims when due. We generally select well capitalized and highly rated reinsurers and in certain instances we require reinsurers to post substantial collateral to secure the reinsured risks. Deterioration in the credit quality of existing reinsurers or disputes over the terms of reinsurance could result in charges to earnings, which may have a material adverse effect on our results of operations and financial condition. In addition, collateral may not be sufficient to cover the reinsurer's obligation to us, and we may not be able to cause the reinsurer to deliver additional collateral.
As of December 31, 2023, we were the beneficiary of letters of credit, trust accounts and funds withheld in the aggregate amount of $5.1 billion, collateralizing $9.2 billion in reinsurance recoverables. The remaining unsecured reinsurance recoverables are ceded to highly-rated, well capitalized reinsurers. Our reinsurance recoverables are based on estimates, and our actual liabilities may exceed the amount we are able to recover from our reinsurers or any collateral securing the reinsurance recoverables. The failure of a reinsurer to meet its obligations to us, whether due to insolvency, dispute or other unwillingness or inability to pay, or due to our inability to access sufficient collateral to cover our liabilities, could have a material adverse effect on our results of operations and financial condition.
The availability and cost of reinsurance are determined by market conditions beyond our control. There is no guarantee that our desired amounts of reinsurance or retrocessional reinsurance will be available in the marketplace in the future. In addition, available capacity may not be on terms we deem appropriate or acceptable or with companies with whom we want to do business. This could impact our ability to write certain products and have a material adverse effect on our results of operations and financial condition.
Market Competition and Broker Reliance
Competition in the insurance and reinsurance markets could reduce profits from our insurance operations. Insurance and reinsurance markets are highly competitive. We compete on an international and regional basis with major United States (U.S.), Bermuda, United Kingdom (U.K.), European, and other international insurers and reinsurers and with underwriting syndicates, some of which have greater financial, marketing, and management resources than we do, have greater access to "big data," and may be able to offer a wider range of, or more sophisticated, commercial and personal lines products. Recent industry consolidation, including business combinations among insurance and other financial services companies, has resulted in larger competitors with even greater financial resources. In addition, capital market participants have created alternative products that are intended to compete with reinsurance products.
Similar to other industries, the insurance industry is undergoing rapid and significant technological and other changes. There is increasing focus by traditional insurance industry participants, technology companies, "InsurTech" start-up companies and others on using technology and innovation to simplify and improve the customer experience, increase efficiencies, redesign products, alter business models and effect other potentially disruptive changes in the insurance industry. If we do not anticipate, keep pace with and adapt to technological and other changes impacting the insurance industry, it will harm our ability to compete, decrease the value of our products to customers, and materially and adversely affect our business. Furthermore, innovation, technological change and changing customer preferences in the markets in which we operate also pose other risks to our businesses. For example, they could result in increasing our service, administrative, policy acquisition or general expenses as we seek to distinguish our products and services from those of our competitors or otherwise keep up with such innovation and changes.
Increased competition could result in fewer submissions, lower premium rates, and less favorable policy terms and conditions, which could reduce our underwriting profits, or within our program services and other fronting operations, our operating profits, and have a material adverse effect on our results of operations and financial condition.
The historical cyclicality in the property and casualty insurance industry could have a material adverse effect on our ability to improve or maintain underwriting profits or to grow or maintain premium volume. The insurance and reinsurance markets have historically been cyclical, characterized by extended periods of intense price competition due to excessive underwriting capacity, and more recently alternative sources of capital, as well as periods when shortages of capacity permitted more favorable rate levels. Among our competitive strengths have been our specialty product focus and our niche market strategy. These strengths also make us vulnerable in periods of intense competition to actions by other insurance companies who seek to write additional premiums without appropriate regard for underwriting profitability. At times it could be very difficult for us to grow or maintain premium volume levels without sacrificing underwriting profits. If we are not successful in maintaining rates or achieving rate increases, it may be difficult for us to improve or maintain underwriting profits or to grow or maintain premium volume levels.
Our efforts to develop new products, expand in targeted markets or improve business processes and workflows may not be successful and may increase or create new risks. From time to time, to protect and grow market share or improve our efficiency, we invest in strategic initiatives to:
•develop products that insure risks we have not previously insured, include new coverages or change coverage terms;
•change commission terms;
•change our underwriting processes;
•improve business processes and workflow to increase efficiencies and productivity and to enhance the experience of our customers and producers;
•expand distribution channels; and
•enter geographic markets where we previously have had relatively little or no market share.
We may not be successful in these efforts, and even if we are successful, they may increase or create the following risks, among others:
•demand for new products or expansion into new markets may not meet our expectations;
•new products and expansion into new markets may increase or change our risk exposures, and the data and models we use to manage those exposures may not be as effective as those we use in existing markets or with existing products;
•models underlying automated underwriting and pricing decisions may not be effective;
•efforts to develop new products or markets or to change commission terms may create or increase distribution channel conflicts;
•in connection with the conversion of existing policyholders to a new product, some policyholders' pricing may increase while the pricing for other policyholders may decrease, the net impact of which could negatively impact retention and profit margins;
•changes to our business processes or workflow, including the use of new technologies, may give rise to execution risk; and
•increased usage of artificial intelligence by us and third parties and the evolving regulatory landscape may increase underwriting and regulatory risk, while also presenting opportunity risk if we do not leverage artificial intelligence appropriately.
These efforts may require us to make substantial expenditures, which may negatively impact results in the near term, and if not successful, could materially and adversely affect our results of operations.
We depend on a few brokers for a large portion of our revenues and the loss of business provided by any one of them could have a material adverse effect on us. We market our insurance and reinsurance worldwide through insurance and reinsurance brokers. For the year ended December 31, 2023, our top five independent brokers represented 37% of the gross premiums written by our underwriting operations. Loss of all or a substantial portion of the business provided by one or more of these brokers could have a material adverse effect on our business.
Financial Strength and Credit Ratings
Our insurance companies and senior debt are rated by various rating agencies, and a downgrade or potential downgrade in one or more of these ratings could have a material adverse effect on us. Financial strength ratings are an important factor in establishing the competitive position of insurance and reinsurance companies. Our senior debt ratings also affect the availability and cost of capital. Certain of our insurance and reinsurance company subsidiaries and our senior debt securities are rated by various rating agencies. Our financial strength and debt ratings are subject to periodic review, and are subject to revision or withdrawal at any time. The financial strength ratings of our insurance subsidiaries are significantly influenced by their statutory surplus amounts and leverage and capital adequacy ratios and other financial metrics. Rating agencies may implement changes to their ratings methodologies or internal models that have the effect of increasing or decreasing the amount of capital our insurance subsidiaries must hold or restrict how the company may deploy its capital in order to maintain its current ratings. For example, for certain of our insurance subsidiaries, rating agencies may take into account in their calculations the collateral provided to us by reinsurers. A change in this practice could adversely impact our ratings. We cannot be sure that we will be able to retain our current, or any future, ratings. If our ratings are reduced from their current levels by one or more rating agencies, our competitive position in our target markets within the insurance industry could suffer and it would be more difficult for us to market our products. A ratings downgrade could result in a substantial loss of business as policyholders and ceding company clients move to other companies with higher claims-paying and financial strength ratings. In addition, a downgrade could trigger contract provisions that allow cedents to terminate their reinsurance contracts on terms disadvantageous to us or require us to collateralize our obligations through trusts or letters of credit. A ratings downgrade could also have a material adverse effect on our liquidity, including the availability of our letter of credit facilities, and limit our access to capital markets, increase our cost of borrowing or issuing debt and require us to post collateral.
The amount of capital that our insurance subsidiaries have and must hold to maintain their financial strength and credit ratings and meet other requirements can vary significantly from time to time and is sensitive to a number of factors, some of which are outside of our control. Capital requirements for our insurance subsidiaries are prescribed by the applicable insurance regulators, while rating agencies establish requirements that inform ratings for our insurance subsidiaries and senior debt securities. Projecting surplus and the related capital requirements is complex and requires making assumptions regarding how our business will perform within the broader macroeconomic environment. Insurance regulators and rating
agencies evaluate company capital through financial models that calculate minimum capitalization requirements based on risk-based capital formulas for property and casualty insurance groups and their subsidiaries. In any particular year, capital levels and risk-based capital requirements may increase or decrease depending on a variety of factors including the mix of business written by our insurance subsidiaries and correlation or diversification in the business profile, the amount of additional capital our insurance subsidiaries must hold to support business growth, the value of securities in our investment portfolio, changes in interest rates and foreign currency exchange rates, as well as changes to the regulatory and rating agency models used to determine our required capital.
Insurance Regulation
Our insurance subsidiaries are subject to supervision and regulation that may have a material adverse effect on our operations and financial condition. Our insurance subsidiaries are subject to supervision and regulation by the regulatory authorities in the various jurisdictions in which they conduct business, including foreign and U.S. state insurance regulators. Regulatory authorities have broad regulatory, supervisory and administrative powers relating to, among other things, data protection and data privacy, cybersecurity, solvency standards, licensing, coverage requirements, product terms and conditions, policy rates and forms, business and claims practices, disclosures to consumers, and the form and content of financial reports. In some instances, we follow practices based on our interpretations of regulations or practices that we believe may be generally followed by the industry. These practices may turn out to be different from the interpretations of regulatory authorities. Insurance regulatory authorities have broad authority to initiate investigations or other proceedings, and, in connection with a failure to comply with applicable laws and regulations, could impose adverse consequences, including fines, penalties, injunctions, denial or revocation of an operating license or approval, increased scrutiny or oversight, limitations on engaging in a particular business, or redress to clients. These actions also could result in negative publicity, reputational damage or harm to client, employee or other relationships. Additionally, regulatory and legislative authorities continue to implement enhanced or new regulatory requirements to assure the stability of insurance companies or enhance policyholder protections or, in certain instances, intended to prevent or mitigate future financial crises. Regulatory authorities also may seek to exercise their supervisory or enforcement authority in new or more extensive ways, such as increased capital requirements. These actions, if they occur, could affect the competitive market, as well as the way we conduct our business or manage our capital, and could result in lower revenues and higher costs. As a result, such actions could have a material adverse effect on our results of operations and financial condition.
Regulators may challenge our use of fronting arrangements in states in which our capacity providers are not licensed. Our program services and other fronting business enters into fronting arrangements with general agents and domestic and foreign insurers that want to access specific U.S. property and casualty insurance business in states in which the capacity providers are not licensed or are not authorized to write particular lines of insurance. Some state insurance regulators may object to these fronting arrangements. In certain states, an insurance commissioner has the authority to prohibit an authorized insurer from acting as an issuing carrier for an unauthorized insurer. In addition, insurance departments in states in which there is no such statutory or regulatory prohibition, could deem the assuming insurer to be transacting insurance business without a license and the issuing carrier to be aiding and abetting the unauthorized sale of insurance.
If regulators in any of the states where we conduct our fronting business were to prohibit or limit those arrangements, we would be prevented or limited from conducting that business for which a capacity provider is not authorized in those states, unless and until the capacity provider is able to obtain the necessary licenses. This could have a material adverse effect on our results of operations and financial condition.
Insurance-Linked Securities
Our ILS operations and our management of third-party capital may expose us to risks. Some of our operating subsidiaries may owe certain legal duties and obligations to third-party investors. A failure to fulfill any of those duties or obligations could result in significant liabilities, penalties or other losses, and harm our businesses and results of operations. In addition, third-party investors may decide not to renew their investments in the funds we manage, which could materially impact the financial condition of those funds, and could, in turn, have a material adverse effect on our results of operations and financial condition. Moreover, we may not be able to maintain or raise additional third-party capital for the funds we manage or for potential new funds and therefore we may forego existing or potential fee income and other income generating opportunities. For example, investment performance at Nephila, as well as the broader ILS market, has been adversely impacted by consecutive years of elevated catastrophe losses, as well as by the COVID-19 pandemic in 2020. These events, as well as volatility in the capital markets, also have impacted investor decisions around allocation of capital to ILS, which in turn have impacted, and may continue to impact, our capital raises and redemptions within the funds we manage, as well as new funds, resulting in a decline in assets under management. See "Critical Accounting Estimates - Goodwill and Intangible
Assets" under Item 7. Management's Discussion & Analysis of Financial Condition and Results of Operations for discussion and considerations of these impacts on the valuation of goodwill and intangible assets attributed to our Nephila ILS operations.
Risks Primarily Related to Our Investments and Access to Capital
Changes in Economic Conditions
Our investment results may be impacted by changes in interest rates, U.S. and international monetary and fiscal policies as well as broader economic conditions. We receive premiums from customers for insuring their risks. We invest these funds until they are needed to pay policyholder claims. Fluctuations in the value of our investment portfolio can occur as a result of changes in interest rates and U.S. and international fiscal, monetary and trade policies as well as broader economic conditions (including, for example, equity market conditions and significant or prolonged inflation or deflation). Although we attempt to take measures to manage the risks of investing in these changing environments, we may not be able to mitigate our sensitivity to them effectively. Despite our mitigation efforts, which include duration and currency targets for asset portfolios, compliance monitoring of these targets and means to reasonably and effectively match asset duration and currency to the duration and currency of the loss reserves, changes in interest rates and U.S. and international fiscal, monetary and trade policies as well as broader economic conditions could have a material adverse effect on our investment results and, consequently, our results of operations and financial condition.
We invest a significant portion of our shareholders' equity in equity securities, which may result in significant variability in our investment results and net income and may have a material adverse effect on shareholders' equity. Additionally, our equity investment portfolio is concentrated, and declines in the value of these significant investments could have a material adverse effect on our financial results and on our ability to carry out our business plans. Equity securities were 64% and 58% of our shareholders' equity at December 31, 2023 and 2022, respectively. Equity securities have historically produced higher returns than fixed maturity securities over long periods of time; however, investing in equity securities may result in significant variability in investment returns from one period to the next. In volatile financial markets, we could experience significant declines in the fair value of our equity investment portfolio, which would result in a material decrease in net income and shareholders' equity. Our equity portfolio is concentrated in particular issuers and industries and, as a result, a decline in the fair value of these concentrated investments also could result in a material decrease in net income and shareholders' equity. A material decrease in shareholders' equity may have a material adverse effect on our ability to carry out our business plans.
Access to Capital
We may require additional capital in the future, which may not be available or may only be available on unfavorable terms. To the extent that cash flows generated by our operations are insufficient to fund future operating requirements, or that our capital position is adversely impacted by a decline in the fair value of our investment portfolio, losses from catastrophe events or otherwise, we may need to raise additional funds through financings or curtail our growth. We also may be required to liquidate fixed maturity securities or equity securities, which may result in realized investment losses. Any further sources of capital, including capacity needed for letters of credit, if available at all, may be on terms that are unfavorable to us. Our access to additional sources of capital will depend on a variety of factors, such as market conditions, the general availability of credit, the availability of credit to the industries in which we operate, our results of operations, financial condition, credit ratings and credit capacity, as well as pending litigation or regulatory investigations. Our ability to borrow under our revolving credit facility and letter of credit facilities is contingent on our compliance with the covenants and other requirements under those facilities. Similarly, our access to capital may be impaired if regulatory authorities or rating agencies take negative actions against us. Our inability to obtain adequate capital when needed could have a negative impact on our ability to invest in, or take advantage of opportunities to expand, our businesses, such as possible acquisitions or the creation of new ventures, and inhibit our ability to refinance our existing indebtedness on terms acceptable to us. Any of these effects could have a material adverse effect on our results of operations and financial condition.
A failure to comply with covenants and other requirements under our credit facilities, senior debt and other indebtedness could have a material adverse effect on us. The agreements and indentures relating to our credit facilities, senior debt and other indebtedness, including letter of credit facilities used by certain of our subsidiaries, contain covenants and other requirements. If we fail to comply with those covenants or requirements, the lenders, noteholders or counterparties under those agreements and indentures could declare a default and demand immediate repayment of all amounts owed to them. In addition, where applicable, our lenders may cancel their commitments to lend or issue letters of credit or require us to pledge additional or a different type of collateral. A default under one debt agreement may also put us at risk of a cross-default
under other debt agreements or other arrangements. Any of these effects could have a material adverse effect on our results of operations and financial condition.
Our liquidity and our ability to meet our debt and other obligations, and pay dividends on our preferred stock, depend on the receipt of funds from our subsidiaries. We are a holding company, and as a result, our cash flow and our ability to meet our debt and other obligations, and pay dividends on our preferred stock, depend upon the earnings of our subsidiaries and on the distribution of earnings, loans or other payments by our subsidiaries to us. The payment of dividends by our insurance subsidiaries, which account for a significant portion of our operating cash flows, may require prior regulatory notice or approval or may be restricted by capital requirements imposed by regulatory authorities. Similarly, our insurance subsidiaries may require capital contributions from us to satisfy their capital requirements. In addition, our reinsurance contracts typically allow the cedent, upon a reduction in an insurance company's capital in excess of specified amounts, to terminate its contract on terms disadvantageous to us or to exercise other remedies that may adversely affect us. Those contract provisions may have the effect of limiting distributions by our insurance subsidiaries to us.
Risks Related to All of Our Operations
Legal and Regulatory Risks
The legal and regulatory requirements applicable to our businesses are extensive. Failure to comply could have a material adverse effect on us. Each of our businesses is highly dependent on the ability to engage on a daily basis in a large number of financial and operational activities, including, among others, insurance underwriting, claim processing, investment activities, the management of third-party capital and providing products and services to businesses and consumers, many of which are highly complex. These activities are subject to internal guidelines and policies, as well as legal and regulatory requirements, including, among others, those related to privacy and data security, economic and trade sanctions, anti-corruption, anti-bribery and global finance and investments, customer protection and insurance matters. Our continued expansion into new businesses, distribution channels and markets brings about additional requirements. While we believe that we have adopted adequate and effective risk management and compliance programs, compliance risks remain, particularly as we become subject to additional rules and regulations. Failure to comply with, or to obtain, appropriate authorizations or exemptions under any applicable laws and regulations could result in restrictions on our ability to do business or undertake activities that are regulated in one or more of the jurisdictions in which we conduct business. Any such failure could also subject us to fines, penalties, equitable relief and changes to our business practices. In addition, a failure to comply could result in defaults under our senior unsecured debt agreements or credit facilities or damage our businesses or our reputation.
Compliance with applicable laws and regulations is personnel- and systems-intensive. Shareholder activism, the current political environment, and the current high level of government intervention and regulatory reform may lead to substantial and complex new regulations and compliance obligations. Any changes in, or the enactment of new, laws and regulations may increase the complexity of the regulatory environment in which we operate, which could materially increase our direct and indirect costs for compliance and other expenses of doing business, and have a material adverse effect on our results of operations and financial condition. For example, failure to implement data management and security controls in the use of artificial intelligence by us or third party providers may subject us to data privacy, intellectual property and general regulatory risk, particularly in light of emerging regulation on the use of artificial intelligence.
Losses from legal and regulatory actions may have a material adverse effect on us. From time to time we may be involved in various legal actions, including at times multi-party or class action litigation, some of which involve claims for substantial or indeterminate amounts. A significant unfavorable outcome in one or more of these actions could have a material adverse effect on our results of operations and financial condition. We are also involved from time to time in various regulatory actions, investigations and inquiries, including market conduct exams by insurance regulatory authorities. If a regulatory authority takes action against us or we enter into a consent order or agreement to settle a matter, a regulatory authority has the option to require us to pay substantial fines or implement remedial measures that could prove costly or disruptive to our businesses and operations. Even if an unfavorable outcome does not materialize, these matters could have an adverse impact on our reputation and result in substantial expense and disruption. See note 21 of the notes to consolidated financial statements included under Item 8 and Item 3 Legal Proceedings.
We are subject to laws and regulations relating to economic and trade sanctions and bribery and corruption, the violation of which could have a material adverse effect on us. We are required to comply with the economic and trade sanctions and embargo programs administered by the U.S. Department of the Treasury's Office of Foreign Assets Control and similar multi-national bodies and governmental agencies worldwide, as well as applicable anti-corruption and anti-bribery laws and regulations of the U.S. and other jurisdictions where we operate. In some cases, we must comply with many new
economic, financial and trade sanctions that are imposed over a short period of time, as occurred with the Russia-Ukraine conflict. A violation of a sanction, embargo program, or anti-corruption law could subject us, and individual employees, to a regulatory enforcement action as well as significant civil and criminal penalties. In addition, a violation could result in defaults under our outstanding indebtedness or credit facilities or damage our businesses or our reputation. Those penalties or defaults, or damage to our businesses or reputation, could have a material adverse effect on our results of operations and financial condition. In some cases, the requirements and limitations applicable to the global operations of U.S. companies and their affiliates are more restrictive than, and may even conflict with, those applicable to non-U.S. companies and their affiliates, which also could have a material adverse effect on our results of operations and financial condition.
Employee error and misconduct may be difficult to detect and prevent and may result in significant losses. We run the risk of misconduct by employees across our businesses. Instances of misconduct, fraud, illegal acts, errors, failure to document transactions properly or to obtain proper internal authorization, or failure to comply with regulatory requirements or our internal policies may result in losses or reputational damage. It is not always possible to detect, deter or prevent employee errors or misconduct or fraud, and the controls and trainings that we have in place to mitigate these activities may not be sufficient or effective in all cases.
Global Operations
We manage our global operations through a network of business entities, which could result in inconsistent management, governance and oversight practices. We manage our global operations through a network of business entities located in the U.S., Bermuda, the U.K., Europe, Canada, the Middle East, Asia and Australia. These business entities are managed by executives, and supported by shared and centralized services; however, for certain of our businesses, subsidiary-level management is responsible for day-to-day operations, profitability, personnel decisions, the growth of the business, and legal and regulatory compliance, including adherence to applicable local laws. Operating through subsidiary-level management can make it difficult for us to implement strategic decisions and coordinated procedures throughout our global operations. In addition, some of our business entities operate with management, sales, and support personnel that may be insufficient to support growth in their respective locations and industries, without significant central oversight and coordination. We continue to enhance our management, governance and oversight procedures to effectively support, and improve transparency throughout, our global operations and network of business entities; however, our operating strategy nonetheless could result in inconsistent management, governance, and oversight practices, which may have a material adverse effect on our results of operations and financial condition.
