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    2018 Markel Corporation Annual Report & Form 10-K


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    T H E C O R P O R AT E P R O F I L E Markel Corporation is a diverse financial holding company serving a variety of niche markets. Our principal business markets and underwrites specialty insurance products. In each of our businesses, we seek to provide quality products and excellent customer service so that we can be a market leader. Our financial goals are to earn consistent underwriting and operating profits and superior investment returns to build shareholder value. THE MARKEL STYLE Markel has a Commitment to Success. We believe in hard work and a zealous pursuit of excellence while keeping a sense of humor. Our creed is honesty and fairness in all our dealings. The Markel way is to seek to be a market leader in each of our pursuits. We seek to know our customers’ needs and to provide our customers with quality products and service. Our pledge to our shareholders is that we will build the financial value of our Company. We respect our relationship with our suppliers and have a commitment to our communities. We are encouraged to look for a better way to do things…to challenge management. We have the ability to make decisions or alter a course quickly. The Markel approach is one of spontaneity and flexibility. This requires a respect for authority but a disdain of bureaucracy. At Markel,we hold the individual’s right to self-determination in the highest light, providing an atmosphere in which people can reach their personal potential. Being results-oriented, we are willing to put aside individual concerns in the spirit of teamwork to achieve success. Above all, we enjoy what we are doing. There is excitement at Markel, one that comes from innovating, creating, striving for a better way, sharing success with others…winning.


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    Highlights FINANCIAL HIGHLIGHTS (dollars in millions, except per share data) 2018 2017 2016 Gross premium volume $ 7,864 $ 5,507 $ 4,797 Net written premiums 4,788 4,418 4,001 Earned premiums 4,712 4,248 3,866 U.S. GAAP combined ratio 98% 105% 92% Total operating revenues 6,841 6,062 5,612 Net income (loss) to shareholders (128) 395 456 Comprehensive income (loss) to shareholders (376) 1,175 667 Total investments, cash and cash equivalents and restricted cash and cash equivalents (invested assets) $ 19,238 $ 20,570 $ 19,059 Total assets 33,306 32,805 25,875 Senior long-term debt and other debt 3,010 3,099 2,575 Shareholders’ equity 9,081 9,504 8,461 Debt to capital 25% 25% 23% P E R S H A R E D ATA Common shares outstanding (at year end, in thousands) 13,888 13,904 13,955 Diluted net income (loss) $ (9.55) $ 25.81 $ 31.27 Book value $ 653.85) $ 683.55 $ 606.30 Growth (decline) in book value (4)% 13% 8% Closing stock price $ 1,038.05) $ 1,139.13 $ 904.50 Growth (decline) in stock price (9)% 26% 2% O P E R AT I N G H I G H L I G H T S • Total operating revenues increased $780 million, or 13% • Comprehensive loss to shareholders of $376 million, driven by declines in the fair value of our investment portfolio • Combined ratio of 98%, including six points of catastrophe losses • Book value per share was $653.85, representing a 7% compound annual growth rate over the five-year period • Growth in our investment management operations included the acquisition of Nephila, an investment manager offering a broad range of investment products, including insurance-linked securities, catastrophe bonds, insurance swaps and weather derivatives • Growth in our Markel Ventures operations included the acquisition of Brahmin, a creator of fashion leather handbags Contents Letter to Business Partners 2 Notes to Consolidated Financial Business Overview 16 Statements 61 Risk Factors 42 Management’s Discussion & Analysis 125 Selected Financial Data 52 Critical Accounting Estimates 127 Management’s Report on Internal Safe Harbor and Cautionary Statement 164 Control over Financial Reporting 54 Legal Proceedings 166 Reports of Independent Registered Other Information 168 Public Accounting Firm 55, 56 Directors and Executive Officers 170 Consolidated Financial Statements 57 Index for Form 10-K 171


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    2018 To Our Business Partners Greetings. Here is our annual report to you for the Short Version year 2018. If you’d like the summary version of 2018, here it is. At Markel, we aspire to build one of the world’s great 2018 was a good, but not great, year. We grew the companies. Our core values remain integrity, business both organically and by acquisition. We adaptability, continuous learning, and humility, among increased the capabilities of the Markel Corporation in others. We wrote the Markel Style over 30 years ago every aspect of our business. As a marker of this to describe our values and culture. We believe this growth we set a new record in revenues. While we are statement of our values ties our varied businesses reporting lower bottom line profitability due to together. Today, it does so for more people and in downdrafts in investment markets and ongoing high more places than ever