3. Acquisitions
The Company has not completed the process of determining the fair value of the assets acquired and liabilities acquired with Costa Farms.assumed. These valuations willare required to be completed within the measurement period, which cannot exceed 12 months from the acquisition date. As a result, the fair value amounts recorded for these items areis a provisional estimatesestimate and may be subject to adjustment. Once completed, any adjustments resulting from the valuations may impact the individual amounts recorded for assets acquired and liabilities assumed, as well as the residual goodwill,goodwill.
The following table presents a reconciliation of consolidated beginning and ending reserves for losses and loss adjustment expenses.
8. Senior Long-Term Debt and Other Debt
In April 2017, the Company repaid its 7.20% unsecured senior notes due April 14, 2017 ($90.6 million principal outstanding at December 31, 2016).
Also in 2017, the Company repaid $84.3 million of debt assumed in connection with acquisitions.
9. Other Revenues and Other Expenses
The following tables summarize the components of other revenues and other expenses.
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, |
| 2017 | | 2016 |
(dollars in thousands) | Other Revenues | | Other Expenses | | Other Revenues | | Other Expenses |
Insurance: | | | | | | | |
Managing general agent operations | $ | 1,637 |
| | $ | 1,134 |
| | $ | 1,704 |
| | $ | 1,347 |
|
Life and annuity | 428 |
| | 6,776 |
| | 466 |
| | 4,232 |
|
Other | — |
| | 63 |
| | — |
| | — |
|
| 2,065 |
| | 7,973 |
| | 2,170 |
| | 5,579 |
|
Non-Insurance: | | | | | | | |
Markel Ventures: Manufacturing | 195,535 |
| | 173,174 |
| | 203,909 |
| | 171,595 |
|
Markel Ventures: Non-Manufacturing | 137,213 |
| | 145,434 |
| | 117,433 |
| | 115,529 |
|
Investment management | 1,248 |
| | 11,552 |
| | 8,297 |
| | 10,385 |
|
Other | 5,743 |
| | 6,154 |
| | 4,666 |
| | 6,625 |
|
| 339,739 |
| | 336,314 |
| | 334,305 |
| | 304,134 |
|
Total | $ | 341,804 |
| | $ | 344,287 |
| | $ | 336,475 |
| | $ | 309,713 |
|
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
(dollars in thousands) | Other Revenues | | Other Expenses | | Other Revenues | | Other Expenses |
Insurance: | | | | | | | |
Managing general agent operations | $ | 7,912 |
| | $ | 4,480 |
| | $ | 8,811 |
| | $ | 6,446 |
|
Life and annuity | 1,634 |
| | 21,009 |
| | 1,407 |
| | 19,432 |
|
Other | 417 |
| | 2,634 |
| | — |
| | — |
|
| 9,963 |
| | 28,123 |
| | 10,218 |
| | 25,878 |
|
Non-Insurance: | | | | | | | |
Markel Ventures: Manufacturing | 556,691 |
| | 483,724 |
| | 589,752 |
| | 491,188 |
|
Markel Ventures: Non-Manufacturing | 376,589 |
| | 357,549 |
| | 315,863 |
| | 295,647 |
|
Investment management | 19,884 |
| | 37,682 |
| | 22,820 |
| | 31,151 |
|
Other | 17,586 |
| | 18,906 |
| | 16,686 |
| | 18,851 |
|
| 970,750 |
| | 897,861 |
| | 945,121 |
| | 836,837 |
|
Total | $ | 980,713 |
| | $ | 925,984 |
| | $ | 955,339 |
| | $ | 862,715 |
|
The Company's Markel Ventures operations primarily consist of controlling interests in various businesses that operate outside of the specialty insurance marketplace and are viewed by management as separate and distinct from the Company's insurance operations. While each of the businesses is operated independently from one another, management aggregates financial results into two industry groups: manufacturing and non-manufacturing.
10. Reinsurance
The following tables summarizetable summarizes the effect of reinsurance and retrocessional reinsurance on premiums written and earned.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | | | | | | | | | | | | | |
| 2020 | | | | | | | | 2019 | | | | | | |
(dollars in thousands) | Direct | | Assumed | | Ceded | | Net Premiums | | Direct | | Assumed | | Ceded | | Net Premiums |
Underwriting: | | | | | | | | | | | | | | | |
Written | $ | 1,420,067 | | | $ | 315,774 | | | $ | (337,181) | | | $ | 1,398,660 | | | $ | 1,358,243 | | | $ | 282,506 | | | $ | (271,094) | | | $ | 1,369,655 | |
Earned | 1,323,451 | | | 362,539 | | | (290,058) | | | 1,395,932 | | | 1,219,103 | | | 327,431 | | | (246,965) | | | 1,299,569 | |
Program services and other: | | | | | | | | | | | | | | | |
Written | 518,921 | | | 17,972 | | | (538,277) | | | (1,384) | | | 584,196 | | | 39,547 | | | (623,014) | | | 729 | |
Earned | 491,524 | | | 14,489 | | | (507,517) | | | (1,504) | | | 576,576 | | | 20,399 | | | (596,512) | | | 463 | |
Consolidated: | | | | | | | | | | | | | | | |
Written | 1,938,988 | | | 333,746 | | | (875,458) | | | 1,397,276 | | | 1,942,439 | | | 322,053 | | | (894,108) | | | 1,370,384 | |
Earned | $ | 1,814,975 | | | $ | 377,028 | | | $ | (797,575) | | | $ | 1,394,428 | | | $ | 1,795,679 | | | $ | 347,830 | | | $ | (843,477) | | | $ | 1,300,032 | |
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, |
| 2017 | | 2016 |
(dollars in thousands) | Written | | Earned | | Written | | Earned |
Direct | $ | 1,035,705 |
| | $ | 966,735 |
| | $ | 888,009 |
| | $ | 883,687 |
|
Assumed | 292,423 |
| | 356,529 |
| | 241,764 |
| | 292,951 |
|
Ceded | (230,374 | ) | | (223,402 | ) | | (200,390 | ) | | (202,394 | ) |
Net premiums | $ | 1,097,754 |
| | $ | 1,099,862 |
| | $ | 929,383 |
| | $ | 974,244 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | | | | | | | | | | | |
| 2020 | | | | | | | | 2019 | | | | | | |
(dollars in thousands) | Direct | | Assumed | | Ceded | | Net Premiums | | Direct | | Assumed | | Ceded | | Net Premiums |
Underwriting: | | | | | | | | | | | | | | | |
Written | $ | 4,229,398 | | | $ | 1,211,335 | | | $ | (936,342) | | | $ | 4,504,391 | | | $ | 3,808,759 | | | $ | 1,129,440 | | | $ | (786,704) | | | $ | 4,151,495 | |
Earned | 3,886,390 | | | 1,035,501 | | | (832,196) | | | 4,089,695 | | | 3,510,203 | | | 946,648 | | | (754,505) | | | 3,702,346 | |
Program services and other: | | | | | | | | | | | | | | | |
Written | 1,475,709 | | | 52,308 | | | (1,532,259) | | | (4,242) | | | 1,754,613 | | | 73,869 | | | (1,826,862) | | | 1,620 | |
Earned | 1,535,248 | | | 54,800 | | | (1,594,432) | | | (4,384) | | | 1,629,659 | | | 49,672 | | | (1,678,207) | | | 1,124 | |
Consolidated: | | | | | | | | | | | | | | | |
Written | 5,705,107 | | | 1,263,643 | | | (2,468,601) | | | 4,500,149 | | | 5,563,372 | | | 1,203,309 | | | (2,613,566) | | | 4,153,115 | |
Earned | $ | 5,421,638 | | | $ | 1,090,301 | | | $ | (2,426,628) | | | $ | 4,085,311 | | | $ | 5,139,862 | | | $ | 996,320 | | | $ | (2,432,712) | | | $ | 3,703,470 | |
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
(dollars in thousands) | Written | | Earned | | Written | | Earned |
Direct | $ | 2,932,022 |
| | $ | 2,743,970 |
| | $ | 2,724,341 |
| | $ | 2,617,074 |
|
Assumed | 1,214,021 |
| | 976,636 |
| | 1,075,744 |
| | 878,882 |
|
Ceded | (650,403 | ) | | (604,568 | ) | | (638,196 | ) | | (613,167 | ) |
Net premiums | $ | 3,495,640 |
| | $ | 3,116,038 |
| | $ | 3,161,889 |
| | $ | 2,882,789 |
|
The percentageSubstantially all of cededthe premiums written and earned premiums to gross earned premiums was 17%in the Company's program services and 16%other fronting operations for the quarter and nine months ended September 30, 2017, respectively,2020 and 17%2019 were ceded. The percentage of consolidated ceded earned premiums to gross earned premiums was 36% and 18%37% for the quarter and nine months ended September 30, 2016, respectively. The percentage of assumed earned premiums to net earned premiums was 32%2020, respectively, and 31%39% and 40% for the quarter and nine months ended September 30, 2017, respectively, and 30%2019, respectively. The percentage of consolidated assumed earned premiums to net earned premiums was 27% for both the quarter and nine months ended September 30, 2016.
Incurred losses and loss adjustment expenses were net of reinsurance recoverables (ceded incurred losses and loss adjustment expenses) of $540.1 million and $83.3 million for the quarters ended September 30, 2017 and 2016, respectively, and $748.7 million and $289.4 million for the nine months ended September 30, 2017 and 2016, respectively. Ceded incurred losses and loss adjustment expenses for both2020 as well as the quarter and nine months ended September 30, 2017 included ceded2019.
Substantially all of the incurred losses and loss adjustment expenses in the Company's program services and other fronting operations, which totaled $412.7 million for both the quarter ended September 30, 2020 and 2019 and $1.1 billion for both the nine months ended September 30, 2020 and 2019, were ceded.
The following table summarizes the effect of reinsurance and retrocessional reinsurance on losses and loss adjustment expenses in the Company's underwriting operations.
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | | | Nine Months Ended September 30, | | |
(dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Gross | $ | 1,023,479 | | | $ | 846,549 | | | $ | 3,135,105 | | | $ | 2,561,579 | |
Ceded | (160,387) | | | (94,362) | | | (481,874) | | | (443,774) | |
Net losses and loss adjustment expenses | $ | 863,092 | | | $ | 752,187 | | | $ | 2,653,231 | | | $ | 2,117,805 | |
The following table presents the Company's reinsurance recoverables and the related allowance for credit losses.
| | | | | | | | | | | |
(dollars in thousands) | September 30, 2020 | | December 31, 2019 |
Reinsurance recoverables, gross | $ | 5,696,938 | | | $ | 5,459,561 | |
Allowance for credit losses | (31,100) | | | (26,849) | |
Reinsurance recoverables | $ | 5,665,838 | | | $ | 5,432,712 | |
The increase in the allowance for credit losses on reinsurance recoverables from December 31, 2019 to September 30, 2020 reflects the 2017 Catastrophesimpact of $464.4 million.adopting ASC 326 effective January 1, 2020 as well as a decline in short-term economic conditions as forecasted during the first nine months of 2020 as a result of expected impacts from the COVID-19 pandemic. See note 1 for further details regarding the impact of adopting ASC 326.
11.Life and Annuity Benefits
Life and annuity benefits are compiled on a reinsurance contract-by-contract basis and are discounted using standard actuarial techniques and cash flow models. Since the development of the life and annuity reinsurance reserves is based upon cash flow projection models, the Company must make estimates and assumptions based on cedent experience, industry mortality tables, and expense and investment experience, including a provision for adverse deviation. The assumptions used to determine policy benefit reserves are generally locked-in for the life of the contract unless an unlocking event occurs. Loss recognition testing is performed to determine if existing policy benefit reserves, together with the present value of future gross premiums and expected investment income earned thereon, are adequate to cover the present value of future benefits, settlement and maintenance costs. If the existing policy benefit reserves are not sufficient, the locked-in assumptions are revised to current best estimate assumptions and a charge to earnings for life and annuity benefits is recognized at that time.
Life and annuity benefits are also adjusted to the extent unrealized gains on the investments supporting the policy benefit reserves would result in a reserve deficiency if those gains were realized. During the quarter and nine months ended September 30, 2016,2020, the Company recognized a reserve deficiency resulting from a decrease in the market yield on the investment portfolio supporting the policy benefit reserves by increasing life and annuity benefits by $9.6$20.6 million and $57.5$56.2 million, respectively, and decreasing the change in net unrealized holding gains included in other comprehensive income by a corresponding amount. NoAs of September 30, 2020 and December 31, 2019, the cumulative adjustment wasto life and annuity benefits attributable to unrealized gains on the underlying investment portfolio totaled $107.6 million and $51.4 million, respectively. The adjustment required for the quarter orand nine months ended September 30, 2017.2019 was $31.3 million and $93.1 million, respectively.
12. Variable Interest Entities
Markel CATCo Investment Management Ltd. (MCIM),MCIM, a wholly-owned consolidated subsidiary of the Company, is an insurance-linked securities investment fund manager and insurancereinsurance manager headquartered in Bermuda. Results attributable to MCIM are included with the Company's non-insurance operations, which are not included in a reportable segment.
MCIM managesserves as the insurance manager for Markel CATCo Re, a Bermuda Class 3 reinsurance company, and as the investment manager for Markel CATCo Reinsurance Fund Ltd., a Bermuda exempted mutual fund company and reinsurance company, bothcomprised of which were organized under Bermuda law.multiple segregated accounts (Markel CATCo Funds). The mutual fund company issuesMarkel CATCo Funds issue multiple classes of nonvoting, redeemable preference shares to investors through its funds (the Funds) and the Markel CATCo Funds are primarily invested in nonvoting preference shares of the reinsurance company.Markel CATCo Re. The underwriting results of the reinsurance companyMarkel CATCo Re are attributed to the Markel CATCo Funds through the issuance ofthose nonvoting preference shares. Voting shares in Markel CATCo Reinsurance Fund Ltd. and Markel CATCo Re are held by MCIM.
The Markel CATCo Funds and the reinsurance companyMarkel CATCo Re are considered VIEs, as their preference shareholders have no voting rights. MCIM has the power to direct the activities that most significantly impact the economic performance of these entities, but does not have a variable interest in any of the entities. Except as described below,Generally, the Company is not the primary beneficiary of the Markel CATCo Funds or the reinsurance company,Markel CATCo Re, and therefore does not consolidate these entities, as the Company's involvement is generally limited to that of an investment or insurance manager, receiving fees that are at market and commensurate with the level of effort required. Investment management fees earned by the Company from unconsolidated Funds were $1.2 million and $8.3 million for the quarters ended September 30, 2017 and 2016, respectively, and $19.9 million and $22.8 million for the nine months ended September 30, 2017 and 2016, respectively.
The Company is the sole investor in one of the Markel CATCo Funds, the Markel Diversified Fund, and consolidates that fund as its primary beneficiary.
As of September 30, 2017, total assets of the Markel Diversified Fund were $183.3 million and total liabilities were $62.8 million. As of December 31, 2016, total assets of the Markel Diversified Fund were $166.8 million and total liabilities were $64.6 million. The assets of the Markel Diversified Fund are available for use only by the Markel Diversified Fund, and are not available for use by the Company. Total assets of the Markel Diversified Fund, includewhich are included on the Company's consolidated balance sheets, were $11.1 million and $19.6 million as of September 30, 2020 and December 31, 2019, respectively, and are primarily comprised of an investment in one of the unconsolidatedMarkel CATCo Funds. The Company also has investments in another one of the Markel CATCo Funds totaling $180.7($92.4 million and $26.8 million as of September 30, 20172020 and $165.1 million as of December 31, 2016,2019, respectively), which represents 7%is not consolidated and includes a $90.0 million investment that was made in the first quarter of 2020. See note 5. With the exception of the outstanding preference shares of that fund as of September 30, 2017 and 6% as of December 31, 2016. ThisCompany's investment is included in equity securities (available-for-sale) on the Company's consolidated balance sheets. Total liabilities of the Markel Diversified Fund, for both periods includes a $62.5 million note payable, delivered as part of the consideration provided forCompany generally does not have the obligation to absorb losses or the right to receive benefits from its investment. This note payable is includedinvestments in senior long-term debt and other debt on the Company's consolidated balance sheets. Other than the note payable, any liabilities held by the Markel Diversified Fund have no recourseCATCo Funds that could potentially be significant to the Company's general credit.respective fund, and therefore does not consolidate those funds.
The Company's exposure to risk from the unconsolidated Markel CATCo Funds and reinsurance companyMarkel CATCo Re is generally limited to its investment and any earned but uncollected fees. The Company has not issued any investment performance guarantees to these VIEs or their investors. As of September 30, 2017, total investment2020 and insuranceDecember 31, 2019, net assets under management of MCIM for unconsolidated VIEs were $4.5$1.1 billion and $2.7 billion, respectively. See note 15.
13. Related Party Transactions
The Company engages in certain related party transactions in the normal course of business at arm's length.
Insurance-Linked Securities
Within the Company's insurance-linked securities operations, the Company provides investment and insurance management services through MCIM and Nephila. See note 12 for details regarding operations conducted through MCIM. Nephila serves as the investment manager to several Bermuda, Ireland and U.S. based private funds (the Nephila Funds). To provide access for the Nephila Funds to the insurance, reinsurance and weather markets, Nephila also provides managing general agent services and acts as an insurance manager to certain Bermuda Class 3 and 3A reinsurance companies and Lloyd's Syndicate 2357 (Syndicate 2357) (collectively, the Nephila Reinsurers). The Company receives management fees for investment and insurance management services provided through its insurance-linked securities operations based on the net asset value of the accounts managed, and, for certain funds, incentive fees based on the annual performance of the funds managed. Nephila also receives commissions from the Nephila Reinsurers, which are based on the direct written premiums of the insurance contracts placed. For the quarter and nine months ended September 30, 2020, total revenues from the Company's insurance-linked securities operations were $38.5 million and $146.3 million, respectively, of which $32.8 million and $122.7 million, respectively, were attributed to unconsolidated entities managed by Nephila and MCIM. For the quarter and nine months ended September 30, 2019, total revenues from the Company's insurance-linked securities operations were $54.9 million and $158.6 million, respectively, of which $52.6 million and $152.8 million, respectively, were attributed to unconsolidated entities managed by Nephila and MCIM. Other related party transactions with the Company's insurance-linked securities operations are described below.
Within the Company's program services business, the Company has a program with Nephila through which the Company writes insurance policies that are ceded to Syndicate 2357 and certain other Nephila Reinsurers. Through this arrangement, Nephila utilizes certain of the Company's licensed insurance companies to write U.S. catastrophe exposed property risk that is then ceded to Nephila Reinsurers. Gross premiums written through the Company's program with Nephila were $119.2 million and $332.6 million for the quarter and nine months ended September 30, 2020, respectively, and $126.4 million and $360.6 million for the quarter and nine months ended September 30, 2019, respectively, all of which were ceded to Nephila Reinsurers. As of September 30, 2020 and December 31, 2019, reinsurance recoverables on the consolidated balance sheets included $291.8 million and $238.8 million, respectively, due from Nephila Reinsurers.
Under this program, the Company bears underwriting risk for annual aggregate agreement year losses in excess of a limit the Company believes is unlikely to be exceeded. To the extent losses under this program exceed the prescribed limit, the Company is obligated to pay such losses to the cedents without recourse to the Nephila Reinsurers. While the Company believes losses under this program are unlikely, those losses, if incurred, could be material to the Company's consolidated results of operations and financial condition.
The Company has also entered into other assumed and ceded reinsurance transactions with the Nephila Reinsurers in the normal course of business, which are not material to the Company's consolidated financial statements.
The Hagerty Group, LLC
In June 2019, the Company acquired a minority ownership interest in The Hagerty Group, LLC (Hagerty Group), a company that primarily operates as a managing general agent under the names Hagerty Insurance Agency and Hagerty Classic Marine Insurance Agency (collectively, Hagerty), which is accounted for under the equity method. Hagerty Group also includes funds heldHagerty Re, a Bermuda Class 3 reinsurance company. Essentia Insurance Company (Essentia), one of the Company's insurance subsidiaries, is the exclusive insurance underwriter for Hagerty in the U.S., and a portion of this insurance is ceded to Hagerty Re. For the quarter and nine months ended September 30, 2020, gross written premiums attributable to Hagerty written on Essentia were $144.8 million and $399.7 million, respectively, of which $68.4 million and $189.0 million, respectively, were ceded to Hagerty Re. For the quarter and nine months ended September 30, 2019, gross written premiums attributable to Hagerty written on Essentia were $120.8 million and $333.7 million, respectively, of which $57.7 million and $159.8 million, respectively, were ceded to Hagerty Re.
14. Shareholders' Equity
a)In May 2020, the Company issued 600,000 6.00% Fixed-Rate Reset Non-Cumulative Series A preferred shares, with 0 par value and a liquidation preference of $1,000 per share, for an aggregate initial purchase price of $600 million. Net proceeds of the Series A preferred shares offering, after deducting the underwriting discount and offering expenses, was $591.9 million. Preferred stock and related additional paid-in capital are included in preferred stock on the Company's consolidated balance sheets.
The Company has the option to redeem the Series A preferred shares:
•in whole but not in part, at any time, within 90 days after the occurrence of a "rating agency event," at $1,020 per Series A preferred share, plus accrued and unpaid dividends,
•in whole but not in part, at any time, within 90 days after the occurrence of a "regulatory capital event" at $1,000 per Series A preferred share, plus accrued and unpaid dividends, or
•in whole or in part, on June 1, 2025, or every fifth anniversary of that date, at $1,000 per Series A preferred share, plus accrued and unpaid dividends.
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 Series A preferred shares, which results in shortening the length of time that the Series A 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 Series A preferred shares would not qualify as capital.
The Series A preferred shares rank senior to the Company's common stock with respect to the payment of dividends and liquidation rights. Holders of the Series A preferred shares will be usedentitled to settle claimsreceive non-cumulative cash dividends, when, as and if declared by the Board of Directors, from the original issue date, semi-annually in arrears on the first day of June and December of each year, beginning December 1, 2020. The Company accrues dividends when they are declared by the Board of Directors. To the extent declared, these dividends will accrue, on the liquidation preference of $1,000 per share, at a fixed annual rate of 6.00% from the original issue date to June 1, 2025. After June 1, 2025, the dividend rate will reset every five years and accrue at an annual rate equal to the five-year U.S. Treasury Rate as of two business days prior to the reset date, plus 5.662%. Dividends will not be cumulative and will not be mandatory. Accordingly, if dividends are not declared for incurred losses.any dividend period, then dividends for that dividend period will not accrue and will not be payable.