We have substantial international operations and investments, which expose us to increased political, civil, operational and economic risks. A substantial portion of our revenues and income is derived from our operations and investments outside the U.S., including from the U.K., Bermuda, Europe, Canada, the Middle East, Asia and Australia. Our international operations and investments expose us to increased political, civil, operational and economic risks. Deterioration or volatility in foreign and international financial markets or general economic and political and civil conditions could adversely affect our operating results, financial condition and liquidity. Concerns about the economic conditions, capital markets, political, civil and economic stability and solvency of certain countries may contribute to global market volatility. Political and civil changes in the jurisdictions where we operate and elsewhere, some of which may be disruptive, can also interfere with our customers and our activities in a particular location. Our international operations also may be subject to a number of additional risks, particularly in emerging economies, including restrictions such as price controls, capital controls, currency exchange limits, ownership limits and other restrictive or anti-competitive governmental actions or requirements, which could have a material adverse effect on our businesses.
General economic, market or industry conditions could lead to investment losses, adverse effects on our businesses and limit our access to the capital markets. General economic and market conditions and industry specific conditions, including extended economic recessions or expansions; prolonged periods of slow economic growth; inflation or deflation; fluctuations and volatility in foreign currency exchange rates, commodity and energy prices and interest rates; volatility in the credit and capital markets; changes in U.S. government debt ratings; the imposition of tariffs and other changes in international trade regulation and other factors, could lead to: substantial realized and unrealized investment losses in future periods; declines in demand for, or increased frequency and severity of claims made under, our insurance products; disruptions in global supply chains and increased costs of inputs for our products and services; reduced demand for our services and the products we sell and distribute; changes in the carrying value of our other assets and liabilities; and limited or no access to the capital markets. Any of these impacts could have a material adverse effect on our results of operations, financial condition, debt and financial strength ratings or our insurance subsidiaries' capital. Markel Ventures businesses have been, and may continue to be, adversely affected by increased costs of labor and materials and declines in demand for certain products and services due to
economic and industry specific conditions. Our efforts to mitigate these impacts may not be successful and, even when they are successful, there may be a time lag before the impacts of these efforts are reflected in our results.
Our businesses, results of operations and financial condition could be adversely affected by ongoing regional or military conflicts and related disruptions in the global economy. The global economy has been, and may in the future be, negatively impacted by regional or military conflicts, for example, the on-going conflicts between Russia and Ukraine and between Israel and Hamas. We may have operations in areas affected by a conflict, and some of our businesses may be adversely affected by a conflict and its effects. Within our underwriting operations, we may have insurance contracts with exposure to losses attributed to a conflict. Our other operations also may have direct exposure to customers and vendors in an affected area. Certain of our businesses may experience shortages in materials and increased costs for transportation, energy, and raw materials due in part to the negative impact of a conflict on the global economy.
Furthermore, governments in the U.S., U.K., and European Union, among others, may impose export controls on certain products and financial and economic sanctions on certain industry sectors and parties in affected areas. These export controls and sanctions, or our failure to comply with them, could result in restrictions on our ability to do business in one or more of the jurisdictions in which we conduct business or have the other adverse effects discussed above under this Item 1A. Risk Factors under "We are subject to laws and regulations relating to economic and trade sanctions and bribery and corruption, the violation of which could have a material adverse effect on us."
We are unable to predict the impact an ongoing conflict may have on our businesses or the global economy. The impact of geopolitical tensions related to these conflicts, including increased trade barriers or restrictions on global trade, is unknown and could result in, among other things, heightened cybersecurity threats, supply disruptions, protracted or increased inflation, increased energy costs, lower consumer demand, fluctuations in interest and foreign exchange rates and increased volatility in financial markets, any of which could adversely affect our businesses, results of operations and financial condition. In addition, an ongoing conflict may have the effect of triggering or intensifying many of the risks described under this Item 1A Risk Factors under Risks Primarily Related to Our Insurance Operations, Risks Primarily Related to Our Investments and Access to Capital, and Risks Related to All of Our Operations.
Acquisitions, Integration and Reliance on Management and Personnel
The integration of acquired businesses may not be as successful as we anticipate. We have completed, and expect to complete, acquisitions in an effort to achieve profitable growth in our underwriting and other insurance operations and to create additional value on a diversified basis in our Markel Ventures operations. Acquisitions present operational, regulatory, strategic and financial risks, as well as risks associated with liabilities arising from the previous operations of the acquired businesses. We also must make decisions about the degree to which we integrate acquisitions into our existing businesses, operations and systems, and over what timeframe. Those decisions may adversely affect how successfully the acquired businesses perform, both in the short-term and in the long-term. All of these risks are magnified in the case of a large acquisition. Integration of the operations, systems and personnel of acquired businesses may prove more difficult than anticipated, which may result in failure to achieve financial objectives associated with the acquisition or diversion of management attention and other resources. In addition, integration of formerly privately-held companies into the management and internal control and financial reporting systems of a publicly-held company presents additional risks. See note 3of the notes to consolidated financial statements included under Item 8 for information about our recent acquisitions.
Impairment in the value of our goodwill or other intangible assets could have a material adverse effect on our operating results and financial condition. As of December 31, 2023, goodwill and intangible assets totaled $4.2 billion and represented 28% of shareholders' equity. We record goodwill and intangible assets at fair value upon the acquisition of a business. Goodwill represents the excess of amounts paid to acquire businesses over the fair value of the net assets acquired. Goodwill and indefinite-lived intangible assets are evaluated for impairment annually, or more frequently if events or circumstances indicate that their carrying value may not be recoverable. Declines in operating results, divestitures, sustained market declines and other factors that impact the fair value of a reporting unit could result in an impairment of goodwill or intangible assets and, in turn, a charge to net income. Such a charge could have a material adverse effect on our results of operations or financial condition. Developments that adversely affect the future cash flows or earnings of an acquired business may cause the goodwill or intangible assets recorded for it to be impaired. See "Critical Accounting Estimates - Goodwill and Intangible Assets" included under Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations and note 8 of the notes to consolidated financial statements included under Item 8 for information about our goodwill and intangible assets.
The loss of, or failure to successfully implement succession planning for, one or more key executives or an inability to attract and retain qualified personnel in our various businesses could have a material adverse effect on us. Our success depends on our ability to retain the services of our existing key executives, implement successful succession planning and attract and retain additional qualified personnel in the future. The temporary or permanent loss of the services of any of our key executives or the inability to hire and retain other highly qualified personnel in the future could have a material adverse effect on our ability to conduct or grow our business.
Additionally, in our decentralized business model, we rely on qualified personnel to manage and operate our various businesses.In our decentralized business model, we need qualified and competent management to direct day-to-day business activities of our operating subsidiaries and to manage changes in future business operations due to changing business or regulatory environments. Our operating subsidiaries also need qualified and competent personnel to execute business plans and serve their customers, suppliers and other stakeholders. Our inability to recruit, train and retain qualified and competent managers and personnel could negatively affect the operating results, financial condition and liquidity of our subsidiaries and Markel Group as a whole.
Information Technology Systems and Third-Party Systems and Service Providers
Information technology systems that we use could fail or suffer a security breach or cyberattack, which could have a material adverse effect on us or result in the loss of regulated or sensitive information. Our businesses are dependent upon the operational effectiveness and security of our enterprise systems and those maintained by third parties. Among other things, we rely on these systems to interact with producers, insureds, customers, clients, and other third parties, to perform actuarial and other modeling functions, to underwrite business, to prepare policies and process premiums, to process claims and make claims payments, to prepare internal and external financial statements and information, as well as to engage in a wide variety of other business activities. A significant failure of our enterprise systems, or those of third parties upon which we may rely, whether because of a natural disaster, network outage or a cyberattack on those systems, including ransomware, could compromise our personal, confidential and proprietary information as well as that of our customers and business partners, impede or interrupt our business operations and could result in other negative consequences, including remediation costs, loss of revenue, additional regulatory scrutiny and fines, litigation and monetary and reputational damages. In addition, if we are unable to innovate, develop and acquire new technology, it may leave us more susceptible to these attacks. Like other companies, we have been subject to cyberattacks, malicious viruses and malware, and denial of service attacks and expect that this will continue in the future with greater sophistication and frequency. Despite any controls or protective actions we take against such attacks, those measures may be insufficient to prevent, or mitigate the effects of, a natural disaster, network outage or a cyberattack on our systems. This could result in liability to us, cause our data to be corrupted or stolen and cause us to commit resources to correct those failures.
In addition, we are subject to numerous data privacy and cybersecurity laws and regulations enacted in the jurisdictions in which we do business. A misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer, business partner, employee or third party could damage our businesses or our reputation or result in significant monetary damages, regulatory enforcement actions, fines and criminal prosecution in one or more jurisdictions. For example, under the European General Data Protection Regulation there are significant punishments for non-compliance which could result in a penalty of up to 4% of a firm's global annual revenue. In addition, a violation of data privacy laws and regulations could result in defaults under our outstanding indebtedness or credit facilities. Those monetary damages, penalties, regulatory or legal actions or defaults, or the damage to our businesses or reputation, could have a material adverse effect on our results of operations and financial condition. Third parties who we utilize to perform certain functions are also subject to these risks, and their failure to adhere to these laws and regulations also could damage our businesses or reputation or result in regulatory intervention, which could have a material adverse effect on our results of operations and financial condition.
Further, we routinely transmit, receive and store personal, confidential and proprietary information by email and other digital means. Although we attempt to protect this personal, confidential and proprietary information, we may be unable to do so in all cases, especially with business partners and other third parties who may not have or use appropriate controls to protect personal, confidential and proprietary information.
While we maintain cyber risk insurance providing first-party and third-party coverages, that insurance may not cover all costs associated with the consequences of an enterprise failure, cyberattack, or breach of systems. A material cyber security breach could have a material adverse effect on our results of operations and financial condition.
Third-party providers may perform poorly, breach their obligations to us or expose us to enhanced risks. Certain of our business functions are performed by third-party providers, and these providers may not perform as expected or may fail to adhere to the obligations owed to us. For example, certain of our business units rely on relationships with a number of third-party administrators under contracts pursuant to which these third-party administrators manage and pay claims on our behalf and advise us with respect to case reserves. In these relationships, we rely on controls incorporated in the provisions of the administration agreement, as well as on the administrator's internal controls, to manage the claims process within our prescribed parameters. In addition, certain of our business units use managing general agents, general agents and other producers to write and administer business on our behalf within prescribed underwriting authorities. Although we monitor these administrators, agents, producers and other service providers on an ongoing basis, our monitoring efforts may not be adequate, or our service providers could exceed their authorities or otherwise breach obligations owed to us, which could result in operational disruption, reputational damage and regulatory intervention and otherwise have a material adverse effect on our results of operation and financial condition.
In addition, we utilize third parties to perform certain technology and business process functions, such as data center hosting, cloud based operating environments, human resources and other outsourced services. If these third-party providers do not perform as expected, we may experience operational difficulties, increased costs and a loss of business, or we may not realize expected productivity improvements or cost efficiencies. Our use of third parties to perform certain technology and business process functions may expose us to risks related to privacy and data security, including through their use of artificial intelligence without our knowledge or below our standards, which could result in monetary and reputational damages. We may be further exposed to risks associated with artificial intelligence and machine learning technology if third-party service providers or any counterparts, where known or unknown to us, use such technology in their business activities. In addition, our ability to receive services from third-party providers might be impacted by a wide variety of factors, including political and civil instability, supply chain disruptions, volatility or disruptions in the financial markets, wide-spread health issues, unanticipated or additional regulatory requirements or policies. As a result, our ability to conduct our businesses may be adversely affected.
Pandemics
Pandemics have had, and could have, material adverse effects on us. The effects of a pandemic, and related governmental responses, may be wide-ranging, costly, disruptive and rapidly changing, resulting in material adverse effects on our underwriting, investment, Markel Ventures and other operations, and on our results of operations and financial condition, as was the case with COVID-19. Factors that give rise, or may give rise, to those effects include, or may include, the following, as well as others that we cannot predict:
•Insured or reinsured losses from pandemic-related claims that are different, or more extensive, than we expect;
•Government actions or judicial decisions related to insurance or reinsurance coverages or rates, including, for example, requiring retroactive coverage of claims or expanding the scope of coverage;
•Disputes, lawsuits and other legal actions challenging the promptness of coverage determinations, or the coverage determinations themselves, under applicable insurance or reinsurance policies, resulting in increased claims, litigation and related expenses;
•Disruptions, delays and increased costs and risks related to having limited or no access to our facilities, workplace re-entry, employee safety concerns and reductions or interruptions of critical or essential services;
•Continually changing business conditions and compliance obligations; and
•Short or long-term impacts on the cost, availability or timeliness of required raw materials, supplies or services provided by third parties, including services provided by state, federal or foreign governments or government agencies.
In addition, a pandemic may, as has been the case with COVID-19, have the effect of triggering or intensifying many of the risks described elsewhere under this Item 1A. Risk Factors under Risks Primarily Related to Our Insurance Operations, Risks Primarily Related to Our Investments and Access to Capital, and Risks Related to All of Our Operations.
Climate Change
The impacts of climate change, and legal or regulatory measures to address climate change, may adversely affect our results of operations or financial condition.Our businesses, results of operations, and financial condition could be impacted by risks associated with climate change, including:
•changes from legislation, regulation and court decisions that:
◦create economic and regulatory uncertainty,
◦increase our compliance costs,
◦impose liability on or increase exposure for our policyholders not contemplated during our underwriting,
◦change our ability to provide insurance coverage to certain policyholders, or
◦impose new or additional requirements that increase the costs associated with, or disrupt, sourcing, manufacturing, and distribution of, our products and services,
•changes in the frequency, severity, and location of weather-related catastrophes, such as hurricanes, tornados, windstorms, floods, wildfires, and other extreme weather events, which may:
◦result in insured losses that exceed our expectations or make it more difficult for us to predict and model catastrophic events, reducing our ability to accurately price our exposure to such events and mitigate our risks,
◦make it more difficult or expensive for us to obtain reinsurance at desired levels, or
◦increase physical risks to and impacts on our operations,
•changing demand for insurance coverage we provide, such as demand from industries that produce or use carbon-based energy including those transitioning from those energy sources, decreased availability of reinsurance available for coverages we provide for carbon intensive industries, or increased claims and losses related to those industries, and
•losses on our invested assets, including from:
◦changes in supply and demand,
◦advances in low-carbon technology and renewable energy development,
◦effects of extreme weather events on the physical and operational exposure of industries and issuers, and
◦the transition that companies make towards addressing climate risk in their own businesses.
Item 1C. CYBERSECURITY
Markel Group is a holding company comprised of a diverse group of companies and investments. Our specialty insurance business, Markel, sits at the core of our company. Markel Group utilizes information technology systems and services, including cybersecurity, provided and/or administered by Markel. Through Markel Group's wholly owned subsidiary, Markel Ventures, Inc. (Markel Ventures), Markel Group owns controlling interests in businesses that operate in a variety of industries. The Markel Ventures businesses are independently managed with respect to their information security and data protection programs.
Insurance
In order to maintain a strong cybersecurity program, Markel uses a variety of controls and technology tools designed to identify, detect, prevent, respond to, and recover from security threats. Markel undergoes regular security audits including a System and Organization Controls (SOC) audit for Cybersecurity conducted annually by independent auditors in which cybersecurity threats are identified and assessed. Markel regularly tests aspects of its internal security and conducts security risk interviews and assessments on third parties with whom it does business, depending on the nature of the relationship. Markel has invested in technology that assists its risk management teams in measuring and addressing weaknesses in its third-party and supply chain community. Markel performs continuous monitoring of all its third parties to ensure they are maintaining acceptable levels of security controls and remediating any known weaknesses.
Markel participates in the Financial Services Information Sharing and Analysis Center to share information about the latest cyber threats and preparedness measures. Markel also shares threat intelligence information with other partners. Markel has a cybersecurity incident response plan, as well as a crisis management plan, that cover cyber events, including a process for determining the materiality of cyber events that includes evaluation by a cross functional crisis management group including security, information technology, finance, legal and business and escalation to Markel Group senior management as warranted by the severity of the situation. An internal team engages in tabletop exercises several times each year to enhance preparedness for such situations.
Information security and data protection risks are the responsibility of all employees. Markel has a mandatory training program covering a variety of security and data protection disciplines. In addition, all Markel employees are required to acknowledge annually policies on acceptable use of Markel's technology resources and enterprise information security. Contractors are required to provide certain representations and certifications relating to information security.
The Markel information security and data protection program is led by a Chief Information Security Officer (CISO) who supervises a team of security and data protection professionals across the globe. Markel's global information security and data protection program leverages the Cybersecurity Framework from the National Institutes of Standards and Technology as well as industry best practices. Markel also is able to map to both ISO (International Organization for Standardization) and BSI (British Standards Institution) among other cybersecurity standards. Markel's CISO has been with Markel 13 years and has 22 years' experience in information technology, with 17 years in information technology security, and is a certified Information Systems Security Professional (CISSP).
Markel Ventures
Each of our Markel Ventures businesses maintains its own, separate IT infrastructure, that often includes third-party providers, to support the needs of its business. As a result, cybersecurity risk for the Markel Ventures businesses is not concentrated in one system or service provider. Further, given the disparate nature of the businesses, systems, and providers, there is no single, uniform approach to managing cybersecurity risk at the Markel Ventures businesses – each is tailored to its unique needs. As is the case with all risks, management for each Markel Ventures business is responsible for evaluating and managing cybersecurity risks for its business. Therefore, each business determines the appropriate IT systems and providers needed to do so. Management for each business shares information on material risks from cybersecurity incidents with Markel Ventures management.
Markel Ventures has established processes for the Markel Ventures businesses to share information about how they assess, identify, and manage cybersecurity risk and shares information on material risks from cybersecurity incidents with Markel Group management, as appropriate. Each Markel Ventures business has a board that meets quarterly. Material matters regarding cybersecurity risk management and cybersecurity incidents are discussed at these meetings. In addition, Markel Ventures management regularly meets with the businesses to discuss their risk identification, assessment, and management approach. These discussions include how the business assesses, identifies, and manages key risks, including cybersecurity risks.
Markel Ventures requires real-time reporting of material cybersecurity incidents to understand how the matters are being managed, assess whether public disclosure is required and inform Markel Group senior management of relevant matters. Depending on the cybersecurity incident, third parties may be engaged by the Markel Ventures businesses to assist them in understanding and managing the event.
Given the varying size and complexity of the Markel Ventures businesses, a diverse array of individuals assume responsibility for managing cybersecurity risks within them. In some instances, primary responsibility may be with a member of the executive management team. In other instances, primary responsibility may land with information technology professionals. In all instances, however, ultimate responsibility rests with each business' Chief Executive Officer.
Markel Group Board Oversight
The Markel Group Board of Directors oversees Markel Group's risk management framework on an enterprise-wide basis, which includes cybersecurity risks. Periodic reports are provided to the Markel Group Board of Directors by members of management which, among other things, seek to systematically identify the principal risks facing our businesses and the manner in which such risks are addressed. For cybersecurity, this includes a review of the cybersecurity program and its governance, active and planned initiatives, protection and prevention matters, detection and response measures, and the threat landscape.
Cybersecurity Risks
No previous cybersecurity incident has had, or is reasonably likely to have, a material adverse effect on Markel Group, its business strategy, results of operations, or financial condition. For risks related to cybersecurity threats, see Item 1A Risk Factors, including under "Information technology systems that we use could fail or suffer a security breach or cyberattack, which could have a material adverse effect on us or result in the loss of regulated or sensitive information."
Item 2. PROPERTIES
We lease office space in Glen Allen, Virginia for our Markel Group corporate headquarters, which also serves as the headquarters for our insurance and Markel Ventures operations. Our insurance operations lease office space throughout the U.S. and in various locations in other countries. In total, we have 64 insurance offices in 17 countries. Additionally, our Markel Ventures businesses maintain office space, factories and warehouses, both through leased and owned properties, throughout the U.S. and in certain international locations. The property needs of our Markel Ventures businesses vary based on the nature of the operations of each business. We believe our properties are suitable and adequate for our current operations.
Item 3. LEGAL PROCEEDINGS
Thomas Yeransian v. Markel Corporation
In October 2010, we completed the acquisition of Aspen Holdings, Inc. (Aspen). As part of the consideration for that acquisition, Aspen shareholders received contingent value rights (CVRs). Prior to the December 31, 2017 CVR maturity date, the CVR holder representative, Thomas Yeransian, disputed our prior estimation of the value of the CVRs. On September 15, 2016, Mr. Yeransian filed a suit, Thomas Yeransian v. Markel Corporation (U.S. District Court for the District of Delaware), alleging, among other things, that we are in default under the CVR agreement. The suit seeks: $47.3 million in damages, which represents the unadjusted value of the CVRs; plus interest ($29.1 million through December 31, 2023) and default interest (up to an additional $24.4 million through December 31, 2023, depending on the date any default occurred); and an unspecified amount of punitive damages, costs, and attorneys' fees.
At the initial hearing held February 21, 2017, the court stayed the proceedings and ordered the parties to discuss resolving the dispute pursuant to the independent CVR valuation procedure under the CVR agreement. The parties met on April 5, 2017, but were unsuccessful in reaching agreement on a process for resolving the dispute. We subsequently filed a motion to stay the litigation and compel arbitration, and, on July 31, 2017, the court issued an order granting that motion.