before. As to tomorrow and levels of insured catastrophes, we believe that the beyond, while we’ve grown tremendously over economic value of Markel stands at a new record level decades, we feel like we’re just getting started. as well. Finally, we ended the year with fewer shares of Markel than at the beginning, so each share of Each year we write you this letter to update you on Markel that you own represents a bigger piece of the the condition and performance of your company. This company than what it did a year ago. year’s letter will be longer than usual (not necessarily due to popular demand). We’d like to take some extra Extended Play Version time and space to describe our strategic initiative in the Insurance Linked Securities (ILS) market, and to As we noted last year, we define a great company as answer some specific questions many of you have one with a win/win/win structure. Our customers win raised in recent months about that initiative. As usual, as we serve them with products and services that we also have a lot to tell you about our existing make their lives better. Our associates win because we insurance, ventures, and investment activities. FINANCIAL HIGHLIGHTS (in millions, except per share data) 2018 2017 2016 2015 2014 2013 2012 2011 2010 Total operating revenues $ 6,841%) 6,062% 5,612% 5,370% 5,134% 4,323% 3,000% 2,630% 2,225% Gross written premiums $ 7,864%) 5,507% 4,797% 4,633% 4,806% 3,920% 2,514% 2,291% 1,982% Combined ratio 98%) 105% 92% 89% 95% 97% 97% 102% 97% Investment portfolio $ 19,238%) 20,570% 19,059% 18,181% 18,638% 17,612% 9,333% 8,728% 8,224% Portfolio per share $1,385.24%)1,479.45% 1,365.72%1,302.48%1,334.89%1,259.26% 969.23% 907.20% 846.24% Net income (loss) to shareholders $ (128)% 395% 456% 583% 321% 281% 253% 142% 267% Comprehensive income (loss) to shareholders $ (376)% 1,175% 667% 233% 936% 459% 504% 252% 431% Shareholders’ equity $ 9,081%) 9,504% 8,461% 7,834% 7,595% 6,674% 3,889% 3,388% 3,172% Book value per share $ 653.85%) 683.55% 606.30% 561.23% 543.96% 477.16% 403.85% 352.10% 326.36% 5-Year CAGR in book value per share (1) 7%) 11% 11% 11% 14% 17% 9% 9% 13% 2 Closing stock price $1,038.05%)1,139.13% 904.50% 883.35% 682.84% 580.35% 433.42% 414.67% 378.13% (1) CAGR— compound annual growth rate


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    enjoy our jobs, and through them provide the means advantage. In today’s world, short term and artificial to serve our families, our colleagues, our customers, time pressures permeate too many decisions. Our dual our communities, and ourselves. Our shareholders win time horizon of, Forever and Right Now, allows us to because by doing these things in positive and make necessary, Right Now, decisions on a day by day sustainable ways, we create financial value which basis. But, we always get to make those decisions with shows up in the increasing value of Markel over time. the Forever mindset guiding us while we do so. That is an incredibly rare advantage in today’s world. It would In order to build one of the world’s great companies not happen without you as long term committed we need to have what someone once called, “The owners. For that we are greatly appreciative. Right Owners, the Right Associates, and the Right Thank you. Strategy.” Over the course of this letter we’ll try to address each of those issues. In order to earn the trust and respect of the right owners, we treat you as full partners. We think about Right Owners what we would want to receive from management if our roles were reversed. If we were distant The first idea is that of the “Right Owners.” As your shareholders, and away from any contact for a year, management team, we want and need a partnership we would want to know how is the firm doing. We with our owners. We need that partnership to be long might wonder what is going well and what is not going term, and not subject to short term whims of market well. Is the firm going in new directions or maintaining disruptions, or false objectives derived from too short the direction that you told us about last year? Did we term an orientation. We need our partners to want the add to the businesses we already owned? Did we same things as we do, namely, the long term creation buy any new businesses? Were there any major of one of the world’s great companies. That notion management changes, and what else took place that embeds ideas about sustainability, diversity, resilience, mattered at Markel last year? durability, and adaptability that have served as the hallmarks of Markel since our inception. These are the sorts of questions we’ll attempt to answer in this letter, and the spirit in which we’ll Having the right owners with a suitable long term time describe our current circumstances as well as our horizon provides us with an immense competitive ongoing hopes and dreams for the future. 20-Year 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 CAGR(1) $ 2,069% 1,977)% 2,551% 2,576% 2,200% 2,262% 2,092% 1,770% 1,397)% 1,094)% 524)% 426% 15% $ 1,906% 2,213)% 2,359% 2,536% 2,401% 2,518% 2,572% 2,218% 1,774)% 1,132)% 595)% 437% 16% 95% 99%) 88% 87% 101% 96% 99% 103% 124%) 114%) 101%) 98% % $ 7,849% 6,893)% 7,775% 7,524% 6,588% 6,317% 5,350% 4,314% 3,591)% 3,136)% 1,625)% 1,483% 14% $799.34% 702.34)% 780.84% 752.80% 672.34% 641.49% 543.31% 438.79% 365.70)% 427.79)% 290.69)% 268.49% 9% $ 202% (59)% 406% 393% 148% 165% 123% 75% (126)% (28)% 41)% 57% % $ 591% (403)% 337% 551% 64% 273% 222% 73% (77)% 82)% (40)% 68% % $ 2,774% 2,181)% 2,641% 2,296% 1,705% 1,657% 1,382% 1,159% 1,085)% 752)% 383)% 425% 17% $282.55% 222.20 % 265.26% 229.78% 174.04% 168.22% 140.38% 117.89% 110.50)% 102.63)% 68.59)% 77.02% 11% 11% 10%) 18% 16% 11% 20% 13% 13% 18%) 21%) 22%) 23% % 3 $340.00% 299.00)% 491.10% 480.10% 317.05% 364.00% 253.51% 205.50% 179.65)% 181.00)% 155.00)% 181.00% 9%