13. Net Income (Loss) per Share
b)Net income (loss) per common share was determined by dividing adjusted net income (loss) to common shareholders by the applicable weighted average common shares outstanding. Basic common shares outstanding include restricted stock units that are no longer subject to any contingencies for issuance, but for which corresponding shares have not been issued. Diluted net income (loss) per common share is computed by dividing adjusted net income (loss) to common shareholders by the weighted average number of common shares and dilutive potential common shares outstanding during the period.
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except per share amounts) | 2017 | | 2016 | | 2017 | | 2016 |
Net income (loss) to shareholders | $ | (259,141 | ) | | $ | 83,796 |
| | $ | (39,612 | ) | | $ | 322,963 |
|
Adjustment of redeemable noncontrolling interests | (3,298 | ) | | (4,928 | ) | | (23,582 | ) | | (10,909 | ) |
Adjusted net income (loss) to shareholders | $ | (262,439 | ) | | $ | 78,868 |
| | $ | (63,194 | ) | | $ | 312,054 |
|
| | | | | | | |
Basic common shares outstanding | 13,947 |
| | 14,033 |
| | 13,974 |
| | 14,013 |
|
Dilutive potential common shares from conversion of options | 1 |
| | 3 |
| | 2 |
| | 4 |
|
Dilutive potential common shares from conversion of restricted stock | 42 |
| | 49 |
| | 42 |
| | 62 |
|
Diluted shares outstanding | 13,990 |
| | 14,085 |
| | 14,018 |
| | 14,079 |
|
Basic net income (loss) per share | $ | (18.82 | ) | | $ | 5.62 |
| | $ | (4.52 | ) | | $ | 22.27 |
|
Diluted net income (loss) per share | $ | (18.82 | ) | | $ | 5.60 |
| | $ | (4.52 | ) | | $ | 22.16 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | | | Nine Months Ended September 30, | | |
(in thousands, except per share amounts) | 2020 | | 2019 | | 2020 | | 2019 |
Net income (loss) to common shareholders | $ | 452,726 | | | $ | 205,637 | | | $ | (31,269) | | | $ | 1,279,362 | |
Adjustment of redeemable noncontrolling interests | (23,621) | | | (12,221) | | | (20,681) | | | 9,464 | |
Adjusted net income (loss) to common shareholders | $ | 429,105 | | | $ | 193,416 | | | $ | (51,950) | | | $ | 1,288,826 | |
| | | | | | | |
Basic common shares outstanding | 13,809 | | | 13,849 | | | 13,811 | | | 13,870 | |
| | | | | | | |
Dilutive potential common shares from restricted stock units and restricted stock (1) | 18 | | | 15 | | | 0 | | | 12 | |
Diluted common shares outstanding | 13,827 | | | 13,864 | | | 13,811 | | | 13,882 | |
Basic net income (loss) per common share | $ | 31.07 | | | $ | 13.97 | | | $ | (3.76) | | | $ | 92.92 | |
Diluted net income (loss) per common share (1) | $ | 31.03 | | | $ | 13.95 | | | $ | (3.76) | | | $ | 92.84 | |
14. Other Comprehensive Income
Other comprehensive income includes net holding gains arising during(1)The impact of restricted stock units and restricted stock of 13 thousand shares was excluded from the period, changes in unrealized other-than-temporary impairment losses on fixed maturities arising during the period and reclassification adjustments for net gains included in net income (loss). Other comprehensive income also includes changes in foreign currency translation adjustments and changes in net actuarial pension loss.
The following table presents the change in accumulated other comprehensive income by component, netcomputation of taxes and noncontrolling interests,diluted earnings per common share for the nine months ended September 30, 20172020 because the effect would have been anti-dilutive.
15. Commitments and 2016.Contingencies
a)Late in the fourth quarter of 2018, the Company was contacted by and received inquiries from the U.S. Department of Justice, U.S. Securities and Exchange Commission and Bermuda Monetary Authority (collectively, Governmental Authorities) into loss reserves recorded in late 2017 and early 2018 at Markel CATCo Re (the Markel CATCo Inquiries), an unconsolidated subsidiary managed by MCIM. As a result, the Company engaged outside counsel to conduct an internal review. |
| | | | | | | | | | | | | | | |
(dollars in thousands) | Unrealized Holding Gains on Available-for-Sale Securities | | Foreign Currency | | Net Actuarial Pension Loss | | Total |
December 31, 2015 | $ | 1,472,762 |
| | $ | (72,696 | ) | | $ | (45,558 | ) | | $ | 1,354,508 |
|
Other comprehensive income (loss) before reclassifications | 411,354 |
| | (6,159 | ) | | — |
| | 405,195 |
|
Amounts reclassified from accumulated other comprehensive income | (33,308 | ) | | — |
| | 1,247 |
| | (32,061 | ) |
Total other comprehensive income (loss) | 378,046 |
| | (6,159 | ) | | 1,247 |
| | 373,134 |
|
September 30, 2016 | $ | 1,850,808 |
| | $ | (78,855 | ) | | $ | (44,311 | ) | | $ | 1,727,642 |
|
| | | | | | | |
December 31, 2016 | $ | 1,714,930 |
| | $ | (84,406 | ) | | $ | (64,658 | ) | | $ | 1,565,866 |
|
Other comprehensive income before reclassifications | 577,796 |
| | 19,750 |
| | — |
| | 597,546 |
|
Amounts reclassified from accumulated other comprehensive income | (14,598 | ) | | — |
| | 2,391 |
| | (12,207 | ) |
Total other comprehensive income | 563,198 |
| | 19,750 |
| | 2,391 |
| | 585,339 |
|
September 30, 2017 | $ | 2,278,128 |
| | $ | (64,656 | ) | | $ | (62,267 | ) | | $ | 2,151,205 |
|
The following table summarizesinternal review was completed in April 2019 and found no evidence that MCIM personnel acted in bad faith in exercising business judgment in the tax expense (benefit) associatedsetting of reserves and making related disclosures during late 2017 and early 2018. The Company's outside counsel has met with each componentthe Governmental Authorities and reported the findings from the internal review. The Company cannot currently predict the duration, scope or result of other comprehensive income.the Markel CATCo Inquiries.
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
(dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Change in net unrealized gains on investments: | | | | | | | |
Net holding gains arising during the period | $ | 109,338 |
| | $ | 8,309 |
| | $ | 278,266 |
| | $ | 196,189 |
|
Change in unrealized other-than-temporary impairment losses on fixed maturities arising during the period | — |
| | (3 | ) | | — |
| | (9 | ) |
Reclassification adjustments for net losses included in net income (loss) | (2,810 | ) | | (4,811 | ) | | (5,206 | ) | | (12,621 | ) |
Change in net unrealized gains on investments | 106,528 |
| | 3,495 |
| | 273,060 |
| | 183,559 |
|
Change in foreign currency translation adjustments | 656 |
| | 2,847 |
| | 153 |
| | 1,152 |
|
Change in net actuarial pension loss | 159 |
| | 86 |
| | 492 |
| | 274 |
|
Total | $ | 107,343 |
| | $ | 6,428 |
| | $ | 273,705 |
| | $ | 184,985 |
|
The following table presentsDuring the details of amounts reclassified from accumulated other comprehensive income into income, by component.
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
(dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Unrealized holding gains on available-for-sale securities: | | | | | | | |
Other-than-temporary impairment losses | $ | (3,444 | ) | | $ | — |
| | $ | (7,261 | ) | | $ | (12,080 | ) |
Net realized investment gains, excluding other-than-temporary impairment losses | 11,461 |
| | 14,569 |
| | 27,065 |
| | 58,009 |
|
Total before taxes | 8,017 |
| | 14,569 |
| | 19,804 |
| | 45,929 |
|
Income taxes | (2,810 | ) | | (4,811 | ) | | (5,206 | ) | | (12,621 | ) |
Reclassification of unrealized holding gains, net of taxes | $ | 5,207 |
| | $ | 9,758 |
| | $ | 14,598 |
| | $ | 33,308 |
|
| | | | | | | |
Net actuarial pension loss: | | | | |
| |
|
Underwriting, acquisition and insurance expenses | $ | (932 | ) | | $ | (476 | ) | | $ | (2,883 | ) | | $ | (1,521 | ) |
Income taxes | 159 |
| | 86 |
| | 492 |
| | 274 |
|
Reclassification of net actuarial pension loss, net of taxes | $ | (773 | ) | | $ | (390 | ) | | $ | (2,391 | ) | | $ | (1,247 | ) |
15. Contingencies
In October 2010,internal review, the Company completed its acquisitiondiscovered violations of Aspen Holdings, Inc. (Aspen).Markel policies by two senior executives of MCIM. As parta result, these two executives are no longer with the Company. On February 21, 2019, Anthony Belisle, one of the considerationtwo senior executives that is no longer with MCIM, filed suit against MCIM and Markel Corporation, which suit was amended on March 29, 2019. As amended, Mr. Belisle's complaint alleged claims for, that acquisition, Aspen shareholders received contingent value rights (CVRs), which are currently expected to result in the payment of additional cash consideration to CVR holders. Absent the litigation described below, the final amount to be paid to CVR holders would be determined after December 31, 2017, the CVR maturity date, based on, among other things, adjustments for the developmentbreach of pre-acquisition loss reservescontract, defamation, invasion of privacy, indemnification, intentional interference with contractual relations and loss sensitive profit commissions.
The CVR holder representative, Thomas Yeransian, has disputed the Company's estimationdeceptive and unfair acts and sought relief of, the value of the CVRs. On September 15, 2016, Mr. Yeransian filed a suit alleging, among other things, that$66.0 million in incentive compensation, enhanced compensatory damages, consequential damages, damages for emotional distress and injury to reputation, exemplary damages and attorneys' fees. In June 2019, MCIM, Markel Corporation, and Mr. Belisle agreed to commence binding arbitration to finally, fully and confidentially resolve the claims and counterclaims alleged in the action, and the Belisle suit was dismissed with prejudice in July 2019. In late July 2020, the parties commenced settlement discussions and reached a final agreement on July 28, 2020. The settlement amount was not material to the Company's consolidated results of operations or financial condition.
In July 2019, MCIM announced it would cease accepting new investments in the Markel CATCo Funds and would not write any new business in Markel CATCo Re. Both the Markel CATCo Funds and Markel CATCo Re have been placed into run-off, returning capital to investors as it becomes available. The process is expected to take approximately three years.
The Markel CATCo Inquiries, as well as other matters related to or arising from the Markel CATCo Inquiries, including matters of which the Company is currently unaware, could result in default underadditional claims, litigation, investigations, enforcement actions or proceedings. For example, additional litigation may be filed by investors in the CVR agreement.Markel CATCo Funds. The holder representative seeks: $47.3 millionCompany also could become subject to increased regulatory scrutiny, investigations or proceedings in damages, which represents the unadjusted valueany of the CVRs; plus interest ($11.1 million through September 30, 2017)jurisdictions where it operates. If any regulatory authority takes action against the Company or the Company enters into an agreement to settle a matter, the Company may incur sanctions or be required to pay substantial fines or implement remedial measures that could prove costly or disruptive to its businesses and default interest (up to an additional $9.7 million through September 30, 2017, dependingoperations. Costs associated with the Company's internal review, including legal and investigation costs, as well as legal costs incurred in connection with any existing or future litigation, are being expensed as incurred.
An unfavorable outcome in one or more of these matters, and others the Company cannot anticipate, could have a material adverse effect on the date any default occurred);Company's results of operations and an unspecified amount of punitive damages, costs, and attorneys’ fees.
Atfinancial condition. In addition, the initial hearing held February 21, 2017, the court stayed the proceedings and ordered the partiesCompany may take further steps 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. The Company subsequently filed a motion to stay the litigation and compel arbitration, and, on July 31, 2017, the court issued an order grantingmitigate potential risks or liabilities that motion. Mr. Yeransian has filed a motion requesting that the court reconsider that order.
Management believes the holder representative’s suit to be without merit and will vigorously defend against it. Further, management believes that any material loss resultingmay arise from the holder representative’s suit to be remoteMarkel CATCo Inquiries and that the contractual contingent consideration payments related to the CVRs will notdevelopments and some of those steps may have a material impact on the Company's liquidity.results of operations or financial condition. Even if an unfavorable outcome does not materialize, these matters, and actions the Company may take in response, could have an adverse impact on the Company's reputation and result in substantial expense and disruption.
b)Since becoming aware of a matter in the first quarter of 2018 related to the manufacturing of products at one of the Company's Markel Ventures businesses, the Company has conducted an investigation, reviewed the business's operations and developed remediation plans. Upon completion of its review during 2018, the Company recorded an expense of $33.5 million in its results of operations and began implementing remediation plans. The amount accrued represented management's best estimate of amounts considered probable including: remediation costs associated with the manufacture of products, costs associated with the investigation of this matter, a write down of inventory on hand and settlement costs related to pre-existing litigation. As of September 30, 2020, $14.6 million remained accrued for this matter.
Final resolution of this matter could ultimately result in additional remediation and other costs, the amount of which cannot be estimated at this time, but which could have a material impact on the Company's income before income taxes. However, management does not expect this matter ultimately will have a material adverse effect on the Company's results of operations or financial condition. If a determination is made that additional costs associated with this matter are considered probable, these additional costs will be recognized as an expense in the Company's results of operations.
c)In addition, contingencies2019, the Company established Lodgepine Capital Management Limited (Lodgepine), a new retrocessional insurance-linked securities fund manager in Bermuda. Lodgepine's initial product offering will be Lodgepine Fund Limited, a property catastrophe retrocessional investment fund, and subject to certain conditions, the Company has committed to invest up to $100 million in Lodgepine Fund Limited.
d)On March 11, 2020, COVID-19, a novel coronavirus outbreak, was declared a pandemic by the World Health Organization. See note 16 for further details regarding potential impacts of COVID-19 on the Company's business.
e)Contingencies arise in the normal course of the Company's operations and are not expected to have a material impact on the Company's financial condition or results of operations.
16. Subsequent EventsDevelopments Related to COVID-19
AfterThe COVID-19 pandemic has caused unprecedented social and economic disruption, increased volatility of capital markets and intervention by various governments and central banks around the endworld, the effects of which have impacted almost all of the third quarterCompany's operations during the first nine months of 2017, northern California sustained2020. The Company cannot reasonably estimate the extent or duration of the impacts of the pandemic; however, further potential impacts of the pandemic on the Company's results of operations, financial condition and cash flows, including those described below, could be material.
The significant volatility in the equity markets arising from economic uncertainty resulted in a net decline in the fair value of the Company's equity portfolio of $242.8 million for the nine months ended September 30, 2020 and further declines are possible.
As described in note 9, the Company's underwriting results for the nine months ended September 30, 2020 included $356.8 million of net losses from several wildfires. Eventsand loss adjustment expenses directly attributed to COVID-19 and assumptions used to develop this estimate are ongoing; however, with the information currently available, the Company has preliminarily estimated itsinherently uncertain and subject to a wide range of net incurred losses on this eventvariability. The Company also has underwriting exposure to be $40 millionloss impacts that are indirectly related to $80 million before income taxes. This estimatedthe COVID-19 pandemic and associated with a broader range of coverages, including coverages within the Company's trade credit, professional liability and workers' compensation product lines, among others, as well as the Company's reinsurance product lines. Underwriting results for the nine months ended September 30, 2020 included $15.0 million of net losses was derived basedand loss adjustment expenses indirectly attributed to the COVID-19 pandemic on preliminary industry loss estimates, policy level reviews and direct contact with insureds and brokers when possible. However, the Company is still gathering loss data from policy holders and cedents and does not expect that allCompany's trade credit product line within the Insurance segment, though no other significant indirect losses have been reported at this time. PotentialBusiness closures, reduced recreational activity and lower gross receipts, revenues and payrolls of insureds, among other things, also may impact the Company's premium volume and the economic impacts of the pandemic on the Company's insureds also may subject it to increased credit risk. A significant decline in economic activity also could impact premium volume within the Company's program services operations, which may result in a reduction in fee income.
Within the Company's Markel Ventures operations, many of the Company's businesses have experienced decreased demand for their products and services as a result of the pandemic. As the social and economic disruption caused by the pandemic is ongoing, the Company expects that revenues from its Markel Ventures operations will continue to be impacted, and these impacts may continue to be material. In certain cases, revenue declines also could result in ongoing cash and working capital constraints and could impact the companies' liquidity and their ability to comply with debt covenants.
Within the Company's insurance-linked securities operations, investment losses associated with business interruptionto date within the investment funds managed by the Company have not been significant; however, uncertainty around potential COVID-19 loss exposures has reduced, and may further reduce, the net asset value on which the Company's management fees are based. Volatility in the capital markets and investor uncertainty regarding insurance industry exposure to COVID-19 also not yet clear.has impacted, and may continue to impact, the Company's ability to raise additional third party capital for the funds it manages. The Company continuesalso has experienced, and may continue to closely monitor reported claims to refine its estimateexperience, higher than anticipated investor redemptions from the funds.
Loss of losses, which will be recordedrevenues in the fourth quarterCompany's underwriting, Markel Ventures, insurance-linked securities or other operations, the extent of 2017.which the Company is currently unable to reasonably estimate, also could impact the carrying value of the Company's goodwill and intangible assets and, with respect to its Markel Ventures operations, inventory and other long-lived assets, which may become impaired. The Company's consolidated balance sheet as of September 30, 2020 included goodwill and intangible assets of $4.4 billion. Through September 30, 2020, the Company considered whether a quantitative assessment of goodwill and intangible assets for impairment was required as a result of the significant economic disruption caused by the COVID-19 pandemic. After considering qualitative factors regarding the actual and expected impacts of the pandemic on the Company's operations, as well as the amount by which the fair value of the Company's reporting units exceeded their respective carrying values at the date of the last quantitative assessment, the Company determined these conditions did not indicate that it is more likely than not that the carrying value of the Company's reporting units exceeded their fair value as of September 30, 2020 based on information available at this time. Similar factors were considered to determine if these circumstances were an indicator requiring an assessment of the recoverability of the Company's intangible assets, and the Company concluded they were not based on information available at this time. However, delayed recovery or further deterioration in market conditions related to the general economy and the specific industries in which the Company operates, a sustained trend of weaker than anticipated financial performance within a reporting unit, or an increase in the market-based weighted average cost of capital, among other factors, could significantly impact the impairment analysis and may result in future goodwill or intangible asset impairment charges that, if incurred, could have a material adverse effect on the Company's financial condition and results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The accompanying consolidated financial statements and related notes have been prepared in accordance with U.S.United States (U.S.) generally accepted accounting principles (U.S. GAAP)(GAAP) and include the accounts of Markel Corporation and its consolidated subsidiaries, as well as any variable interest entities that meet the requirements for consolidation (the Company).
Our Business
We are a diverse financial holding company serving a variety of niche markets. Our principal business markets and underwrites specialty insurance products. We believe that our specialty product focus and niche market strategy enable us to develop expertise and specialized market knowledge. We seek to differentiate ourselves from competitors by our expertise, service, continuity and other value-based considerations. We also own interests in various businesses that operate outside of the specialty insurance marketplace. Our financial goals are to earn consistent underwriting and operating profits and superior investment returns to build shareholder value.
We monitorOur business is comprised of the following types of operations:
•Underwriting - our underwriting operations are comprised of our risk-bearing insurance and reportreinsurance operations
•Investing - our investing activities are primarily related to our underwriting operations
•Markel Ventures - our Markel Ventures operations include our controlling interests in a diverse portfolio of businesses that operate outside of the specialty insurance marketplace
•Insurance-linked securities - our insurance-linked securities (ILS) operations include investment fund managers that offer a variety of investment products, including insurance-linked securities, catastrophe bonds, insurance swaps and weather derivatives
•Program services - our program services business serves as a fronting platform that provides other insurance entities access to the U.S. property and casualty insurance market
Underwriting and Investing
Our chief operating decision maker allocates resources to and assesses the performance of our ongoing underwriting operations on a global basis in the following threetwo segments: U.S. Insurance, International Insurance and Reinsurance. In determining how to aggregate and monitor our underwriting results, management considerswe consider many factors, including the geographic location and regulatory environment of the insurance entity underwriting the risk, the nature of the insurance product sold, the type of account written and the type of customer served. The U.S. Insurance segment includes all direct business and facultative placements written by our insurance subsidiaries domiciled inacross the United States. The International Insurance segment includes all direct business and facultative reinsurance placements written by our insurance subsidiaries domiciled outside of the United States, including our syndicate at Lloyd's of London (Lloyd's).Company. The Reinsurance segment includes all treaty reinsurance written across the Company. Results for lines of business discontinued prior to, or in conjunction with, acquisitions, including development on asbestos and environmental loss reserves and the results attributable to the run-off of life and annuity reinsurance business, are reportedmonitored separately and are not included in the Other Insurance (Discontinued Lines)a reportable segment. All investing activities related to our insuranceunderwriting operations are included in the Investing segment.
Our U.S. Insurance segment includes both hard-to-place risks written outside of the standard market on an excess and surplus lines basis and unique and hard-to-place risks that must be written on an admitted basis due to marketing and regulatory reasons. The following products are included in this segment: general liability, professional liability, catastrophe-exposed property, personal property, workers' compensation, specialty program insurance for well-defined niche markets, and liability coverages and other coverages tailored for unique exposures. Business in this segment is written through our Wholesale, Specialty and Global Insurance divisions. The Wholesale division writes commercial risks, primarily on an excess and surplus lines basis, using a network of wholesale brokers managed on a regional basis. The Specialty division writes program insurance and other specialty coverages for well-defined niche markets, primarily on an admitted basis. The Global Insurance division writes risks outside of the standard market on both an admitted and non-admitted basis. Global Insurance division business written by our U.S. insurance subsidiaries is included in this segment.
In April 2017, we completed the acquisition of SureTec Financial Corp. (SureTec), a Texas-based privately held surety company primarily offering contract, commercial and court bonds. Results attributable to SureTec are included in the U.S. Insurance segment.