On November 13, 2018, Mr. Yeransian filed a second suit, Thomas Yeransian v. Markel Corporation (U.S. District Court for the District of Delaware), which also alleges that the Company is in default under the CVR agreement. The second suit seeks the same monetary damages and relief as the original suit. We filed a motion to stay this suit until the arbitration for the original suit had concluded and the CVR holders received the final amount due under the CVR Agreement. The court granted that motion on August 6, 2019.
On June 5, 2020, Mr. Yeransian filed a third suit, Thomas Yeransian v. Markel Corporation (U.S. District Court for the District of Delaware). Similar to the first and second suits, the third suit alleges that the Company is in default under the CVR agreement and, in addition, has interfered with the arbitration for the CVR valuation. The third suit seeks the same monetary damages and relief as the original suit and the second suit, as well as other declaratory and non-monetary judgments and orders. We filed a motion to stay this suit, which the court granted on March 16, 2021.
Under the arbitration terms of the CVR Agreement, independent experts were appointed to determine the final value of the CVRs. On September 20, 2021, the experts delivered their report indicating a final CVR valuation of $22.4 million, excluding interest. We had previously paid $8.0 million to the CVR holders, representing 90% of the undisputed value of the CVRs, plus interest of $1.9 million. On September 20, 2021, we paid $20.1 million, which represents $14.1 million for the unpaid portion of the final CVR amount (excluding fees payable to a third party), plus $6.0 million in additional interest.
The stay was lifted on each pending suit, and the three suits were consolidated. On June 8, 2023, the court ruled in favor of the Company and against Mr. Yeransian on all counts. Mr. Yeransian has appealed the court's decision.
We believe Mr. Yeransian's suits to be without merit. We further believe that any material loss resulting from the suits to be remote.
Information About Our Executive Officers
Thomas S. Gayner
Chief Executive Officer since January 2023. Co-Chief Executive Officer from January 2016 to December 2022. President and Chief Investment Officer from May 2010 to December 2015. Chief Investment Officer from January 2001 to December 2015. Director from 1998 to 2004. Director since August 2016. Age 62.
Michael R. Heaton
Executive Vice President and Chief Operating Officer since February 2024 and Executive Vice President since May 2022. President, Markel Ventures from January 2016 to May 2022. President and Chief Executive Officer, Markel Ventures, Inc., a subsidiary, from May 2020 to May 2022; President and Chief Operating Officer, Markel Ventures, Inc., from January 2016 to May 2020. Chief Operating Officer, Markel Ventures, Inc., from September 2013 to December 2015. Age 47.
Andrew G. Crowley
President, Markel Ventures since May 2022. President, Markel Ventures, Inc., a subsidiary, since May 2022. Executive Vice President, Markel Ventures, Inc., from May 2020 to May 2022. Managing Director, Markel Ventures, Inc., from January 2017 to May 2020. Age 41.
Jeremy A. Noble
President, Insurance since January 2023. Senior Vice President and Chief Financial Officer from September 2018 to December 2022. Senior Vice President, Finance from June 2018 to September 2018. Finance Director, Markel International from July 2015 to June 2018. Managing Director, Internal Audit from September 2011 to July 2015. Age 48.
Richard R. Grinnan
Senior Vice President, Chief Legal Officer and Secretary of Markel Group since February 2020 and of Markel since October 2022. General Counsel and Secretary from June 2014 to February 2020. Assistant General Counsel from August 2012 to June 2014. Age 55.
Brian J. Costanzo
Chief Financial Officer of Markel Group and of Markel since December 2023. Senior Vice President, Finance, Chief Accounting Officer and Controller from October 2022 to December 2023. Principal financial officer (on an interim basis) from January 2023 to March 2023. Chief Accounting Officer and Controller from June 2021 to October 2022. Controller from December 2019 to June 2021. Segment Controller - U.S. Insurance from March 2014 to December 2019. Age 45.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Performance Graph
The following graph compares the cumulative total return (based on share price) on our common stock with the cumulative total return of companies included in the Standard & Poor's (S&P) 500 Index and the Dow Jones U.S. Property & Casualty Insurance Companies Index. We are a holding company comprised of a diverse group of businesses and investments, and we believe there are few companies with a mix of business operations comparable to ours. Our principal business markets and underwrites specialty insurance products, and therefore, we have used the Dow Jones U.S. Property & Casualty Insurance Companies Index as our peer group. However, we also own controlling interests in a diverse portfolio of businesses that operate in a variety of other industries. This information is not necessarily indicative of future results.
![881](https://capedge.com/proxy/10-K/0001096343-24-000025/mkl-20231231_g8.jpg)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2018 (1) | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 |
Markel Group Inc. | $ | 100 | | | $ | 110 | | | $ | 100 | | | $ | 119 | | | $ | 127 | | | $ | 137 | |
S&P 500 Index | 100 | | | 131 | | | 156 | | | 200 | | | 164 | | | 207 | |
Dow Jones U.S. Property & Casualty Insurance Index | 100 | | | 127 | | | 131 | | | 160 | | | 184 | | | 209 | |
(1) $100 invested on December 31, 2018 in our common stock or the listed index. Includes reinvestment of dividends.
Common Stock and Dividend Information
Our common stock trades on the New York Stock Exchange under the symbol MKL. The number of shareholders of record as of January 31, 2024 was approximately 260. The total number of shareholders, including those holding shares in street name or in brokerage accounts, is estimated to be in excess of 220,000. Our current strategy is to retain earnings and, consequently, we have not paid and do not expect to pay a cash dividend on our common stock.
Common Share Repurchases
The following table summarizes our common share repurchases for the quarter ended December 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | |
Issuer Purchases of Equity Securities |
| (a) | | (b) | | (c) | | (d) |
| Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) |
October 1, 2023 through October 31, 2023 | 16,635 | | | $ | 1,470.02 | | | 16,635 | | | $ | 221,111 | |
November 1, 2023 through November 30, 2023 | 75,841 | | | $ | 1,400.09 | | | 75,841 | | | $ | 748,196 | |
December 1, 2023 through December 31, 2023 | 25,200 | | | $ | 1,396.70 | | | 25,200 | | | $ | 712,999 | |
Total | 117,676 | | | $ | 1,409.25 | | | 117,676 | | | $ | 712,999 | |
(1) The Board of Directors approved the repurchase of up to $750 million of our common shares pursuant to a share repurchase program publicly announced in November 2023. The new program terminated and replaced a similar $750 million share repurchase program authorized in February 2022. Under our share repurchase program, we may repurchase outstanding common shares of our stock from time to time in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934. The share repurchase program has no expiration date but may be terminated by the Board at any time.
Securities Authorized for Issuance Under Equity Compensation Plans
See Part III for information on securities authorized for issuance under our equity compensation plans.
Available Information
This document represents Markel Group's Annual Report on Form 10-K, which is filed with the U.S. Securities and Exchange Commission. We make available free of charge on or through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the U.S. Securities and Exchange Commission. Our website address is www.mklgroup.com.
Transfer Agent
Equiniti Trust Company, LLC, 48 Wall Street, Floor 23, New York, NY 10005
(800) 937-5449 helpast@equiniti.com
Annual Shareholders Meeting
Our annual shareholders meeting will take place on May 22, 2024 at the University of Richmond Robins Center in Richmond, Virginia at 2:00 p.m. (Eastern Time). The shareholders meeting will be part of a two-day event we are calling the 2024 Reunion, which is open to shareholders, employees, and friends of Markel Group. More information on the agenda and registration for the 2024 Reunion is available at www.mklreunion.com.
Item 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis includes discussion of changes in our results of operations and financial condition from 2022 to 2023 and should be read in conjunction with the consolidated financial statements and related notes included under Item 8, Item 1 Business, Item 1A Risk Factors and "Safe Harbor and Cautionary Statement" under Item 7. The accompanying consolidated financial statements and related notes have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) and include the accounts of our holding company, Markel Group Inc. (Markel Group), and its consolidated subsidiaries, as well as any variable interest entities that meet the requirements for consolidation (the Company). A discussion of changes in our results of operations and financial condition from 2021 to 2022 may be found in Part II Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission on February 17, 2023.
Item 7 is divided into the following sections:
•Results of Operations
•Liquidity and Capital Resources
•Critical Accounting Estimates
•Safe Harbor and Cautionary Statement
For a discussion of our significant accounting policies, as well as recently issued accounting pronouncements that we have not yet adopted and their expected effects on our consolidated financial position, results of operations and cash flows, see note 1 of the notes to consolidated financial statements included under Item 8.
Results of Operations
The following table presents the components of operating revenues.
| | | | | | | | | | | |
| Years Ended December 31, |
(dollars in thousands) | 2023 | | 2022 |
Insurance segment | $ | 7,282,705 | | | $ | 6,528,263 | |
Reinsurance segment | 1,014,294 | | | 1,063,347 | |
Program services and other fronting, insurance-linked securities and other insurance | 280,131 | | | 493,746 | |
Insurance operations | 8,577,130 | | | 8,085,356 | |
Net investment income | 729,219 | | | 445,846 | |
Net investment gains (losses) | 1,524,054 | | | (1,595,733) | |
Other | (11,854) | | | (17,661) | |
Investing segment | 2,241,419 | | | (1,167,548) | |
Markel Ventures segment | 4,985,081 | | | 4,757,527 | |
Total operating revenues | $ | 15,803,630 | | | $ | 11,675,335 | |
The following table presents the components of comprehensive income (loss) to shareholders.
| | | | | | | | | | | |
| Years Ended December 31, |
(dollars in thousands) | 2023 | | 2022 |
Insurance segment profit | $ | 162,176 | | | $ | 549,871 | |
Reinsurance segment profit (loss) | (19,265) | | | 83,859 | |
Program services and other fronting, insurance-linked securities and other insurance | 205,234 | | | 294,979 | |
Amortization of intangible assets (1) | (98,244) | | | (99,735) | |
Impairment of goodwill (2) | — | | | (80,000) | |
Insurance operations | 249,901 | | | 748,974 | |
Investing segment profit (loss) | 2,241,419 | | | (1,167,548) | |
Markel Ventures segment profit (3) | 437,508 | | | 325,238 | |
Operating income (loss) | 2,928,828 | | | (93,336) | |
Interest expense | (185,077) | | | (196,062) | |
Net foreign exchange gains (losses) | (90,045) | | | 137,832 | |
| | | |
Income tax (expense) benefit | (552,616) | | | 48,209 | |
Net income attributable to noncontrolling interests | (105,030) | | | (112,920) | |
Net income (loss) to shareholders | 1,996,060 | | | (216,277) | |
Preferred stock dividends | (36,000) | | | (36,000) | |
| | | |
Net income (loss) to common shareholders | 1,960,060 | | | (252,277) | |
Other comprehensive income (loss) to shareholders | 289,284 | | | (989,502) | |
Comprehensive income (loss) to shareholders | $ | 2,285,344 | | | $ | (1,205,779) | |
(1) NM Amortization of intangible assets includes all amortization attributable to our insurance operations. Amortization of intangible assets attributable to our underwriting segments was $37.1 million and $38.5 million for the years ended December 31, 2023 and 2022, respectively; however, we do not allocate amortization of intangible assets between the Insurance and Reinsurance segments. Amortization of intangible assets attributable to our program services and other fronting, insurance-linked securities and other insurance operations was $61.2 million for the years ended December 31, 2023 and 2022.
(2) Impairment of goodwill for the year ended December 31, 2022 was attributable to our Nephila ILS operations.
(3) Segment profit for the Markel Ventures segment includes amortization of intangible assets attributable to Markel Ventures.
The change in comprehensive income (loss) to shareholders in 2023 compared to 2022 was primarily due to pre-tax net investment gains of $1.5 billion in 2023 compared to pre-tax net investment losses of $1.6 billion in 2022, as well as pre-tax net unrealized gains on our fixed maturity securities of $389.5 million in 2023 compared to pre-tax net unrealized losses of $1.5 billion in 2022.
The components of net income (loss) to shareholders and comprehensive income (loss) to shareholders are discussed in further detail under "Insurance Results," "Investing Results," "Markel Ventures Results," "Interest Expense, Net Foreign Exchange Gains (Losses) and Income Taxes" and "Comprehensive Income (Loss) to Shareholders and Book Value per Common Share."
Insurance Results
Our Insurance engine includes our underwriting, program services and other fronting and insurance-linked securities (ILS) operations. We have a suite of capabilities through which we can access capital to support our customers' risks, which includes our own capital through our underwriting operations and third-party capital through our program services and other fronting and ILS operations. Our underwriting operations, which are primarily comprised of our Insurance and Reinsurance segments, produce revenues primarily by underwriting insurance contracts and earning premiums in the specialty insurance market. Our program services and other fronting and insurance-linked securities operations produce revenues primarily through fees earned for fronting services and investment management services, respectively. Our insurance operations also include the underwriting results of run-off lines of business that were discontinued prior to, or in conjunction with, insurance acquisitions,
and the results of our run-off life and annuity reinsurance business. The following table presents the components of our Insurance engine gross premium volume and operating revenues.
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(dollars in thousands) | 2023 | | 2022 | | % Change |
Gross premium volume: | | | | | |
Underwriting | $ | 10,277,632 | | | $ | 9,847,538 | | | 4 | % |
Program services and other fronting (1) | 3,724,605 | | | 3,354,144 | | | 11 | % |
Insurance operations | $ | 14,002,237 | | | $ | 13,201,682 | | | 6 | % |
| | | | | |
Operating revenues: | | | | | |
Insurance segment | $ | 7,282,705 | | | $ | 6,528,263 | | | 12 | % |
Reinsurance segment | 1,014,294 | | | 1,063,347 | | | (5) | % |
Program services and other fronting, insurance-linked securities and other insurance | 280,131 | | | 493,746 | | | (43) | % |
Insurance operations | $ | 8,577,130 | | | $ | 8,085,356 | | | 6 | % |
(1) Substantially all gross premiums from our program services and other fronting operations were ceded to third parties for the years ended December 31, 2023 and 2022.
Underwriting Results
Underwriting profits are a key component of our strategy to build shareholder value. The property and casualty insurance industry commonly defines underwriting profit or loss as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. We use underwriting profit or loss and the combined ratio as a basis for evaluating our underwriting performance. 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. The combined ratio is the sum of the loss ratio and the expense ratio. The loss ratio represents the relationship of incurred losses and loss adjustment expenses to earned premiums. The expense ratio represents the relationship of underwriting, acquisition and insurance expenses to earned premiums. A combined ratio less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss.
In addition to the U.S. GAAP combined ratio, loss ratio and expense ratio, we also evaluate our underwriting performance using measures that exclude the impacts of certain items on these ratios. We believe these adjusted measures, which are non-GAAP measures, provide financial statement users with a better understanding of the significant factors that comprise our underwriting results and how management evaluates underwriting performance.
When analyzing our combined ratio, we exclude current accident year losses and loss adjustment expenses attributed to natural catastrophes and certain other significant, infrequent loss events, for example, the on-going military conflict between Russia and Ukraine that began following Russia's invasion of Ukraine in February 2022. Due to the unique characteristics of these events, there is inherent variability as to the timing or loss amount, which cannot be predicted in advance. We believe measures that exclude the effects of such events are meaningful to understand the underlying trends and variability in our underwriting results that may be obscured by these items.
When analyzing our loss ratio, we evaluate losses and loss adjustment expenses attributable to the current accident year separate from losses and loss adjustment expenses attributable to prior accident years. Prior accident year reserve development, which can either be favorable or unfavorable, represents changes in our estimates of losses and loss adjustment expenses related to loss events that occurred in prior years. We believe a discussion of current accident year loss ratios, which exclude prior accident year reserve development, is helpful since it provides more insight into estimates of current underwriting performance and excludes changes in estimates related to prior year loss reserves. We also analyze our current accident year loss ratio excluding losses and loss adjustment expenses attributable to catastrophes and, in 2022, the Russia-Ukraine conflict. The current accident year loss ratio excluding the impact of catastrophes and other significant, infrequent loss events is also commonly referred to as an attritional loss ratio within the property and casualty insurance industry.
The following table presents summary data for our consolidated underwriting operations, which are comprised predominantly of our Insurance and Reinsurance segments. Our consolidated underwriting results also include results from discontinued lines of business and the retained portion of our program services and other fronting operations.
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| Years Ended December 31, |
(dollars in thousands) | 2023 | | 2022 | | % Change |
Gross premium volume | $ | 10,276,419 | | | $ | 9,843,555 | | | 4 | % |
Net written premiums | $ | 8,397,575 | | | $ | 8,203,390 | | | 2 | % |
Earned premiums | $ | 8,295,479 | | | $ | 7,587,792 | | | 9 | % |
Underwriting profit | $ | 132,736 | | | $ | 626,620 | | | (79) | % |
| | | | | |
Underwriting Ratios (1) | | | | | Point Change |
Loss ratio | | | | | |
Current accident year loss ratio | 64.6 | % | | 60.8 | % | | 3.8 | |
Prior accident years loss ratio | (0.5) | % | | (2.2) | % | | 1.7 | |
Loss ratio | 64.2 | % | | 58.6 | % | | 5.6 | |
Expense ratio | 34.2 | % | | 33.2 | % | | 1.0 | |
Combined ratio | 98.4 | % | | 91.7 | % | | 6.7 | |
| | | | | |
Current accident year loss ratio catastrophe impact (2) | 0.5 | % | | 0.6 | % | | (0.1) | |
Current accident year loss ratio Russia-Ukraine conflict impact (2) | — | % | | 0.5 | % | | (0.5) | |
| | | | | |
Current accident year loss ratio, excluding catastrophes and Russia-Ukraine conflict impact | 64.1 | % | | 59.7 | % | | 4.4 | |
Combined ratio, excluding current year catastrophes and Russia-Ukraine conflict impact | 97.9 | % | | 90.7 | % | | 7.2 | |
(1) Amounts may not meaningfulreconcile due to rounding.
(2) The point impact of catastrophes and COVID-19the Russia-Ukraine conflict is calculated as the associated net losses and loss adjustment expenses divided by total earned premiums.
(3)
Premiums
The increase in gross premium volume in our underwriting operations in 2023 was driven by growth within our Insurance segment, partially offset by lower gross premium volume within our Reinsurance segment. Net retention of gross premium volume for our underwriting operations was 82% in 2023 compared to 83% in 2022. The decrease was driven by lower retention in 2023 compared to 2022 across both of our underwriting segments. Within our underwriting operations, we purchase reinsurance and retrocessional reinsurance to manage our net retention on individual risks and overall exposure to losses and to enable us to write policies with sufficient limits to meet policyholder needs. The increase in earned premiums in 2023 was primarily attributable to higher gross premium volume in recent periods.
Throughout 2023, we achieved an overall modest rate increase across the landscape of our diversified product portfolio. However, rate trends by product class were more divergent in 2023 in contrast to the past few years, where we experienced rate increases across most of our product lines. These more nuanced rate trends, coupled with increases in loss cost trends due to heightened economic and social inflation, have forced us to examine each of our product classes more closely and target premium growth only in product lines where we are most confident in the levels of rate adequacy.
During 2023, we achieved significant rate increases on our property coverages and select marine and energy product lines, due to recent industry loss experience and the increasing cost of obtaining reinsurance protection, which led us to pursue opportunistic growth within these product lines. Additionally, within our general liability product lines, we continued to achieve modest rate increases across most product classes and saw the level of rate increases improve over the course of the year. We maintained modest growth in these product lines, while carefully selecting risks, managing limits and adjusting attachment points in response to heightened loss cost trends within general liability lines.
Within our insurance and reinsurance professional liability product lines, overall, we saw modest rate decreases driven by notable rate decreases within our public directors and officers product, consistent with broader trends across the industry, and,
to a lesser extent, within our errors and omissions coverages. Within these products, we are contracting our new premium writings when we believe rates are inadequate and are also allowing business to lapse. In other professional liability product lines, particularly within our international portfolio, we are generally seeing consistency in rates and are continuing to pursue growth opportunities where we find the business to be adequately priced. We also saw rate decreases globally within our cyber product line as that market matures, following several years of significant rate increases and strong industry underwriting performance. Despite these current trends, we view cyber as a long-term growth opportunity. Finally, we continued to realize low single digit rate decreases within our workers' compensation product line and are reacting accordingly on a state-by-state basis to maintain profitability.
Combined Ratio
In 2023, underwriting results included $40.1 million of net losses and loss adjustment expenses attributed to the Hawaiian wildfires and Hurricane Idalia (2023 Catastrophes). The net losses and loss adjustment expenses from the 2023 Catastrophes were net of ceded losses of $9.3 million. In 2022, underwriting results included $46.2 million and $35.7 million of net losses and loss adjustment expenses attributed to Hurricane Ian and the Russia-Ukraine conflict, respectively. The net losses and loss adjustment expenses from Hurricane Ian and the Russia-Ukraine conflict were net of ceded losses of $115.3 million and $44.3 million, respectively. Excluding these losses, the increase in our consolidated combined ratio in 2023 compared to 2022 was primarily driven by a higher attritional loss ratio across both of our underwriting segments.