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    Right People That continues to be the case. Diversification means that we pursue more than one business or idea at a The second idea is that of the “Right People.” We time. This creates a tough, flexible, and resilient believe we have a great formula to help us attract and organization, capable of withstanding setbacks in any retain the right people. It is called the Markel Style. one area. Diversity, and being good at it, allows us to The Style explicitly describes attributes such as hard continue to move forward no matter what. And we work, pursuing excellence, integrity, having a sense of have observed over the years that “no matter what” humor, and adapting to change, among others. It also seems to happen on a recurring basis. talks about having fun while doing so. We also believe diversity applies to more than just the The Markel Style serves as a written monument to list of businesses we’re in. It means diversity in the who we are as the people of Markel. It talks about people of our organization. We need people with why we work hard, and how our ultimate goal of different skills, backgrounds, and points of view, to winning stems from doing things for others. We bring robust talent to the tasks at hand. believe that the ultimate value of a firm derives from the value that the firm delivers to its customers… Diversity also means doing business in more than one others. The Markel Style applies to every single person place. Over the years we’ve grown from a small local of this organization whether they are in the insurance, business in Richmond, Virginia to a global operation. ventures, or investment operations. The sun is always shining on some Markel facility somewhere in the world. Five years ago 7,200 associates called Markel their professional home. Today, that number stands at over Specialization means being good at something 17,000. Today there are over 17,000 unique stories of specific. Markel bursts at the seams with world class people helping others. They are doing so in their work experts in the disciplines of insurance, reinsurance, by providing products and solutions that meet the investments, safety, risks, industrial equipment, needs of a customer. They are doing so by having the securitizations, medical services, horticulture, means to take care of their families and their consumer goods, transportation equipment, communities. They are doing so by setting examples, affordable housing, and so on and so on. We bring teaching, mentoring, coaching, listening, learning, specialized expertise to bear on challenging problems. giving, and helping, in countless ways, in countless As we solve those problems for our customers, we situations. serve them, and make them better off than they would be without us. We continue to attract the right people who yearn for the values embedded in the Markel Style. We thank Each customer problem we solve today gives us the them for what they do. We’re committed to running opportunity to solve another one tomorrow. That is Markel in such a way as to continue to create this the ultimate formula for the sustainability of Markel opportunity for more and more people over time. over time. Thank you for this opportunity. The tactics of how we accomplish those worthy goals Right Strategy change over time. It is our job as the associates of Markel to figure that out. It’s a fun and challenging The third idea is that of the “Right Strategy.” In our task to do so. And that challenge helps to motivate us initial annual report in 1986 we described our overall and drive the excellence you find in this company. strategy as one of “Diversification and Specialization.” 4


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    Markel Corporation We believe we’re pursuing the “Right Strategy” of It’s unusual for companies to describe their progress being “Diversified and Specialized.” We view the long in this sort of multi-year fashion. We do so because term record of excellent financial performance as a we think it highlights the long term focus with which validation of that statement, and we expect to we operate. We also think that it washes away some continue to refine and adapt our tactics to build on portion of short term market volatility distortions. We that record going forward. think looking at the fundamental economic measures over long time horizons helps us to make better long 2018 Financial Results term decisions. We back up that belief by tying the bulk of our incentive compensation to the Usually, when people have a headline like, “2018 accomplishment of long term goals. Financial Results” they mean just for the year 2018. We mean that and more. We provide even more data which describes and supports our long term focus in the chart at the For the year 2018, at the top line, we reported total bottom of this letter. We show 21 years of key revenues of $6.8 billion compared to $6.1 billion in financial items and we do so every year in this letter. 