Our International Insurance segment writes risks that are characterized by either the unique nature of the exposure or the high limits of insurance coverage required by the insured. Risks written in the Internationalour Insurance segment are written on either a direct basis or a subscription basis, the latter of which means that the loss exposures brought into the market are typically insured by more than one insurance company or Lloyd's of London (Lloyd's) syndicate. When we write business in the subscription market, we prefer to participate as lead underwriter in order to control underwriting terms, policy conditions and claims handling. Products offered within our International Insurance segment includeThe following products are included in this segment: general liability, professional liability, primary and excess of loss property, excess liability, professional liability,including catastrophe-exposed property, personal property, workers' compensation, marine and energy liability coverages, specialty program insurance for well-defined niche markets, and liability coverages and other coverages tailored for unique exposures. Business included in this segment is producedwritten through our Markel Specialty, Markel International and Global InsuranceState National divisions. The Markel Specialty division was formed effective April 1, 2020 through the combination of our Markel Assurance and Markel Specialty divisions. The newly combined Markel Specialty division creates a unified platform that makes it easier for our customers to access our diverse portfolio of products and capabilities, offered on both an excess and surplus and admitted basis, and provides an improved customer experience. The Markel International division writes business worldwide from our London-based platform,London and Munich-based platforms, which includes our syndicate at Lloyd's. Global Insurance divisioninclude branch offices around the world. The State National division's collateral protection underwriting business written by our non-U.S. insurance subsidiaries, which primarily targets Fortune 1000 accounts,also is included in thisthe Insurance segment.
Our Reinsurance segment includes property, casualty and specialty treaty reinsurance products offered to other insurance and reinsurance companies globally through the broker market. Our treaty reinsurance offerings include both quota share and excess of loss reinsurance and are typically written on a participation basis, which means each reinsurer shares proportionally in the business ceded under the reinsurance treaty written. Principal lines of business include: property, (includingincluding catastrophe-exposed property),property, professional liability, general casualty,liability, credit, surety, auto and workers' compensation. In October 2020, we made the decision to discontinue writing catastrophe-exposed property business at our Global Reinsurance division, within our Reinsurance segment, as our Nephila ILS operations will become our single point of entry for serving the property catastrophe reinsurance market. Our reinsurance product offerings are underwritten primarily by our Global Reinsurance division and our Markel International division.
Markel Ventures
For purposes of segment reporting, the Other Insurance (Discontinued Lines) segment includes lines of business that have been discontinued prior to, or in conjunction with, acquisitions. The lines were discontinued because we believed some aspect of the product, such as risk profile or competitive environment, would not allow us to earn consistent underwriting profits. The Other Insurance (Discontinued Lines) segment also includes development on asbestos and environmental loss reserves and the results attributable to the run-off of our life and annuity reinsurance business.
Through our wholly-owned subsidiary Markel Ventures, Inc. (Markel Ventures), we own interests in various businesses that operate outside ofwe monitor and report in the specialty insurance marketplace.Markel Ventures segment. These businesses are viewed by management as separate and distinct from our insurance operations and are comprised of a diverse portfolio of businesses from different industries that offer various industries. Local management teams overseetypes of products and services to businesses and consumers, predominately in the day-to-day operations of these companies, while strategic decisions are made in conjunction with members of our executive management team. While each of these businessesUnited States. Our products group is operated independently, we aggregate their financial results into two industry groups: manufacturing and non-manufacturing. Our manufacturing operations are comprised of manufacturers of transportation and other industrial equipment. Our non-manufacturing operations are comprised of businesses from severalthat manufacture or produce equipment, transportation-related products and consumer and building products. For example, types of products offered by businesses in this group include equipment used in baking systems and food processing, over-the-road car haulers, laminated oak and composite wood flooring used in the trucking industry groups, including consumer goodsas well as ornamental plants and residential homes. The services (including healthcare)group is comprised of businesses that provide healthcare, consulting and business services. Our strategyother types of services to businesses and consumers. For example, types of services offered by businesses in making these investments is similar to our strategy for purchasing equity securities. We seek to invest in profitable companies, with honestthis group include management and talented management, that exhibit reinvestment opportunitiestechnology consulting, behavioral healthcare and capital discipline, at reasonable prices. We intend to own the businesses acquired for a long period of time.retail intelligence.
In August 2017,November 2019, we acquired 81% of Costa Farms,VSC Fire & Security, Inc. (VSC), a Florida-basedVirginia-based privately held growerprovider of housecomprehensive fire protection, life safety and garden plants.low voltage solutions. Results attributable to Costa FarmsVSC are included within our Markel Ventures segment.
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), bringing our ownership in Lansing to 91%. Results attributable to Lansing are included in our Markel Ventures segment.
Insurance-Linked Securities
Our insurance-linked securities operations whichare primarily comprised of our Nephila and run-off Markel CATCo operations.
In November 2018, we completed the acquisition of all of the outstanding shares of Nephila Holdings Ltd. (together with its subsidiaries, Nephila). Nephila primarily serves as an insurance and investment fund manager headquartered in Bermuda that offers a broad range of investment products, including insurance-linked securities, catastrophe bonds, insurance swaps and weather derivatives.
Nephila serves as the investment manager to several Bermuda, Ireland and U.S. based private funds (the Nephila Funds). To provide access for the Nephila Funds to the insurance, reinsurance and weather markets, Nephila also provides managing general agent services and acts as an insurance manager to certain Bermuda Class 3 and 3A reinsurance companies and Lloyd's Syndicate 2357 (Syndicate 2357) (collectively, the Nephila Reinsurers). The 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 a reportable segment.
our consolidated financial statements.
Our non-insurance operations also include our Markel CATCo operations which are conducted through Markel CATCo Investment Management Ltd. (MCIM). MCIM is an insurance-linked securities investment fund manager and reinsurance manager headquartered in Bermuda and through 2019, was focused on building and managing highly diversified, collateralized retrocession and reinsurance portfolios covering global property catastrophe risks. MCIM serves as the insurance manager for Markel CATCo Re Ltd. (Markel CATCo Re), a Bermuda Class 3 reinsurance company, and as the investment manager for Markel CATCo Reinsurance Fund Ltd., a Bermuda exempted mutual fund company comprised of multiple segregated accounts (Markel CATCo Funds). MCIM also serves as the investment manager to CATCo Reinsurance Opportunities Fund Ltd. (CROF), a limited liability closed-end Bermuda exempted mutual fund company listed on a market operated by the London Stock Exchange and on the Bermuda Stock Exchange. CROF invests substantially all of its assets in Markel CATCo Reinsurance Fund Ltd. Both Markel CATCo Re and the Markel CATCo Funds are unconsolidated subsidiaries of Markel Corporation.
In July 2019, MCIM announced it would cease accepting new investments in the Markel CATCo Funds and would not write any new business in Markel CATCo Re. Both the Markel CATCo Funds and Markel CATCo Re have been placed into run-off, returning capital to investors as it becomes available. See note 15 of the notes to consolidated financial statements for further details regarding other developments within our Markel CATCo operations.
In 2019, we established Lodgepine Capital Management Limited (Lodgepine), a new retrocessional insurance-linked securities fund manager in Bermuda. Lodgepine's initial product offering will be Lodgepine Fund Limited, a property catastrophe retrocessional investment fund, and subject to certain conditions, we have committed to invest up to $100 million in Lodgepine Fund Limited. Lodgepine Fund Limited initially plans to subscribe to a portfolio of retrocessional reinsurance, which includes contracts written in our Reinsurance segment.
Program Services
Our program services business is conducted through our State National division and is separately managed from our underwriting operations. Our program services business generates fee income, in the form of ceding (program service) fees, by offering issuing carrier capacity to both specialty 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. Through our program services business, we write a wide variety of insurance products, principally including general liability insurance, commercial liability insurance, commercial multi-peril insurance, property insurance and workers' compensation insurance, substantially all of which is ceded to third parties.
Although we reinsure substantially all of the risks inherent in our program services business, we have certain programs that contain limits on our reinsurers' obligations to us that expose us to underwriting risk. Under certain programs, including one program with Syndicate 2357, an unconsolidated affiliate, we bear underwriting risk for annual aggregate agreement year losses in excess of a limit that we believe is highly unlikely to be exceeded. See note 13 of the notes to consolidated financial statements for further details regarding our program with Syndicate 2357.
Critical Accounting Estimates
Critical accounting estimates are those estimates that both are important to the portrayal of our financial condition and results of operations and require us to exercise significant judgment. The preparation of financial statements in accordance 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, including litigation contingencies. These estimates, by necessity, are based on assumptions about numerous factors.
We review the followingOur critical accounting estimates consist of estimates and assumptions quarterly: evaluatingused in determining the reserves for unpaid losses and loss adjustment expenses and life and annuity reinsurance benefit reserves as well as estimates and assumptions used in the valuation of goodwill and intangible assets. We review the adequacy of reserves for unpaid losses and loss adjustment expenses and life and annuity reinsurance benefit reserves the reinsurance allowance for doubtful accounts and income tax liabilities, as well as analyzing the recoverability of deferred tax assets, estimating reinsurance premiums written and earned and evaluating the investment portfolio for other-than-temporary declines in estimated fair value. Critical accounting estimatesquarterly. Estimates and assumptions for goodwill and intangible assets are reviewed in conjunction with an acquisitionacquisitions and goodwill and indefinite-lived intangible assets are reassessed for impairment at least annually for impairment.or when events or circumstances indicate that their carrying value may not be recoverable. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements.
Readers are urged to review our 20162019 Annual Report on Form 10-K for a more complete description of our critical accounting estimates. Additionally, see "Developments Related to COVID-19" for further discussion on our interim considerations around the evaluation of goodwill and intangible assets for impairment.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has recently issued several accounting standards updates (ASUs) that have the potential to impact our consolidated financial position, results of operations or cash flows upon adoption. The standards that we expect have the most potential to significantly impact us in future periods are as follows:
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)
ASU No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities
ASU No. 2016-02, Leases (Topic 842)
ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
See note 2 of the notes to consolidated financial statements for discussion of these ASUsrecently issued accounting pronouncements that we have not yet adopted and the expected effects on our consolidated financial position, results of operations and cash flows.
Key Performance Indicators
Results of Operations
The following table presents the components of net income (loss) to shareholders and comprehensive income to shareholders.
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | | | Nine Months Ended September 30, | | |
(dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Insurance segment underwriting profit | $ | 74,960 | | | $ | 81,285 | | | $ | 3,659 | | | $ | 180,945 | |
Reinsurance segment underwriting profit (loss) | (34,881) | | | (6,475) | | | (44,085) | | | 5,697 | |
Investing segment profit (1) | 629,682 | | | 145,364 | | | 43,104 | | | 1,408,771 | |
Markel Ventures segment profit (2) | 79,605 | | | 35,467 | | | 200,766 | | | 147,056 | |
Other operations (3) | (56,974) | | | 6,607 | | | (74,122) | | | (18,945) | |
Interest expense | (42,744) | | | (47,465) | | | (133,201) | | | (129,022) | |
Net foreign exchange gains (losses) | (65,577) | | | 53,850 | | | (8,736) | | | 57,001 | |
Loss on early extinguishment of debt | — | | | (6,705) | | | — | | | (6,705) | |
Income tax expense | (130,028) | | | (57,975) | | | (3,047) | | | (356,849) | |
Net loss (income) attributable to noncontrolling interests | (1,317) | | | 1,684 | | | (15,607) | | | (8,587) | |
Net income (loss) to shareholders | 452,726 | | | 205,637 | | | (31,269) | | | 1,279,362 | |
| | | | | | | |
Net income (loss) to common shareholders | 452,726 | | | 205,637 | | | (31,269) | | | 1,279,362 | |
Other comprehensive income to shareholders | 67,363 | | | 44,432 | | | 290,942 | | | 326,282 | |
Comprehensive income to shareholders | $ | 520,089 | | | $ | 250,069 | | | $ | 259,673 | | | $ | 1,605,644 | |
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
(dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
U.S. Insurance segment underwriting profit (loss) | $ | (70,348 | ) | | $ | (6,800 | ) | | $ | 11,943 |
| | $ | 85,179 |
|
International Insurance segment underwriting profit (loss) | (87,607 | ) | | 19,070 |
| | (31,195 | ) | | 29,024 |
|
Reinsurance segment underwriting profit (loss) | (214,857 | ) | | 12,788 |
| | (251,301 | ) | | 80,109 |
|
Other Insurance (Discontinued Lines) segment underwriting profit (loss) | 1,333 |
| | (2,740 | ) | | 7,287 |
| | 10,763 |
|
Net investment income | 104,489 |
| | 93,147 |
| | 304,156 |
| | 279,437 |
|
Net realized investment gains (losses) | (40,007 | ) | | 27,416 |
| | (1,515 | ) | | 65,836 |
|
Other revenues | 341,804 |
| | 336,475 |
| | 980,713 |
| | 955,339 |
|
Other expenses | (344,287 | ) | | (309,713 | ) | | (925,984 | ) | | (862,715 | ) |
Amortization of intangible assets | (18,654 | ) | | (17,010 | ) | | (53,450 | ) | | (51,474 | ) |
Interest expense | (31,814 | ) | | (33,152 | ) | | (97,013 | ) | | (97,690 | ) |
Loss on early extinguishment of debt | — |
| | — |
| | — |
| | (44,100 | ) |
Income tax benefit (expense) | 98,913 |
| | (36,060 | ) | | 17,791 |
| | (121,968 | ) |
Net (income) loss attributable to noncontrolling interests | 1,894 |
| | 375 |
| | (1,044 | ) | | (4,777 | ) |
Net income (loss) to shareholders | $ | (259,141 | ) | | $ | 83,796 |
| | $ | (39,612 | ) | | $ | 322,963 |
|
(1)Net investment income and net investment gains (losses), if any, attributable to Markel Ventures are included in segment profit for Markel Ventures. All other net investment income and net investment gains (losses) are included in Investing segment profit.
(2)Segment profit for the Markel Ventures segment includes amortization of intangible assets attributable to Markel Ventures. Amortization of intangible assets is not allocated to our Insurance and Reinsurance segments.
(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 $10.4 million and $31.5 million for the quarter and nine months ended September 30, 2020, respectively, and $9.8 million and $29.5 million for the quarter and nine months ended September 30, 2019; however, we do not allocate amortization of intangible assets between the Insurance and Reinsurance segments.
Comprehensive income to shareholders for the nine months ended September 30, 2020 reflects significant investing and underwriting losses attributed to COVID-19, a novel coronavirus outbreak that was declared a pandemic by the World Health Organization on March 11, 2020, which has caused unprecedented social and economic disruption, increased volatility of capital markets and intervention by various governments and central banks around the world.
The components of net income (loss) to shareholders and comprehensive income to shareholders for the quarter and nine months ended September 30, 2020 and 2019 are discussed in detail under "Underwriting Results," "Investing Results," "Markel Ventures," "Other Revenues and Other Expenses" andOperations," "Interest Expense, Loss on Early Extinguishment of Debt and Income Taxes.Taxes" and "Comprehensive Income to Shareholders."
Underwriting Results
Underwriting profits are a key component of our strategy to grow book value per share.build shareholder value. We believe that the ability to achieve consistent underwriting profits demonstrates knowledge and expertise, commitment to superior customer service and the ability to manage insurance risk. The property and casualty insurance industry commonly defines underwriting profit or loss as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. We use underwriting profit or loss and the combined ratio as a basis for evaluating our underwriting performance. 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. The combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. 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.
Consolidated
The following table presents selected data from our underwriting operations.
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | | | Nine Months Ended September 30, | | |
(dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Gross premium volume (1) | $ | 1,734,457 | | | $ | 1,645,995 | | | $ | 5,436,491 | | | $ | 4,944,336 | |
Net written premiums | $ | 1,397,276 | | | $ | 1,370,384 | | | $ | 4,500,149 | | | $ | 4,153,115 | |
Net retention (1) | 81 | % | | 83 | % | | 83 | % | | 84 | % |
Earned premiums | $ | 1,394,428 | | | $ | 1,300,032 | | | $ | 4,085,311 | | | $ | 3,703,470 | |
Losses and loss adjustment expenses | $ | 863,247 | | | $ | 752,134 | | | $ | 2,652,811 | | | $ | 2,118,000 | |
Underwriting, acquisition and insurance expenses | $ | 492,824 | | | $ | 475,219 | | | $ | 1,477,349 | | | $ | 1,392,747 | |
Underwriting profit (loss) | $ | 38,357 | | | $ | 72,679 | | | $ | (44,849) | | | $ | 192,723 | |
| | | | | | | |
U.S. GAAP Combined Ratios | | | | | | | |
Insurance | 94 | % | | 92 | % | | 100 | % | | 94 | % |
Reinsurance | 116 | % | | 103 | % | | 106 | % | | 99 | % |
Consolidated | 97 | % | | 94 | % | | 101 | % | | 95 | % |
(1)Gross premium volume and net retention exclude $538.3 million and $1.5 billion for the quarter and nine months ended September 30, 2020, respectively, and $618.5 million and $1.8 billion for the quarter and nine months ended September 30, 2019, respectively, of written premiums attributable to our program services business and other fronting arrangements that were ceded.
Combined Ratio
Our consolidated combined ratio was 97% for the quarter ended September 30, 2020 compared to 94% for the same period of 2019. The increase in the combined ratio was driven by higher catastrophe losses in 2020 compared to 2019 and an increase in our estimate of net losses and loss adjustment expenses attributed to COVID-19 during the third quarter of 2020, partially offset by a lower attritional loss ratio and a lower expense ratio within our Insurance segment in 2020 compared to 2019 .
Our consolidated combined ratio was 101% for the nine months ended September 30, 2020 compared to 95% for the same period of 2019. The increase in the consolidated combined ratio was driven by losses attributed to COVID-19 in 2020 and higher catastrophe losses in 2020 compared to 2019, partially offset by more favorable development on prior accident years' loss reserves and a lower attritional loss ratio and a lower expense ratio within our Insurance segment in 2020 compared to 2019.
|
| | | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, | |
(dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 | |
Gross premium volume | $ | 1,328,128 |
| | $ | 1,129,773 |
| | $ | 4,146,043 |
| | $ | 3,800,085 |
| |
Net written premiums | 1,097,754 |
| | 929,383 |
| | 3,495,640 |
| | 3,161,889 |
| |
Net retention | 83 | % | | 82 | % | | 84 | % | | 83 | % | |
Earned premiums | 1,099,862 |
| | 974,244 |
| | 3,116,038 |
| | 2,882,789 |
| |
Losses and loss adjustment expenses | 1,075,432 |
| | 579,405 |
| | 2,210,129 |
| | 1,564,925 |
| |
Underwriting, acquisition and insurance expenses | 395,909 |
| | 372,521 |
| | 1,169,175 |
| | 1,112,789 |
| |
Underwriting profit (loss) | (371,479 | ) | | 22,318 |
| | (263,266 | ) | | 205,075 |
| |
| | | | | | | | |
U.S. GAAP Combined Ratios | | | | | | | | |
U.S. Insurance | 112 | % | | 101 | % | | 99 | % | | 95 | % | |
International Insurance | 136 | % | | 91 | % | | 105 | % | | 95 | % | |
Reinsurance | 183 | % | | 94 | % | | 135 | % | | 87 | % | |
Other Insurance (Discontinued Lines) | NM |
| (1) | NM |
| (1) | NM |
| (1) | NM |
| (1) |
Markel Corporation (Consolidated) | 134 | % | | 98 | % | | 108 | % | | 93 | % | |
Catastrophe Losses | |
(1)
| NM – Ratio is not meaningful. |
Underwriting results for the quarter and nine months ended September 30, 20172020 included $503.0$101.0 million of underwriting loss from Hurricanes Harvey, IrmaLaura, Sally and MariaIsaias, as well as the earthquakesderecho in Mexico (2017Iowa and wildfires in the western U.S. (2020 Catastrophes). The underwriting loss on the 2017 Catastrophes was comprised of $521.2 million of estimated net losses and $18.2 million of net assumed reinstatement premiums, or 46% and 16% on the combined ratio for the quarter and nine months ended September 30, 2017, respectively.
The following table summarizes, by segment, the components of the underwriting losses related to the 2017 Catastrophes for the quarter and nine months ended September 30, 2017.
|
| | | | | | | | | | | | | | | |
| Quarter and Nine Months Ended September 30, 2017 |
(dollars in thousands) | U.S. Insurance | | International Insurance | | Reinsurance | | Consolidated |
Losses and loss adjustment expenses | $ | 139,952 |
| | $ | 108,185 |
| | $ | 273,073 |
| | $ | 521,210 |
|
Ceded (assumed) reinstatement premiums | 7,654 |
| | 4,890 |
| | (30,756 | ) | | (18,212 | ) |
Underwriting loss | $ | 147,606 |
|
| $ | 113,075 |
|
| $ | 242,317 |
| | $ | 502,998 |
|
Impact on quarter to date combined ratio | 24 | % | | 47 | % | | 95 | % | | 46 | % |
Impact on year to date combined ratio | 9 | % | | 17 | % | | 34 | % | | 16 | % |
The estimated net losses and loss adjustment expenses on the 2017 Catastrophes are net of estimated reinsurance recoverables of $464.4 million. Both the gross and net loss estimates on the 20172020 Catastrophes represent our best estimate of lossesestimates based upon information currently available. Our estimateestimates for these losses isare based on claims received to date and detailed policy level reviews,preliminary industry loss estimates, output from both industry and proprietary models, as well as a review of in-force contracts. The estimate isclaims received to date and detailed policy and reinsurance contract level reviews. Due to limited claims activity thus far on the 2020 Catastrophes, these loss estimates are still dependent on broad assumptions about coverage, liability and reinsurance. Duereinsurance and are therefore subject to these factors, we believe our gross and net loss estimates on the 2017 Catastrophes have a high degreewide range of volatility.variability. While we believe our reserves for the 20172020 Catastrophes as of September 30, 20172020 are adequate, we continue to closely monitor industry loss estimates and reported claims and will adjust our estimates of gross and net losses as new information becomes available.
Underwriting results for the quarter and nine months ended September 30, 2019 included $42.6 million of underwriting loss from Hurricane Dorian and Typhoon Faxai (2019 Catastrophes).
The following table summarizes, by segment, the components of the underwriting losses related to the 2020 Catastrophes and 2019 Catastrophes for the quarter and nine months ended September 30, 2020 and 2019, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter and Nine Months Ended September 30, | | | | | | | | | | |
| 2020 | | | | | | 2019 | | | | |
| 2020 Catastrophes | | | | | | 2019 Catastrophes | | | | |
(dollars in thousands) | Insurance | | Reinsurance | | Consolidated | | Insurance | | Reinsurance | | Consolidated |
Losses and loss adjustment expenses | $ | 66,581 | | | $ | 35,211 | | | $ | 101,792 | | | $ | 13,868 | | | $ | 31,253 | | | $ | 45,121 | |
Assumed reinstatement premiums | — | | | (750) | | | (750) | | | — | | | (2,475) | | | (2,475) | |
Underwriting loss | $ | 66,581 | | | $ | 34,461 | | | $ | 101,042 | | | $ | 13,868 | | | $ | 28,778 | | | $ | 42,646 | |
Impact on quarter to date combined ratio | 6 | % | | 15 | % | | 7 | % | | 1 | % | | 12 | % | | 3 | % |
Impact on year to date combined ratio | 2 | % | | 5 | % | | 2 | % | | — | % | | 4 | % | | 1 | % |
COVID-19 Losses
Underwriting results for the quarter and nine months ended September 30, 2020 included $48.9 million and $373.9 million, respectively, of underwriting losses arising from the COVID-19 pandemic.