Insurance Segment
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(dollars in thousands) | 2023 | | 2022 | | % Change |
Gross premium volume | $ | 9,217,150 | | | $ | 8,606,700 | | | 7 | % |
Net written premiums | $ | 7,432,062 | | | $ | 7,040,176 | | | 6 | % |
Earned premiums | $ | 7,282,705 | | | $ | 6,528,263 | | | 12 | % |
Underwriting profit | $ | 162,176 | | | $ | 549,871 | | | (71) | % |
| | | | | |
Underwriting Ratios (1) | | | | | Point Change |
Loss ratio | | | | | |
Current accident year loss ratio | 64.4 | % | | 60.3 | % | | 4.1 | |
Prior accident years loss ratio | (1.4) | % | | (2.2) | % | | 0.8 | |
Loss ratio | 63.0 | % | | 58.1 | % | | 4.9 | |
Expense ratio | 34.8 | % | | 33.5 | % | | 1.3 | |
Combined ratio | 97.8 | % | | 91.6 | % | | 6.2 | |
| | | | | |
Current accident year loss ratio catastrophe impact (2) | 0.5 | % | | 0.7 | % | | (0.2) | |
Current accident year loss ratio Russia-Ukraine conflict impact (2) | — | % | | 0.4 | % | | (0.4) | |
| | | | | |
Current accident year loss ratio, excluding catastrophes and Russia-Ukraine conflict impact | 63.9 | % | | 59.2 | % | | 4.7 | |
Combined ratio, excluding current year catastrophes and Russia-Ukraine conflict impact | 97.2 | % | | 90.5 | % | | 6.7 | |
(1) Amounts may not reconcile due to rounding.
(4)(2) The point impact of catastrophes does not includeand the favorable impact of assumed reinstatement premiumsRussia-Ukraine conflict is calculated as the associated with the 2021 Catastrophes of $21.7 million for the year ended December 31, 2021. Reinstatement premiums were not significant for the year ended December 31, 2020.net losses and loss adjustment expenses divided by total earned premiums.
Premiums
The increase in gross premium volume in our ReinsuranceInsurance segment in 20212023 was primarily attributable todriven by more favorable rates and new business growth across many of our product lines, most notably within our personal lines and increases on renewalsproperty product lines. The increase was partially offset by lower premium volume within select lines of our professional liability and general liability product lines, where we are adjusting our writings in response to changes in market conditions and downward pressure on rates. We continue to focus on rate adequacy, particularly within certain classes of our casualty and professional liability product lines, and will not write business that we believe will not meet our underwriting profit targets.
Net retention of gross premium volume was 81% in 2023 compared to 82% in 2022. The decrease was driven by higher cession rates on our personal lines product lines in 2023 compared to 2022. The increase in earned premiums in 2023 was primarily due to higher gross premium volume across most product lines in recent periods.
Combined Ratio
The Insurance segment's current accident year losses and loss adjustment expenses in 2023 included $39.6 million of net losses and loss adjustment expenses attributed to the 2023 Catastrophes. Current accident year losses in 2022 included $46.2 million and $23.0 million of net losses and loss adjustment expenses attributed to Hurricane Ian and the Russia-Ukraine conflict, respectively. Excluding these losses, the increase in the current accident year loss ratio in 2023 compared to 2022 was primarily attributable to higher attritional loss ratios within our general liability and professional liability product lines in 2023 compared to 2022. Based on the adverse prior accident year loss development trends on these long-tail lines of business and the uncertainty around future loss cost trends, as discussed in further detail below, we increased our attritional loss ratios on certain product classes within our general liability and professional liability product lines in 2023. Consistent with our loss reserving philosophy and to increase the likelihood that the reserves established for our in-force portfolio will ultimately prove to be adequate, we are taking a more cautious approach in our reserving, resulting in higher attritional loss ratios on this business.
Additionally, we recognized losses on our intellectual property collateral protection insurance written within our professional liability product line in 2023 due to higher than anticipated levels of claims and loss experience. Losses on this product line also included $65.0 million of credit losses recognized in connection with fraudulent letters of credit that were provided by an affiliate of Vesttoo Ltd. as collateral for reinsurance purchased on two policies, which we believe represents our full exposure to credit losses on the related reinsurance recoverables. We are actively pursuing remedies to make recoveries on the reinsurance recoverables impacted by the fraudulent letters of credit and do not have any other ceded reinsurance contracts with Vesttoo Ltd. or its affiliates.
The Insurance segment's 2023 combined ratio included $104.7 million of favorable development on prior accident years loss reserves, which was primarily attributable to favorable development on our property, marine and energy, international professional liability, personal lines and workers' compensation product lines, partially offset by adverse development on our U.S. and Bermuda general liability and professional liability product lines. In 2022, the combined ratio included $142.9 million of favorable development on prior accident years loss reserves, which was primarily attributable to favorable development on our workers' compensation, programs, property and credit and surety product lines. Favorable development in 2022 was partially offset by adverse development on our professional liability and general liability product lines, primarily on our U.S. and Bermuda business. See note 11 of the notes to consolidated financial statements included under Item 8 for more information on the Insurance segment's prior year loss reserve development.
Net favorable development in 2022 was net of $128.5 million, or two points, of adverse development on our U.S. and Bermuda professional liability and general liability product lines, which was primarily attributable to unfavorable claim settlements and increased claim frequency and severity on the 2016 to 2019 accident years. The adverse development was across a number of products, including directors and officers, errors and omissions and employment practices liability within professional liability and contractors and excess and umbrella within general liability. Development on prior years loss reserves within our U.S. and Bermuda professional liability and general liability product lines in 2022 was impacted by broader market conditions. The impact of economic and social inflation, including the rising cost to adjust and settle claims and the impact of more pervasive litigation financing trends, has contributed to the loss cost trends, leading to higher than anticipated losses in older accident years for these product lines. The impacts of social inflation were most significant on our large, risk-managed excess professional liability accounts, corresponding with a notable rise in the number of class action lawsuits on these years and the recent unfavorable legal environment. The development of this claims trend was influenced by state and federal court closures following the onset of the COVID-19 pandemic in 2020, which delayed court proceedings for claims on the impacted product lines.
In 2023, we continued to see an increased frequency of large claims and unfavorable loss cost trends on our U.S. and Bermuda general liability and professional liability product lines. In response to consecutive quarters of adverse loss development, in the fourth quarter of 2023, we conducted an extensive reserve study on selected general liability and professional liability product lines, which resulted in further increases to our prior accident year loss reserves. Adverse development in 2023 on our U.S. and Bermuda general liability and professional liability product lines totaled $330.7 million, or five points. This adverse development was most substantial on our primary casualty contractors' liability and excess and umbrella general liability product lines.
A significant portion of our casualty portfolio is associated with construction business, which has grown meaningfully in recent years. Our study determined that the ultimate claim reporting tail on certain of our casualty construction lines is likely to be longer than we initially anticipated. Within our excess and umbrella general liability and risk-managed errors and omissions professional liability books, we determined that there was a greater than expected propensity for limits below our attachment point to erode, pushing more claims into our layers. Further, reporting of these claims has lagged historical loss development patterns due to the effect of court closures and claims backlogs arising from the COVID-19 pandemic, in addition to aggressive tactics by the plaintiffs' bar and delayed claims reporting trends. Although we have achieved significant rate increases since 2019 on many of these lines in response to heightened loss trends, the findings of our study led us to increase our loss development factors, and therefore our estimate of the ultimate loss ratios, on our primary casualty contractors' liability, excess and umbrella general liability and risk-managed errors and omissions professional liability product lines. This resulted in significant strengthening of reserves on the impacted lines, including on the 2020 to 2022 accident years where we determined that the incurred loss trends are following a similar loss development trend at the same stage as older accident years.
Consistent with our reserving philosophy to hold reserves that are more likely to be redundant than deficient, we increased reserves in areas where there were indications that our reserves may have been deficient, however, in instances where claims trends have been more favorable than we previously anticipated, we will wait to reduce loss reserves until those trends are observed over additional periods of time. For those lines in which we strengthened reserves, although we believe the gross and net reserves are adequate based on information available at this time, we continue to closely monitor reported claims, claim settlements, ceded reinsurance contract attachments and judicial decisions, among other things, and may adjust our estimates as new information becomes available.
The increase in the Insurance segment's expense ratio in 2023 was primarily due to higher personnel costs, professional fees and other general and administrative expenses, which were partially offset by the impact of higher earned premiums.
Reinsurance Segment
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| Years Ended December 31, |
(dollars in thousands) | 2023 | | 2022 | | % Change |
Gross premium volume | $ | 1,046,539 | | | $ | 1,229,851 | | | (15) | % |
Net written premiums | $ | 967,799 | | | $ | 1,167,312 | | | (17) | % |
Earned premiums | $ | 1,014,294 | | | $ | 1,063,347 | | | (5) | % |
Underwriting profit (loss) | $ | (19,265) | | | $ | 83,859 | | | NM (1) |
| | | | | |
Underwriting Ratios (2) | | | | | Point Change |
Loss ratio | | | | | |
Current accident year loss ratio | 66.0 | % | | 63.6 | % | | 2.4 | |
Prior accident years loss ratio | 5.6 | % | | (2.4) | % | | 8.0 | |
Loss ratio | 71.7 | % | | 61.2 | % | | 10.5 | |
Expense ratio | 30.2 | % | | 30.9 | % | | (0.7) | |
Combined ratio | 101.9 | % | | 92.1 | % | | 9.8 | |
| | | | | |
| | | | | |
Current accident year loss ratio Russia-Ukraine conflict impact (3) | — | % | | 1.2 | % | | (1.2) | |
| | | | | |
Current accident year loss ratio, excluding Russia-Ukraine conflict impact | 66.0 | % | | 62.4 | % | | 3.6 | |
Combined ratio, excluding current year Russia-Ukraine conflict impact | 101.9 | % | | 90.9 | % | | 11.0 | |
(1) NM - Ratio is not meaningful.
(2) Amounts may not reconcile due to rounding.
(3) The point impact of the Russia-Ukraine conflict is calculated as the associated net losses and loss adjustment expenses divided by total earned premiums.
Premiums
The decrease in gross premium adjustmentsvolume in our Reinsurance segment in 2023 was driven by significantly lower gross premiums within our professional liability product lines, primarily attributable to unfavorable premium adjustments in 2023 compared to favorable premium adjustments in 2022, largely driven by transaction liability business, due to lower volume of deal activity, and the deterioration in the pricing environment on directors and officers liability. Lower premium volume within professional liability also reflects decreases on renewals, due to decreased exposures and participation. The decrease in professional liability premium volume was partially offset by lowerhigher gross premiums within our propertymarine and energy product lines. Thelines due to increases on renewals, and favorable premium adjustments were primarily due toarising from increased exposures arising from growth in underlying portfolios and more favorable rates.rates, as well as new business. Significant variability in gross premium volume can be expected in our Reinsurance segment due to individually significant contracts and multi-year contracts.
Lower gross premiums within our property product lines in 2021 were primarily attributable to non-renewals following our decision to discontinue writing property reinsurance business on a risk-bearing basis effective January 1, 2021. We continued to have property loss exposure throughout 2021, including catastrophe exposure, on property treaties written in prior years with contract terms that extended beyond January 1, 2021 and on our retrocessional reinsurance property business, which we discontinued writing effective January 1, 2022. With few exceptions, effective January 1, 2022, we no longer have exposure to reinsurance and retrocessional reinsurance property risks within our Reinsurance segment.
Net retention of gross premium volume was 90%92% in 20212023 compared to 85%95% in 2020.2022. The increasedecrease in net retention was driven by changes in mix of business. Our growinggross premium volume, as our professional liability and general liability product lines arebusiness is fully retained while the non-renewed propertyand our marine and energy business hadcarries a lower retentionhigher cession rate than the rest of the segment.
The increasedecrease in earned premiums in 20212023 was primarily due to less favorable premium adjustments in 2023 compared to 2022, primarily attributable to growth in gross premium volumeour professional liability and credit and surety product lines, and the non-renewal of a large treaty within our general liability and professional liabilityworkers' compensation product lines in recent years, partially offset by the impact of lower gross premiums within our property product lines as a result of our decision to discontinue writing property reinsurance business, as previously discussed.line.
Combined Ratio
The increase in the Reinsurance segment's current accident year losses and loss adjustment expenses in 2021 included $100.3 million of net losses and loss adjustment expenses attributed to the 2021 Catastrophes. Partially offsetting the impact of losses attributed to the 2021 Catastrophes was $21.7 million of favorable reinstatement premiums in 2021 attributed to these events. Current accident year losses in 2020 included $61.9 million and $47.8 million of net losses and loss adjustment expenses attributed to COVID-19 and the 2020 Catastrophes, respectively. Catastrophe losses and reinstatement premiums in 2021 were primarily attributed to our retrocessional reinsurance property business, a portion of which was ceded to Lodgepine Reinsurance Limited effective July 1, 2021, and our property reinsurance product lines, both of which we have discontinued writing on a risk-bearing basis, as previously discussed. Catastrophe losses in 2020, and a portion of our 2020 COVID-19 losses, were also attributed to our property reinsurance product lines. Excluding the impact of catastrophes and COVID-19, the decrease in the current accident year loss ratio in 2023 compared to 2022 was driven byprimarily due to less favorable premium adjustments on prior accident years in 2023 compared to 2022, primarily on our professional liability and general liabilitycredit and surety product lines. These product lines benefited from higher premium rates and an increase in the proportion of quota share contract structures within our portfolio, which generally have lower loss ratios than excess of loss contracts. The favorable impact of changes in these product lines on the current accident year loss ratio was partially offset by an unfavorable impact from the change in mix of business within the segment as the non-renewed property business had a lower attritional loss ratio than the rest of the segment.
The Reinsurance segment's 20212023 combined ratio included $19.9$57.1 million of adverse development on prior accident years loss reserves, which was primarily attributable todriven by $95.5 million, or nine points, of adverse development on our propertygeneral liability product lines and $53.7 million, or five points, of adverse development on our public entity product line, as well as additional exposures recognized on prior accident years related to net favorable premium adjustments on our general liability product lines. These increases in prior accident year reserves in 2023 were partially offset by favorable development across several product lines, including our property and workers' compensation product lines, as well as reduced exposures recognized on prior accident years related to net unfavorable premium adjustments on our professional liability product lines.
Adverse development on our propertygeneral liability product lines was primarily attributable to an increase in reserves attributed to COVID-19, reflecting changes in our net estimates resulting from updatedlarge reported loss claims and newadverse loss information from cedents. We also had netdevelopment trends across multiple accident years. Substantially all of the adverse development withinon our propertypublic entity product linesline was attributable to a segment of this business that we discontinued writing in 2020, which experienced an increased frequency of large claims over the past several quarters, most significantly on natural catastrophes that occurred in recent years, however, this adverse development was largely offset by favorablethe 2014 to 2019 accident years. Adverse development on natural catastrophes within other product lines in the Reinsurance segment. In 2021, the increase in prior years loss reserves on our property and professional liability product lines was also partially offset by favorable development onboth our general liability and creditpublic entity product lines included notable strengthening as a result of actions taken in the fourth quarter in response to changes in loss trends observed in the reserve study previously discussed under "Insurance Segment" and suretythe expectation that those loss trends will ultimately emerge within comparable reinsurance product lines.
In 2020,2022, the combined ratio included $51.8$26.1 million of favorable development on prior accident years loss reserves, which reflectedwas primarily attributable to favorable development onwithin our property product lines related to natural catastrophes and our credit and surety product lines. Favorable development on prior years loss reserves in 2022 was partially offset by adverse development on our public entity and professional liability product lines and additional exposures recognized on prior accident years related to net favorable premium adjustments on our general liability, credit and surety and professional liability product lines.
See note 911 of the notes to consolidated financial statements included under Item 8 for more information on the Reinsurance segment's prior year loss reserve development.
The decrease in the Reinsurance segment's expense ratio in 2021 was primarily attributable to lower compensationProgram Services and general expenses due to the discontinuation of our property reinsurance business as well as the favorable impact of higher earned premiums in 2021 compared to 2020.Other Fronting, Insurance-linked Securities and Other Insurance
Disposal Loss
ResultsThe following table presents the components of operating revenues and operating expenses attributable to our Reinsurance segment for the year ended December 31, 2020 included a disposal loss of $41.5 million related to the planned disposition of our reinsurance operations in Latin America, which was included inprogram services and other expensesfronting, insurance-linked securities and was notother insurance operations, including our run-off block of life and annuity reinsurance contracts, none of which are included in the segment's underwriting loss. This disposal loss was primarily attributable to foreign currency translation adjustments for these operations, which were previously included in accumulated other comprehensive income. The transaction was completed in 2021.a reportable segment.
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| Years Ended December 31, |
| 2023 | | 2022 |
(dollars in thousands) | Operating revenues | | Operating expenses | | Net | | Operating revenues | | Operating expenses | | Net |
Services and other: | | | | | | | | | | | |
Program services and other fronting | $ | 155,654 | | | $ | 31,591 | | | $ | 124,063 | | | $ | 149,993 | | | $ | 27,613 | | | $ | 122,380 | |
Program services - disposition gain | 16,923 | | | — | | | 16,923 | | | — | | | — | | | — | |
Insurance-linked securities | 97,550 | | | 75,950 | | | 21,600 | | | 109,020 | | | 125,316 | | | (16,296) | |
Insurance-linked securities - disposition gains | — | | | — | | | — | | | 225,828 | | | — | | | 225,828 | |
Life and annuity (1) | 40 | | | 12,070 | | | (12,030) | | | 1,040 | | | 11,073 | | | (10,033) | |
Markel CATCo buy-out | — | | | — | | | — | | | — | | | 101,904 | | | (101,904) | |
Markel CATCo Re (2) | — | | | (71,491) | | | 71,491 | | | — | | | (89,862) | | | 89,862 | |
Other | 11,484 | | | 18,122 | | | (6,638) | | | 11,683 | | | 19,431 | | | (7,748) | |
| 281,651 | | | 66,242 | | | 215,409 | | | 497,564 | | | 195,475 | | | 302,089 | |
Underwriting (3) | (1,520) | | | 8,655 | | | (10,175) | | | (3,818) | | | 3,292 | | | (7,110) | |
| 280,131 | | | 74,897 | | | 205,234 | | | 493,746 | | | 198,767 | | | 294,979 | |
Amortization of intangible assets | | | 61,168 | | | (61,168) | | | | | 61,202 | | | (61,202) | |
Impairment of goodwill | | | — | | | — | | | | | 80,000 | | | (80,000) | |
| $ | 280,131 | | | $ | 136,065 | | | $ | 144,066 | | | $ | 493,746 | | | $ | 339,969 | | | $ | 153,777 | |
(1) Investment income earned on the investments that support life and annuity policy benefit reserves are included in our Investing segment.
(2) Results attributable to Markel CATCo Re were entirely attributable to noncontrolling interest holders in Markel CATCo Re.
(3) Underwriting results attributable to our other insurance operations include results from discontinued lines of business and the retained portion of our program services and other fronting operations.
Program Services and Other Fronting
The increase in operating revenues in 2023 was due to modest increases at both our program services business and other fronting operations as a result of higher gross premium volume in 2023 compared to 2022. The following table summarizes gross premium volume in our program services and other fronting operations.
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(dollars in thousands) | 2023 | | 2022 | | % Change |
Program services | $ | 2,883,737 | | | $ | 2,800,273 | | | 3 | % |
Other fronting | $ | 840,868 | | | $ | 553,871 | | | 52 | % |
The increase in gross premium volume within our program services operations in 2023 was attributable to expansion of existing programs and growth from new programs. The increase in gross premium volume in our other fronting operating in 2023 was driven by expansion of our property catastrophe programs with Nephila Reinsurers and achieving more favorable rates on this business, as well as growth from a new specialty program with Nephila Reinsurers.
In June 2023, we sold Independent Specialty Insurance Company, a subsidiary within our program services operations, which resulted in a gain of $16.9 million.
Insurance-Linked Securities
The decrease in operating revenues and operating expenses in our Nephila insurance-linked securities operations in 2023 was primarily due to the disposition of our Velocity managing general agent operations in February 2022, which resulted in a gain of $107.3 million, and our Volante managing general agent operations in October 2022, which resulted in a gain of $118.5 million. Following these sales, our Nephila ILS operations are solely comprised of our fund management operations. In 2023, the increase in operating revenues within our fund management operations was primarily due to $31.1 million of management fees recognized upon the release of capital from side pocket reserves. Nephila's net assets under management were $6.8 billion as of December 31, 2023.
Additionally, in 2022, we recognized a goodwill impairment charge of $80.0 million attributable to our Nephila fund management operations. See note 8 of the notes to consolidated financial statements included under Item 8 for more information about this goodwill impairment.
Markel CATCo
In March 2022, we completed a buy-out transaction with Markel CATCo Re Ltd. (Markel CATCo Re) and Markel CATCo Reinsurance Fund Ltd. (the Markel CATCo Funds) that provided for an accelerated return of all remaining capital to investors in the Markel CATCo Funds and resulted in the consolidation of Markel CATCo Re upon completion of the transaction. In order to complete the transaction, we made $101.9 million in payments, net of insurance proceeds, to or for the benefit of investors that were recognized as an expense during the first quarter of 2022. See note 17 of the notes to consolidated financial statements for further details regarding our Markel CATCo operations, the buy-out transaction and the consolidation of Markel CATCo Re.
Investing Results
Our business strategy recognizes the importance of both consistent underwriting and operating profits and superior investment returns to build shareholder value. We rely on sound underwriting practices to produce investable funds. We measure investing resultsour investment performance by ouranalyzing net investment income earned on our investment portfolio, which reflects the recurring interest and dividend earnings on our investment portfolio. We also analyze net investment gains, and the change in netwhich include unrealized gains and losses on available-for-sale investments, as well as investment yield and taxable equivalent total investment return.our equity portfolio. Based on the potential for volatility in the financial markets, we understand that the level of gains or losses may vary from one period to the next, and therefore believe that our investment performance is best analyzed over several years.longer periods of time.
The following table summarizes our consolidated investment performance.