2017. At the bottom line, we reported a comprehensive loss of ($376 million) compared to We report in this way by design. It helps us keep our comprehensive income of $1.2 billion in 2017. We’ll focus on doing the right thing every day to accomplish break out the steps and items between the top and long term and enduring excellence. We wish to bottom line over the course of this report but those minimize short term distractions and costly stop gap are the annual, twelve month results. Additionally, behaviors which might puff up short term results at Markel shares closed the year at a price of $1,038 the possible expense of long term performance. compared to $1,139 a year ago. Captain’s Log 2018 We measure ourselves over longer and more important time frames as well. Longer term results In 2018, we made excellent progress in continuing to matter more, and provide better and more robust data build the long term economic value of Markel but it as to how we are doing in achieving our ultimate was a challenging year. We made some mistakes in goals. As a tool to help reinforce this message, we use certain areas. We experienced short term mark to five year calculations as the basis for the vast majority market declines in our investment portfolio, and we of our management incentive compensation programs look back wishing that we had done some things as opposed to year by year measurements. We think differently a year ago. this helps to demonstrate and reinforce the fact that we put our money where our mouth is when it comes The good news from this report though is that we to the importance of a long term time horizon. learned immense lessons during 2018. We continued to relentlessly and continuously learn, and to increase With a five year view, here are the same numbers. At our capabilities to serve our customers, associates, the top line we reported revenues of $29.0 billion and shareholders as we move forward. from 2014 to 2018 compared to $14.2 billion from 2009 to 2013. At the bottom line we earned Specifically, the challenges in 2018 included the comprehensive income of $2.6 billion in the 5 years second successive year of higher than average from 2014 to 2018 compared to $2.2 billion in the property catastrophe losses as manifested in record years from 2009 to 2013. Additionally, Markel shares hurricane, typhoon, and wildfire losses. Not closed 2018 at a price of $1,038 compared to $580 surprisingly, those losses affected our insurance, at the end of 2013. reinsurance, and Insurance Linked Securities 5


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    operations. We also experienced headwinds in our Five year view publicly traded investment portfolio from rising interest rates and negative overall equity market One of the benefits of looking at the five year returns. We also experienced highs and lows in our comparison of numbers is that you can start to see diverse Markel Ventures business operations. things with a clearer perspective than year by year. We are incredibly optimistic that we learned immense When you look at the last five years at Markel you see lessons from each of those experiences and we will go the transformation of your company in stark terms. on to use that knowledge and wisdom to build the future value of Markel. We’re also pleased and Here are some of the ways we’ve transformed Markel. relieved to report to you that over the years we’ve built a resilient and durable business. We can and did In the U.S. we combined our insurance operations absorb some painful lessons in 2018, yet we still from their separate silos of wholesale and retail. Our earned reasonably good financial results while doing simple goal is to seamlessly provide all customers of so. That statement becomes even truer when viewed Markel with any insurance capability found within our over longer time frames such as the five rather than organization. We want to be able to provide insurance one year time period. coverage to our customers in whatever way they want to buy it. We also have some excellent news from 2018. Namely, we acquired Nephila, the market leader in Some coverages will be available on-line and direct Insurance Linked Securities, and we added Brahmin to consumer. For example, our coverages for Leather to our Markel Ventures operations. We also motorcycles, boats, horses, liability for directors worked to improve our skills and capabilities within all of non-profit entities, and many other lines can of the existing insurance, investment, and ventures be researched and purchased on-line directly operations. from Markel. In our existing operations we pursued the Other forms of insurance require the expertise of non-glamorous daily tasks of day to day execution retail insurance agency networks. We have direct and daily work. As always, we tended to our