The following table summarizes, by segment, the components of the underwriting losses attributed to the COVID-19 pandemic for the quarter and nine months ended September 30, 2020. As of September 30, 2020, losses and loss adjustment expenses were net of ceded losses of $92.6 million.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| COVID-19 Pandemic | | | | | | | | | | |
| Quarter Ended September 30, 2020 | | | | | | Nine Months Ended September 30, 2020 | | | | |
(dollars in thousands) | Insurance | | Reinsurance | | Consolidated | | Insurance | | Reinsurance | | Consolidated |
Losses and loss adjustment expenses | $ | 12,395 | | | $ | 34,450 | | | $ | 46,845 | | | $ | 305,395 | | | $ | 66,450 | | | $ | 371,845 | |
Ceded (assumed) reinstatement premiums | 2,145 | | | (93) | | | 2,052 | | | 2,145 | | | (93) | | | 2,052 | |
Underwriting loss | $ | 14,540 | | | $ | 34,357 | | | $ | 48,897 | | | $ | 307,540 | | | $ | 66,357 | | | $ | 373,897 | |
Impact on combined ratio | 1 | % | | 15 | % | | 3 | % | | 9 | % | | 10 | % | | 9 | % |
Beginning in late February, as the COVID-19 outbreak was becoming more widespread, it was identified as a potential exposure within our underwriting operations. We began to regularly review all of our product lines to identify lines of business we believed could be directly impacted by COVID-19 and to evaluate the extent to which the virus may impact our coverages. In those instances where we identified COVID-19 as the proximate, or direct, cause of loss, we established net reserves for losses and loss adjustment expenses totaling $325.0 million during the first quarter of 2020. Our direct losses from COVID-19 are primarily attributed to business written within our international insurance operations and are primarily associated with coverages for event cancellation and business interruption losses in policies where no specific pandemic exclusions exist. During the quarter ended September 30, 2020, we increased our estimate of direct net losses for the 2017 Catastrophes were withinand loss adjustment expenses attributable to COVID-19 by $31.8 million following changes in certain assumptions on which our risk tolerance for eventsestimates are based, as further discussed below, and resulting in total direct net losses and loss adjustment expenses of this magnitude.
The consolidated combined ratio$356.8 million for the nine months ended September 30, 20172020.
In addition to loss exposures that are directly attributable to COVID-19, we are also included $85.0exposed to losses indirectly related to the COVID-19 pandemic and associated with a broader range of coverages, including coverages within our trade credit, professional liability and workers' compensation product lines, among others, as well as our reinsurance product lines. During the quarter and nine months ended September 30, 2020, we recognized $15.0 million of net losses and loss adjustment expenses in our trade credit product line within our Insurance segment related to losses that were indirectly attributable to the pandemic. No other significant indirect losses attributable to COVID-19 have been reported at this time. See "Developments Related to COVID-19" for further discussion of other potential indirect exposures arising from the pandemic.
The following table summarizes, by coverage and underwriting platform, the components of our direct net losses and loss adjustment expenses from COVID-19 for the quarter and nine months ended September 30, 2020.
| | | | | | | | | | | | | | | | | |
| Quarter Ended September 30, 2020 | | | | |
(dollars in millions) | Insurance | | Reinsurance | | Consolidated |
Event cancellation | | | | | |
International | $ | 13.2 | | | $ | — | | | $ | 13.2 | |
United States | (1.0) | | | — | | | (1.0) | |
Business interruption | | | | | |
International | (12.4) | | | 20.0 | | | 7.6 | |
United States | (7.5) | | | — | | | (7.5) | |
All other coverages | 5.1 | | | 14.4 | | | 19.5 | |
Total | $ | (2.6) | | | $ | 34.4 | | | $ | 31.8 | |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 | | | | |
(dollars in millions) | Insurance | | Reinsurance | | Consolidated |
Event cancellation | | | | | |
International | $ | 185.7 | | | $ | — | | | $ | 185.7 | |
United States | 7.5 | | | — | | | 7.5 | |
Business interruption | | | | | |
International | 79.6 | | | 22.0 | | | 101.6 | |
United States | 8.5 | | | 15.0 | | | 23.5 | |
All other coverages | 9.1 | | | 29.4 | | | 38.5 | |
Total | $ | 290.4 | | | $ | 66.4 | | | $ | 356.8 | |
Both the gross and net loss estimates for direct losses attributed to COVID-19 represent our best estimates as of September 30, 2020 based upon information currently available. Our estimates for these direct losses and loss adjustment expenses are based on reported claims, as well as detailed policy level reviews and reviews of in-force assumed reinsurance contracts for potential exposures. We also considered analysis provided by our brokers and claims counsel. There are no recent historical events with similar characteristics to COVID-19, and therefore we have no past loss experience on which to base our estimates. Additionally, the economic and social impacts of the pandemic continue to evolve.
Significant assumptions on which our estimates of reserves for direct COVID-19 losses and loss adjustment expenses are based include:
•the scope of coverage provided under our policies, particularly those that provide for business interruption coverage, which generally falls under the following three categories:
◦coverage has not been triggered because the policy's insuring agreement has not been satisfied and/or three points,a covered cause of adverse development on prior years' loss reserves resulting fromhas not been established;
◦the policy would not respond because the policy includes a decreasecommunicable disease, virus or pandemic exclusion; or
◦the policy may provide coverage for communicable diseases and pandemics, but also includes conditions and limitations to coverage;
•coverage provided under our ceded reinsurance contracts;
•the expected duration of the disruption caused by the COVID-19 pandemic, which we have assumed will extend, in varying degrees, beyond the government directives currently in place and may impact certain covered events through the end of the year and beyond; and
•the ability of insureds to mitigate some or all of their losses. For example, in the discount rate, known ascase of our event cancellation coverages, by deferring the Ogden Rate, usedevent or moving to calculate lump sum awardsa virtual format, and for our business interruption exposures, the ability to continue providing certain services or to provide services remotely.
Due to the inherent uncertainty associated with the assumptions surrounding the COVID-19 pandemic, these estimates are subject to a wide range of variability. Our initial estimates at March 31, 2020 reflected limited claims reporting and were based on broad assumptions about coverage, liability and reinsurance. A test case of a sample of business interruption coverages for policies written in the United Kingdom, (U.K.) bodily injury cases. Effective March 20, 2017,which do not have the Ogden Rate decreased from plus 2.5%same exclusions as policies commonly written in the U.S., concluded in the third quarter of 2020 with the court's judgment finding mostly in favor of policyholders. This ruling was most impactful to minus 0.75%, which representscertain estimates in our Reinsurance segment, where we increased our estimate of losses and loss adjustment expenses on certain treaties following an increase in estimated losses by the first raterespective cedents on the treaties. The ruling did not meaningfully impact the reserves previously established for business interruption coverage within our Insurance segment given the assumptions made in our initial estimates and our policy terms and conditions. Our estimates at September 30, 2020 also reflect additional data gathered through increased claims reporting and a change since 2001. The effectin our expectation of the rate change isduration of the pandemic, which was most impactful to our U.K. auto casualty exposures throughevent cancellation coverages.
As of September 30, assumptions about coverage, liability and reinsurance contracts written in our Reinsurance segment. We ceased writing new U.K. auto business in late 2014. The reductioncontinue to be subject to judicial review and may be subject to other government action. Additionally, it is highly likely that there will be significant litigation involved in the Ogden Rate increasedhandling of claims associated with COVID-19, and in certain instances, assessing the expectedvalidity of policy exclusions for pandemics and interpreting policy terms to determine coverage for pandemics, which are in the process of being tested in various judicial systems. While we believe our net reserves for losses and loss adjustment expenses for COVID-19 as of September 30, 2020 are adequate based on information available at this time, we continue to closely monitor reported claims, paymentsgovernment actions, judicial decisions and changes in the levels of worldwide social disruption and economic activity arising from the pandemic and will 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.
Insurance Segment
The combined ratio for the Insurance segment was 94% (including six points for underwriting losses on these exposures,the 2020 Catastrophes and management increasedone point for underwriting losses attributed to COVID-19) for the quarter ended September 30, 2020 compared to 92% (including one point for underwriting losses on the 2019 Catastrophes) for the same period of 2019.
For the quarter ended September 30, 2020, the increase in the combined ratio was driven by higher catastrophe losses in 2020 compared to 2019 and the impact of losses attributed to COVID-19 in 2020, partially offset by a lower attritional loss reserves accordingly. Our estimateratio and a lower expense ratio in 2020 compared to 2019. Higher earned premiums in 2020 compared to 2019 had a favorable impact on our expense ratio and an unfavorable impact on the prior accident years' loss ratio.
•Excluding the impact of the ultimate cost2020 and 2019 Catastrophes and losses attributed to COVID-19 in 2020, the current accident year loss ratio for the quarter ended September 30, 2020 decreased compared to the same period of settling these claims is based2019 primarily driven by lower attritional loss ratios on many factors,our property and is subject to increase or decrease as the effect of changes in these factors becomes known over time.general liability product lines, which benefited from higher premium rates.
•The consolidatedInsurance segment's combined ratio for the quarter ended September 30, 20162020 included $50.1$137.3 million or five points on the consolidated combined ratio, of losses and loss adjustment expenses resulting from management actions in response to claim trends noted by our actuaries in our medical malpractice and specified medical product lines within the U.S. Insurance segment. Of this amount, $36.5 million represented reserve strengtheningfavorable development on prior accident years.years' loss reserves compared to $135.0 million for the same period of 2019. For the nine monthsquarter ended September 30, 2020, favorable development was most significant on our general liability and professional liability products lines, across several accident years, and workers' compensation product lines, primarily on the 2016 redundanciesto 2019 accident years. The favorable development on prior years' loss reserves in the third quarter of 2019 was also most significant on our U.S. Insurance segment included $71.4 million, or two points on the consolidated combined ratio, of adverse development on thesegeneral liability, workers' compensation and professional liability product lines.
•The increase in the consolidated combinedexpense ratio for the quarter ended September 30, 2017 was attributable to the impact of the 2017 Catastrophes, partially offset by a decrease in the expense ratio driven by the favorable impact from higher earned premium across all of our insurance segments in 20172020 decreased compared to the same period of 2016. Additionally, prior year redundancies increased for the third quarter of 2017 compared2019, primarily due to 2016, primarily in our U.S. Insurance segment. For the nine months ended September 30, 2017, the increase in the consolidated combined ratio was attributable to the impact of the 2017 Catastrophes, partially offset by a decrease in the expense ratio and prior accident year loss ratio driven by the favorable impact of higher earned premium in 2017 compared to 2016.premiums.
U.S. Insurance Segment
The combined ratio for the U.S. Insurance segment was 112%100% (including 24%nine points for the underwriting losslosses attributed to COVID-19 and two points for underwriting losses on the 2017 Catastrophes) for the quarter ended September 30, 2017 and 99% (including 9% for the underwriting loss on the 20172020 Catastrophes) for the nine months ended September 30, 20172020 compared to 101% and 95%94% for the same periodsperiod of 2016.2019.
For the quarternine months ended September 30, 2017,2020, the increase in the combined ratio was driven by the impact of the 2017 Catastrophes, partially offset by lower attritional losses attributed to COVID-19 in 2020 and more favorable development on prior years' loss reserves.
Excluding the impact of the 2017 Catastrophes, the current accident year loss ratio for the quarter ended September 30, 2017 decreasedhigher catastrophe losses in 2020 compared to the quarter ended September 30, 2016, primarily due to lower attritional losses on our specified medical and medical malpractice product lines and the favorable impact from our new surety business, which was acquired during the second quarter of 2017 and carries a lower loss ratio than other products in the segment.
The U.S. Insurance segment's combined ratio for the quarter ended September 30, 2017 included $87.6 million of favorable development on prior years' loss reserves compared to $21.5 million for the same period in 2016. The increase in redundancies was primarily due to adverse development on our medical malpractice and specified medical product lines in the third quarter of 2016, which totaled $36.5 million, or seven points on the segment combined ratio. There was no development on these product lines in the third quarter of 2017. In the third quarter of 2017, the favorable development on prior years' loss reserves was most significant on our general liability and workers compensation product lines, primarily on the 2012 through 2016 accident years and on our property product lines, primarily on the 2015 and 2016 accident years. The favorable development in the third quarter of 2016 was most significant on our general liability product lines.
For the nine months ended September 30, 2017, the increase in the combined ratio was driven by the impact of the 2017 Catastrophes,2019, partially offset by more favorable development on prior years' loss reserves.
The U.S. Insurance Segment's combined ratio for the nine months ended September 30, 2017 included $207.5 million of favorable development on prior years' loss reserves compared to $126.5 million for the same period in 2016. The increase in favorable development was primarily due to adverse development on our medical malpractice and specified medical product lines in the first nine months of 2016, which totaled $71.4 million, or four points on the segment combined ratio. There was no development on these product lines in the first nine months of 2017. Also contributing to the increase in favorable development on prior years' loss reserves was more favorable development on our workers compensation product lines, partially offset by less favorable development on our general liability product lines compared to the first nine months of 2016. The favorable development on prior years' loss reserves in 2017 was most significant on our general liability product lines across several accident years, workers compensation product lines, on the 2011 through 2016 accident years, and personal lines business, on the 2013 through 2016 accident years. During 2016, favorable development on prior years' loss reserves was most significant on our general liability, workers compensation and property product lines.
International Insurance Segment
The combined ratio for the International Insurance segment was 136% (including 47% for the underwriting loss on the 2017 Catastrophes) for the quarter ended September 30, 2017 and 105% (including 17% for the underwriting loss on the 2017 Catastrophes) for the nine months ended September 30, 2017, compared to 91% and 95% for the same periods of 2016.
For the quarter ended September 30, 2017, the increase in the combined ratio was driven by the impact of the 2017 Catastrophes, less favorable development on prior years' loss reserves and a higher expense ratio, partially offset by lower attritional losses.
Excluding the impact of the 2017 Catastrophes, the current accident year loss ratio for the third quarter of 2017 decreased compared to the same period of 2016. The current accident year loss ratio for the third quarter of 2016 included higher attritional losses and large losses, primarily on our marine and energy product lines, compared to the same period of 2017.
The International Insurance segment's combined ratio for the quarter ended September 30, 2017 included $40.7 million of favorable development on prior years' loss reserves compared to $42.7 million in 2016. Favorable development on prior years' loss reserves in the third quarter of 2017 had a less favorable impact on the segment combined ratio compared to the third quarter of 2016 due to higher earned premium in 2017. For the quarter ended September 30, 2017, favorable development was most significant on our professional liability and general liability product lines across several accident years. The favorable development in the third quarter of 2016 was most significant on our professional liability product lines.
The expense ratio for the International Insurance segment increased primarily due to changes in the mix of business, which was due in part to higher retentions on products with higher net commission rates compared to the third quarter of 2016, expenses in 2017 related to changes in our branch office locations and an unfavorable impact from ceded reinstatement premiums related to the 2017 Catastrophes. These increases in the expense ratio were partially offset by the favorable impact from higher earned premium and lower profit sharing expenses in the third quarter of 2017 compared to 2016.
For the nine months ended September 30, 2017, the increase in the combined ratio was driven by the impact of the 2017 Catastrophes, partially offset by more favorable development on prior years' loss reserves and a lower attritional loss ratio and a lower expense ratio in 2020 compared to 2019. Higher earned premiums in 2020 compared to 2019 had a favorable impact on our expense ratio and an unfavorable impact on the same period of 2016.prior years' loss ratio.
•Excluding the impact of losses attributed to COVID-19 in 2020 and the 20172020 and 2019 Catastrophes, the current accident year loss ratio for the nine months ended September 30, 2017 was flat2020 decreased compared to the prior year period. In 2017, the impactsame period of higher2019, primarily due to lower net attritional loss ratios, primarily on our property product lines, was largely offset by lower attritional and large losses on our marine and energy and professional liability product lines, compared to the prior year period.partially offset by higher net attritional losses on our programs product line. We also had lower attritional loss ratios on our property and general liability product lines, which benefited from higher premium rates in 2020.
•The International Insurance segment's combined ratio for the nine months ended September 30, 20172020 included $146.3$404.6 million of favorable development on prior years' loss reserves compared to $111.4$309.3 million in 2016.for the same period of 2019. The increase in loss reserve redundanciesimpact on prior years' loss reserves in 2017 compared to 2016 was driven bythe combined ratio of more favorable development on our general liability and professional liability product lines in 2017. For the nine months ended September 30, 2017, the favorable development on prior years' loss reserves was most significantpartially offset by the unfavorable impact of higher earned premiums in 2020 compared to 2019. The increase in favorable development was primarily due to more favorable development on our professional liability and general liability product lines across several accident yearsin 2020 compared to 2019 and favorable development on our marine and energyproperty product lines primarily on the 2013 through 2016 accident years.in 2020 compared to adverse development in 2019. For the nine months ended September 30, 2016, the2020, favorable development was most significant on our general liability, professional liability and workers' compensation product lines across several accident years. The favorable development on prior years' loss reserves in 2019 was also most significant on our general liability, workers' compensation and professional liability and marine and energy product lines.
•The decrease in the expense ratio wasfor the nine months ended September 30, 2020 decreased compared to the same period of 2019, primarily due to lower profit sharing in 2017 compared to 2016, the favorable impact fromof higher earned premium in 2017 compared to 2016 and the write offpremiums.
Reinsurance Segment
The combined ratio for the Reinsurance segment was 183%116% (including 95%15 points for the underwriting losslosses attributed to COVID-19 and 15 points for underwriting losses on the 20172020 Catastrophes) for the quarter ended September 30, 2017 and 135%2020 compared to 103% (including 34%12 points for the underwriting losslosses on the 20172019 Catastrophes) for the nine months ended September 30, 2017, compared to 94% and 87% for the same periodsperiod of 2016.2019.
For the quarter ended September 30, 20172020, the increase in the combined ratio was driven by the impact of the 2017 Catastrophes,underwriting losses attributed to COVID-19 in 2020 and higher catastrophe losses in 2020 compared to 2019, partially offset by a lower expensemore favorable development on prior accident years' loss reserves in 2020 compared to 2019.
•Excluding the impact of losses attributed to COVID-19 in 2020 and the 2020 and 2019 Catastrophes, the current accident year loss ratio in 2017for the quarter ended September 30, 2020 increased compared to the same period of 2016.2019, primarily due to less favorable premium adjustments in 2020 compared to 2019, most notably within our property and workers' compensation product lines, partially offset by lower net attritional losses, primarily on our general liability and property product lines.
•The Reinsurance segment's combined ratio for the quarter ended September 30, 20172020 included $21.2$30.7 million of favorable development on prior years' loss reserves compared to $19.1$13.8 million for the same period of 2019. The increase in favorable development was primarily due to favorable development on our professional liability and workers' compensation product lines in 2016.2020 compared to adverse development on these product lines in 2019. For the quarter ended September 30, 2017, favorable development on prior years' loss reserves was most significant on our property product lines on the 2013 through 2015 accident years. For the quarter ended September 30, 2016, the2020, favorable development was most significant on our property and generalprofessional liability product lines.
lines across several accident years. The decrease in the expense ratio was primarily due to a favorable impact from assumed reinstatement premiums related to the 2017 Catastrophes, lower profit sharing expenses and the favorable impact of higher earned premiumdevelopment on prior years' loss reserves in the third quarter of 20172019 was most significant on our property product lines.
The combined ratio for the Reinsurance segment was 106% (including 10 points for underwriting losses attributed to COVID-19 and five points for underwriting losses on the 2020 Catastrophes) for the nine months ended September 30, 2020 compared to 2016.99% (including four points for underwriting losses on the 2019 Catastrophes) for the same period of 2019.
For the nine months ended September 30, 20172020, the increase in the combined ratio was primarily driven by the impact of the 2017 Catastrophesunderwriting losses attributed to COVID-19 in 2020 and adverse development on prior year loss reserves,higher catastrophe losses in 2020 compared to 2019, partially offset by a lower expense ratio.
Excluding the impact of the 2017 Catastrophes, the currentratio and more favorable development on prior accident yearyears' loss ratio for the nine months ended September 30, 2017 increasedreserves in 2020 compared to 2016, primarily as a result of more unfavorable premium adjustments related to prior accident years in 2017 compared to 2016.2019.
•The Reinsurance segment's combined ratio for the nine months ended September 30, 20172020 included $22.2$29.0 million of adversefavorable development on prior years' loss reserves compared to $90.1$20.7 million for the same period of 2019. The increase in favorable development was primarily due to more favorable development on our property product lines in 2016. The2020 compared to 2019, partially offset by more adverse development on prior years' loss reserves in 2017 is primarily due to the decrease in the Ogden Rate, as previously discussed, which resulted in $85.0 million of adverse development, or 12 points on the Reinsurance segment combined ratio. Also contributing to the unfavorable variance to the prior year period was less favorable development across several of our public entity product lines in 20172020 compared to 2016.2019. Additionally, in 2020, we recognized additional exposure related to net favorable premium adjustments along with adverse development on certain of our professional liability product lines. For the nine months ended September 30, 2017,2020, favorable development was most significant on our property product lines, primarily on the 2012 through 2015 accident years and on our whole account product line on the 2010 through 20142017 to 2019 accident years. The favorable development on prior years' loss reserves in 20162019 was most significant on our propertyaviation, auto and workers compensationwhole account product lines.
•The expense ratio decreased for the nine months ended September 30, 20172020 decreased compared to the same period of 20162019, primarily due to lower profit sharing expenses and a favorable impact from higher earned premium, including reinstatement premiums related to the 2017 Catastrophes.general expenses.