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| Years Ended December 31, |
(dollars in thousands) | 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
Net investment income | $ | 374,601 | | | $ | 371,830 | | | $ | 451,888 | | | $ | 434,215 | | | $ | 405,709 | |
Net investment gains (losses) (1) | $ | 1,978,534 | | | $ | 617,979 | | | $ | 1,601,722 | | | $ | (437,596) | | | $ | (5,303) | |
Change in net unrealized gains on available-for-sale investments (2) | $ | (450,096) | | | $ | 442,089 | | | $ | 381,890 | | | $ | (299,446) | | | $ | 1,125,440 | |
| | | | | | | | | |
Investment Ratios | | | | | | | | | |
Investment yield (3) | 2.0 | % | | 2.4 | % | | 3.0 | % | | 2.7 | % | | 2.6 | % |
Taxable equivalent total investment return | 8.8 | % | | 9.4 | % | | 14.6 | % | | (1.0) | % | | 10.2 | % |
(1) Effective January 1, 2018, we adopted Financial Accounting Standards Board Accounting Standards Update No. 2016-01. As a result, equity securitiesperformance, which consists predominantly of the results of our Investing segment. Net investment gains or losses in any given period are no longer classified as available-for-sale with unrealized gains and losses recognized in other comprehensive income; rather, alltypically attributable to changes in the fair value of our equity securities are now recognized in net income. Prior periods have not been restatedportfolio due to conform to the current presentation.
(2)market value movements. The change in net unrealized gains (losses) on available-for-sale investments included an increase relatedin any given period is typically attributable to an adjustmentchanges in the fair value of our fixed maturity portfolio due to our life and annuity benefit reserves of $63.0 million forchanges in interest rates during the year ended December 31, 2021 and a decrease related to an adjustment to our life and annuity benefit reserves of $68.2 million and $51.4 million forperiod.
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| Years Ended December 31, |
(dollars in thousands) | 2023 | | 2022 | | 2021 | | 2020 | | 2019 |
Net investment income | $ | 734,532 | | | $ | 446,755 | | | $ | 367,417 | | | $ | 375,826 | | | $ | 442,182 | |
Yield on fixed maturity securities (1) | 2.8 | % | | 2.3 | % | | 2.6 | % | | 3.1 | % | | 3.5 | % |
Yield on short-term investments (1) | 4.5 | % | | 1.5 | % | | 0.1 | % | | 0.5 | % | | 1.9 | % |
Yield on cash and cash equivalents and restricted cash and cash equivalents (1) | 2.8 | % | | 0.6 | % | | 0.0 | % | | 0.2 | % | | 0.9 | % |
| | | | | | | | | |
Net realized investment gains (losses) | $ | (42,177) | | | $ | (40,983) | | | $ | 37,908 | | | $ | 14,780 | | | $ | (1,482) | |
Change in fair value of equity securities | 1,566,231 | | | (1,554,750) | | | 1,940,626 | | | 603,199 | | | 1,603,204 | |
Net investment gains (losses) | $ | 1,524,054 | | | $ | (1,595,733) | | | $ | 1,978,534 | | | $ | 617,979 | | | $ | 1,601,722 | |
| | | | | | | | | |
Return on equity securities (2) | 21.6 | % | | (16.1) | % | | 29.4 | % | | 15.1 | % | | 29.8 | % |
Five-year annual return | 14.6 | % | | 9.3 | % | | 18.4 | % | | 15.2 | % | | 11.4 | % |
Ten-year annual return | 11.9 | % | | 12.9 | % | | 16.9 | % | | 14.3 | % | | 14.7 | % |
Twenty-year annual return | 10.2 | % | | 10.6 | % | | 11.0 | % | | 10.5 | % | | 11.0 | % |
| | | | | | | | | |
Other (3) | $ | (11,854) | | | $ | (17,661) | | | $ | 7,184 | | | $ | (3,996) | | | $ | 9,706 | |
Change in net unrealized gains (losses) on available-for-sale investments | $ | 390,558 | | | $ | (1,463,876) | | | $ | (513,084) | | | $ | 510,247 | | | $ | 433,280 | |
(1) Yield reflects the years ended December 31, 2020 and 2019, respectively. See note 11 of the notes to consolidated financial statements included under Item 8 for details on our life and annuity benefit reserve adjustments.
(3) Investment yield reflects net investmentapplicable interest income as a percentage of the applicable monthly average invested assets at amortized cost.
(2) Return on equity securities is calculated by dividing dividends and the change in fair value of equity securities by the monthly average equity securities at fair value and considers the timing of net purchases and sales.
(3) Other income or losses within our investing operations primarily relate to equity method investments in our investing segment, which are managed separately from the rest of our investment portfolio.
The increase in net investment income in 20212023 was driven byprimarily attributable to higher dividend income in 2021 and income on our equity method investments in 2021 compared to losses in 2020. This increase was partially offset by lower interest income on ourcash equivalents, fixed maturity securities and short-term investments due to lowerhigher yields during 2023 compared to 2022. Throughout 2023, we increased our allocation of cash to money market funds in response to increases in short-term interest rates in 2021 compared to 2020. Net investmentrates. Additionally, interest income on our fixed maturity securities increased in 2021 was consistent with 2020, as the lower yield in 2021 was largely offset by the impact ofpart due to higher average holdings of fixed maturity securities during 2021in 2023 compared to 2020.2022. See note 4(d) of the notes to consolidated financial statements included under Item 8 for further details regarding the components of net investment income.
Net investment gains in both 2021 and 2020 were primarily attributable to an increase in the fair value of our equity securities driven by favorable market value movements. Net investment gains in 2020 reflected significant market volatility experienced during the year. The impact of significant declines in the fair value of our equity securities in the first quarter of 2020, driven by unfavorable market value movements resulting from the onset of the COVID-19 pandemic, were more than offset by increases in the fair value of our equity securities over the subsequent three quarters of 2020. See note 4(e) of the notes to consolidated financial statements included under Item 8 for further details on the components of net investment gains (losses).
Markel Ventures Results
The decrease in net unrealized gains on available-for-sale investments in 2021 was attributable to decreases in the fair value of our fixed maturity securities as a result of an increase in interest rates during 2021. The increase in net unrealized gains on available-for-sale investments in 2020 was attributable to increases in the fair value of our fixed maturity securities as a result of a decrease in interest rates during 2020.
Taxable equivalent total investment return is a non-GAAP financial measure. Taxable equivalent total investment return includes items that impact net income, such as coupon interest on fixed maturity securities, changes in fair value of equity securities, dividends on equity securities and realized investment gains or losses on available-for-sale securities, as well as changes in unrealized gains or losses on available-for-sale securities, which do not impact net income. Certain items that are included in net investment income have been excluded from the calculation of taxable equivalent total investment return, such as amortization and accretion of premiums and discounts on our fixed maturity portfolio, to provide a comparable basis for measuring our investment return against industry investment returns. The calculation of taxable equivalent total investment return also includes the current tax benefit associated with income on certain investments that is either taxed at a lower rate than the statutory income tax rate or is not fully included in U.S. taxable income. We believe the taxable equivalent total
investment return is a better reflection of the economics of our decision to invest in certain asset classes. We focus on our long-term investment return, understanding that the level of investment gains or losses may vary from one period to the next.
We believe our investment performance is best analyzed from the review of taxable equivalent total investment return over several years. The following table presents taxable equivalent total investment return before and after the effects of foreign currency movements.
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| | | | | | | | | | | Five-Year Annual Return | | Ten-Year Annual Return | | Twenty-Year Annual Return |
| Years Ended December 31, | | | |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | | |
Equities | 29.6 | % | | 15.2 | % | | 30.0 | % | | (3.5) | % | | 25.5 | % | | 18.6 | % | | 17.3 | % | | 11.5 | % |
Fixed maturity securities, cash and short-term investments (1) | (0.7) | % | | 5.7 | % | | 6.5 | % | | 1.3 | % | | 3.4 | % | | 3.2 | % | | 3.1 | % | | 4.4 | % |
Total portfolio, before foreign currency effect | 9.0 | % | | 8.6 | % | | 14.4 | % | | (0.7) | % | | 9.2 | % | | 8.0 | % | | 7.0 | % | | 6.3 | % |
Total portfolio | 8.8 | % | | 9.4 | % | | 14.6 | % | | (1.0) | % | | 10.2 | % | | 8.3 | % | | 6.8 | % | | 6.4 | % |
| | | | | | | | | | | | | | | |
(1) Includes cash and cash equivalents and restricted cash and cash equivalents.
The following table reconciles investment yield to taxable equivalent total investment return.
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| Years Ended December 31, |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
Investment yield (1) | 2.0 | % | | 2.4 | % | | 3.0 | % | | 2.7 | % | | 2.6 | % |
Adjustment of investment yield from amortized cost to fair value | (0.6) | % | | (0.5) | % | | (0.7) | % | | (0.6) | % | | (0.5) | % |
Net amortization of net premium on fixed maturity securities | 0.4 | % | | 0.4 | % | | 0.4 | % | | 0.4 | % | | 0.4 | % |
Net investment gains (losses) and change in net unrealized investment gains on available-for-sale securities (2) | 5.9 | % | | 5.8 | % | | 10.3 | % | | (3.8) | % | | 5.9 | % |
Taxable equivalent effect for interest and dividends (3) | 0.1 | % | | 0.1 | % | | 0.2 | % | | 0.1 | % | | 0.4 | % |
Other (4) | 1.0 | % | | 1.2 | % | | 1.4 | % | | 0.2 | % | | 1.4 | % |
Taxable equivalent total investment return | 8.8 | % | | 9.4 | % | | 14.6 | % | | (1.0) | % | | 10.2 | % |
(1) Investment yield reflects net investment income as a percentage of monthly average invested assets at amortized cost.
(2) Adjustment includes the impact of changes in foreign currency exchange rates beginning in 2018.
(3) Adjustment to tax-exempt interest and dividend income to reflect a taxable equivalent basis.
(4) Adjustment to reflect the impact of time-weighting the inputs to the calculation of taxable equivalent total investment return and the impact of changes in foreign currency exchange rates prior to 2018.
Markel Ventures
Our Markel Ventures segment includes a diverse portfolio of businesses from different industries that offer various types of products and services to businesses and consumers, predominantly in the United States. We measure Markel Ventures' results by its operating income and net income, as well as earnings before interest, income taxes, depreciation and amortization (EBITDA). We consolidate the results of our Markel Ventures subsidiaries on a one-month lag, with the exception of significant transactions or events that occur during the intervening period.
During the 2021 and 2020, our Markel Ventures operations expanded through acquisitions of majority interests in three businesses. In December 2021, we acquired a controlling interest in Metromont LLC (Metromont), a precast concrete manufacturer and concrete building solutions provider for commercial projects. Due to the one month lag in consolidating the results of our Markel Ventures operations, the financial results for Metromont will be included in our consolidated statements of income and comprehensive income beginning in January 2022. In August 2021, we acquired a controlling interest in Buckner HeavyLift Cranes (Buckner), a provider of crane rental services for large commercial contractors. In April 2020, we acquired a controlling interest in Lansing Building Products, LLC, a supplier of exterior building products and materials to professional contractors throughout the U.S., which simultaneously acquired the distribution business of Harvey Building Products to enhance its geographic reach and scale (together, Lansing). See note 3 of the notes to consolidated financial statements included under Item 8 for additional details related to these acquisitions.
The following table summarizes the amounts recognized on the consolidated balance sheets related toresults from our Markel Ventures.Ventures segment.
| | | | | | | | | | | |
| December 31, |
(dollars in thousands) | 2021 | | 2020 |
ASSETS | | | |
Cash and cash equivalents | $ | 321,473 | | | $ | 363,532 | |
Receivables | 501,349 | | | 299,051 | |
Goodwill | 1,196,590 | | | 901,045 | |
Intangible assets | 766,179 | | | 623,120 | |
Other assets: | | | |
Inventory | 529,250 | | | 412,554 | |
Property, plant and equipment, net | 948,971 | | | 492,477 | |
Right-of-use lease assets | 393,551 | | | 368,126 | |
Other | 300,916 | | | 176,155 | |
Total Other assets | 2,172,688 | | | 1,449,312 | |
Total Assets | $ | 4,958,279 | | | $ | 3,636,060 | |
LIABILITIES AND EQUITY | | | |
Accounts payable and accrued liabilities | $ | 320,375 | | | $ | 270,361 | |
Senior long-term debt and other debt (1) | 1,140,559 | | | 775,650 | |
Other liabilities: | | | |
Lease liabilities | 445,683 | | | 374,667 | |
Other | 544,718 | | | 380,190 | |
Total Other liabilities | 990,401 | | | 754,857 | |
Total Liabilities | 2,451,335 | | | 1,800,868 | |
Redeemable noncontrolling interests | 461,378 | | | 245,642 | |
Shareholders' equity (2) | 2,050,675 | | | 1,599,466 | |
Noncontrolling interests | (5,109) | | | (9,916) | |
Total Equity | 2,045,566 | | | 1,589,550 | |
Total Liabilities and Equity | $ | 4,958,279 | | | $ | 3,636,060 | |
(1) Debt as of December 31, 2021 and 2020 included $853.0 million and $733.0 million, respectively, of debt due to other subsidiaries of Markel Corporation, which was eliminated in consolidation.
(2) Shareholders' equity as of December 31, 2021 and 2020 included $1.4 billion and $1.2 billion, respectively, of common stock, which represents Markel Corporation's investment in Markel Ventures, which was eliminated in consolidation.
The following table summarizes the amounts recognized on the consolidated statements of income related to Markel Ventures.
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| Years ended December 31, |
(dollars in thousands) | 2021 | | 2020 | | % Change |
OPERATING REVENUES | | | | | |
Products revenues | $ | 1,712,120 | | | $ | 1,439,515 | | | |
Services and other revenues | 1,931,696 | | | 1,355,199 | | | |
Net investment income | 11 | | | 245 | | | |
Total Operating Revenues | 3,643,827 | | | 2,794,959 | | | 30 | % |
OPERATING EXPENSES | | | | | |
Products expenses | 1,544,506 | | | 1,256,159 | | | |
Services and other expenses | 1,769,201 | | | 1,232,150 | | | |
Amortization of intangible assets | 57,568 | | | 52,572 | | | |
| | | | | |
Total Operating Expenses | 3,371,275 | | | 2,540,881 | | | |
Operating Income | 272,552 | | | 254,078 | | | 7 | % |
Net foreign exchange gains (losses) | 1,119 | | | (1,092) | | | |
Interest expense (1) | (35,031) | | | (46,664) | | | |
Income Before Income Taxes | 238,640 | | | 206,322 | | | |
Income tax expense | (43,626) | | | (45,815) | | | |
Net Income | 195,014 | | | 160,507 | | | |
Net income attributable to noncontrolling interests | (20,607) | | | (15,058) | | | |
Net Income to Shareholders | $ | 174,407 | | | $ | 145,449 | | | 20 | % |
EBITDA | $ | 402,700 | | | $ | 366,934 | | | 10 | % |
(1) Interest expense for the years ended December 31, 2021 and 2020 included intercompany interest expense of $25.8 million and $32.0 million, respectively, which was eliminated in consolidation. | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(dollars in thousands) | 2023 | | 2022 | | % Change |
Operating revenues | $ | 4,985,081 | | | $ | 4,757,527 | | | 5 | % |
Operating income | $ | 437,508 | | | $ | 325,238 | | | 35 | % |
EBITDA | $ | 628,483 | | | $ | 506,336 | | | 24 | % |
The increase in operating revenues in 2021 was driven by an increase of $638.9 million from our construction services businesses, primarily due to an increased contribution from Lansing and the contribution from Buckner in the fourth quarter of 2021, as well as improved pricing and increased demand in 2021 compared to 2020. Additionally, operating revenues in 2021 increased across our transportation-related and equipment manufacturing businesses, due in part to lower sales volumes at most of these businesses in 2020 as a result of the economic and social disruption caused by the COVID-19 pandemic. In 2020, following the onset of the COVID-19 pandemic, these businesses were impacted by decreased demand for their products and also saw orders and contracts postponed. Sales volumes began to recover in late 2020 before fully recovering in 2021. The increase in operating revenues in 2021 also reflected higher revenues in our consumer and building products businesses, given increased demand reflecting increases in consumer spending in 2021. These increases in operating revenues were partially offset by lower operating revenues from our healthcare businesses due to the sale of certain subsidiaries of one of these businesses in January 2021.
The benefit of increases in operating revenues to operating income, EBITDA and net income to shareholders in 2021 was reduced by increased costs of materials and labor across many of our businesses, which are reflective of current economic conditions. The higher cost of materials is due in part to a shortage in the availability of certain products, the higher cost of shipping and inflation. We try to mitigate the impact of these cost increases through a variety of actions, such as increasing the prices of our products and services, pre-purchasing materials, locking in prices in advance or utilizing alternate sources of materials. However, we may not be successful at these efforts and even when we are successful, there may be a time lag before the impacts of these changes are reflected in our margins.
The increase in operating income, EBITDA and net income to shareholders in 20212023 was driven by higher revenues at our construction services businesses as previously discussed. The increase was also attributableand transportation-related businesses, due to a pre-tax transaction gaincombination of $22.0 million, which was included in servicesincreased demand, higher prices, and other expenses and recognized in connection with the sale of certain subsidiariesgrowth, as well as increased production at one of our healthcareequipment manufacturing businesses as previously discussed, as well as other associated changescompared to 2022. The increase also reflected a full-year contribution from Metromont, compared to an 11-month contribution in this business.2022 following its acquisition. These increases in operating revenues were partially offset by the impact of decreased demand at our consumer and building products businesses, consulting services businesses and one of our construction services businesses.
The increases in operating income and EBITDA in 2023 were driven by our products businesses, particularly our consumer and building products businesses, which had higher margins in 2023 compared to 2022. In 2022, the operating margins at many of our products businesses were impacted by increased costs of materials, freight and labor, which reflected the impact of broader economic conditions. As conditions stabilized throughout 2023, particularly in regard to materials and freight costs, our operating margins for those businesses improved. The increases in operating income and EBITDA at many of our businesses were partially offset by the impact of lower revenues and operating margins at one of our consultingconstruction services businesses in 2021 as well as a $17.2 million pre-tax increase in our estimate of the contingent consideration obligations relateddue to better than expected financial performance of certain of our recent acquisitions.decreased demand.
Markel Ventures EBITDA is a non-GAAP financial measure. We use Markel Ventures EBITDA as an operating performance measure in conjunction with U.S. GAAP measures, including operating revenues, operating income, and net income to shareholders, to monitor and evaluate the performance of our Markel Ventures segment. Because EBITDA excludes interest, income taxes, depreciation and amortization, it provides an indicator of economic performance that is useful to both management and investors in evaluating our Markel Ventures businesses as it is not affected by levels of debt, interest rates, effective tax rates or levels of depreciation or amortization resulting from purchase accounting.
The following table reconciles Markel Ventures operating income to Markel Ventures EBITDA.
| | Years ended December 31, |
| Years Ended December 31, | | | Years Ended December 31, |
(dollars in thousands) | (dollars in thousands) | 2021 | | 2020 | (dollars in thousands) | 2023 | | 2022 |
Markel Ventures operating income | Markel Ventures operating income | $ | 272,552 | | | $ | 254,078 | |
Depreciation expense | Depreciation expense | 72,580 | | | 60,284 | |
Amortization of intangible assets | Amortization of intangible assets | 57,568 | | | 52,572 | |
Markel Ventures EBITDA | Markel Ventures EBITDA | $ | 402,700 | | | $ | 366,934 | |
The following table summarizestables present condensed financial information reflecting the financial position, results of operations and cash flows attributable toof Markel Ventures.Ventures, Inc., and also summarizing the amounts recognized in the consolidated financial statements included under Item 8 for the Markel Ventures segment, unless otherwise noted.
| | | | | | | | | | | |
| Years ended December 31, |
(dollars in thousands) | 2021 | | 2020 |
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of year | $ | 363,532 | | | $ | 256,758 | |
Net cash provided by operating activities | 187,180 | | | 357,675 | |
Net cash used by investing activities | (585,971) | | | (607,641) | |
Net cash provided by financing activities (1) (2) | 356,562 | | | 356,542 | |
Effect of foreign currency rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents | 170 | | | 198 | |
Increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents | (42,059) | | | 106,774 | |
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of year | $ | 321,473 | | | $ | 363,532 | |
| | | | | | | | | | | |
CONDENSED BALANCE SHEETS |
| | | |
| December 31, |
(dollars in thousands) | 2023 | | 2022 |
ASSETS | | | |
Cash and cash equivalents | $ | 398,983 | | | $ | 315,452 | |
Receivables | 655,875 | | | 636,161 | |
Goodwill | 1,137,654 | | | 1,153,909 | |
Intangible assets | 736,717 | | | 796,297 | |
Other assets: | | | |
Inventory | 617,250 | | | 639,562 | |
Property, plant and equipment, net | 1,145,359 | | | 1,028,156 | |
Right-of-use lease assets | 534,342 | | | 484,527 | |
Other | 293,362 | | | 261,613 | |
Total other assets | 2,590,313 | | | 2,413,858 | |
Total Assets | $ | 5,519,542 | | | $ | 5,315,677 | |
LIABILITIES AND EQUITY | | | |
Debt (1) | $ | 1,077,034 | | | $ | 1,222,152 | |
Other liabilities: | | | |
Accounts payable and accrued liabilities | 372,768 | | | 355,037 | |
Lease liabilities | 547,099 | | | 489,877 | |
Other | 622,986 | | | 556,427 | |
Total other liabilities | 1,542,853 | | | 1,401,341 | |
Total Liabilities | 2,619,887 | | | 2,623,493 | |
Redeemable noncontrolling interests | 469,685 | | | 523,154 | |
Shareholders' equity (2) | 2,433,184 | | | 2,172,935 | |
Noncontrolling interests | (3,214) | | | (3,905) | |
Total Equity | 2,429,970 | | | 2,169,030 | |
Total Liabilities and Equity | $ | 5,519,542 | | | $ | 5,315,677 | |
(1) Debt as of December 31, 2023 and 2022 included $738.0 million and $808.1 million, respectively, of debt due to other subsidiaries of Markel Group, which was eliminated in consolidation and is guaranteed by Markel Group.