access and availability of appropriate insurance to businesses one day, one customer, one decision, at a retail insurance agents as they explain coverages, time. We helped our long standing associates with and provide and share servicing responsibility, for training, and experience, to become better at their those customers. daily work, and to learn new skills and capabilities. We also added talented individuals with specific skills and Finally, complex and large scale insurance products capabilities all across the organization to help us all require the specialized knowledge and distribution continuously adapt and grow. capabilities of wholesale insurance brokers, and large international insurance agency operations. Through Today, newer skills might be called digital, or cyber, or the offerings of our Markel Assurance division, we can analytics, or other terms. Those words speak to the meet the needs of those customers and that increasing complexity of today’s world. We need to distribution system as well. constantly develop new capabilities in whatever skills the marketplace needs. This concept is nothing new, Five years ago, each of those efforts operated in and we’ve been doing it at Markel for decades. Expect semi-autonomous silos with minimal overlap. Today, us to continue. Stopping means death and we have no we are approaching the ability to match the 6 interest in that.


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    Markel Corporation capabilities that exist within Markel to any customer, Through our Global Reinsurance capabilities anywhere. headquartered in Bermuda and with US, UK, and other locations, we offer global reinsurance coverages. Five years ago, the gross written premium revenues of Five years ago the gross written premiums of our the preceding divisions that now make up the reinsurance operations were $566 million, in 2018 combined Markel Assurance grouping were $1.6 they were $1.1 billion. billion. In 2018, those gross written premiums were $2.1 billion. The growth reflects our increased ability Reinsurance by its nature tends to be volatile from to provide whatever our customer wants and needs in year to year. While we’ve suffered the blows of back whatever method they wish to purchase it. We’re just to back years of record high catastrophe losses, we trying to get out of our own way here in order to give are confident in the leadership of our reinsurance the customer what they want, how and where they business and we expect meaningful and positive want it. returns on capital from our ongoing reinsurance activities. We also operate internationally with our London based Markel International operations. With a The change in the scope and scale of our Insurance combination of licenses owned by Markel Linked Securities (ILS) operations over the last five International, as well as those markets where we can years is the most dramatic of all. Five years ago the operate through our licenses with Lloyd’s of London, revenues of our ILS business were $0. In 2018 they we can serve customers all around the globe. were $92 million. We’ll pick up the discussion of ILS shortly. Our international operations offer local market coverages to local customers in the UK, Canada, In our Markel Ventures operations, five years ago we Continental Europe, and Asia, with local offices and reported total revenues of $686 million and EBITDA local presence. We also offer global coverages to of $84 million. In 2018 we reported total revenues of global customers through the combined capabilities of $1.9 billion and EBITDA of $170 million. We use the Markel Assurance and Markel International along with imperfect tool of EBITDA to give you a least-worst our Lloyd’s, and Markel Global Reinsurance proxy of the earning power of the Markel Ventures capabilities. companies. We think EBITDA gives you a better view of the underlying economic earnings power of the Also, while Brexit looms large as a current issue for Markel Ventures companies since purchase the UK, we prepared years in advance to be ready for accounting tends to distort the GAAP measure of net such a development. Namely, we established a local income. The distortion is especially true in the early German presence several years ago. We’ve worked to years following acquisitions. Over time, as the base of continuously develop our capabilities within Europe on Markel Ventures grows and amortization of purchase a separate and standalone basis from the UK. As such, accounting items diminish, the net income we believe we’re prepared to adapt to whatever Brexit measurement should converge towards the same rate outcome ultimately takes place. of change as the EBITDA measure. Five years ago the gross written premiums of our The seeds of Markel Ventures, planted decades International Insurance operations were $826 million, ago, now show up as meaningful crops. Expect this in 2018 they were $1.1 billion. to continue. 7