Other Insurance (Discontinued Lines)
The Other Insurance (Discontinued Lines) segment produced an underwriting profit
Premiums and Net Retentions
The following tables summarize gross premium volume, net written premiums and earned premiums by segment.premiums.
|
| | | | | | | | | | | | | | | |
Gross Premium Volume | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
(dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
U.S. Insurance | $ | 778,323 |
| | $ | 663,196 |
| | $ | 2,171,481 |
| | $ | 2,000,454 |
|
International Insurance | 319,914 |
| | 269,093 |
| | 949,031 |
| | 879,078 |
|
Reinsurance | 230,077 |
| | 196,948 |
| | 1,025,716 |
| | 920,038 |
|
Other Insurance (Discontinued Lines) | (186 | ) | | 536 |
| | (185 | ) | | 515 |
|
Total | $ | 1,328,128 |
| | $ | 1,129,773 |
| | $ | 4,146,043 |
| | $ | 3,800,085 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | | | Nine Months Ended September 30, | | |
(dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Insurance | $ | 1,514,002 | | | $ | 1,418,363 | | | $ | 4,482,149 | | | $ | 3,979,559 | |
Reinsurance | 222,066 | | | 226,387 | | | 958,529 | | | 963,145 | |
Other underwriting | (227) | | | 516 | | | 55 | | | 12 | |
Total Underwriting | 1,735,841 | | | 1,645,266 | | | 5,440,733 | | | 4,942,716 | |
Program services and other | 536,893 | | | 619,226 | | | 1,528,017 | | | 1,823,965 | |
Total | $ | 2,272,734 | | | $ | 2,264,492 | | | $ | 6,968,750 | | | $ | 6,766,681 | |
Gross premium volume in our underwriting operations for the quarter and nine months ended September 30, 20172020 increased 18%6% and 9%10%, respectively, compared to the same periods of 2016. The2019 due to an increase in gross premium volume in our Insurance segment. Also impacting consolidated gross premium volume were gross premiums written through our program services business and other fronting arrangements, which decreased 13% and 16% for the quarter and nine months ended September 30, 2020, respectively. The decrease in gross premium volume in our program services business for both periods was driven by the run-off of one large program and the cancellation of an in-force book of policies related to another large program. Substantially all gross premiums from our program services business and other fronting arrangements were ceded to third parties for the quarter and nine months ended September 30, 2020 and 2019. See "Other Operations" for further discussion on gross premiums from our program services operations.
Gross premium volume in our Insurance segment increased 7% and 13% for the quarter and nine months ended September 30, 2020, respectively, compared to the same periods of 2019. The increase for both periods was primarily driven by growth and more favorable rates within our professional liability and general liability product lines, as well as growth in our personal lines product lines. For the quarter ended September 30, 2020, these increases were partially offset by lower gross premiums written within our programs product line, due in part to reduced social and economic activity related to COVID-19, as well as active portfolio management where we have discontinued writing certain underperforming programs.
Gross premium volume in our Reinsurance segment decreased slightly for both the quarter and nine months ended September 30, 2017 was attributable2020 compared to an increase in gross premium volume across all threethe same period of our ongoing underwriting segments.
Gross premium volume in our U.S. Insurance segment increased 17% and 9% for2019. For the quarter and nine months ended September 30, 2017, respectively. The increase in2020, significant offsetting variances compared to 2019 include:
•lower gross premium volume for both the quarter and nine months ended September 30, 2017 was driven by growthpremiums within our programs, general liability and personal linesworkers' compensation product lines, as well as increased premiums from our new surety business which was acquired in the second quarter of 2017.
Gross premium volume in our International Insurance segment increased 19% and 8% for the quarter and nine months ended September 30, 2017, respectively. The increase in gross premium volume for both the quarter and nine months ended September 30, 2017 was primarily due to higherlower gross premiums on renewals and less favorable premium volumeadjustments,
•lower gross premiums within our marineproperty product lines, primarily due to an unfavorable impact from the timing of multi-year contracts, and energy product lines. The increase in
•higher gross premium volume for the nine months ended September 30, 2017 was also attributable to higher premium volumepremiums within our general liability product lines.lines, primarily due to new business.
Gross premium volume in our Reinsurance segment increased 17% and 11% for the quarter and nine months ended September 30, 2017. The increase in gross premium volume for the quarter ended September 30, 2017 was driven by higher gross premium volume in our property product line as a result of the favorable impact of assumed reinstatement premiums related to the 2017 Catastrophes. The increase in gross premium volume for the nine months ended September 30, 2017 was driven by $136.5 million of premium related to two large specialty quota share treaties entered into in the first quarter of 2017, as well as a favorable impact from assumed reinstatement premiums and higher gross premium volume in our professional liability and workers compensation product lines. These increases were partially offset by lower gross premium volume in our auto, property and general liability product lines. Significant variability in gross premium volume can be expected in our Reinsurance segment due to individually significant dealscontracts and multi-year contracts.contracts, as well as the timing of renewals.
ThroughDuring the first nine months of 2017,2020, we continued to see small price decreasesimproved pricing across manymost of our product lines, especially inmost notably within our international business on ourgeneral liability, professional liability and property and marine and energy product lines. Our large account business has also been subjectThe primary exception was workers' compensation, where we continued to more pricing pressure.see low single digit rate decreases given generally favorable underlying trends in recent years. When we believe the prevailing market price will not support our underwriting profit targets, the business is not written. As a result of our underwriting discipline, gross premium volume may vary when we alter our product offerings to maintain or improve underwriting profitability.
See "Developments Related to COVID-19" for further discussion on potential impacts to our premiums.
|
| | | | | | | | | | | | | | | |
Net Written Premiums | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
(dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
U.S. Insurance | $ | 653,970 |
| | $ | 562,215 |
| | $ | 1,829,528 |
| | $ | 1,694,193 |
|
International Insurance | 254,326 |
| | 209,656 |
| | 766,571 |
| | 680,691 |
|
Reinsurance | 189,636 |
| | 157,043 |
| | 899,698 |
| | 786,450 |
|
Other Insurance (Discontinued Lines) | (178 | ) | | 469 |
| | (157 | ) | | 555 |
|
Total | $ | 1,097,754 |
| | $ | 929,383 |
| | $ | 3,495,640 |
| | $ | 3,161,889 |
|
Net Written Premiums | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | | | Nine Months Ended September 30, | | |
(dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Insurance | $ | 1,220,054 | | | $ | 1,181,919 | | | $ | 3,683,767 | | | $ | 3,306,447 | |
Reinsurance | 178,994 | | | 187,180 | | | 820,573 | | | 844,949 | |
Other underwriting | (388) | | | 556 | | | 51 | | | 99 | |
Total Underwriting | 1,398,660 | | | 1,369,655 | | | 4,504,391 | | | 4,151,495 | |
Program services and other | (1,384) | | | 729 | | | (4,242) | | | 1,620 | |
Total | $ | 1,397,276 | | | $ | 1,370,384 | | | $ | 4,500,149 | | | $ | 4,153,115 | |
Net retention of gross premium volume for our underwriting operations for the quarter and nine months ended September 30, 20172020 was 83%81% and 84%83%, respectively, compared to 82%83% and 83%, respectively,84% for the same periods of 2016.2019. The increasedecrease in net retention for both the quarter and nine months ended September 30, 20172020 compared to the same periods of 20162019 was driven by higher retention within the International Insurance and Reinsurance segments. The increasea decrease in net retention within the Internationalour Insurance segment, for both periods of 2017due in part to a new quota share agreement to fully cede premiums on a program that was largely dueput into run-off. Within our underwriting operations, we purchase reinsurance and retrocessional reinsurance to highermanage our net retention on our professional liability product lines. The increase in net retention within the Reinsurance segment for the quarter ended September 30, 2017 was primarily driven by higher net retentions on our property product lines. The increase in net retention within the Reinsurance segment for the nine months ended September 30, 2017 was primarily dueindividual risks and overall exposure to changes in the mix of business. Net retention in the U.S. Insurance segment decreased for both the quarterlosses and nine months ended September 30, 2017 compared to the same periods of 2016. This was dueenable us to lower retention on our programs and personal lines business, partially offset by higher retention on our casualty product lines.write policies with sufficient limits to meet policyholder needs.
|
| | | | | | | | | | | | | | | |
Earned Premiums | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
(dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
U.S. Insurance | $ | 600,294 |
| | $ | 548,792 |
| | $ | 1,727,871 |
| | $ | 1,614,588 |
|
International Insurance | 240,145 |
| | 218,968 |
| | 673,606 |
| | 637,365 |
|
Reinsurance | 259,601 |
| | 206,018 |
| | 714,718 |
| | 630,151 |
|
Other Insurance (Discontinued Lines) | (178 | ) | | 466 |
| | (157 | ) | | 685 |
|
Total | $ | 1,099,862 |
| | $ | 974,244 |
| | $ | 3,116,038 |
| | $ | 2,882,789 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | | | Nine Months Ended September 30, | | |
(dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Insurance | $ | 1,173,758 | | | $ | 1,058,869 | | | $ | 3,400,760 | | | $ | 3,023,865 | |
Reinsurance | 222,369 | | | 240,144 | | | 688,884 | | | 678,382 | |
Other underwriting | (195) | | | 556 | | | 51 | | | 99 | |
Total Underwriting | 1,395,932 | | | 1,299,569 | | | 4,089,695 | | | 3,702,346 | |
Program services and other | (1,504) | | | 463 | | | (4,384) | | | 1,124 | |
Total | $ | 1,394,428 | | | $ | 1,300,032 | | | $ | 4,085,311 | | | $ | 3,703,470 | |
Earned premiums increased 7% and 10% for the quarter and nine months ended September 30, 2017 increased 13% and 8%,2020, respectively, compared to the same periods of 2016.2019. The increase in earned premiums for both the quarter and nine months ended September 30, 20172020 was primarily attributable to an increase in earned premiums across all three of our ongoing underwriting segments.
The increase in earned premiums in our U.S. Insurance segment for both periods of 2017 was primarily due to the increase in gross premium volume within our Insurance segment on our professional and general liability and surety product lines, as described above. The increase in earned premiums for the nine months ended September 30, 2017 was also attributable to an increase in earned premiums within our workers compensation and personal lines product lines.
The increase in earned premiums in our International Insurance segment for both the quarter and nine months ended September 30, 2017 was attributable to an increase in earned premiums across multiple product lines. The increase in earned premiums for the nine months ended September 30, 2017 was partially offset by an unfavorable impact from movements in foreign currency exchange rates.
The increase in earned premiums in our Reinsurance segment for both the quarter and nine months ended September 30, 2017 was primarily due to higher earned premiums in our property product lines due to the favorable impact
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 while minimizing underwriting risk. We measure investing results by our net investment income and net investment gains as well as our taxable equivalent total investment return.
The following table summarizes our investment performance.
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | | | Nine Months Ended September 30, | | |
(dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Net investment income | $ | 90,384 | | | $ | 113,382 | | | $ | 274,242 | | | $ | 339,395 | |
Net investment gains (losses) | $ | 539,302 | | | $ | 32,144 | | | $ | (230,896) | | | $ | 1,069,988 | |
Change in net unrealized investment gains on available-for-sale securities (1) | $ | 98,148 | | | $ | 92,904 | | | $ | 429,658 | | | $ | 511,307 | |
Investment yield (2) | 0.6 | % | | 0.7 | % | | 1.8 | % | | 2.3 | % |
Taxable equivalent total investment return, before foreign currency effect | | | | | 3.8 | % | | 11.3 | % |
Taxable equivalent total investment return | | | | | 3.8 | % | | 10.9 | % |
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
(dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Net investment income | $ | 104,489 |
| | $ | 93,147 |
| | $ | 304,156 |
| | $ | 279,437 |
|
Net realized investment gains (losses) | $ | (40,007 | ) | | $ | 27,416 |
| | $ | (1,515 | ) | | $ | 65,836 |
|
Change in net unrealized gains on investments | $ | 328,768 |
| | $ | 26,381 |
| | $ | 836,258 |
| | $ | 619,072 |
|
Investment yield (1) | 0.7 | % | | 0.6 | % | | 1.9 | % | | 1.8 | % |
Taxable equivalent total investment return, before foreign currency effect | | | | | 6.7 | % | | 5.8 | % |
Taxable equivalent total investment return | | | | | 8.1 | % | | 5.8 | % |
(1)The change in net unrealized gains on available-for-sale securities excludes the reserve deficiency adjustment for life and annuity benefit reserves of $20.6 million and $31.3 million, respectively, for the quarters ended September 30, 2020 and 2019, and $56.2 million and $93.1 million, respectively, for the nine months ended September 30, 2020 and 2019. | |
(1)
| Investment yield reflects net investment income as a percentage of monthly average invested assets at amortized cost. |
(2)Investment yield reflects net investment income as a percentage of monthly average invested assets at cost.
The increasedecrease in net investment income for both the quarter and nine months ended September 30, 20172020 compared to the same periods of 2019 was driven primarily by an increase inlower short-term investment income primarily due to higherlower short-term interest rates, and higher dividendlower interest income on our fixed maturity investment portfolio, primarily due to increaseddecreased holdings of fixed maturity securities in 2020. The decrease in net investment income for the nine months ended September 30, 2020 was also driven by losses on our equity holdings.method investments. See note 4(d) of the notes to consolidated financial statements for details regarding the components of net investment income.
Net realized investment losses for the quarter and nine months ended September 30, 2017 included losses of $51.6 million and $39.5 million, respectively, on our investment in insurance-linked securities funds (ILS Funds) as a result of a decrease in the net asset value of the ILS Funds during the third quarter, which was driven by the impact of losses from Hurricanes Harvey, Irma and Maria on the underlying reinsurance contracts in which the ILS Funds are invested. Net realized investment losses for the quarter and nine months ended September 30, 2017 also included write downs for other-than-temporary declines in the estimated fair value of investments of $3.4 million and $7.3 million, respectively, all of which were attributable to equity securities. Net realized investment gains for the nine months ended September 30, 2016 included write downs for other-than-temporary declines in the estimated fair value of investments of $12.1 million, all of which were attributable to equity securities. There were no write downs for other-than-temporary declines in the estimated fair value of investments for the quarter ended September 30, 2016.
The increase in net unrealized gains on investments, net of taxes, for both the quarter and nine months ended September 30, 2017 was attributable to an increase in the fair value of both our fixed maturity and equity portfolios compared to June 30, 2017 and December 31, 2016, respectively. The increase in net unrealized gains on investments, net of taxes, for the quarter ended September 30, 2016 was2020 were primarily attributable to an increase in the fair value of our equity portfolio partially offsetdriven by a decreasefavorable market value movements. This follows significant declines in the fair value of our fixed maturityequity portfolio comparedin the first quarter of 2020 driven by unfavorable market value movements resulting from the onset of the COVID-19 pandemic, the impacts of which are further discussed in "Developments Related to June 30, 2016.COVID-19." The increasedecline in fair value of the equity portfolio in the first quarter of 2020 resulted in net unrealized gains on investments, net of taxes,investment losses for the nine months ended September 30, 2016 was attributable to an increase in the fair value of both our fixed maturity and equity portfolios compared to December 31, 2015.2020. See note 4(e) of the notes to consolidated financial statements for further details regardingon the components of the change in net unrealizedinvestment gains on investments.(losses).
We complete a detailed analysis each quarter to assess whether the decline in the fair value of any investment below its cost basis is deemed other-than-temporary. At September 30, 2017, we held securities with gross unrealized losses of $51.8 million, or less than 1% of invested assets. All securities with unrealized losses were reviewed, and we believe that there were no other securities with indications of declines in estimated fair value that were other-than-temporary at September 30, 2017. However, given the volatility in the debt and equity markets, we caution readers that further declines in fair value could be significant and may result in additional other-than-temporary impairment charges in future periods. Variability in the timing of realized and unrealized gains and losses is to be expected.
We also evaluate our investment performance by analyzing taxable equivalent total investment return, which is a non-GAAP financial measure. Taxable equivalent total investment return includes items that impact net income, (loss), such as coupon interest on fixed maturities,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 (loss).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 federalU.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 realized and unrealized investment gains or losses may vary from one period to the next.
The following table reconciles investment yield to taxable equivalent total investment return.
|
| | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
Investment yield (1) | 1.9 | % | | 1.8 | % |
Adjustment of investment yield from amortized cost to fair value | (0.4 | )% | | (0.3 | )% |
Net amortization of net premium on fixed maturities | 0.3 | % | | 0.3 | % |
Net realized investment gains (losses) and change in net unrealized gains on investments | 4.4 | % | | 3.8 | % |
Taxable equivalent effect for interest and dividends (2) | 0.3 | % | | 0.3 | % |
Other (3) | 1.6 | % | | (0.1 | )% |
Taxable equivalent total investment return | 8.1 | % | | 5.8 | % |
| |
(1)
| Investment yield reflects net investment income as a percentage of monthly average invested assets at amortized cost. |
| |
(2)
| Adjustment to tax-exempt interest and dividend income to reflect a taxable equivalent basis. |
| |
(3)
| Adjustment to reflect the impact of changes in foreign currency exchange rates and time-weighting the inputs to the calculation of taxable equivalent total investment return. |
| | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2020 | | 2019 |
Investment yield (1) | 1.8 | % | | 2.3 | % |
Adjustment of investment yield from amortized cost to fair value | (0.4) | % | | (0.5) | % |
Net amortization of net premium on fixed maturity securities | 0.3 | % | | 0.3 | % |
Net investment gains (losses) and change in net unrealized investment gains on available-for-sale securities | 1.0 | % | | 8.4 | % |
Taxable equivalent effect for interest and dividends (2) | 0.1 | % | | 0.1 | % |
Other (3) | 1.0 | % | | 0.3 | % |
Taxable equivalent total investment return | 3.8 | % | | 10.9 | % |
(1)Investment yield reflects net investment income as a percentage of monthly average invested assets at amortized cost. Other Revenues(2)Adjustment to tax-exempt interest and Other Expensesdividend income to reflect a taxable equivalent basis.
(3)Adjustment to reflect the impact of time-weighting the inputs to the calculation of taxable equivalent total investment return.
Markel Ventures Operations
Operating revenues and expenses associated withWe report the results of our Markel Ventures operations are included in other revenuesour Markel Ventures segment. This segment includes a diverse portfolio of businesses from different industries that offer various types of products and other expensesservices to businesses and consumers, predominantly in the consolidated statements ofUnited States. We measure Markel Ventures' results by its operating income (loss) and comprehensivenet income, (loss)as well as earnings before interest, income taxes, depreciation and amortization (EBITDA). We consolidate the results of our Markel Ventures operationssubsidiaries on a one-month lag, with the exception of any significant transactions or events that occur in the intervening period.
The following table summarizes the operating revenues, operating income, EBITDA and net income to shareholders and EBITDA from our Markel Ventures operations.segment. See note 7 of the notes to consolidated financial statements for further details regarding the components of our Markel Ventures segment operating revenues and expenses.
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | | | Nine Months Ended September 30, | | |
(dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Operating revenues | $ | 824,132 | | | $ | 496,243 | | | $ | 2,013,492 | | | $ | 1,568,443 | |
Operating income | $ | 79,605 | | | $ | 35,467 | | | $ | 200,766 | | | $ | 147,056 | |
EBITDA | $ | 110,804 | | | $ | 58,716 | | | $ | 283,536 | | | $ | 219,131 | |
Net income to shareholders | $ | 48,731 | | | $ | 19,877 | | | $ | 108,712 | | | $ | 84,878 | |
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
(dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Operating revenues | $ | 332,748 |
| | $ | 321,342 |
| | $ | 933,280 |
| | $ | 905,615 |
|
Net income to shareholders | $ | 3,822 |
| | $ | 13,490 |
| | $ | 38,369 |
| | $ | 49,520 |
|
EBITDA | $ | 24,869 |
| | $ | 41,800 |
| | $ | 115,802 |
| | $ | 133,842 |
|
RevenuesOperating revenues from our Markel Ventures operationssegment increased $11.4 million and $27.7 million for the quarter and nine months ended September 30, 2017, respectively,2020 compared to the same periods of 2016. In both periods, higher revenues2019 due to increased sales volumesthe contribution of revenues from Lansing, which was acquired in our non-manufacturing operations were partially offset by lowerApril 2020, and VSC, which was acquired in November 2019. The quarter and nine months ended September 30, 2020 included $373.4 million and $563.6 million, respectively, of operating revenues attributable to Lansing and VSC. Excluding the contributions of Lansing and VSC in our manufacturing operations, primarily from one of our transportation related businesses, in 2017 compared to 2016.
Net income to shareholders and EBITDA2020, operating revenues from our other Markel Ventures operationsbusinesses decreased for the quarter and nine months ended September 30, 20172020 compared to the same periods of 2016. Operating expenses for2019, primarily due to decreased demand across many of our products businesses attributable to the economic and social disruption caused by the COVID-19 pandemic. For both periods, the decrease in demand, which led to lower sales volumes, had the most significant impact at our transportation-related businesses. These decreases were partially offset by the impact of 2017 included $20.0 millionhigher sales volumes at one of estimated inventory loss arising from Hurricane Irma. We have not recognized the potential for any insurance recoveries resulting from these losses. Insurance recoveries will be recognized asour consumer and building products businesses.
Operating income in the period they become more certain. Operating expenses for both periods of 2016 included $10.3 million of expense as a result of an increase in our estimate of the contingent consideration obligation related to the 2015 acquisition of CapTech. There was no similar charge in 2017. We also experienced lower net income to shareholders and EBITDA from our Markel Ventures segment increased for the quarter and nine months ended September 30, 20172020 compared to the same periods of 20162019. The increase in operating income and EBITDA for both periods was due in part to lower sales volumesthe acquisitions of Lansing and VSC. The increase in operating income and EBITDA for both periods was also attributable to a gain on the sale of assets at one of our manufacturing operations, partially offset byleasing businesses and higher revenues in certainat one of our non-manufacturing operations.consumer and building products businesses, as described above. For the nine months ended September 30, 2020, the increase in operating income and EBITDA was also attributable to growth and improved operating results at one of our consulting services businesses. Operating income and EBITDA for both periods were unfavorably impacted by lower operating revenues at our transportation-related businesses, as a result of decreased demand attributed to the COVID-19 pandemic, as described above.
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 operations.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 andor amortization resulting from purchase accounting. The following table reconciles consolidated netMarkel Ventures operating income (loss) to shareholders to Markel Ventures EBITDA,EBITDA.
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | | | Nine Months Ended September 30, | | |
(dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Markel Ventures operating income | $ | 79,605 | | | $ | 35,467 | | | $ | 200,766 | | | $ | 147,056 | |
Depreciation expense | 15,337 | | | 12,892 | | | 43,471 | | | 40,401 | |
Amortization of intangible assets | 15,862 | | | 10,357 | | | 39,299 | | | 31,674 | |
Markel Ventures EBITDA | $ | 110,804 | | | $ | 58,716 | | | $ | 283,536 | | | $ | 219,131 | |
Net income to shareholders from our Markel Ventures segment increased for the quarter and nine months ended September 30, 2020 compared to the same periods of 2019, primarily due to higher operating income, partially offset by higher income tax expense and interest expense.