(2) Shareholders' equity as of both December 31, 2023 and 2022 included $1.4 billion of common stock, which represents Markel Group's investment in Markel Ventures, Inc. and which was eliminated in consolidation.
| | | | | | | | | | | |
CONDENSED STATEMENTS OF INCOME |
| | | |
| Years ended December 31, |
(dollars in thousands) | 2023 | | 2022 |
OPERATING REVENUES | | | |
Products revenues | $ | 2,545,053 | | | $ | 2,427,096 | |
Services and other revenues | 2,434,715 | | | 2,329,522 | |
Net investment income | 5,313 | | | 909 | |
Total Operating Revenues | 4,985,081 | | | 4,757,527 | |
OPERATING EXPENSES | | | |
Products expenses | 2,220,676 | | | 2,241,736 | |
Services and other expenses | 2,244,527 | | | 2,111,510 | |
Amortization of intangible assets | 82,370 | | | 79,043 | |
| | | |
Total Operating Expenses | 4,547,573 | | | 4,432,289 | |
Operating Income | 437,508 | | | 325,238 | |
Interest expense (1) | (47,227) | | | (46,780) | |
Net foreign exchange gains (losses) | (6,295) | | | 3,140 | |
Income Before Income Taxes | 383,986 | | | 281,598 | |
Income tax expense | (85,295) | | | (61,588) | |
Net Income | 298,691 | | | 220,010 | |
Net income attributable to noncontrolling interests | (33,585) | | | (27,409) | |
Net Income to Shareholders | $ | 265,106 | | | $ | 192,601 | |
(1) Interest expense for the years ended December 31, 2023 and 2022 included intercompany interest expense of $26.5 million and $27.4 million, respectively, which was eliminated in consolidation.
| | | | | | | | | | | |
CONDENSED STATEMENTS OF CASH FLOWS |
| | | |
| Years ended December 31, |
(dollars in thousands) | 2023 | | 2022 |
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of year | $ | 315,452 | | | $ | 321,473 | |
Net cash provided by operating activities | 568,063 | | | 260,286 | |
Net cash used by investing activities | (238,242) | | | (302,770) | |
Net cash provided (used) by financing activities (1) | (246,102) | | | 37,897 | |
Effect of foreign currency rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents | (188) | | | (1,434) | |
Increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents | 83,531 | | | (6,021) | |
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of year | $ | 398,983 | | | $ | 315,452 | |
(1) Net cash provided (used) by financing activities for the years ended December 31, 20212023 and December 31, 2020 included a capital contribution from our holding company, Markel Corporation, of $250.0 million and $535.0 million, respectively, which was eliminated in consolidation.
(2) Net cash provided by financing activities for the year ended December 31, 2021 included net additions to intercompany debt of $120.0 million, which were eliminated in consolidation. Net cash provided by financing activities for the year ended December 31, 20202022 included net repayments of intercompany debt of $125.9$70.0 million and $44.9 million, respectively, which were eliminated in consolidation.
Other Operations
The following table presents the components of operating revenues and operating expenses that are not included in a reportable segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 |
(dollars in thousands) | Services and other revenues | | Services and other expenses | | Amortization of intangible assets | | | | Services and other revenues | | Services and other expenses | | Amortization of intangible assets | | |
Other operations: | | | | | | | | | | | | | | | |
Insurance-linked securities | $ | 202,019 | | | $ | 186,510 | | | $ | 38,448 | | | | | $ | 200,928 | | | $ | 168,118 | | | $ | 38,447 | | | |
Program services and other fronting | 125,716 | | | 20,132 | | | 20,938 | | | | | 104,171 | | | 20,427 | | | 20,937 | | | |
Life and annuity | 1,515 | | | 16,667 | | | — | | | | | 1,233 | | | 17,713 | | | — | | | |
Other (1) | 17,195 | | | 30,534 | | | 2,403 | | | | | 32,006 | | | 81,251 | | | 5,453 | | | |
| 346,445 | | | 253,843 | | | 61,789 | | | | | 338,338 | | | 287,509 | | | 64,837 | | | |
Underwriting operations (2) | | | | | 41,182 | | | | | | | | | 41,906 | | | |
Total | $ | 346,445 | | | $ | 253,843 | | | $ | 102,971 | | | | | $ | 338,338 | | | $ | 287,509 | | | $ | 106,743 | | | |
(1)Other includes the results of our run-off Lodgepine and Markel CATCo operations for both periods presented. For the year ended December 31, 2020, services and other expenses included a legal settlement at our Markel CATCo operations.
(2)Amortization of intangible assets attributable to our underwriting operations is not allocated between the Insurance and Reinsurance segments.
Insurance-Linked Securities
The increase in operating revenues in our Nephila insurance-linked securities (ILS) operations in 2021 was driven by growth in our managing general agent operations, partially offset by lower investment management fees. The decrease in investment management fees was primarily due to higher management fees in 2020 attributable to releases of capital from side pocket reserves, which were more significant in 2020 than 2021, as well as lower average assets under management during 2021. Nephila's net assets under management were $8.8 billion and $9.6 billion as of December 31, 2021 and 2020, respectively.
Investment performance at Nephila, as well as the broader ILS market, has been adversely impacted by consecutive years of elevated catastrophe losses, as well as by COVID-19 in 2020. These events, as well as volatility in the capital markets, also have impacted investor decisions around allocation of capital to ILS. Such decisions have impacted, and may continue to impact, our capital raises and redemptions within the funds we manage, as well as new funds, resulting in a decline in assets under management. See "Critical Accounting Estimates - Goodwill and Intangible Assets" for discussion and considerations of these impacts on the valuation of goodwill and intangible assets attributed to our Nephila ILS operations.
In February 2022, we completed the sale of our Velocity managing general agent operations, which provide risk origination services for our Nephila fund management operations, as well as for third parties. Velocity has been a source of growth within our ILS operations since we acquired Nephila in 2018. We continue to have a minority interest in Velocity after the sale, and Velocity will continue to be a source for risk origination for our Nephila fund management operations. Estimated consideration for the portion of our interest that was sold was $180 million.
Program Services and Other Fronting
The increase in operating revenues and operating income in our program services and other fronting operations in 2021 were primarily due to higher gross premium volume at our program services operations driven by the expansion of existing programs, as well as growth from new programs. Gross written premiums in our program services operations were $2.7 billion and $2.1 billion for the years ended December 31, 2021 and 2020, respectively.
Interest Expense, Net Foreign Exchange Gains (Losses) and Income Taxes
Interest Expense
Interest expense was $183.6$185.1 million in 20212023 compared to $177.6$196.1 million in 2020.2022. The increasedecrease in interest expense in 2021 was primarily attributable to interest expense associated withthe impact of the retirement of our 3.45%3.625% unsecured senior notes issued in May 2021.March 2023 and our 4.9% unsecured senior notes in July 2022. See note 14 of the notes to consolidated financial statements included under Item 8 for further details regarding the retirement of our senior long-term debt.
10K - 50Net Foreign Exchange Gains (Losses)
Net foreign exchange gains (losses) included in net income (loss) were losses of $90.0 million in 2023 compared to gains of $137.8 million in 2022. Net foreign exchange gains (losses) are primarily due to the remeasurement of our foreign currency denominated insurance reserves to the U.S. Dollar. The U.S. Dollar moderately weakened against the Euro and British Pound, the predominant foreign currencies within our insurance operations, during 2023, while it strengthened against the Euro and British Pound in 2022. Pre-tax net foreign exchange gains and losses attributed to changes in exchange rates on available-for-sale securities supporting our insurance reserves, which are included in the changes in net unrealized gains (losses) on available-for-sale investments in other comprehensive income (loss), were gains of $74.0 million in 2023 compared to losses of $79.5 million in 2022.
Income Taxes
The effective tax rate was 22%21% in 20212023 compared to 17%32% in 2020.2022. The effective tax rate for 20202022 differs from the effective tax rate for 2021,2023, and the statutory rate of 21%, primarily due to the impact of various immaterial items resulting in a net tax benefit that was recognizedmagnified due to the small pre-tax loss in 2020 for accumulated losses on certain investments we sold that were not previously deductible.2022. See note 1315 of the notes to consolidated financial statements included under Item 8 for further discussion of our income taxes.
The Inflation Reduction Act of 2022 (the IRA), which implemented a 15% corporate minimum tax based on adjusted financial statement income, became effective in 2023. The IRA did not have a material impact on our results of operations, financial conditions or cash flows in 2023, and is not expected to have a material impact on our results of operations, financial condition or cash flows in future periods. However, we will continue to evaluate the impacts of the IRA as additional guidance is issued by the U.S. Treasury.
The Organization for Economic Co-operation and Development (OECD) recently introduced rules, commonly referred to as Pillar Two, to establish a 15% global corporate minimum tax on large, multi-national enterprises. Certain countries in which we have operations, including the United Kingdom, have enacted legislation consistent with Pillar Two, which generally became effective on January 1, 2024. Additionally, in response to Pillar Two, in December 2023, Bermuda enacted the Corporate Income Tax Act of 2023 (the Bermuda CIT Act) effective January 1, 2025, which imposes a 15% corporate income tax on certain Bermuda businesses of large, multi-national enterprises. We do not expect Pillar Two or the Bermuda CIT Act to have a material impact on our results of operations, financial condition or cash flows, however, we will continue to evaluate these tax law changes as additional guidance is issued by the OECD and relevant tax authorities.
Comprehensive Income (Loss) to Shareholders and Book Value per Common Share
The following table summarizes the components of comprehensive income (loss) to shareholders.
| | | | | | | | | | | |
| Years Ended December 31, |
(dollars in thousands) | 2021 | | 2020 |
Net income to shareholders | $ | 2,425,003 | | | $ | 816,030 | |
Other comprehensive income (loss) | | | |
Change in net unrealized gains on available-for-sale investments, net of taxes | (354,938) | | | 352,773 | |
Other, net of taxes | 8,177 | | | 22,849 | |
Other comprehensive (income) loss attributable to noncontrolling interest | 2 | | | (18) | |
Other comprehensive income (loss) to shareholders | (346,759) | | | 375,604 | |
Comprehensive income to shareholders | $ | 2,078,244 | | | $ | 1,191,634 | |
| | | | | | | | | | | |
| Years Ended December 31, |
(dollars in thousands) | 2023 | | 2022 |
Net income (loss) to shareholders | $ | 1,996,060 | | | $ | (216,277) | |
Other comprehensive income (loss): | | | |
Change in net unrealized gains (losses) on available-for-sale investments, net of taxes | 306,903 | | | (1,154,830) | |
Change in discount rate for life and annuity benefits, net of taxes | (22,343) | | | 149,874 | |
Other, net of taxes | 4,778 | | | 15,471 | |
Other comprehensive income attributable to noncontrolling interests | (54) | | | (17) | |
Other comprehensive income (loss) to shareholders | 289,284 | | | (989,502) | |
Comprehensive income (loss) to shareholders | $ | 2,285,344 | | | $ | (1,205,779) | |
Book value per common share increased 17% from $885.72$935.65 at December 31, 20202022 to $1,034.56$1,095.95 as of December 31, 2021, primarily due to net income to shareholders in 2021.2023.
Liquidity and Capital Resources
Holding Company
We seek to maintain prudent levels of liquidity and financial leverage for the benefit and protection of our policyholders, creditors and shareholders. Our consolidated debt to capital ratio was 23%20% at December 31, 20212023 and 21%24% at December 31, 2020.2022, both of which are within the range of our target capital structure. The increasedecrease reflects an increase in senior long-term debt and other debt, primarily attributable to senior notes issued in May 2021.
In May 2021, we issued $600 millionthe retirement of 3.45%our 3.625% unsecured senior notes due May 2052 with net proceedsMarch 30, 2023 and an increase in shareholder's equity, primarily attributable to an increase in the fair value of $591.4 million, before expenses. See note 12 of the notes to consolidated financial statements included under Item 8 for further information regarding our May 2021 senior notes offering.equity securities.
Holding Company
Our holding company had $5.3$3.5 billion and $4.1$3.7 billion of investments, cash and cash equivalents and restricted cash and cash equivalents (invested assets) at December 31, 20212023 and December 31, 2020,2022, respectively. The increase in holding company invested assetsdecrease was primarily due to repurchases of our common stock and the retirement of our 3.625% unsecured senior notes due March 30, 2023, partially offset by dividends received from ourinsurance subsidiaries net proceeds from our May 2021 senior notes offering and an increase in the fair value of equity securities partially offsetheld by cash used in connection withour holding company. See note 23 of the acquisition of Metromont andnotes to repurchase outstanding shares ofconsolidated financial statements included under Item 8 for condensed financial information for our common stock. holding company.
The following table presents the composition of our holding company's invested assets.
| | | December 31, | | December 31, |
| | 2021 | | 2020 | | 2023 | | 2022 |
Fixed maturity securities | Fixed maturity securities | 4 | % | | 7 | % | Fixed maturity securities | 4 | % | | 4 | % |
Equity securities | Equity securities | 53 | % | | 45 | % | Equity securities | 49 | % | | 40 | % |
Short-term investments, cash and cash equivalents and restricted cash and cash equivalents | Short-term investments, cash and cash equivalents and restricted cash and cash equivalents | 43 | % | | 48 | % | Short-term investments, cash and cash equivalents and restricted cash and cash equivalents | 47 | % | | 56 | % |
Total | Total | 100 | % | | 100 | % | Total | 100 | % | | 100 | % |
|
After satisfying our interest and principal obligations on our senior long-term debt and notes payable to subsidiaries,paying dividends on our preferred stock when declared by our Board of Directors, as well as any other holding company obligations, excess liquiditycapital at Markel CorporationGroup is available to, among other things, allocate capital to our existing businesses, complete acquisitions, build our portfolio of equity securities or repurchase shares of our common stock.
In February 2022,November 2023, our Board of Directors approved a new share repurchase program that replaced the previous share repurchase program. The program provides for the repurchase of up to $750 million of common stock andstock. The program has no expiration date but may be terminated by the Board of Directors at any time. As of December 31, 2023, $713.0 million remained available for repurchases under the program.
Our underwriting operations collect premiums and pay claims, reinsurance costs and operating expenses. Premiums collectedWe may from time to time seek to prepay, retire or repurchase our underwriting operations are invested primarily in short-term investments and fixed maturity securities. Short-term investments held byoutstanding senior notes or preferred shares, through open market purchases, privately negotiated transactions or otherwise. Those prepayments, retirements or repurchases, if any, will depend on prevailing market conditions, our insurance subsidiaries provide liquidity for projected claims, reinsurance costs and operating expenses. Fixed maturity securities are held by our insurance subsidiaries to support our loss reserves and the eventual payment of claims, and therefore have maturities that generally match the duration of the underlying net loss reserves. As a holding company, Markel Corporation receives cash from its subsidiaries as reimbursement for operatingrequirements, contractual restrictions and other administrative expenses it incurs. The reimbursements are made within the guidelines of various management agreements between the holding company and its subsidiaries.factors.
The holding company relieshas historically primarily relied on dividends from its insurance subsidiaries to meet debt service obligations and pay dividends on our preferred stock.its obligations. Under the insurance laws of the various states in which our domestic insurance subsidiaries are incorporated, an insurer is restricted in the amount of dividends it may pay without prior approval of regulatory authorities. There are also regulatory restrictions on the amount of dividends that certain of our foreign insurance subsidiaries may pay based on applicable laws in their respective jurisdictions. At December 31, 2021,2023, our domestic insurance subsidiaries and Markel Bermuda Limited could pay ordinary dividends of $1.3$1.2 billion during the following twelve months under these laws.
We maintain aIn June 2023, we entered into an amended and restated credit agreement for our corporate revolving credit facility, which provides up to $300 million of capacity for future acquisitions, investments and stock repurchases, and for other working capital and general corporate purposes. At our discretion, up to $200 million of the total capacity may be used for letters of credit. We may increase the capacity of the facility by up to $200 million subject to obtaining commitments for the increase and satisfying certain other terms and conditions. Markel Group guaranteed the obligations under the facility of the insurance subsidiaries that are also parties to the credit agreement. This facility expires in April 2024. See note 12 of the notes to consolidated financial statements included under Item 8 for further discussion of our revolving credit facility.June 2028. As of December 31, 20212023 and 2020,2022, there were no borrowings outstanding on ourunder this revolving credit facility.
We were in compliance with all covenants contained in our corporate revolving credit facility at December 31, 2021.2023. To the extent that we are not in compliance with our
covenants, our access to the revolving credit facility could be restricted. While we believe this to be unlikely, the inability to access the revolving credit facility could adversely affect our liquidity. See note 14 of the notes to consolidated financial statements included under Item 8 for further discussion of our revolving credit facility.
We have access to various capital sources, including dividends from certain of our subsidiaries, holding company invested assets, undrawn capacity under our revolving credit facility and access to the debt and equity capital markets. We believe we have, or have access to, adequate liquidity to meet our capital and operating needs, including that which may be required to support the operating needs of our subsidiaries. However, the availability of these sources of capital and the availability and terms of future financings will depend on a variety of factors. See the "Access to Capital" risk factors under Item 1A Risk Factors for more discussion regarding our access to capital sources.
Operating Subsidiaries
Insurance
Within our insurance subsidiaries, our primary source of cash inflows is the collection of premiums, and our primary cash outflow is the subsequent payment of claims, reinsurance costs and operating expenses. Premiums collected by our underwriting operations are invested primarily in short-term investments and fixed maturity securities. Short-term investments held by our insurance subsidiaries provide liquidity for payment of projected claims, reinsurance costs and operating expenses. Fixed maturity securities are held by our insurance subsidiaries to support our loss reserves and the eventual payment of claims, and therefore have maturities that generally match the duration of the underlying net loss reserves.
We seek to maintain capital in each of our insurance subsidiaries that exceeds required capital levels, as prescribed by applicable regulators. Capital held at our insurance subsidiaries beyond that which we anticipate will be needed to cover payment of claims and operating expenses is typically invested in equity securities, which over the long run, have produced higher returns relative to fixed maturity securities and short-term investments. At least annually, when capital at an insurance subsidiary exceeds our target levels, it is typically paid to Markel Group in the form of dividends. In certain instances, an insurance subsidiary may require additional capital to meet our target capital levels. In these instances, Markel Group has historically contributed capital to the insurance subsidiary to restore capital to our target levels.
In 2023 and 2022, our insurance subsidiaries paid dividends totaling $310.0 million and $130.0 million, respectively, to Markel Group. Additionally, in 2022, as a result of unfavorable market value movements in the public equity markets, the portion of capital held in equity securities at our insurance subsidiaries declined significantly. Therefore, in order to maintain our target levels of excess capital within the impacted insurance subsidiaries, our holding company made capital contributions totaling $973.5 million in 2022. There were no capital contributions from our holding company to our insurance subsidiaries in 2023.
Markel Ventures
Our Markel Ventures operating subsidiaries include a diverse portfolio of businesses in a variety of industries. The nature of the cash inflows and outflows generated by each of the individual operating businesses varies based on their individual industries and business strategies. In general, these businesses operate using limited long-term debt and rely primarily on revolving lines of credit for their operational financing needs. Markel Ventures, Inc. may also provide loans or make contributions to these operating subsidiaries to fund strategic growth investments and projects. Capital used by Markel Ventures, Inc. to complete acquisitions consists of profits generated by Markel Ventures, as well as capital contributions from Markel Group and loans from our insurance subsidiaries.
Operating cash flows from our Markel Ventures operations was $568.1 million in 2023 and $260.3 million in 2022. After satisfying the obligations on their debt, along with any capital expenditures, operating cash flows from our Markel Ventures subsidiaries are available to be allocated across the Company by Markel Group. Historically, cash flows generated by our Markel Ventures operating subsidiaries have been retained by Markel Ventures, Inc., at Markel Group's direction, to fund growth opportunities within Markel Ventures or repay loans with our insurance subsidiaries, rather than making distributions to Markel Group. In 2023 and 2022, Markel Ventures, Inc. repaid $70.0 million and $44.9 million, respectively, of principle on debt with our insurance subsidiaries. As of December 31, 2023 and 2022, Markel Ventures, Inc.'s outstanding intercompany debt with our insurance subsidiaries was $738.0 million and $808.1 million, respectively, all of which is guaranteed by Markel Group.
As of December 31, 2023 and 2022, redeemable noncontrolling interests attributable to Markel Ventures, Inc. totaled $469.7 million and $523.2 million, respectively, which represents the obligation for Markel Ventures, Inc. to purchase the remaining equity interests in Markel Ventures businesses that are not wholly owned. Of the total balance at December 31, 2023, $82.6 million is available for redemption in 2024, with the remainder becoming redeemable between 2025 and 2030.
Various of our Markel Ventures subsidiaries maintain revolving credit facilities or lines of credit, which provide up to $680 million of aggregate capacity for working capital and other general operational purposes. A portion of the capacity on certain of these credit facilities may be used as security for letters of credit and other obligations. At December 31, 2023 and 2022, $169.5 million and $238.1 million, respectively, of borrowings were outstanding under these credit facilities. At December 31, 2023, all of our Markel Ventures subsidiaries were in compliance with all covenants contained in their respective credit facilities. To the extent our Markel Ventures subsidiaries are not in compliance with their respective covenants, access to their credit facilities could be restricted, which could adversely affect their operations.