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    Insurance Linked Securities (ILS) Strategy a major insurance company that sells a broad variety Discussion - "Everything You’ve always of coverages in a given market. If a company sold wanted to know about Insurance Linked homeowners coverages, auto coverages, business Securities but were afraid to ask." interruption coverages, and other lines in markets like Florida or California, they might be concerned that a Over the last several years, we’ve been on a multi-year single event in one location could cause losses across and multi-acquisition process to build our capabilities all of the products they sell. As we’ve seen in recent in the insurance linked securities market. Through the years, hurricanes in Florida and wildfires in California acquisitions of ILS managers CATCo, and Nephila, as caused massive losses to whatever stood in harm’s well as State National, with its necessary regulatory way. All and every coverage was hit, and often well servicing and licensing capabilities, we’ve assembled beyond what industry participants expected to be the largest single entity that participates in the the case. Insurance Linked Securities market. We are incredibly optimistic about the future of this business and what In order to protect themselves, major insurance it means for Markel as a whole. companies might buy a type of an insurance linked security known as an “Industry Loss Warranty” (ILW) That said, we encountered unexpected challenges in cover. These covers provide buyers with our CATCo ILS management operations in 2018. As reimbursement if total industry losses from an event we announced in December, we received inquiries exceed a certain amount. This is in essence a from U.S. and Bermuda authorities into loss reserves reinsurance purchase, but it is not tied to specific recorded in late 2017 and early 2018 at CATCo and coverages or policies. It just is meant to provide some its subsidiaries. We are fully cooperating. We continue reimbursement to the buyer if the total industry to investigate the issue, and we retained first rate losses go over a certain amount. outside advisors to conduct a fulsome inquiry into the matter. As of this writing, the investigation remains An ILS manager finds buyers who are looking for this ongoing. We will report on the outcomes of the type of coverage. investigation when it concludes. As the ILS manager finds buyers who seek this sort of We are confident that our efforts in Insurance Linked coverage, it needs to find sellers (capital providers), Securities will prove to be a valuable and important who will provide the capital to fund losses if they strategic pillar of our operations at Markel. We will occur. learn, and we will adapt as necessary, to make our ILS operations a key contributor to our results over time. The sellers of the coverage (the investors) put up cash to pay for losses if they occur. In response to many of your questions, we thought it would be a good idea to describe the nature of the In exchange, if there are no or limited losses, the Insurance Linked Securities business. What is it? What investors receive their cash back, plus the cash that are Insurance Linked Securities? How does this market the buyers paid to put the coverage into place. work? What do buyers want? What do sellers want? What is Markel’s role in the business and what are our The ILS manager puts the transaction together and potential risks and rewards? matches up the buyers and sellers with specific terms, rates and coverages. It facilitates the custody of the As a first step to answer these questions, take the cash during the time of coverage, and settles out the point of view of the buyer of an ILS product. In one cash in, and cash out, for all parties. The manager 8 incredibly oversimplified example, that buyer could be typically provides only a small, if any, amount of the


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    Markel Corporation underlying capital behind these transactions. The bulk With the same math over four years, the numbers of the capital comes from the investors, and the ILS should balance out perfectly. If the losses truly do manager earns management fees, as well as occur once every four years, then collectively the performance fees based on outcomes. buyers and the sellers each put in $100 million and they each took out $100 million over time. To continue with the math of how this might work in very simple terms consider the following example. The real world is obviously more complicated than Assume a buyer paid a premium of 25% of the total that over-simplified example. Many things in life are coverage for an ILW policy. That means they are more complicated to do than they are to say. That is paying $25 million for $100 million in coverage. The certainly the case for Insurance Linked Securities. sellers/investors put up $75 million of cash. That cash Here are some of the complexities, and how they gets added to the $25 million of the premium from start to affect real world outcomes. the ILW buyer and the $100 million total amount is held in escrow in the form of cash. The first complexity is to acknowledge that the real world will not play out in a precise one in four way. If you assume the over-simplified example of no fees For instance, assume that the big catastrophic event or expenses, the 25% rate for that coverage implies took place once every three years rather than once that the event being covered would happen once in