See "Developments Related to COVID-19" for further discussion of impacts of the pandemic on our Markel Ventures operations.
Other Operations
The following table presents the components of operating revenues and operating expenses that are not included in a reportable segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | | | | | | | | | |
| 2020 | | | | | | 2019 | | | | |
(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 | $ | 38,547 | | | $ | 83,495 | | | $ | 9,612 | | | $ | 54,947 | | | $ | 46,123 | | | $ | 9,611 | |
Program services | 23,519 | | | 4,746 | | | 5,235 | | | 28,844 | | | 3,422 | | | 5,236 | |
Life and annuity | 541 | | | 1,063 | | | — | | | 378 | | | 1,789 | | | — | |
Other | 886 | | | 639 | | | 3,579 | | | 7,250 | | | 6,009 | | | 650 | |
| 63,493 | | | 89,943 | | | 18,426 | | | 91,419 | | | 57,343 | | | 15,497 | |
Underwriting operations | | | | | 10,376 | | | | | | | 9,841 | |
Total | $ | 63,493 | | | $ | 89,943 | | | $ | 28,802 | | | $ | 91,419 | | | $ | 57,343 | | | $ | 25,338 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | | | | | | | |
| 2020 | | | | | | 2019 | | | | |
(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 | $ | 146,265 | | | $ | 183,814 | | | $ | 28,836 | | | $ | 158,570 | | | $ | 159,006 | | | $ | 33,748 | |
Program services | 74,561 | | | 16,073 | | | 15,703 | | | 79,395 | | | 14,300 | | | 15,704 | |
Life and annuity | 1,071 | | | 12,613 | | | — | | | 1,145 | | | 14,284 | | | — | |
Other | 15,612 | | | 13,731 | | | 4,918 | | | 24,868 | | | 20,425 | | | 2,019 | |
| 237,509 | | | 226,231 | | | 49,457 | | | 263,978 | | | 208,015 | | | 51,471 | |
Underwriting operations | | | | | 31,520 | | | | | | | 29,518 | |
Total | $ | 237,509 | | | $ | 226,231 | | | $ | 80,977 | | | $ | 263,978 | | | $ | 208,015 | | | $ | 80,989 | |
Insurance-Linked Securities
For the quarter ended September 30, 2020, the decrease in operating revenues in our insurance-linked securities operations was driven by lower revenues from our Nephila operations, primarily due to lower investment management fees as a result of increases in development class assets, or capital held in a side-pocket for which management fees are not earned, and redemptions in 2020. The decrease in operating revenues for the quarter ended September 30, 2020 was also attributable to lower revenues from our Markel CATCo operations, primarily due to lower assets under management during 2020 compared to 2019 and, effective January 1, 2020, a further reduction in the management fee rate.
For the nine months ended September 30, 2020, the decrease in operating revenues in our insurance-linked securities operations was driven by lower revenues from our Markel CATCo operations, as described above, partially offset by higher revenues from our Nephila operations. Higher revenues from our Nephila operations for the nine months ended September 30, 2020 were primarily due to growth in our managing general agent operations, partially offset by lower investment management fees, as described above.
Nephila's net assets under management were $9.4 billion and $10.4 billion as of noncontrolling interests.
September 30, 2020 and December 31, 2019, respectively. MCIM's net assets under management were $1.2 billion and $2.8 billion as of September 30, 2020 and December 31, 2019, respectively, a portion of which is attributable to our investments in the Markel CATCo Funds.
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
(dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Net income (loss) to shareholders | $ | (259,141 | ) | | $ | 83,796 |
| | $ | (39,612 | ) | | $ | 322,963 |
|
(Income) loss before income taxes from other Markel operations | 362,425 |
| | (96,708 | ) | | 117,458 |
| | (365,806 | ) |
Income tax expense (benefit) from other Markel operations | (99,462 | ) | | 26,402 |
| | (39,477 | ) | | 92,363 |
|
Markel Ventures net income to shareholders | 3,822 |
| | 13,490 |
| | 38,369 |
| | 49,520 |
|
Interest expense (1) | 5,315 |
| | 4,005 |
| | 11,738 |
| | 11,610 |
|
Income tax expense | 215 |
| | 9,368 |
| | 19,688 |
| | 28,431 |
|
Depreciation expense | 9,092 |
| | 8,247 |
| | 26,760 |
| | 24,075 |
|
Amortization of intangible assets | 6,425 |
| | 6,690 |
| | 19,247 |
| | 20,206 |
|
Markel Ventures EBITDA - Total | $ | 24,869 |
| | $ | 41,800 |
| | $ | 115,802 |
| | $ | 133,842 |
|
| | | | | | | |
Markel Ventures EBITDA - Manufacturing | $ | 25,362 |
| | $ | 35,082 |
| | $ | 82,037 |
| | $ | 105,600 |
|
Markel Ventures EBITDA - Non-Manufacturing | (493 | ) | | 6,718 |
| | 33,765 |
| | 28,242 |
|
Markel Ventures EBITDA - Total | $ | 24,869 |
| | $ | 41,800 |
| | $ | 115,802 |
| | $ | 133,842 |
|
| |
(1)
| Interest expense for the quarters ended September 30, 2017 and 2016 includes intercompany interest expense of $3.7 million and $2.7 million, respectively. Interest expense for the nine months ended September 30, 2017 and 2016 includes intercompany interest expense of $7.7 million and $7.4 million, respectively. |
The increase in services and other expenses in our insurance-linked securities operations for both the quarter and nine months ended September 30, 2020 compared to the same periods of 2019 was primarily due to a legal settlement at our Markel CATCo operations. See note 15 of the notes to consolidated financial statements for further details around developments in our Markel CATCo operations. Services and other expenses at our Nephila operations increased for both the quarter and nine months ended September 30, 2020 compared to the same periods of 2019 due to growth in our managing general agent operations in 2020. For the nine months ended September 30, 2020, higher managing general agent expenses were partially offset by a favorable impact from transaction-related costs in 2019 that did not recur in 2020. Services and other expenses in 2020 also reflect start-up costs associated with our new retrocessional insurance-linked securities fund manager, Lodgepine.
Program Services
The decrease in operating revenues in our program services operations for both the quarter and nine months ended September 30, 2020 compared to the same periods of 2019 was primarily due to lower gross premium volume. Gross written premiums in our program services operations were $536.6 million and $1.5 billion for the quarter and nine months ended September 30, 2020, respectively, and $619.2 million and $1.8 billion for the quarter and nine months ended September 30, 2019, respectively. The decrease in gross premium volume for both periods was driven by the run-off of one large program and the cancellation of an in-force book of policies related to another large program resulting in a one-time unfavorable premium adjustment of $55.0 million associated with the return of unearned premium, which was recognized in the first quarter of 2020. For the nine months ended September 30, 2020, these decreases were partially offset by gross written premiums from new program business in 2020.
Interest Expense, Loss on Early Extinguishment of Debt and Income Taxes
Interest Expense and Loss on Early Extinguishment of Debt
Interest expense was $31.8$42.7 million and $97.0$133.2 million for the quarter and nine months ended September 30, 2017,2020, respectively, compared to $33.2$47.5 million and $97.7$129.0 million for the same periods of 2016.2019. The decreasechange in interest expense for the quarter and nine months ended September 30, 20172020 was primarily due toa result of the repaymentfollowing transactions:
•the purchase and redemption of our 7.20%6.25% and 5.35% unsecured senior notes in the secondthird and fourth quarters of 2019
•the repayment of our 7.125% unsecured senior notes in the third quarter of 2017. 2019
•the issuance of our 3.35% and 4.15% unsecured senior notes in the third quarter of 2019
The decreasechange in interest expense for the nine months ended September 30, 20172020 was due toalso impacted by the partial purchaseissuance of our 7.125% unsecured senior notes and our 7.35% unsecured senior notes in the second quarter of 2016 and the repayment of our 7.20% unsecured senior notes in the second quarter of 2017, partially offset by interest expense associated with our 5.0% unsecured senior notes which were issued in the second quarter of 2016.2019.
In September 2019, we purchased $125.2 million of principal on our 6.25% unsecured senior notes due September 30, 2020 and $97.8 million of principal on our 5.35% unsecured senior notes due June 1, 2021 through a tender offer at a total purchase price of $130.1 million and $103.0 million, respectively. In connection with the partialtender offer and purchase, of our 7.125% unsecured senior notes and our 7.35% unsecured senior notes in the second quarter of 2016, we recognized a loss on early extinguishment of debt of $44.1$6.7 million during the quarter and nine months ended September 30, 2016.2019. See "Financial Condition" for further discussion of our other 2019 senior long-term debt transactions.
Income Taxes
The effective tax rate was 32% and 27% for the nine months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017, the effective tax rate differs from the U.S. statutory tax rate of 35% primarily as a result of tax-exempt investment income, partially offset by a reduced tax benefit from losses attributable to our foreign operations. For the nine months ended September 30, 2016, the effective tax rate differs from the U.S. statutory tax rate of 35% primarily as a result of tax-exempt investment income. The increase in the effective tax rate for the nine months ended September 30, 2017 compared2020 was not meaningful due to the same period of 2016 was primarily attributable to the impact during the third quarter of having a small pre-tax loss in the period. The effective tax rate was 22% for the nine months ended September 30, 2017, which magnified the effect of certain tax adjustments.
Our effective tax rate, which is based upon2019. We use the estimated annual effective tax rate may fluctuatemethod for calculating our tax provision in interim periods. This method applies our best estimate of the effective tax rate expected for the full year to year-to-date earnings before income taxes. Certain items, including those deemed to be unusual, infrequent or that cannot be reliably estimated (discrete items), are excluded from period to period based on the relative mix of income or loss reported by jurisdictionestimated annual effective tax rate, and the varyingrelated tax ratesexpense or benefit is reported in each jurisdiction.
Comprehensive Income (Loss) to Shareholders
Comprehensive loss to shareholders was $19.9 million for the third quarter of 2017 compared to comprehensive income to shareholders of $89.2 million for the same period as the related item. The estimated annual effective tax rate was 21% for both the nine months ended September 30, 2020 and 2019. The difference between the estimated annual effective tax rate and the effective tax rate for both periods was attributed to discrete items during the respective periods, however, the impact of 2016. Comprehensive loss to shareholders for the third quarter of 2017 included a net loss to shareholders of $259.1 million, an increase in net unrealized gains on investments, net of taxes, of $222.2 million and favorable foreign currency translation adjustments, net of taxes, of $16.3 million. Comprehensive income to shareholders for the third quarter of 2016 included net income to shareholders of $83.8 million and an increase in net unrealized gains on investments, net of taxes, of $13.3 million.
Comprehensive income to shareholders was $545.7 milliondiscrete items for the nine months ended September 30, 2017 compared2020 was magnified due to $696.1 million for the same periodsmall pre-tax loss during the period.
Comprehensive Income to Shareholders
The following table summarizes the components of comprehensive income to shareholdersshareholders.
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | | | Nine Months Ended September 30, | | |
(dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Net income (loss) to shareholders | $ | 452,726 | | | $ | 205,637 | | | $ | (31,269) | | | $ | 1,279,362 | |
Other comprehensive income | | | | | | | |
Change in net unrealized gains on available-for-sale investments, net of taxes | 61,087 | | | 48,518 | | | 297,927 | | | 329,873 | |
Other, net of taxes | 6,294 | | | (4,144) | | | (6,961) | | | (3,640) | |
Other comprehensive (income) loss attributable to noncontrolling interest | (18) | | | 58 | | | (24) | | | 49 | |
Other comprehensive income to shareholders | 67,363 | | | 44,432 | | | 290,942 | | | 326,282 | |
Comprehensive income to shareholders | $ | 520,089 | | | $ | 250,069 | | | $ | 259,673 | | | $ | 1,605,644 | |
Book Value per Common Share and Total Shareholder Return
Book value per common share was $819.71 as of September 30, 2020, which reflects an increase of 2% from $802.59 at December 31, 2019. Our stock price per share, or total shareholder return, decreased 15% for the nine months ended September 30, 2017 included an increase in net unrealized gains on investments, net2020.
The increase in net unrealized gains on investments for both the quarter and nine months ended September 30, 2016 were net of an adjustment of $9.6 million and $57.5 million, respectively, to reclassify unrealized gains on the investments supporting future policy benefits to life and annuity benefit reserves. No adjustment was required for the quarter or nine months ended September 30, 2017. See note 11 of the notes to consolidated financial statements for further discussion of this adjustment.
Financial Condition
Investments, cash and cash equivalents and restricted cash and cash equivalents (invested assets) were $20.0$23.6 billion at September 30, 20172020 compared to $19.1$22.3 billion at December 31, 2016. Net unrealized gains on investments, net of taxes, were $2.3 billion at September 30, 2017 compared to $1.7 billion at December 31, 2016.2019. Equity securities were $5.7$6.2 billion, or 29%26% of invested assets, at September 30, 2017,2020, compared to $4.7$7.6 billion, or 25%34% of invested assets, at December 31, 2016.2019. The decrease in equity securities from December 31, 2019 to September 30, 2020 was attributable to sales of equity securities as well as a decrease in fair value, which was driven by net unfavorable market value movements during the nine months ended September 30, 2020. Fixed maturity securities were 43% of invested assets at September 30, 2020 compared to 45% at December 31, 2019.
Net cash provided by operating activities was $598.7 million$1.3 billion for the nine months ended September 30, 20172020 compared to $324.4$712.0 million for the same period of 2016. Net cash provided by operating activities for the nine months ended September 30, 2017 and 2016 was net of cash payments of $45.8 million and $51.9 million, respectively, made in connection with commutations that were completed during the respective periods.2019. Net cash flows from operating activities for the nine months ended September 30, 20172020 reflected higher net premium collections in the U.S.our Insurance segment, lower claims settlement activity across all of our underwriting segments and lower payments for income taxes and employee profit sharing compared to the same period of 2016. Cash flows for the nine months ended September 30, 2016 also included payments totaling $47.0 million to settle contingent purchase consideration obligations, of which $32.9 million was included in operating activities.segment.
Net cash usedprovided by investing activities was $94.2$22.5 million for the nine months ended September 30, 20172020 compared to $1.1 billion for the same period of 2016. The decrease in net cash used by investing activities was primarily a result of a decrease in our holdings in short-term investments during$657.2 million for the same period of 2019. During the nine months ended September 30, 2017 compared to an increase in the same period of 2016. During the first nine months of 2017, the proceeds2020, net cash provided by investing activities included $1.2 billion from the sales, maturities and calls of fixed maturities and sales of equity securities, were reinvestednet of cash used for purchases of equity securities. This was partially offset by cash used to increase our holdings of short-term investments in fixed maturities and equity securities.the period. See "Developments Related to COVID-19" for further discussion of actions we have taken in our investment portfolio in response to the pandemic. Net cash provided by investing activities duringin 2020 also was net of $547.9 million of net cash used for the acquisition of Lansing. During the nine months ended September 30, 2017 was2019, net of $592.0cash used by investing activities included $212.5 million of cash net of cash acquired, used to complete acquisitions.acquire a minority ownership interest in The Hagerty Group, LLC. Cash flowsflow from investing activities areis also affected by various factors such as anticipated payment of claims, financing activity, acquisition opportunities and individual buy and sell decisions made in the normal course of our investment portfolio management.
Net cash usedprovided by financing activities was $299.3$475.6 million for the nine months ended September 30, 20172020 compared to net cash provided by financing activities of $203.0$770.6 million for the same period of 2016.2019. In May 2020, we issued preferred shares with net proceeds of $591.9 million, as further discussed below. During the second quarternine months ended September 30, 2019, we issued unsecured senior notes with net proceeds of 2017, we$1.4 billion, before expenses. We used casha portion of $90.6 millionthese proceeds to repay the remaining outstanding balance of our 7.20%7.125% unsecured senior notes due April 14, 2017. Also during 2017, we used cash of $84.3September 30, 2019 ($234.8 million to repay debt assumed in connection with acquisitions. During the second quarter of 2016, we issued $500 million of 5.0% unsecured senior notes due April 5, 2046. Net proceeds were $493.1 million.aggregate principal outstanding at December 31, 2018). We used aan additional portion of these proceeds to purchase $70.2$223.0 million of principal on two additional series of our 7.35%other unsecured senior notes due 2034 and $108.8 million of principal on our 7.125% unsecured senior notes due 2019 through a tender offer at a total purchase price $95.0of $233.1 million. Cash of $23.9 million and $126.4 million, respectively. Cash of $84.4 million and $15.5$82.0 million was used to repurchase shares of our common stock during the first nine months of 20172020 and 2016,2019, respectively. We suspended repurchases of our shares in March 2020.
We seek to maintain prudent levels of liquidity and financial leverage for the protection of our policyholders, creditors and shareholders. Our debt to capital ratio was 22%23% at September 30, 20172020 and 23%24% at December 31, 2016.2019.
We have access to various capital sources, including dividends from certain of our insurance and Markel Ventures subsidiaries, holding company invested assets, undrawn capacity under our revolving credit facility and access to the debt and equity capital markets. We believe that we have sufficient liquidity to meet our capital needs. However, the availability of these sources of capital and the availability and terms of future financings will depend on a variety of factors, and could be adversely affected by, among other things, risks and uncertainties related to COVID-19. See "Developments Related to COVID-19" for further discussion of the potential impacts of COVID-19 on our liquidity and capital resources.
In May 2020, we issued 600,000 6.00% Fixed-Rate Reset Non-Cumulative Series A preferred shares, with no par value and a liquidation preference of $1,000 per share, for aggregate net proceeds after expenses of $591.9 million. Dividends, if declared by our Board of Directors, are payable semi-annually in arrears beginning in December 2020. If we do not declare and pay the full dividends for the latest completed dividend period on all outstanding Series A preferred shares, we may not (i) declare or pay a dividend on our common shares or (ii) purchase, redeem or otherwise acquire for consideration any common shares, subject to certain exceptions. See note 14 of the notes to consolidated financial statements.
Our holding company had $2.5$3.8 billion and $4.0 billion of invested assets at both September 30, 20172020 and December 31, 2016.2019, respectively. The decrease in invested assets was primarily due to a capital contribution to Markel Ventures for the acquisition of Lansing as well as interest payments associated with our unsecured senior notes and a decrease in the fair value of equity securities, partially offset by the proceeds from our preferred shares offering, as described above.
Shareholders' equity
Developments Related to COVID-19
On March 11, 2020, COVID-19, a novel coronavirus outbreak, was $8.9declared a pandemic by the World Health Organization. This pandemic has caused unprecedented social and economic disruption, increased volatility of capital markets and intervention by various governments and central banks around the world. In addition to the losses incurred in both our investing and underwriting operations during the first nine months of 2020, and the decreased demand for certain products and services within our Markel Ventures operations, we are experiencing significant impacts across our business operations. Most of the workforce in our insurance operations is working remotely from their homes, however, some of our offices have re-opened to the workforce at a reduced capacity. We have taken significant measures and developed new policies and procedures to protect the health and safety of our employees who are returning the office. While remote working continues to be the predominate approach, and is currently operating effectively, an extended period of remote work arrangements could strain our business continuity plans, introduce or increase operational and control risks, including but not limited to increased cybersecurity risks, and impact our ability to effectively manage our businesses. Within our Markel Ventures operations, most of our businesses are operating on their premises, however, their ability to continue to do so may be impacted as the pandemic evolves. For those employees in our insurance and Markel Ventures operations who are returning to work, or have continued work, on our premises, there is a risk that they will contract COVID-19, which could expose us to increased risk of employment related claims and litigation. Illnesses suffered by key employees, or a significant percentage of our workforce, also could prevent or delay the performance of critical business functions.
We are committed to serving the needs of our employees, customers, business partners and shareholders and continue to focus our efforts on safeguarding our people, supporting our front office and business operations and keeping our employees, customers, business partners and shareholders informed.
Other impacts we have experienced in our operations during the quarter and nine months ended September 30, 2020, including our consideration of these impacts on the valuation of our goodwill and intangible assets, as well as steps we are taking to respond to the economic disruption and dislocation caused by the pandemic, are discussed below, along with potential future impacts to our results of operations and financial condition.
Liquidity and Capital Resources
We seek to maintain prudent levels of liquidity and financial leverage for the protection of our policyholders, creditors and shareholders. We began the year in a strong liquidity position, holding $4.0 billion of invested assets at our holding company, the highest level in our history, and at September 30, 2017 and $8.52020, our holding company held $3.8 billion of invested assets. Invested assets at December 31, 2016. Book value per share increased to $641.20 atthe holding company as of September 30, 20172020 include net proceeds from $606.30 at December 31, 2016, primarilyour May 2020 issuance of preferred stock totaling $591.9 million, and following two debt issuances in 2019 and the purchase and redemption of our unsecured senior notes due to $545.7mature in 2020 and 2021, we have no unsecured senior notes maturing until July 2022. We also have access to our $300 million revolving credit facility. We continue to maintain a fixed maturity portfolio comprised of comprehensive incomehigh credit quality, investment grade securities with an average rating of "AA." Despite a $242.8 million decrease in the fair value of our equity portfolio in the first nine months of 2020, unrealized gains on our equity portfolio were $3.4 billion as of September 30, 2020.
Given the dislocation in the financial markets and related uncertainty around the global credit markets, we have taken several steps within our investment portfolio to shareholdersincrease our allocation to cash. Initially, we were retaining cash proceeds from maturities of short-term investments and fixed maturity securities. However, we subsequently have been reallocating cash to purchase short-term investments and fixed maturity securities. We also paused our purchases of equity securities and sold certain equity securities based on our views of the underlying fundamentals of these positions and where pricing was deemed appropriate. We also suspended repurchases of our shares in March 2020 and are focusing on expense reductions across our company.
Declines in the fair value of our equity securities and underwriting losses arising from COVID-19, as well as the 2020 Catastrophes, have reduced the capital held by our insurance subsidiaries. Our insurance operations may require additional capital to support premium writings, and we remain committed to maintaining adequate capital and surplus at each of our insurance subsidiaries. As of September 30, 2020, the statutory capital of all of our insurance subsidiaries exceeded required capital, and we believe we are well positioned to continue to pay claims, including those arising from the pandemic, promptly in accordance with the terms of our policies.
We continue to believe we have adequate liquidity to meet our capital and operating needs, including that which may be required to support the operating needs of our subsidiaries.