Cash Flows and Invested Assets
Net cash provided by operating activities was $2.3$2.8 billion in 20212023 compared to $1.7$2.7 billion in 2020.2022. The increase in net cash flows from operating activities for the year ended December 31, 2021 was primarily due to higher net premium collections,an increase in operating cash flows from Markel Ventures and investments, partially offset by higher claims settlement activity, as a result of continued growthdecrease in premium volume withinoperating cash flows from our Insurance segment.insurance operations.
Net cash used by investing activities was $2.9$2.7 billion in 20212023 compared to $511.7 million$1.7 billion in 2020.2022. In 2021,2023, net cash used by investing activities included net purchases of fixed maturity securities netand equity securities of maturities$2.2 billion and $339.7 million, respectively, and net sales of $2.5 billion. Net cash used by investing activities in 2021 also included $510.9 millionshort-term investments of net cash used for the acquisitions of Buckner and Metromont.$202.9 million. In 2020,2022, net cash used by investing activities included $829.5 million of net purchases of fixed maturity securities, short-term investments and $550.8equity securities of $959.7 million, of$846.0 million and $201.0 million, respectively. In 2022, net cash used for the acquisition of Lansing. Net cash used by investing activities in 2020 was net of $1.2 billion$630.0 million of proceeds from sales of equity securities, net of purchases equity securities.
In 2020, given the dislocation in the financial markets and related uncertainty around the global credit markets resulting from the onset of the COVID-19 pandemic, we increased our allocation to cash and short-term investments by retainingrestricted cash proceeds from maturitiesacquired as part of fixed maturity securities, pausing our purchasesconsolidation of equity securities and,Markel CATCo Re, of which $169.4 million was subsequently distributed to Markel CATCo investors for shares that were redeemed in some instances, selling certain equity securities based on our views ofconjunction with the underlying fundamentals of these positions and where pricing was deemed appropriate. In 2021, as global markets stabilized, we reallocated cash to purchase fixed maturity securities, to support our growing underwriting business, as well as equity securities.buy-out transaction. Cash flow from investing activities is also affected by various
other factors such as anticipated payment of claims, financing activity, acquisition opportunities and individual buy and sell decisions made in the normal course of our investment portfolio management.
In 2023, we continued to increase our allocation of cash and short-term investments to fixed maturity securities in response to higher interest rates and to support our growing underwriting business. Additionally, we increased our purchases of equity securities in 2023.
Invested assets were $28.3$30.9 billion at December 31, 20212023 compared to $24.9$27.4 billion at December 31, 2020,2022, reflecting an increase of 14%13% in 20212023. The increase was primarily attributable to operating cash flows, from operations of $2.3 billion and increasesas well as an increase in the fair value of our equity securities, driven by favorable market value movements.portfolio. The following table presents the composition of our invested assets.
| | | December 31, | | December 31, |
| | 2021 | | 2020 | | 2023 | | 2022 |
Fixed maturity securities | Fixed maturity securities | 44 | % | | 43 | % | Fixed maturity securities | 47 | % | | 43 | % |
Equity securities | Equity securities | 32 | % | | 28 | % | Equity securities | 31 | % | | 28 | % |
Short-term investments, cash and cash equivalents and restricted cash and cash equivalents | Short-term investments, cash and cash equivalents and restricted cash and cash equivalents | 24 | % | | 29 | % | Short-term investments, cash and cash equivalents and restricted cash and cash equivalents | 22 | % | | 29 | % |
Total | Total | 100 | % | | 100 | % | Total | 100 | % | | 100 | % |
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Our insurance operations require capital to support premium writings, and we remain committed to maintaining adequate capital and surplus at each of our insurance subsidiaries. The National Association of Insurance Commissioners (NAIC) developed a model law and risk-based capital formula designed to help regulators identify domestic property and casualty insurers that may be inadequately capitalized. Under the NAIC's requirements, a domestic insurer must maintain total capital and surplus above a calculated threshold or face varying levels of regulatory action. Capital adequacy of our foreign insurance subsidiaries is regulated by applicable laws of the United Kingdom, Bermuda and other jurisdictions, including Germany. At December 31, 2021,2023, the capital and surplus of each of our insurance subsidiaries significantly exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements.
Critical accounting estimates are those estimates that both are important to the portrayal of our financial condition and results of operations and require us to exercise significant judgment. The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of material contingent assets and liabilities. These estimates, by necessity, are based on assumptions about numerous factors. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements. Our accounts with accounting policies that involve critical accounting estimates are unpaid losses and loss adjustment expenses and goodwill and intangible assets.
Our consolidated balance sheets included estimated unpaid losses and loss adjustment expenses of $18.2$23.5 billion and reinsurance recoverables on unpaid losses of $6.9$8.8 billion at December 31, 20212023 compared to $16.2$20.9 billion and $5.7$8.0 billion, respectively, at December 31, 2020.2022. Included in these balances were unpaid losses and loss adjustment expenses and reinsurance recoverables on unpaid losses attributable to our program services business and other fronting arrangements totaling $4.2$5.2 billion for the year endedas of both December 31, 20212023 and $3.3 billion for the year ended2022. Additionally, consolidated unpaid losses and loss adjustment expenses as of December 31, 2020.2023 and December 31, 2022 included $185.0 million and $347.9 million, respectively, of fully collateralized reserves attributable to Markel CATCo Re, which we consolidate following the Markel CATCo buy-out. See note 17 of the notes to consolidated financial statements for further details regarding the consolidation of Markel CATCo Re. Our consolidated balance sheets do not include reserves for losses and loss adjustment expenses attributed to unconsolidated subsidiaries or affiliates that we manage through our Nephila insurance-linked securities operations.
We accrue liabilities for unpaid losses and loss adjustment expenses based upon estimates of the ultimate amounts payable. We maintain reserves for specific claims incurred and reported (case reserves) and reserves for claims incurred but not reported (IBNR reserves).
Reported claims are in various stages of the settlement process, and the corresponding reserves for reported claims are based upon all information available to us. Case reserves consider our estimate of the ultimate cost to settle the claims, including investigation and defense of lawsuits resulting from the claims, and may be subject to adjustment for differences between costs originally estimated and costs subsequently re-estimated or incurred. Claims are settled based upon their merits, and some claims may take years to settle, especially if legal action is involved. As of any balance sheet date, all claims have not yet been reported, and some claims may not be reported for many years. As a result, the liability for unpaid losses and loss adjustment expenses includes significant estimates for incurred but not reported claims.
information that would allow us to more accurately estimate future payments. There is also often a time lag between cedents establishing case reserves andor re-estimating their reserves and notifying us of thethose new or revised case reserves. As a result, the reporting lag is more pronounced in our reinsurance contracts than in our insurance contracts due to the reliance on ceding companies to report their claims and, in some instances, loss estimates to us.contracts. On reinsurance transactions, the reporting lag will generally be 60 to 90 days after the end of a reporting period but can be longer in some cases. There may also be a more pronounced reporting lag, as well as reliance on third-party claims handling practices and reserve estimates, on insurance contracts for which we are not the primary insurer and participate only in excess layers of loss. Based on the experience of our actuaries and management, we select loss development factors and trending techniques to mitigate the difficulties caused by reporting lags. At least annually, we evaluate and update our loss development factors and trending factor selectionsassumptions using cedent specificour own loss data, as well as cedent-specific and industry data.data, and update them as needed.
U.S. GAAP requires that IBNR reserves be based on the estimated ultimate cost of settling claims, including the effects of inflation and other social and economic factors, using past experience adjusted for current trends and any other factors that would modify past experience. IBNR reserves are generally calculated by subtracting paid losses and loss adjustment expenses and case reserves from estimated ultimate losses and loss adjustment expenses. IBNR reserves were 67%72% of total unpaid losses and loss adjustment expenses at December 31, 20212023 compared to 66%70% at December 31, 2020.2022.
Each quarter, our actuaries prepare estimates of the ultimate liability for unpaid losses and loss adjustment expenses based on established actuarial methods. Management reviews these estimates, supplements the actuarial analyses with information provided by claims, underwriting and other operational personnel and determines its best estimate of loss reserves, which is recorded in our consolidated financial statements. Our procedures for determining the adequacy of loss reserves at the end of the year are substantially similar to the procedures applied at the end of each interim period.
Any adjustments to reserves resulting from our interim or year-end reviews, including changes in estimates, are recorded as a component of losses and loss adjustment expenses in the period of the change. Reserve changes that increase previous estimates of ultimate claims cost are referred to as unfavorable or adverse development, or reserve strengthening. Reserve changes that decrease previous estimates of ultimate claims cost are referred to as favorable development.
For our insurance operations, we are generally notified of insured losses by our insureds, their brokers or their brokers.the primary insurer in instances in which we participate in excess layers of insured losses on a contract. Based on this information, we establish case reserves by estimating the expected ultimate losses from the claim, (includingincluding any administrative or legal costs associated with settling the claim).claim. Our claims personnel use their knowledge of the policy provisions and details specific to the claim, along with information provided by internal and external experts, including underwriters, actuaries and legal counsel, to estimate the expected ultimate losses.
For our reinsurance operations, case reserves are generally established based on reports received from ceding companies or their brokers. For excess of loss contracts, we are typically notified of insurance losses on specific contracts and record a case reserve for the estimated expected ultimate losses from the claim. For quota share contracts, we typically receive aggregated claims information and record a case reserve based on that information. As with insurance business, we evaluate this information and estimate the expected ultimate losses.
Our liabilities for unpaid losses and loss adjustment expenses can generally be categorized into two distinct groups, short-tail business and long-tail business. Short-tail business refers to lines of business, such as property, accident and health, automobile, watercraft and marine hull exposures, for which losses are usually known and paid shortly after the loss actually occurs. Long-tail business describesrefers to lines of business for which specific losses take much longer to emerge and may not be known and reported for some time and losses take much longer to emerge.time. Given the time frame over which long-tail exposures are ultimately settled, there is greater uncertainty and volatility in these lines than in short-tail lines of business. Our long-tail coverages consist of most casualty lines, including professional liability, directors' and officers' liability, products liability, general and excess liability and excess and umbrella exposures, as well as workers' compensation insurance.insurance, many of which have been a significant source of growth in premium volume in recent years. Some factors that contribute to the uncertainty and volatility of long-tail casualty programs,business, and thus require a significant degree of judgment in the reserving process, include the effects of unanticipated levels of economic inflation, the impact of social inflation, the inherent uncertainty as to the length of reporting and payment development patterns, the possibility of judicial interpretations or legislative changes, including changes in workers' compensation benefit laws, that might impact future loss experience relative to prior loss experience and the potential lack of comparability of the underlying data used in performing loss reserve analyses.
Our ultimate liability may be greater or less than current reserves. Changes in our estimated ultimate liability for loss reserves generally occur as a result of the emergence of unanticipated loss activity, the completion of specific actuarial or claims studies or changes in internal or external factors. We closely monitor new information on reported claims and use statistical analyses prepared by our actuaries to evaluate the adequacy of our recorded reserves. We are required to exercise considerable judgment when assessing the relative credibility of loss development trends. Our philosophy is to establish loss reserves that are more likely redundant than deficient. This means that we seek to establish loss reserves that will ultimately prove to be adequate. As a result, if new information or trends indicate an increase in frequency or severity of claims in excess of what we initially anticipated, we generally respond quickly and increase loss reserves. If, however, frequency or severity trends are more favorable than initially anticipated, we often wait to reduce our loss reserves until we can evaluate experience in additional periods to confirm the credibility of the trend. In addition, for long-tail lines of business, trends develop over longer periods of time, and as a result, we give credibility to these trends more slowly than for short-tail or less volatile lines of business.
In establishing our liabilities for unpaid losses and loss adjustment expenses, our actuaries estimate an ultimate loss ratio, by accident year or policyunderwriting year, for each of our product lines with input from our underwriting and claims personnel. For product lines in which loss reserves are established on a policyunderwriting year basis, we have developed a methodology to convert from policyunderwriting year to accident year for financial reporting purposes. In estimating an ultimate loss ratio for a particular line of business, our actuaries may use one or more actuarial reserving methods and select from these a single point estimate. To varying degrees, these methods include detailed statistical analysis of past claim reporting, settlement activity, claim frequency and severity, policyholder loss experience, industry loss experience and changes in market and economic conditions, policy forms and exposures. The actuarial methods we use include:
A key assumption in most actuarial analyses is that past development patterns will repeat themselves in the future, absent a significant change in internal or external factors that influence the ultimate cost of our unpaid losses and loss adjustment expenses. Our estimates reflect implicit and explicit assumptions regarding the potential effects of external factors, including economic and social inflation, judicial decisions, changes in law, general economic conditions and recent trends in these factors. Our actuarial analyses are based on statistical analysis but also consist of reviewing internal factors that are difficult to analyze statistically, including changes in underwriting and claims handling practices, as well as rate changes. In some of our markets,the London market, and where we act as a reinsurer or participate only in excess layers of insured losses, the timing and amount of information reported about underlying claims are in the control of third parties. This can also affect estimates and require re-estimation as new information becomes available.
Loss reserves are established at management's best estimate, which is developed using the actuarially calculated point estimate as the starting point. The actuarial point estimate represents our actuaries' estimate of the most likely amount that will ultimately be paid to settle the losses that have occurred at a particular point in time; however, there is inherent uncertainty in the point estimate as it is the expected value in a range of possible reserve estimates. Similarly, the point estimate for ceded losses is calculated based on the ultimate gross loss amount expected to be paid, as well as the frequency and severity of the underlying claims, which ultimately determines coverage under the applicable ceded reinsurance contracts. Therefore, ceded loss estimates are subject to many of the same judgments and assumptions as the gross loss estimates. In some cases, actuarial
In developing its best estimate of loss reserves, management's philosophy is to establish loss reserves that are more likely to be redundant rather than deficient, and therefore, will ultimately prove to be adequate. Management's approach to establishing loss reserves typically results in loss reserves that exceed the calculated actuarial point estimate. Management also considers the range, or variability, of reasonably possible lossesloss outcomes determined by our actuaries when establishing its best estimate for loss reserves. The actuarial ranges represent our actuaries' estimate of a likely lowest amount and likely highest amount that willcould ultimately be paid to settle the losses that have occurred at a particular point in time. The range determinations are based on estimates and actuarial judgements and are intended to encompass reasonably likely changes in one or more of the factors that were used to determine the point estimates. Using statistical models, our actuaries establish high and low ends of a range of reasonable reserve estimates for each of our underwriting segments. Additionally, following an acquisition of insurance operations, acquired reserves initially are recorded at fair value, and therefore our recorded loss reserves may be closer to the actuarial point estimate until we build total loss reserves that are consistent with our historic level of confidence. Management's best estimate of net reserves for unpaid losses and loss adjustment expenses exceeded the actuarially calculated point estimate by $638.3$683.4 million, or 6.0%5.0%, at December 31, 2021,2023, compared to $587.4$688.4 million, or 5.9%5.8%, at December 31, 2020.2022.
Loss frequency and loss severity are two key measures of loss activity that often result in adjustments to actuarial assumptions relative to ultimate loss reserve estimates. Loss frequency measures the number of claims per unit of insured exposure. When the number of newly reported claims is higher than anticipated, generally speaking, loss reserves are generally increased. Conversely, loss reserves are generally decreased when fewer claims are reported than expected. Loss severity measures the average size of a claim. When the average severity of reported claims is higher than originally estimated, loss reserves are typically increased. When the average claim size is lower than anticipated, loss reserves are typically decreased.
Changes in prior years loss reserves, including the trends and factors that impacted loss reserve development in 20212023 and 2020,2022, as well as further details regarding the historical development of reserves for losses and loss adjustment expenses and changes in methodologies and assumptions used to calculate reserves for unpaid losses and loss adjustment expenseexpenses are discussed in further detail in note 911 of the notes to consolidated financial statements included under Item 8.
The following table summarizes our reserves for net unpaid losses and loss adjustment expenses and the actuarially established high and low ends of a range of reasonable reserve estimates at December 31, 2021.2023. This table excludes the fully collateralized reserves attributable to Markel CATCo Re. As described in note 911 of the notes to consolidated financial statements included under Item 8, unpaid losses and loss adjustment expenses attributable to acquisitions are recorded at fair value as of the acquisition date, which generally consists of the present value of the expected net loss and loss adjustment expense payments plus a risk premium. The net loss reserves presented in this table represent our
estimated future payments for losses and loss adjustment expenses, whereas the reserves for unpaid losses and loss adjustment expenses included on the consolidated balance sheet include the unamortized portion of fair value adjustments recorded in conjunction with an acquisition.
Undue reliance should not be placed on these ranges of estimates as they are only one of many points of reference used by management to determine its best estimate of ultimate losses. Further, actuarial ranges may not be a true reflection of the potential variability between loss reserves estimated at the balance sheet date and the ultimate cost of settling claims. Similar to the development of our estimate of ultimate losses, actuarial ranges are developed based on known events as of the valuation date, while ultimate paid losses are subject to events and circumstances that are unknown as of the valuation date.
Goodwill and intangible assets are recorded as a result of business acquisitions. Goodwill represents the excess of the amount paid to acquire a business over the net fair value of assets acquired and liabilities assumed at the date of acquisition. Indefinite-lived and other intangible assets are recorded at fair value as of the acquisition date. The determination of the fair value of certain assets acquired, including goodwill and intangible assets, and liabilities assumed involves significant judgment and the use of valuation models and other estimates, which require assumptions that are inherently subjective. DuringWe did not make any significant acquisitions during the years ended December 31, 2021 and 2020, we recorded $497.7 million and $497.1 million, respectively, of goodwill and intangible assets in connection with acquisitions.2023 or 2022.
Intangible assets with definite lives are reviewed for impairment when events or circumstances indicate that their carrying value may not be recoverable. Goodwill and indefinite-lived intangible assets are tested for impairment annually, or when events or circumstances indicate that their carrying value may not be recoverable. A significant amount of judgment is required in performing impairment tests, including the optional assessment of qualitative factors for the annual impairment
test, which is used to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. This assessment serves as a basis for determining whether it is necessary to perform a quantitative impairment test.
When performing our qualitative assessments, we considered macroeconomic factors such as industry conditions and market conditions. We also considered reporting unit-specific events, actual financial performance versus expectations and management's future business expectations, as well as the amount by which the fair value of the reporting unit exceeded its carrying value at the date of the last quantitative assessment. As part of our qualitative assessment of recently acquired reporting units with material goodwill, we considered the fact that the businesses had been acquired in orderly transactions between market participants, and our purchase price represented fair value at acquisition. We considered similar factors to determine if there were any indicators requiring an assessment of the recoverability of our definite lived intangible assets and concluded there were not. For recent acquisitions for which we elected to perform a qualitative assessment, there were no events since acquisition that had a significant adverse impact on the fair value of these reporting units through the assessment date. Based on the results of our qualitative assessments, we believe it is more likely than not that the fair value of each of thesethe assessed reporting units exceeded its respective carrying amount asamount.
The Company does not manage products at this level of aggregation as it offers a diverse portfolio of products and manages these products in logical groupings within each underwriting segment.
The Company does not manage the Markel Ventures portfolio of businesses at this level of aggregation due to the distinct characteristics of each business and the autonomy with which each business operates. Management reviews and assesses the performance of the Markel Ventures businesses in the aggregate at the Markel Ventures segment level, while individual management teams are responsible for developing strategic initiatives, managing day-to-day operations and making investment and capital allocation decisions for their respective companies.
3. Acquisitions and Dispositions
In December 2021, the Company acquired 51% of Metromont LLC (Metromont), a precast concrete manufacturer and concrete building solutions provider for commercial projects. Under the terms of the acquisition agreement, the Company has the option to acquire the remaining equity interests and the remaining equity holders have the option to sell their interests to the Company in the future.Company. The redemption value of the remaining equity interests is generally based on Metromont's earnings in specified periods preceding the redemption date. Total consideration for the transaction was $282.3$274.5 million, all of which was cash.
In August 2021, the Company acquired 90% of the holding company for the Buckner HeavyLift Cranes companies (Buckner), a provider of crane rental services for large commercial contractors. Under the terms of the acquisition agreement, the Company has the option to acquire the remaining equity interests and the remaining equity holders have the option to sell their interests to the Company in the future. The redemption value of the remaining equity interests is generally based on Buckner's earnings in specified periods preceding the redemption dates. Total consideration for the transaction was $237.9 million, all of which was cash.
4. Investments
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.issuer.
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 did not have an allowance for credit losses for any available-for-sale securities as of December 31, 20212023 or 2020.2022.
Quarterly, 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 thea 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.
The following table presents the components of restricted assets.
The following table summarizes changes in Level 3 investments measured at fair value on a recurring basis.
6. Equity Method Investments
The following table presents a rollforward of the components of goodwill by reportable segment.
The Company completed its annual tests for goodwill and indefinite-lived intangible asset impairment as of October 1, 20212023 based upon results of operations through September 30, 2021.2023. See note 1 for further details regarding impairment testing. Based on the resultsThere was no impairment of these tests, as well as analysisgoodwill during 2023 or 2021 and no impairment of definite-livedindefinite-lived intangible assets during 2023, 2022 or 2021. For the Company determined noneyear ended December 31, 2022, impairment of its goodwill or intangible assets were impaired. However, revenues within the Company'swas $80.0 million, which was attributable to our Nephila ILS operations continueoperations.
The following table presents a rollforward of net intangible assets by reportable segment.
The following table presents the components of intangible assets.
The following table summarizes details for the Company's operating leases recorded on the consolidated balance sheet.sheets.
The following table summarizes maturities of the Company's operating lease liabilities as of December 31, 2021,2023, which reconciles to total operating lease liabilities included in other liabilities on the Company's consolidated balance sheet.
In 2021, current accident year losses and loss adjustment expenses included $195.0 million of net losses and loss adjustment expenses from Winter Storm Uri, European Floods and Hurricane Ida (2021 Catastrophes).Ida. These net losses and loss adjustment expenses were net of ceded losses of $221.7 million.
The Company uses a variety of techniques to establish the liabilities for unpaid losses and loss adjustment expenses based upon estimates of the ultimate amounts payable. The Company maintains reserves for specific claims incurred and reported (case reserves) and reserves for claims incurred but not reported (IBNR reserves), which include expected development on reported claims. The Company does not discount its reserves for losses and loss adjustment expenses to reflect estimated present value, except for reserves held for a runoffrun-off book of United Kingdom (U.K.)U.K. motor business. Additionally, reserves assumed in connection with an acquisition are recorded at fair value at the acquisition date. The fair value adjustment includes an adjustment to reflect the acquired reserves for losses and loss adjustment expenses at present value plus a risk premium, the net of which is amortized to losses and loss adjustment expenses within the consolidated statements of income.
As of any balance sheet date, all claims have not yet been reported, and some claims may not be reported for many years. As a result, the liability for unpaid losses and loss adjustment expenses includes significant estimates for incurred but not reported claims.
IBNR reserves are based on the estimated ultimate cost of settling claims, including the effects of inflation and other social and economic factors, using past experience adjusted for current trends and any other factors that would modify past experience. IBNR reserves are generally calculated by subtracting paid losses and loss adjustment expenses and case reserves from estimated ultimate losses and loss adjustment expenses. IBNR reserves were 67%72% of total unpaid losses and loss adjustment expenses at December 31, 20212023 compared to 66%70% at December 31, 2020.2022.
In establishing liabilities for unpaid losses and loss adjustment expenses, the Company's actuaries estimate an ultimate loss ratio, by accident year or policyunderwriting year, for each product line with input from underwriting and claims personnel. For product lines in which loss reserves are established on a policyan underwriting year basis, the Company has developed a methodology to convert from policyunderwriting year to accident year for financial reporting purposes. In estimating an ultimate loss ratio for a particular line of business, the actuaries may use one or more actuarial reserving methods and select from these a single point estimate. To varying degrees, these methods include detailed statistical analysis of past claim reporting, settlement activity, claim frequency and severity, policyholder loss experience, industry loss experience and changes in market and economic conditions, policy forms and exposures. Greater judgment may be required when new product lines are introduced or when there have been changes in claims handling practices, as the statistical data available may be insufficient. Greater judgment also may be required for product lines that experience a low frequency of high severity claims, particularly when the Company is reliant on third party case reserve estimates and claims handling practices. These estimates also reflect implicit and explicit assumptions regarding the potential effects of external factors, including economic and social inflation, judicial decisions, changes in law, general economic conditions and recent trends in these factors. Management believes the process of evaluating past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events.
Loss reserves are established at management's best estimate, which is developed using the actuarially calculated point estimate as the starting point. The actuarial point estimate represents the actuaries' estimate of the most likely amount that will ultimately be paid to settle the losses that have occurred at a particular point in time; however, there is inherent uncertainty in the point estimate as it is the expected value in a range of possible reserve estimates. Similarly, the point estimate for ceded losses is calculated based on the ultimate gross loss amount expected to be paid, as well as the frequency and severity of the underlying claims, which ultimately determines coverage under the applicable ceded reinsurance contracts. Therefore, ceded loss estimates are subject to many of the same judgments and assumptions as the gross loss estimates. In some cases, actuarial analyses, which are generally based on statistical analysis, cannot fully incorporate all of the subjective factors that affect development of losses. In other cases, management's perspective of these more subjective factors may differ from the actuarial perspective. Subjective factors influencing the development of management's best estimate include: the credibility and timeliness of claims and loss information received from cedents and other third parties,parties; and the impacts of economic and social inflation, judicial decisions, changes in law, changes in underwriting or claims handling practices, general economic conditions, the risk of moral hazard and other current and developing trends within the insurance and reinsurance markets, including the effects of competition. For example, the Company's loss experience in recent years has reflected higher than anticipated levels of economic inflation, as well as the impacts of social inflation, including the rising cost to adjust and settle claims and the impact of more pervasive litigation financing trends.
Inherent in the Company's reserving practices is the desire to establish loss reserves that are more likely redundant than deficient, and therefore, will ultimately prove to be adequate. This approach to establishing loss reserves typically results in loss reserves that exceed the calculated actuarial point estimate. However, following an acquisition of insurance operations, acquired reserves initially are recorded at fair value, and therefore the acquired loss reserves may be closer to the actuarial point estimate until the Company builds total loss reserves that are consistent with the Company's historic level of confidence. Management continually attempts to improve its loss estimation process by refining its ability to analyze loss development patterns, claim payments and other information, but uncertainty remains regarding the potential for adverse development of estimated ultimate liabilities.
The Company's ultimate liability may be greater or less than current reserves. Changes in the Company's estimated ultimate liability for loss reserves generally occur as a result of the emergence of unanticipated loss activity, the completion of specific actuarial or claims studies or changes in internal or external factors that impact the assumptions used to derive the Company's estimates. The Company closely monitors new information on reported claims and uses statistical analyses prepared by its actuaries to evaluate the adequacy of recorded reserves. Management exercises judgment when assessing the relative credibility of loss development trends.
Management currently believes the Company's gross and net reserves are adequate. However, there is no precise method for evaluating the impact of any significant factor on the adequacy of reserves, and actual results will differ from original estimates.
The following tables summarize, by segment, the product lines with the most significant changes in prior accident years loss reserves for the years ended December 31, 2021, 20202023, 2022 and 2019,2021, along with the corresponding accident years and the trends and factors that impacted management's best estimate of ultimate losses and loss adjustment expenses on underlying products in each of these product lines. The Company does not estimate losses at this level of aggregation as it offers a diverse portfolio of products and manages these products in logical groupings within each underwriting segment. As a result of the trends and factors described in the following tables, the Company's actuaries adjusted their estimates of the ultimate liability for unpaid losses and loss adjustment expenses. Additionally, forFor those product lines with favorable development on prior accident years loss reserves, management has now given more credibility to the favorable trends observed by the Company's actuaries and after also incorporating these favorable trends into its best estimate, reduced prior years loss reserves accordingly. The unfavorable claims and loss trends experienced on the Company's U.S. and Bermuda general liability and professional liability product lines in 2023 and 2022 reflected broader market conditions, including the effects of economic and social inflation, and disrupted the development of the claims trend observed in 2021 and prior years. In 2022, these changes in trends were most impactful on the 2018 and 2019 accident years for the professional liability product lines and the 2016 to 2019 accident years for the general liability product lines. In 2023, we continued to observe similar trends on those accident years and also determined that the loss trends on more recent accident years were following a similar loss development trend at the same stage as older accident years. Consistent with the Company's reserving philosophy, management is responding quickly to increase loss reserves following any indication of increased claims frequency or severity in excess of previous expectations, however in instances where trends have been more favorable than previously anticipated, management will wait to reduce loss reserves until those trends are observed over additional periods of time.
The following tables present undiscounted loss development information, by accident year, for the Company's Insurance and Reinsurance segments, including cumulative incurred and paid losses and allocated loss adjustment expenses, net of reinsurance, as well as the corresponding amount of IBNR reserves as of December 31, 2021.2023. This level of disaggregation is consistent with how the Company analyzes loss reserves for both internal and external reporting purposes. The loss development information for the years ended December 31, 20122014 through 20202022 is presented as supplementary information. All amounts included in the following tables related to transactions denominated in a foreign currency have been translated into U.S. Dollars using the exchange rates in effect at December 31, 2021.2023.
The difference between the segment loss development implied by the tables for the year ended December 31, 20212023 and actual losses and loss adjustment expenses recognized on prior accident years for the Insurance and Reinsurance segments for the year ended December 31, 20212023 is primarily attributed to the fact that amounts presented in these tables exclude amounts attributed to the 20112013 and prior accident years. AdverseFavorable development on 20112013 and prior accident years for the year ended December 31, 20212023 totaled $26.8$25.9 million for the Insurance segment.segment, reflecting modest favorable development on the segment's professional liability, marine and energy and general liability product lines. Favorable development on 20112013 and prior accident years for the year ended December 31, 20212023 totaled $57.2$69.4 million for the Reinsurance segment. For the Reinsurance segment, this favorable developmentwhich was due in part to lower loss severity than expected paid and incurred lossespreviously anticipated on reported claims within the segment's professional liability and property product lines across multiple accident years prior to 2012, which partially offset the overall increase in prior accident year losses and loss adjustment expenseslines. Additionally, within the Reinsurance segment's professional liability product lines driven bysegment, net reserves on the recognition2014 and 2015 accident years decreased $28.1 million as a result of additional exposuresreserves ceded in connection with the retroactive reinsurance transaction related to net favorable premium adjustments on more recent accident years. This favorable development was also duethe Company's run-off book of U.K.motor casualty business completed in part to lower than expected paid losses on reported claims within the segment's general liability product lines on the 2011 accident year.2023.
The remaining difference between the segment loss development implied by the tables for the year ended December 31, 20212023 and actual losses and loss adjustment expenses on prior accident years is attributed to the fact that amounts presented in these tables exclude unallocated loss adjustment expenses and exclude amounts attributable to reserve discounting, and fair value adjustments recorded in conjunction with acquisitions, as well as differences in the presentation of foreign currency movements, as previously described, none of which are material to the Insurance or Reinsurance segments.
The Insurance segment table that follows also includes claim frequency information, by accident year. The Company defines a claim as a single claim incident, per policy, which may include multiple claimants and multiple coverages on a single policy. Claim counts include claims closed without a payment as well as claims where the Company is monitoring to determine if an exposure exists, even if a reserve has not been established.
All of the business contained within the Company's Reinsurance segment represents treaty business that is assumed from other insurance or reinsurance companies, for which the Company does not have access to the underlying claim counts. Further, this business includes both quota share and excess of loss treaty reinsurance, through which only a portion of each reported claim results in losses to the Company. As such, the Company has excluded claim count information from the Reinsurance segment disclosures.
The following table presents supplementary information about average historical claims duration as of December 31, 20212023 based on the cumulative incurred and paid losses and allocated loss adjustment expenses presented above.
The following table reconciles the net incurred and paid loss development tables to the liability for losses and loss adjustment expenses on the consolidated balance sheet.
The Company's reserves for losses and loss adjustment expenses related to A&E exposures represent management's best estimate of ultimate settlement values based on statistical analysis of these reserves by the Company's actuaries. A&E exposures are subject to significant uncertainty due to potential loss severity and frequency resulting from the uncertain and unfavorable legal climate. A&E reserves could be subject to increases in the future, however, management believes the Company's gross and net A&E reserves at December 31, 20212023 are adequate.
In reinsurance and retrocession transactions, an insurance or reinsurance company transfers, or cedes, all or part of its exposure in return for a premium. The ceding of insurance does not legally discharge the Company from its primary liability for the full amount of the policies, and the Company will be required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance or retrocessional agreement. A credit risk exists with ceded reinsurance to the extent that any reinsurer is unable to meet the obligations assumed under the reinsurance or retrocessional contracts. Allowances are established for credit losses expected to be recognized over the life of the reinsurance recoverables.
Within its underwriting operations, the Company uses reinsurance and retrocessional reinsurance to manage its net retention on individual risks and overall exposure to losses while providing it with the ability to offer policies with sufficient limits to meet policyholder needs.
The following tables summarize the effect of reinsurance and retrocessional reinsurance on premiums written and earned.
Substantially all of the premiums written and earned in the Company's program services and other fronting operations for the years ended December 31, 2021, 20202023, 2022 and 20192021 were ceded. The percentage of consolidated ceded earned premiums to gross earned premiums was 38%39%, 37%38% and 39%38% for the years ended December 31, 2021, 20202023, 2022 and 2019,2021, respectively. The percentage of consolidated assumed earned premiums to net earned premiums was 27%31%, 26%30% and 27% for the years ended December 31, 2021, 20202023, 2022 and 2019,2021, respectively.
Substantially all of the incurred losses and loss adjustment expenses in the Company's program services and other fronting operations whichwere ceded. These losses totaled $2.5 billion and $1.6$3.0 billion for the years ended December 31, 20212023 and 2020, respectively, were ceded.2022, respectively.
The following table summarizes the effect of reinsurance and retrocessional reinsurance on losses and loss adjustment expenses in the Company's underwriting operations.
The following table summarizes the Company's senior long-term debt and other debt.
The Company's 7.35% unsecured senior notes due August 15, 2034 are not redeemable. The Company's other unsecured senior notes are redeemable by the Company at any time, subject to payment of a make-whole premium to the noteholders. None of the Company's senior long-term debt is subject to any sinking fund requirements.
The estimated fair value of the Company's senior long-term debt and other debt was $5.0$3.4 billion and $4.4$3.5 billion at December 31, 20212023 and 2020,2022, respectively.
The following table summarizes the future principal payments due at maturity on senior long-term debt and other debt as of December 31, 2021.2023.
The following table presents the components of domestic and foreign deferred tax assets and liabilities.
Deferred tax assets and liabilities are recorded on the consolidated balance sheets on a net basis by taxing jurisdiction. As of December 31, 20212023 and 2020,2022, the Company's consolidated balance sheets included net deferred tax liabilities of $1.4$1.2 billion and $990.1$896.7 million, respectively, in other liabilities and net deferred tax assets of $18.4$23.5 million and $3.9$37.2 million, respectively, in other assets.
The Company is subject to income tax in the U.S. and in foreign jurisdictions. The Internal Revenue Service is currently examining the Company's 2017 U.S. federal income tax return. The Company believes its income tax liabilities are adequate as of December 31, 2021,2023, however, these liabilities could be adjusted as a result of this examination. With few exceptions, including the 2017 U.S. federal income tax return, the Company is no longer subject to income tax examination by tax authorities for years ended before January 1, 2017.2020.
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). Voting shares in Markel CATCo Reinsurance Fund Ltd. and Markel CATCo Re are held by MCIM, which has the power to direct the activities that most significantly impact the economic performance of these entities. The Markel CATCo Funds issued 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 investors through its nonvoting preference shares. Both Markel CATCo Re and the Markel CATCo Funds through those nonvoting preference shares. Voting shareswere placed into run-off in Markel CATCo Reinsurance Fund Ltd. and Markel CATCo Re are held by MCIM.
The Company engages in certain related party transactions in the normal course of business at arm's length.
Within the Company's insurance-linked securities operations, the Company provides investment and insurance management services through Nephila Holdings Ltd. (together with its consolidated subsidiaries, Nephila). 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 a variety of insurance-linked securities in the insurance, reinsuranceproperty catastrophe, climate and weatherspecialty markets, Nephila also provides managing general agent services and acts as an insurance manager to certain Bermuda Class 3 and 3A reinsurance companies, Lloyd's Syndicate 2357 and Lloyd's Syndicate 2357 (Syndicate 2357)2358 (collectively, the Nephila Reinsurers), as well as other unaffiliated insurance entities.. Nephila receives management fees for investment and insurance management services provided through its insurance-linked securities operations primarily based on the net asset value of the accounts managed, and, for certain funds, incentive fees based on their annual performance. Prior to the annual performancedisposition of the funds managed.Velocity in February 2022, Nephila also receives commissions fromprovided managing general agent services to the Nephila Reinsurers which are based on the direct written premiums of the insurance contracts placed.in exchange for commissions. For the years ended December 31, 2021, 20202023, 2022 and 2019,2021, total revenues attributed to unconsolidated entities managed by Nephila were $141.9$97.5 million, $152.0$79.5 million and $165.5$141.9 million, respectively.
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 Company holds a minority ownership interest in Hagerty, which operates primarily as a managing general agent under the names Hagerty Insurance Agency and Hagerty Classic Marine Insurance Agency and also includes Hagerty Re,Reinsurance Limited (Hagerty Re), a Bermuda Class 3 reinsurance company. Essentia Insurance Company (Essentia), one ofThrough the Company's underwriting operations, the Company underwrites insurance subsidiaries, is an underwriter for Hagerty, in the U.S., and a portion of this insurancewhich is ceded to Hagerty Re. ForThe amounts attributed to these arrangements are summarized in the years endedfollowing table.
A "rating agency event" means that any nationally recognized statistical rating organization that publishes a rating for the Company amends, clarifies or changes the criteria it uses to assign equity credit to securities like the preferred shares, which results in shortening the length of time that the preferred shares are assigned a particular level of equity credit or in the lowering of the equity credit assigned to the preferred shares.
A "regulatory capital event" means that the Company becomes subject to capital adequacy supervision by a capital regulator and determines that, under such capital adequacy guidelines, the liquidation preference amount of the preferred shares would not qualify as capital.
The following table summarizes statutory net income (loss) for the Company's insurance subsidiaries.
The laws of the domicile states of the Company's U.S. insurance subsidiaries govern the amount of dividends that may be paid to the Company.holding company. Generally, statutes in the domicile states of the Company's U.S. insurance subsidiaries require prior approval for payment of extraordinary, as opposed to ordinary, dividends. As of December 31, 2021,2023, the Company's U.S. insurance subsidiaries could pay up to $740.8$592.5 million to the holding company during the following 12 months under the ordinary dividend regulations.
In converting from U.S. statutory accounting principles to U.S. GAAP, typical adjustments include deferral of policy acquisition costs, differences in the calculation of deferred income taxes and the inclusion of net unrealized gains or losses relating to fixed maturity securities in shareholders' equity. The Company does not use any permitted statutory accounting practices that are different from prescribed statutory accounting practices which impact statutory capital and surplus.
The Company's U.K. insurance subsidiary, Markel International Insurance Company Limited (MIICL), and its Lloyd's managing agent, Markel Syndicate Management Limited (MSM), are authorized by the Prudential Regulation Authority (PRA) and regulated by both the PRA and the Financial Conduct Authority (FCA). The PRA oversees compliance with established periodic auditing and reporting requirements, minimum solvency margins and individual capital assessment requirements under the Solvency II Directive (Solvency II) and imposes dividend restrictions, while both the PRA and the FCA oversee compliance with risk assessment reviews and various other requirements. MIICL is required to give advance notice to the PRA for any transaction or proposed transaction with a connected or related person. MSM is required to satisfy the solvency requirements of Lloyd's. In addition, the Company's U.K. subsidiaries must comply with the United Kingdom Companies Act of 2006, which provides that dividends may only be paid out of profits available for that purpose. Earnings of the Company's U.K. insurance subsidiaries are available for distribution to the holding company to the extent not otherwise restricted.
The Company's Bermuda insurance subsidiary, Markel Bermuda Limited (MBL), is subject to enhanced capital requirements in addition to minimum solvency and liquidity requirements. The enhanced capital requirement is determined by reference to a risk-based capital model that determines a control threshold for statutory capital and surplus by taking into account the risk characteristics of different aspects of the insurer's business. At December 31, 2021,2023, MBL satisfied both the enhanced capital requirements and the minimum solvency and liquidity requirements.
Under the Bermuda Insurance Act, MBL is prohibited from paying or declaring dividends during a fiscal year if it is in breach of its enhanced capital requirement, solvency margin or minimum liquidity ratio or if the declaration or payment of the dividend would cause a breach of those requirements. If an insurer fails to meet its solvency margin or minimum liquidity ratio on the last day of any financial year, it is prohibited from declaring or paying any dividends during the next financial year without the approval of the BMA.Bermuda Monetary Authority (BMA). Further, MBL is prohibited from declaring or paying, in any financial year, dividends of more than 25% of its total statutory capital and surplus as set forth in its previous year's statutory balance sheet unless at least seven days before payment of those dividends it files with the BMA an affidavit stating that it will continue to meet its solvency margin and minimum liquidity ratio. MBL must obtain the BMA's prior approval for a reduction by 15% or more of the total statutory capital as set forth in its previous year's financial statements. In addition, as a long-term insurer, MBL may not declare or pay a dividend to any person other than a policyholder unless the value of the assets in its long-term business fund, as certified by MBL's approved actuary, exceeds the liabilities of its long-term business. The amount of the dividend cannot exceed the aggregate of that excess and any other funds legally available for the payment of the dividend. As of December 31, 2021,2023, MBL could pay up to $526.7$588.3 million to the holding company during the following 12 months without making any additional filings with the BMA.
The following parent company only condensed financial information reflects the financial position, results of operations and cash flows of Markel Corporation.Group Inc.
Item 9A. CONTROLS AND PROCEDURES
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Management does not expect that its internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. The design of any system of internal control over financial reporting also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
KPMG LLP, our independent registered public accounting firm, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2021,2023, which is included herein.
There were no changes in our internal control over financial reporting during the fourth quarter of 20212023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20212023 and 2020,2022, the related consolidated statements of income (loss) and comprehensive income (loss), changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2021,2023, and the related notes (collectively, the consolidated financial statements), and our report dated February 18, 202223, 2024 expressed an unqualified opinion on those consolidated financial statements.
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Except for the information set forth under "Information About Our Executive Officers" in Part I, the information required by Part III (Items 10, 11 (excluding information required pursuant to Item 402(v) of Regulation S-K), 12, 13 and 14) will be incorporated by reference from the Company's Proxy Statement for its 20222024 Annual Meeting of Shareholders pursuant to instructions G(1) and G(3) of the General Instructions to Form 10-K.
Our independent registered public accounting firm is KPMG LLP, Richmond, VA, Auditor Firm ID: 185.
Item 15. EXHIBITEXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
The following consolidated financial statements, as well as the Report of Independent Registered Public Accounting Firm, are included in Item 8.
Other schedules are omitted because they are not required, information therein is not applicable, or is reflected in the consolidated financial statements or notes to consolidated financial statements.
The registrant hereby agrees to furnish to the Securities and Exchange Commission, upon request, a copy of all other instruments defining the rights of holders of long-term debt of the registrant and its subsidiaries.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.