Underwriting Operations
As previously discussed, our underwriting results for the nine months ended September 30, 2017.2020 included $356.8 million of net losses and loss adjustment expenses directly attributed to COVID-19 (where COVID-19 was deemed the proximate cause of loss), including $31.8 million recognized during the third quarter. Due to the inherent uncertainty associated with the assumptions surrounding this pandemic, these estimates are subject to a wide range of variability. While we believe our net reserves for direct losses and loss adjustment expenses for COVID-19 as of September 30, 2020 are adequate based on information available at this time, we continue to closely monitor reported claims, government actions, judicial decisions and changes in local and worldwide social disruption arising from the pandemic and will adjust our estimates of gross and net losses as new information becomes available. See "Results of Operations - Underwriting Results" for further discussion on our estimate of direct losses and loss adjustment expenses attributed to COVID-19.
We also have underwriting exposure to loss impacts that are indirectly related to the COVID-19 pandemic and associated with a broader range of coverages, including coverages within our trade credit, professional liability and workers' compensation product lines, among others, as well as our reinsurance product lines. During the quarter and nine months ended September 30, 2020, we recognized $15.0 million of net losses and loss adjustment expenses in our trade credit product line within our Insurance segment related to losses that were indirectly attributable to the pandemic. As the impacts of the pandemic continue to evolve, we expect that further losses indirectly related to the COVID-19 pandemic are likely to emerge. As an example, we provide liability coverage for health and medical institutions and professions, as well as other professions, which have been strained or otherwise impacted by the pandemic. No other significant indirect losses have been reported at this time.
The widespread economic and social disruption caused by COVID-19 has created significant financial hardships for individuals and businesses worldwide. However, at this time, we do not believe there has been any material change in our exposure to credit losses. Our allowances for credit losses in both our insurance receivables and reinsurance recoverables were adjusted during the first quarter of 2020 to reflect the increased credit risk associated with the negative economic outlook, the impact of which was not material to our underwriting results.
The significant decline in economic activity occurring during the pandemic may have an unfavorable impact on our premium volume, due to business closures, reduced recreational activity and lower gross receipts, revenues and payrolls of our insureds, among other things. While premium volume for the quarter and nine months ended September 30, 2020 was impacted by these effects of the pandemic, the impact was not material to our underwriting results. For those policies where the underlying loss exposures have been reduced as a result of decreased economic activity or stay-at-home orders resulting from COVID-19, we also may be required to refund premiums to policyholders, however, there have been no material adjustments to date. These adverse impacts on our premium volume could be material.
Within our underwriting operations, we also are reviewing and analyzing the underwriting guidelines and procedures we use to underwrite and reinsure policies that provide coverages related to communicable diseases, viruses, pathogens and other similar risks. Where appropriate, we are taking steps to mitigate our exposure to additional or further losses related to these types of risks, including increasing pricing and adding policy terms and conditions, including exclusions. These actions may reduce premium volume in certain classes of business.
Markel Ventures Operations
Beginning in the second quarter of 2020, the economic and social disruption created by the pandemic impacted the results of operations, financial position and cash flows of our Markel Ventures operations. Revenues across many of our businesses decreased due to changes in consumer behavior and the overall impact of current economic conditions on commercial and consumer spending, all of which impacted demand for certain products and services within our businesses. We have also seen orders and contracts canceled or postponed, and as a result of reduced demand, we have temporarily reduced capacity at certain of our operations for which the duration is currently uncertain. As the social and economic disruption caused by the pandemic is ongoing, we expect that revenues from our Markel Ventures operations will continue to be impacted, and these impacts may continue to be material.
In July 2017,order to partially mitigate the impact of decreased revenues, certain of our businesses have taken actions to reduce expenses, including, but not limited to, elimination of non-essential expenses, cancellation or deferral of open positions, salary reductions and workforce furloughs and reductions. Our businesses may increase borrowings, if needed, to maintain the cash flow required to operate.
Continued loss of revenues in certain of our products and services businesses, the extent of which we entered intoare currently unable to reasonably estimate, could also impact the carrying value of inventory, goodwill and intangible assets and other long-lived assets, which may become impaired. See further discussion below for considerations regarding the valuation of our goodwill and intangible assets as of September 30, 2020. In certain cases, revenue declines also could result in ongoing cash and working capital constraints and could impact the companies' liquidity and their ability to comply with debt covenants, and, in response, we may take steps necessary to support these operations.
As a definitive merger agreementresult of the economic hardship experienced by our customers, we may modify our payment terms or offer discounts to acquire State National Companies, Inc. State National is a leading specialty providerour customers, and we also are exposed to increased credit risk. Our allowances for credit losses on our receivables were adjusted during the first quarter of property2020 to reflect the increased credit risk associated with the negative economic outlook, the impact of which was not material to our results of operations.
Insurance-Linked Securities and casualtyProgram Services
Through our insurance-linked securities operations, we receive management fees for investment and insurance management services that includes both fronting servicesbased on the net asset value of the accounts we manage, and, collateral protection insurance coverage. Underfor certain funds, incentive fees based on the merger agreement, State National stockholders will receive $21.00annual performance of the funds managed.
For the nine months ended September 30, 2020, investment losses attributed to COVID-19 within the investment funds we manage have not been significant; however, uncertainty around potential COVID-19 loss exposures, has reduced, and may further reduce, the net asset value on which our management fees are based. Deferred or reduced investment management fees and the associated decline in cash flows, the extent of which we are currently unable to reasonably estimate, also could impact the carrying value of our goodwill and intangible assets, which may become impaired. See further discussion below for each outstanding shareconsiderations regarding the valuation of State National common stock (other than restricted shares that do not vest in connection with the transaction). The aggregate merger consideration, which includes net cash payments for State National stock optionsour goodwill and restricted stock, is estimated to be $919 million. The merger was approved by State National's stockholders on October 24, 2017. The transaction remains subject to customary closing conditions, including regulatory approvals, and is expected to closeintangible assets as of September 30, 2020.
Volatility in the fourth quartercapital markets and investor uncertainty regarding insurance industry exposure to COVID-19 also has impacted, and may continue to impact, our ability to raise additional third party capital for the funds we manage. We also have experienced, and may continue to experience, higher than anticipated investor redemptions from our funds. These impacts could have a material impact on our results of 2017.operations and financial condition.
Our program services business generates fee income, in the form of ceding (program service) fees. This fee income is calculated based on the gross premium volume of the insurance programs we support. Similar to our underwriting operations, the significant decline in economic activity may have an unfavorable impact on premium volume, which may result in a reduction in fee income.
Goodwill and Intangible Assets
Our consolidated balance sheet as of September 30, 2020 included goodwill and intangible assets of $4.4 billion, as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | | | | | |
(dollars in millions) | Underwriting | | Markel Ventures | | Other (1) | | Total |
Goodwill | $ | 892.9 | | | $ | 904.7 | | | $ | 807.0 | | | $ | 2,604.6 | |
Intangible assets | 460.0 | | | 637.0 | | | 723.5 | | | 1,820.5 | |
Total | $ | 1,352.9 | | | $ | 1,541.7 | | | $ | 1,530.5 | | | $ | 4,425.1 | |
(1)Amounts included in Other reflect our operations that are not included in a reportable segment, including our insurance-linked securities operations and our program services operations.
Through September 30, 2020, we considered whether a quantitative assessment of goodwill and intangible assets for impairment was required as a result of the significant economic disruption caused by the COVID-19 pandemic. After considering qualitative factors regarding the actual and expected impacts of the pandemic on our operations, as well as the amount by which the fair value of our reporting units exceeded their respective carrying values at the date of the last quantitative assessment, we determined these conditions did not indicate that it is more likely than not that the carrying value of any of our reporting units exceeded their fair value as of September 30, 2020 based on information available to us at this time. Similar factors were considered to determine if these circumstances were an indicator requiring an assessment of the recoverability of our intangible assets, and we concluded they were not based on information available to us at this time. However, delayed recovery or further deterioration in market conditions related to the general economy and the specific industries in which we operate, a sustained trend of weaker than anticipated financial performance within a reporting unit, or an increase in the market-based weighted average cost of capital, among other factors, could significantly impact the impairment analysis and may result in future goodwill or intangible asset impairment charges that, if incurred, could have a material adverse effect on our financial condition and results of operations.
For additional risks to our businesses related to COVID-19, see the risk factor titled "The COVID-19 pandemic has had, and may continue to have, material adverse effects on us."
Brexit Developments
On June 23, 2016, the U.K.United Kingdom (U.K.) voted to exit the European Union (E.U.) (Brexit), and on March 29, 2017,. A Withdrawal Agreement was agreed between the U.K. government delivered formal notice to the other E.U. member countries that it is leaving the E.U. A two-year period has now commenced during which the U.K. and the E.U. will negotiatein October 2019 and was approved by the futureU.K. Parliament on January 23, 2020. Under the Withdrawal Agreement, the U.K. left the E.U. on January 31, 2020. The effect of the Withdrawal Agreement is that E.U. laws continue to have effect in the U.K. during a transition period until December 31, 2020. The final terms of the U.K.'sfuture relationship with the E.U., including the terms of trade between the U.K. and the E.U. Unless this period is extended, the U.K. will automatically exit the E.U., with or without an agreement in place, after two years. During this period the U.K. will remain a part of the E.U. After Brexit terms are agreed, Brexit couldto be implemented in stages over a multi-year period. No member country has left the E.U., and the rules for exit (contained in Article 50 of the Treaty on European Union) are brief.
Accordingly, there are significant uncertainties related to the political, monetary and economic impacts of Brexit, including related tax, accounting and financial reporting implications. Brexit could also lead to legal uncertainty and potentially a large number of new and divergent national laws and regulations, including new tax rules, as the U.K. determines which E.U. laws to replace or replicate.
negotiated. The effects of Brexit will depend in part on agreements, if any, agreements the U.K. makes to retain access to E.U. markets either duringmarkets. Ultimately, all Brexit terms also must be ratified by the legislative bodies of the 27 E.U. member states.
Without a transitional periodBrexit agreement on future terms of trade, U.K. based insurers may be prohibited from administering policies for, or more permanently. Brexit could impair or end the ability of bothpaying claims to, European Economic Area (EEA) policyholders post Brexit. In order to provide certainty for its EEA policyholders, our U.K. insurance company, Markel International Insurance Company Limited, (MIICL)transferred its legacy EEA exposures, claims and policies to our German insurance company, Markel Insurance SE. Lloyd's also has commenced its transfer of legacy EEA exposures. That transfer is expected to be completed prior to December 31, 2020, however it may take longer, and there is no assurance that approval of that transfer will be granted or on what terms and conditions. Lloyd's has indicated that it intends to honor contractual commitments, including the payment of valid claims, and expects that its approach will be respected by EEA regulators pending the completion of its transfer of legacy EEA exposures. The European Insurance and Occupational Pensions Authority has issued its recommendation to E.U. member states that they adopt legislation to permit the orderly run-off of legacy EEA exposures, claims and policies by U.K. insurers. While some E.U. member states have adopted such legislation, no E.U. member state is obligated to do so, and the terms of any such legislation may vary significantly among the E.U. member states. Without an orderly run-off regime for legacy business in every E.U. member state, Lloyd's, and in turn, our Lloyd's syndicate, to transactmay be impaired in running-off business, including paying claims, in E.U. countries from our U.K. offices and MIICL's ability to maintain its current branches inthe E.U. member countries and in Switzerland. We have started the processstates.
For additional risks related to obtain regulatory approval to establish an insurance company in Germany in order to continue transacting E.U. business if U.K. access to E.U. markets ceases or is materially impaired. The Society of Lloyd's has announced that it will be setting up a new European insurance company in Brussels in order to maintain access to E.U. business for Lloyd's syndicates. Access to E.U. markets through a solution devised by the Society of Lloyd's may supplement, or serve as an alternative to, a new E.U.-based insurance carrier for business we transact in the E.U.
Disclosure of Certain Activities Relating to Iran
Under the Iran Threat Reduction and Syria Human Rights Act of 2012, non-U.S. entities owned or controlled by U.S. persons have been prohibited from engaging in activities, transactions or dealings with Iran to the same extent as U.S. persons. Effective January 16, 2016, the Office of Foreign Assets ControlBrexit, see "The exit of the U.S. DepartmentUnited Kingdom from the European Union could have a material adverse effect on us." under Risk Factors in our 2019 Annual Report on Form 10-K.
Section 13(r) of the Securities Exchange Act of 1934 requires reporting of certain Iran-related activities that are now permitted under General License H, including underwriting, insuring and reinsuring certain activities related to the importation of refined petroleum products by Iran and vessels involved in the transportation of crude oil from Iran.
Certain of our non-U.S. insurance operations underwrite global marine hull policies and global marine hull war policies that provide coverage for vessels or fleets navigating into and out of ports worldwide, potentially including Iran. Under a global marine hull war policy, the insured is required to give notice before entering designated areas, including Iran. During the quarter ended September 30, 2017 we have received notice that one or more vessels covered by a global marine hull war policy were entering Iranian waters. However, no additional premium is required under global marine hull policies or global marine hull war policies for calling into Iran. During the quarter ended September 30, 2017, we have not been asked to cover a specific voyage into or out of Iran that would result in a separate, allocable premium for that voyage.
Certain of our non-U.S. reinsurance operations underwrite marine, energy, aviation and trade credit liability treaties on a worldwide basis and, as a result, it is possible that the underlying insurance portfolios may have exposure to the Iranian petroleum industry and its related products and service providers.
We provide two energy construction reinsurance contracts in Iran, two Iran-related marine liability contracts, two Iran-related marine cargo contracts and one Iran-related hull war contract. These contracts have been underwritten through our syndicate at Lloyd's and one of our non-U.S. insurance companies. We expect our portion of the annual premium for these contracts to be approximately $1 million in the aggregate. Except for these contracts, we are not aware of any premium apportionment with respect to underwriting, insurance or reinsurance activities of our non-U.S. insurance subsidiaries reportable under Section 13(r). Should any such risks have entered into the stream of commerce covered by the insurance portfolios underlying our reinsurance treaties, we believe that the premiums associated with such business would be immaterial.
Our non-U.S. insurance subsidiaries intend to continue to provide insurance and reinsurance for coverage of Iran-related risks, if at all, only to the extent permitted under, and in accordance with, General License H or other applicable economic or trade sanctions requirements or licenses.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosures
Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in equity prices, interest rates, foreign currency exchange rates and commodity prices. Our consolidated balance sheets include assets and liabilities with estimated fair values that are subject to market risk. Our primary market risks have been equity price risk associated with investments in equity securities, interest rate risk associated with investments in fixed maturitiesmaturity securities and foreign currency exchange rate risk associated with our international operations. Various companiesSome businesses within our Markel Ventures operations are subjectexposed to commodity price risk;risk resulting from changes in the price of raw materials, parts and other components necessary to manufacture products, however, this risk is not material to the Company. The operating results of these businesses could be adversely impacted should they be unable to obtain price increases from customers in response to significant increases in raw materials, parts and other component prices.
As of September 30, 2017, the carrying value of goodwill and intangible assets denominated in foreign currency, which is not matched or hedged, was $243.5 million, compared to $208.7 million as of December 31, 2016. The increase is primarily due to the impact of the strengthening of the United Kingdom Sterling and Canadian Dollar against the U.S. Dollar during 2017. During the nine months ended September 30, 2017,2020, there were no other material changes to the market risk components described in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
The estimated fair value of our investment portfolio at September 30, 20172020 was $20.0$23.6 billion, 71%43% of which was invested in fixed maturities, short-term investments, cashmaturity securities and cash equivalents and restricted cash and cash equivalents and 29%26% of which was invested in equity securities. At December 31, 2016,2019, the estimated fair value of our investment portfolio was $19.1$22.3 billion, 75%45% of which was invested in fixed maturities, short-term investments, cashmaturity securities and cash equivalents and restricted cash and cash equivalents and 25%34% of which was invested in equity securities.
Our fixed maturity portfolio includes corporate bonds, mortgage-backed securities and securities issued by municipalities, foreign governments and non-sovereign foreign institutions. Credit risk isexists within our fixed maturity portfolio from the potential for loss resulting from adverse changes in an issuer's ability to repay its debt obligations. During the nine months ended September 30, 2020, there were no material changes in our corporate bond, mortgage-backed security, municipal bond or foreign government fixed maturity holdings.
We monitorbelieve that our investmentfixed maturity portfolio to ensure that credit risk does not exceed prudent levels.is highly diversified and is comprised of high quality securities. We have consistently invested in high credit quality, investment grade securities. Our fixed maturity portfolio has an average rating of "AA," with 98% rated "A" or better by at least one nationally recognized rating organization. Our policy is to invest in investment grade securities and to minimize investments in fixed maturitiesmaturity securities that are unrated or rated below investment grade. At September 30, 2017,2020, less than 1% of our fixed maturity portfolio was unrated or rated below investment grade. Our fixed maturity portfolio includes securities issued with financial guaranty insurance. We purchase fixed maturitiesmaturity securities based on our assessment of the credit quality of the underlying assets without regard to insurance.
Our fixed maturity portfolio includes securities issuedWe also have credit risk to the extent any of our reinsurers are unwilling or unable to meet their obligations under our ceded reinsurance agreements. As of December 31, 2019, all of our ten largest reinsurers within our underwriting operations were rated "A" or better by foreign governmentsA.M. Best and non-sovereign foreign institutions. General concern exists aboutwithin our program services business, six of our ten largest reinsurers were rated "A" or better by A.M. Best. For reinsurers within our program services business with a credit rating of lower than "A" we employ a stringent collateral monitoring program, under which the financial difficulties facing certain foreign countries in lightmajority of the adverse economic conditions experienced over the past several years. We monitor developments in foreign countries, currencies and issuers that could pose risks to our fixed maturity portfolio, including ratings downgrades, political and financial changes and the widening of credit spreads. We believe that our fixed maturity portfolio is highly diversified and is comprised of high quality securities.reinsurance recoverable balances are fully collateralized. During the nine months ended September 30, 2017,2020, there were no material changes to the credit ratings of our top ten reinsurers within our underwriting and program services operations as reported in our foreign government fixed maturity holdings.Annual Report on Form 10-K for the year ended December 31, 2019.
General concern also exists about municipalities that experience financial difficulties during periods
Our fixed maturities, equity securities and short-term investments are recorded at fair value, which is measured based upon quoted prices in active markets, if available. We determine fair value for these investments after considering various sources of information, including information provided by a third-party pricing service. The pricing service provides prices for substantially all of our fixed maturities and equity securities. In determining fair value, we generally do not adjust the prices obtained from the pricing service. We obtain an understanding of the pricing service's valuation methodologies and related inputs, which include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, duration, credit ratings, estimated cash flows and prepayment speeds. We validate prices provided by the pricing service by reviewing prices from other pricing sources and analyzing pricing data in certain instances.
Item 4. Controls and Procedures
As of the end of the period covered by this quarterly report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15 (Disclosure Controls). This evaluation was conducted under the supervision and with the participation of our management, including the PrincipalCo-Principal Executive Officer (PEO)Officers (Co-PEOs) and the Principal Financial Officer (PFO).
Our management, including the PEOCo-PEOs and PFO, does not expect that our Disclosure Controls 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. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. 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. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls 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.
Based upon our controls evaluation, the PEOCo-PEOs and PFO concluded that effective Disclosure Controls were in place to ensure that the information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
During the third quarter of 2017, we implemented a new treasury system to process and administer certain of our cash management activities. This system eliminates certain manual processes, automates and streamlines certain tasks, and enhances cash management processes and reporting.
There were no other changes in our internal control over financial reporting during the third quarter of 20172020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Safe Harbor and Cautionary Statement
This report contains statements concerning or incorporating our expectations, assumptions, plans, objectives, future financial or operating performance and other statements that are not historical facts. These statements are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may use words such as "anticipate," "believe," "estimate," "expect," "intend," "predict," "project" and similar expressions as they relate to us or our management.
There are risks and uncertainties that may cause actual results to differ materially from predicted results in forward-looking statements. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Additional factors that could cause actual results to differ from those predicted are set forth under "Business Overview," "Risk Factors"Factors," and "Safe Harbor"Management's Discussion and Cautionary Statement"Analysis of Financial Condition and Results of Operations" in our 20162019 Annual Report on Form 10-K and under "Item 5. Other Information""Developments Related to COVID-19" and "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017,this report, or are included in the items listed below:
•current global economic, market and industry conditions, as well as significant volatility, uncertainty and disruption caused by the COVID-19 pandemic, including governmental, legislative, judicial or regulatory actions or developments affecting our businesses;
•our anticipated premium volume isexpectations about future results of our underwriting, investing, Markel Ventures and other operations are based on current knowledge and assumesassume no significant man-made or natural catastrophes, no significant changes in products or personnel and no adverse changes in market conditions;
•the effect of cyclical trends on our underwriting, investing, Markel Ventures and other operations, including demand and pricing in the insurance, reinsurance and reinsurance markets;other markets in which we operate;
•actions by competitors, including the applicationuse of new or "disruptive" technologies or businesstechnology and innovation to simplify the customer experience, increase efficiencies, redesign products, alter models and consolidation,effect other potentially disruptive changes in the insurance industry, and the effect of competition on market trends and pricing;
•our efforts to develop new products, expand in targeted markets or improve business processes and workflows may not be successful and may increase or create new risks (e.g., insufficient demand, change to risk exposures, distribution channel conflicts, execution risk, increased expenditures);
•the frequency and severity of man-made and natural catastrophes (including earthquakes, wildfires and weather-related catastrophes) may exceed expectations, are unpredictable and, in the case of wildfires and weather-related catastrophes, may be exacerbated if, as many forecast, changing conditions in the oceans and atmosphere result in increased hurricane, flood, drought or other adverse weather-related activity;
•we offer insurance and reinsurance coverage against terrorist acts in connection with some of our programs, and in other instances we are legally required to offer terrorism insurance; in both circumstances, we actively manage our exposure, but if there is a covered terrorist attack, we could sustain material losses;
the frequency and severity of man-made and natural catastrophes (including earthquakes, fires and weather-related catastrophes) may exceed expectations, are unpredictable and, in the case of fires and weather-related catastrophes, may be exacerbated if, as many forecast, conditions in the oceans and atmosphere result in increased hurricane, flood, drought or other adverse weather-related activity;
•emerging claim and coverage issues, changing legal and social trends, and inherent uncertainties in the loss estimation process can adversely impact the adequacy of our loss reserves and our allowance for reinsurance recoverables;
•reinsurance reserves are subject to greater uncertainty than insurance reserves, primarily because of reliance upon the original underwriting decisions made by ceding companies and the longer lapse of time from the occurrence of loss events to their reporting to the reinsurer for ultimate resolution;
•inaccuracies (whether due to data error, human error or otherwise) in the various modeling techniques and data analytics (e.g., scenarios, predictive and stochastic modeling, and forecasting) we use to analyze and estimate exposures, loss trends and other risks associated with our insurance and insurance-linked securities businesses could cause us to misprice our products or fail to appropriately estimate the risks to which we are exposed;
•changes in the assumptions and estimates used in establishing reserves for our life and annuity reinsurance book (which is in runoff), for example, changes in assumptions and estimates of mortality, longevity, morbidity and interest rates, could result in material increases in our estimated loss reserves for such business;
•adverse developments in insurance coverage litigation or other legal or administrative proceedings could result in material increases in our estimates of loss reserves;
•initial estimates for catastrophe losses are often based on limited information, are dependent on broad assumptions about the failure or inadequacynature and extent of any loss limitation methods we employ;losses, coverage, liability and reinsurance, and those losses may ultimately differ materially from our expectations;
•changes in the availability, costs, quality and qualityproviders of reinsurance coverage, which may impact our ability to write or continue to write certain lines of business;business or to mitigate the volatility of losses on our results of operations and financial condition;
•the ability or willingness of reinsurers to pay balances due may be adversely affected by industry and economic conditions, deterioration in reinsurer credit quality and coverage disputes, can affect the ability or willingness of reinsurersand collateral we hold, if any, may not be sufficient to pay balances due;cover a reinsurer's obligation to us;
•after the commutation of ceded reinsurance contracts, any subsequent adverse development in the re-assumed loss reserves will result in a charge to earnings;
•regulatory actions can impede our ability to charge adequate rates and efficiently allocate capital;
•general economic and market conditions and industry specific conditions, including extended economic recessions or expansions; prolonged periods of slow economic growth; inflation or deflation; fluctuations in foreign currency exchange rates, commodity and energy prices and interest rates; volatility in the credit and capital markets; and other factors;
•economic conditions, actual or potential defaults in corporate bonds, municipal bonds, mortgage-backed securities or sovereign debt obligations, volatility in interest and foreign currency exchange rates and changes in market value of concentrated investments can have a significant impact on the fair value of our fixed maturity securities and equity securities, as well as the carrying value of our other assets and liabilities, and this impact may be heightened by market volatility;volatility and our ability to mitigate our sensitivity to these changing conditions;
•economic conditions may adversely affect our access to capital and credit markets;
•the effects of government intervention, including material changes in the monetary policies of central banks, to address financial downturns and economic and currency concerns;
•the impacts that political and civil unrest and regional conflicts may have on our businesses and the markets they serve or that any disruptions in regional or worldwide economic conditions generally arising from these situations may have on our businesses, industries or investments;
•the impacts that health epidemics and pandemics, including the COVID-19 pandemic, as well as actions of local, state and federal authorities in response thereto, may have on our business operations and claims activity;
•the impact on our businesses in the event of thea repeal, in part or in whole, or modification of U.S. health care reform legislation and regulations;
•changes in U.S. tax laws, regulations or interpretations, or in the tax laws, regulations or interpretations of other jurisdictions in which we operate;operate, and adjustments we may make in our operations or tax strategies in response to those changes;
we are dependent upon operational effectiveness and security•a failure of our enterprise information technology systems and those maintained by third parties; if oneparties upon which we may rely, or more of those systemsa failure to comply with data protection or privacy regulations;
•outsourced providers may fail to perform as we anticipate or suffer a securitymay breach their obligations to us;
•our businesses or reputation could be adversely impacted;
our acquisition of insurance and non-insurance businessesacquisitions may increase our operational and control risks for a period of time;
•we may not realize the contemplated benefits, including cost savings and synergies, of our acquisitions;
•any determination requiring the write-off of a significant portion of our goodwill and intangible assets;
•the failure or inadequacy of any methods we employ to manage our loss exposures;
•the loss of services of any executive officer or other key personnel could adversely impact one or more of our operations;
•the manner in which we manage our global operations through a network of business entities could result in inconsistent management, governance and oversight practices and make it difficult for us to implement strategic decisions and coordinate procedures;
•our substantial international operations and investments expose us to increased political, operational and economic risks, including foreign currency exchange rate and credit risk;
•the vote bypolitical, legal, regulatory, financial, tax and general economic impacts, and other impacts we cannot anticipate, related to the United Kingdom to leaveKingdom's withdrawal from the European Union (Brexit), which could have adverse consequences for our businesses, particularly our London-based international insurance operations;
•our ability to obtain additional capital for our operations on terms favorable to us;
•our compliance, or failure to comply, with covenants and other requirements under our revolving credit facility, senior debt and other indebtedness;
•our ability to maintain or raise third party capital for existing or new investment vehicles and risks related to our management of third party capital;
•the effectiveness of our procedures for compliance with existing and ever increasingfuture guidelines, policies and legal and regulatory standards, rules, laws and regulations;
•the impact of economic and trade sanctions and embargo programs on our businesses, including instances in which the requirements and limitations applicable to the global operations of U.S. companies and their affiliates are more restrictive than, or conflict with, those applicable to non-U.S. companies and their affiliates;
•regulatory changes, or challenges by regulators, regarding the use of certain issuing carrier or fronting arrangements;
•our dependence on a limited number of brokers for a large portion of our revenues and third-party capital;
•adverse changes in our assigned financial strength or debt ratings or outlook could adversely impact us, including our ability to attract and retain business, the amount of capital our insurance subsidiaries must hold and the availability and cost of capital;
•changes in the amount of statutory capital our insurance subsidiaries are required to hold, which can vary significantly and is based on many factors, some of which are outside our control;
•losses from litigation and regulatory investigations and actions; and
•a number of additional factors may adversely affect our Markel Ventures operations, and the markets they serve, and negatively impact their revenues and profitability, including, among others: adverse weather conditions, plant disease and other contaminants; changes in government support for education, healthcare and infrastructure projects; changes in capital spending levels; changes in the housing market;and commercial construction markets; liability for environmental matters; volatility in the market prices for their products; and volatility in commodity prices and interest and foreign currency exchange rates; andrates.
adverse changes in our assigned financial strength or debt ratings could adversely impact us, including our ability to attract and retain business and the availability and cost of capital.
Our premium volume, underwriting and investment results and results from our non-insuranceother operations have been and will continue to be potentially materially affected by these factors. In addition, with respect to previously reported developments at MCIM and the decision to place both the Markel CATCo Funds and Markel CATCo Re into run-off:
•the inquiries by the U.S. Department of Justice, U.S. Securities and Exchange Commission and Bermuda Monetary Authority into loss reserves recorded in late 2017 and early 2018 at Markel CATCo Re (the Markel CATCo Inquiries) may result in adverse findings, reputational damage, the imposition of sanctions, increased costs, litigation and other negative consequences; and
•management time and resources may be diverted to address the Markel CATCo Inquiries, as well as related litigation.
By making forward-looking statements, we do not intend to become obligated to publicly update or revise any such statements whether as a result of new information, future events or other changes. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as at their dates.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Thomas YeransianMarkel CATCo Inquiries
We previously reported that the U.S. Department of Justice, U.S. Securities and Exchange Commission and Bermuda Monetary Authority (together, the Governmental Authorities) are conducting inquiries into loss reserves recorded in late 2017 and early 2018 at our Markel CATCo operations. Those reserves are held at Markel CATCo Re, an unconsolidated subsidiary of MCIM. 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 has met with the Governmental Authorities and reported the findings from the internal review. At this time, we are unable to predict the duration, scope or result of the Markel CATCo Inquiries.
Belisle Arbitration
On February 21, 2019, Anthony Belisle filed a lawsuit, Anthony Belisle v. Markel CorporationCATCo Investment Management Ltd and Markel Corp. (U.S. District Court for the District of Delaware)New Hampshire), which suit was amended on March 29, 2019. As amended, the complaint alleged claims for, among other things, breach of contract, defamation, invasion of privacy, indemnification, intentional interference with contractual relations and deceptive and unfair acts and sought relief of, among other things, $66 million in incentive compensation, enhanced compensatory damages, consequential damages, damages for emotional distress and injury to reputation, exemplary damages and attorneys' fees. In June 2019, MCIM, Markel Corporation, and Mr. Belisle agreed to commence binding arbitration to finally, fully and confidentially resolve the claims and counterclaims alleged in the action, and the Belisle suit was dismissed with prejudice in July 2019. In late July 2020, the parties commenced settlement discussions and reached a final agreement on July 28, 2020.
Thomas Yeransian v. Markel Corporation
In October 2010, we completed ourthe acquisition of Aspen Holdings, Inc. (Aspen). As part of the consideration for that acquisition, Aspen shareholders received contingent value rights (CVRs),. Based on a valuation of the CVRs as of their December 31, 2017 maturity date, we paid $9.9 million to the CVR holders on June 5, 2018, which we currently expect will result inrepresents 90% of the paymentundisputed portion of additional cash consideration to CVR holders. Absent the litigation described below, the final amount we believe we are required to be paidpay under the CVR agreement.
Prior to CVR holders would be determined afterthe December 31, 2017 the CVR maturity date, based on, among other things, adjustments for the development of pre-acquisition loss reserves and loss sensitive profit commissions.
The CVR holder representative, Thomas Yeransian, hashad 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 holder representativesuit seeks: $47.3 million in damages, which represents the unadjusted value of the CVRs; plus interest ($11.118.8 million through September 30, 2017)2020) and default interest (up to an additional $9.7$15.7 million through September 30, 2017,2020, depending on the date any default occurred); and an unspecified amount of punitive damages, costs, and attorneys’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 September 20, 2018, a new judge was assigned to the case. On October 12, 2018, the court denied both Mr. Yeransian's motion to reconsider the order staying the litigation and compelling arbitration and our motion for sanctions against Mr. Yeransian hasfor violating the confidentiality of mediation proceedings. The court subsequently (1) on December 3, 2018 ordered Mr. Yeransian to provide the court and us with the identity of an actuarial firm to participate in the selection of independent experts for the CVR valuation process under the CVR agreement and (2) on December 11, 2018 denied Mr. Yeransian's motion for judgment that we had waived our right to require Mr. Yeransian's participation in the CVR valuation process. On July 8, 2019, the Court granted our motion for instructions as to how the independent experts are to conduct the CVR valuation process and denied Mr. Yeransian's motion to have a hearing officer appointed to oversee the valuation process. The independent experts, who were jointly selected by the parties, have been engaged and are conducting the valuation process.
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 requestingto stay this suit until the arbitration for the original suit has concluded and the CVR holders have received the remainder of the final amount due under the CVR Agreement. The court granted that motion on August 6, 2019.
On June 5, 2020, 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 court reconsider that order.Company is in default under the CVR agreement and, in addition, has interfered with the current, on-going 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.
We believe the holder representative’s suitMr. Yeransian's suits to be without merit and will vigorously defend against it.merit. We further believe that any material loss resulting from the holder representative’s suitsuits to be remote. We do not believe the contractual contingent consideration payments related to the CVRs, as ultimately determined by the independent experts in the valuation process, will have a material impact on ourthe Company's liquidity.
Item 2. Unregistered Sales1A. Risk Factors
Other than the risk factor discussed below, or as discussed elsewhere in this report, including under note 15 (Commitments and Contingencies) and note 16 (Developments Related to COVID-19) of Equity Securitiesthe notes to consolidated financial statements or under "Management's Discussion and UseAnalysis of ProceedsFinancial Condition and Results of Operations," including "Developments Related to COVID-19" and "Brexit Developments," or under "Legal Proceedings" in this report, there have been no material changes with regard to the risk factors previously disclosed in our 2019 Annual Report on Form 10-K.
The COVID-19 pandemic has had, and may continue to have, material adverse effects on us. The effects of the COVID-19 pandemic, and U.S. and international responses, are wide-ranging, costly, disruptive and rapidly changing. The COVID-19 pandemic has had, and may continue to have, material adverse effects on our underwriting, investment, Markel Ventures and other operations, and on our results of operations and financial condition. Factors that give rise, or may give rise, to those effects include, or may include, the following, table summarizesas well as others that we cannot predict:
•Executive, legislative or regulatory mandates or judicial decisions that require retroactive coverage of business interruption claims stemming from the COVID-19 pandemic or to expand the scope of other types of insurance or reinsurance coverages, for example, workers' compensation insurance;
•Regulatory actions:
◦prohibiting or postponing the cancellation or non-renewal of insurance policies in accordance with policy terms or requiring renewals on current terms and conditions;
◦requiring the coverage of losses irrespective of policy terms or exclusions;
◦relaxing policyholder reporting requirements for claims, which may affect coverage under our common stock repurchasesclaims made and claims made and reported policies;
◦requiring or encouraging premium refunds;
◦granting extended grace periods for premium payments; and
◦extending due dates to pay past due premiums;
•Rapidly and dramatically changing business conditions and compliance obligations, including as a result of federal and state executive orders and regulatory guidance;
•Disruptions, delays and increased costs and risks related to working remotely, having limited or no access to our facilities, workplace re-entry, employee safety concerns and reductions or interruptions of critical or essential services. Those effects may include, among others:
◦an inability, or a decreased ability, to provide our insurance and non-insurance products and services, provide customer service, pay third parties in a timely manner or perform other necessary business functions; and
◦exposure to additional and increased risks related to internal controls, data security and information privacy, both for the quarter ended September 30, 2017.Company and for our suppliers, vendors and other third-parties with whom we do business;
•Illnesses suffered by key employees, or a significant percentage of our workforce or the workforce of our agents, brokers, suppliers or outsourcing providers, which could prevent or delay the performance of critical business functions;
Issuer Purchases•Illnesses suffered by employees who have continued to work, or who have or will return to work, in our facilities may expose us to increased risk of Equity Securitiesemployment related claims and litigation;
|
| | | | | | | | | | | | | |
| (a) | | (b) | | (c) | | (d) |
Period | 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) |
July 1, 2017 through July 31, 2017 | 11,200 |
| | $ | 988.13 |
| | 11,200 |
| | $ | 167,086 |
|
August 1, 2017 through August 31, 2017 | 7,715 |
| | $ | 1,053.06 |
| | 7,715 |
| | $ | 158,962 |
|
September 1, 2017 through September 30, 2017 | 5,605 |
| | $ | 1,039.13 |
| | 5,605 |
| | $ | 153,138 |
|
Total | 24,520 |
| | $ | 1,020.22 |
| | 24,520 |
| | $ | 153,138 |
|
•Lawsuits and other legal actions challenging the promptness of coverage determinations or the coverage determinations themselves on claims under applicable insurance or reinsurance policies, including, among others, business interruption claims, resulting in increased claims, litigation and related expenses; | |
(1)
| The Board of Directors approved the repurchase of up to $300 million of our common stock pursuant to a share repurchase program publicly announced on November 21, 2013 (the Program). Under the Program, we may repurchase outstanding shares of our common stock from time to time in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934. The Program has no expiration date but may be terminated by the Board of Directors at any time. |
•Delays in the reporting of non-COVID-19 claims, and the settlement of those claims, due to a variety of factors, including "stay-at-home" and similar orders instituted by many governmental authorities, potentially increasing the severity of those claims and reducing the predictability of the underlying statistical data used in establishing reserves, particularly for longer-tailed lines of business;
•Reduced demand for our insurance and non-insurance products and services due to reduced global economic activity, which could adversely impact our revenues and cash flows;
•Adverse impacts on our revenues and cash flows due to:
◦premium refunds or delayed receipt of premium payments;
◦delayed payment of reinsurance recoverables; and
◦expedited claims payments in response to regulatory requirements;
•Adverse effects on future cash flows or earnings of one or more of our underwriting, Markel Ventures or other acquired businesses, which could result in an impairment of goodwill or intangible assets and, in turn, a charge to net income;
•Increased needs for capital at our regulated insurance and reinsurance subsidiaries and non-insurance subsidiaries and the constraints that may be placed on our liquidity and other uses of holding company capital;
•Insured or reinsured losses from COVID-19-related claims could be greater than our reserves for those losses;
•Volatility and declines in global financial markets, defaults on fixed maturity securities (including corporate bonds, mortgage-backed securities and securities issued by municipalities, foreign governments and non-sovereign foreign institutions), and declines in interest rates and dividend payments, which have reduced, and could continue to reduce, future investment results and the fair market value of our invested assets;
•Deterioration in global financial and economic conditions, which have had, or could have, a broad range of material adverse effects on our businesses, and on our results of operations and financial condition, including, among others:
◦increased reinsurance costs and the inability to obtain the desired kinds and amounts of reinsurance;
◦furloughs and lay-offs of employees;
◦downgrades, or changes in outlook, by rating agencies of the financial strength or debt ratings of the Company or our insurance or reinsurance company subsidiaries;
◦reduced ability to access capital;
◦inability of our key vendors and contract counterparties to perform or pay the obligations required of them on a timely basis, or at all; and
◦increased credit risk, including credit risk related to our fixed maturity investments and receivables from insureds, reinsurers and customers;
•Delayed or reduced management and incentive fees from our insurance-linked securities operations, due to the resolution of COVID-19 related claims, adverse impacts on our ability to maintain or raise third party capital for existing or new investment vehicles and increased risks related to our management of third party capital;
•A failure to satisfy financial covenants under our revolving credit agreement, which can be adversely affected by a significant decline in our consolidated net worth, including due to the impact of changes in fair value of our equity investments and, to a lesser extent, impairments in our fixed maturity investment portfolio, or impairment of our goodwill and intangible assets. While we currently have no debt outstanding under our revolving credit facility, a failure to satisfy the financial covenants under the revolving credit agreement, unless waived or amended, would result in our inability to borrow or secure letters of credit under that facility;
•Increases in the number of consumer complaints challenging coverage or claims decisions under applicable insurance policies;
•Increases in the number of potential fraudulent claims made under insurance policies due to the economic hardships experienced by companies and individuals as a result of the COVID-19 pandemic; and
•Increases in local, state and federal taxes to pay for costs incurred by governmental expenditures associated with the COVID-19 pandemic.
One or more of these factors resulting from the COVID-19 pandemic, and others the Company cannot anticipate, could have material adverse effects on the Company's results of operations and financial condition; and the extent of these effects will depend, at least in part, on the scope, severity, duration and subsequent recurrences of the pandemic. In addition, the Company may take steps to mitigate potential risks or liabilities that may arise from the COVID-19 pandemic and related developments and some of those steps may have a material adverse effect on the Company's results of operations and financial condition. Even if an unfavorable outcome does not materialize, these factors, and actions the Company may take in response, may have a material adverse impact on the Company's reputation and result in substantial expense and disruption.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations," including "Developments Related to COVID-19," and the notes to consolidated financial statements in this report, including note 16 (Developments Related to COVID-19), for additional discussion of effects COVID-19 has had, and could have, on our businesses, results of operations and financial condition.
In addition, it is important to note and emphasize, the COVID-19 pandemic also may have the effect of triggering or intensifying many of the risks described under "Risk Factors" in our 2019 Annual Report on Form 10-K, including without limitation, the risks discussed under the following headings:
•We may experience losses or disruptions from catastrophes;
•The failure of any of the methods we employ to manage our loss exposures could have a material adverse effect on us;
•The effects of emerging claim and coverage issues on our business are uncertain;
•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;
•Our results may be affected because actual insured or reinsured losses differ from our loss 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;
•We may be unable to purchase reinsurance protection on terms acceptable to us, or we may be unable to collect on reinsurance we purchase;
•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;
•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;
•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;
•Our insurance subsidiaries are subject to supervision and regulation that may have a material adverse effect on our operations and financial condition;
•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 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;
•We may require additional capital in the future, which may not be available or may only be available on unfavorable terms;
•Our failure to comply with covenants and other requirements under our revolving credit facility, senior debt and other indebtedness could have a material adverse effect on us;
•Our liquidity and our ability to make payments on debt or other obligations depend on the receipt of funds from our subsidiaries;
•The legal and regulatory requirements applicable to our businesses are extensive. Failure to comply could have a material adverse effect on us;
•Losses from legal and regulatory actions may have a material adverse effect on us;
•Employee error and misconduct may be difficult to detect and prevent and may result in significant losses;
•We manage our global operations through a network of business entities, which could result in inconsistent management, governance and oversight practices;
•We have substantial international operations and investments, which expose us to increased political, operational and economic risks;
•General economic, market or industry conditions could lead to investment losses, adverse effects on our businesses and limit our access to the capital markets;
•We may not find suitable acquisition candidates or new ventures;
•The integration of acquired companies may not be as successful as we anticipate;
•Impairment in the value of our goodwill or other intangible assets could have a material adverse effect on our operating results and financial condition;
•The loss of one or more key executives or an inability to attract and retain qualified personnel could have a material adverse effect on us;
•Information technology systems that we use could fail or suffer a security breach, which could have a material adverse effect on us or result in the loss of regulated or sensitive information; and
•Outsourced providers may perform poorly, breach their obligations to us or expose us to enhanced risks.
For other factors that may cause actual results to differ materially from those indicated in any forward-looking statement contained in this report, see "Safe Harbor and Cautionary Statement."
Item 6. Exhibits
| | | | | |
Exhibit No. | Document Description |
| |
Exhibit No. | Document Description |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
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. | |
| |
| |
| |
|
| |
| |
| |
| |
| |
| |
101 | The following consolidated financial statements from Markel Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,2020, filed on October 25, 2017,27, 2020, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income (Loss) and Comprehensive Income, (Loss), (iii) Consolidated Statements of Changes in Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements.** |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| |
** | Filed with this report. |
* Indicates management contract or compensatory plan or arrangement
** Filed with this report.
Signatures
Pursuant to the requirements 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, this 2527th day of October 2017.2020.
| | | | | | | | |
| Markel Corporation | |
| | |
| Markel CorporationBy: | /s/ Thomas S. Gayner |
| | Thomas S. Gayner |
| By: | /s/ Alan I. KirshnerCo-Chief Executive Officer |
| | Alan I. Kirshner(Co-Principal Executive Officer) |
| | Executive Chairman |
| By: | /s/ Richard R. Whitt, III |
| | Richard R. Whitt, III |
| | Co-Chief Executive Officer |
| | (PrincipalCo-Principal Executive Officer) |
| | |
| By: | /s/ Anne G. WaleskiJeremy A. Noble |
| | Anne G. WaleskiJeremy A. Noble |
| | ExecutiveSenior Vice President and Chief Financial Officer |
| | (Principal Financial Officer) |