every four years. What happens then? four years. In that case, over the three years, buyers would have Here’s what happens for the investors if there are no paid a cumulative premium for the coverage of $75 losses (what the actuaries assumed would happen in million (3 years x $25 million), and they would have three out of four years for this type of coverage). The collected a loss payment of $100 million when the buyer would be out $25 million but have been catastrophe occurred. They’d be up a net $25 million protected against a catastrophic outcome. on the trade and the sellers/investors would be net $25 million behind ($75 million collected over 3 The investors would receive their $75 million back and years minus the $100 million of loss payments). the $25 million cash paid by the buyer. That would produce a return of 33% ($25 million divided by $75 Following the same math and logic, if the event took million). That’s why sellers/investors provide capital place once every five years, the buyers would be for these transactions. behind a net amount of $25 million and the sellers would be up by an equal and opposite amount. That would be the result in any one year, for one policy, when there weren’t any losses. These products As such, the first part of the equation for an ILS are for large losses, and big catastrophes, so that is manager is to attempt to underwrite the risk of the not an unrealistic outcome in any one year. product as to the frequency (how often it might happen) and the severity (the cost when it does). Our Obviously, if those conditions prevailed continuously, ILS managers and their actuaries use various tools to the market would stop because that outcome is too attempt to calculate appropriate pricing that will favorable to the sellers, and the buyers are paying too roughly balance out the equation for buyers and much for the risk they’re seeking to reduce. sellers over time. That is the first and most challenging complexity when we go from the oversimplified example to the real world. 9


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    Also, fees and expenses are not zero. Buyers will pay a In the short run, compared to hundreds of years of price that is ultimately higher than the actuarial traditional insurance coverages, this is a relatively new technical rate because they get something more than market. In 2018 a series of record-setting just a reimbursement for when a loss happens. They catastrophes in multiple markets caused the investors get to structure their balance sheet in a way that in ILS markets to experience losses. This was the helps to prevent a “risk of ruin.” That is a valuable second year in a row of such events, and those losses assurance, and they will pay something to provide have triggered much discussion about the results and themselves with assurance that they will be long term viability of the ILS market. We believe in the financially solvent after major catastrophes to be able future of the ILS market and that the results will to continue to operate. balance back out towards a more sustainable equilibrium. ILS products provide real and valuable benefits to their customers to protect them in the event of major In hindsight, CATCo’s initial estimates for the catastrophes. Even if the catastrophe doesn’t happen, catastrophe losses of 2017 and 2018 proved to be the ability to operate with confidence, and in a too low. The losses to investors on CATCo products financially sound and protected manner, is of the have exceeded initial estimates. foremost importance. This is a win-win circumstance for the ILS manager and its buyers. Among other matters, the reserve setting process at CATCo involves a unique challenge in that products For the investors, the returns from their investments such as Industry Loss Warranty covers end up with a should not be correlated to overall financial markets, completely binary outcome. To continue our extreme general economic conditions, or other circumstances. and oversimplified example, if the industry loss Investments in Insurance Linked Securities provide number in a given contract is set at $5 billion, and diverse and independent cash flows for their industry losses turn out to be $4,999,999,999, the portfolios. This ability to earn returns that are loss for the sellers/investors in the ILS security is zero. separate and distinct from stock markets, interest rate If the overall industry loss deteriorates by $2, that moves, or other factors is of value to investors seeking means the ILS contract would go to a total loss that to manage investment portfolios. As such, an ILS might be hundreds of millions. manager provides a product that helps investors meet their objectives. We can earn a fair and appropriate fee Determining a point estimate for what that loss might as compensation for doing so. Again, this is a win-win be, and doing so for a wildfire that is burning while relationship between ILS managers and the investors. you are in the room and trying to come up with that number, is a tough task. Frankly, it is impossible to get Additionally, the fees and expenses associated with it exactly right. these transactions, as well as the returns on capital supporting these deals, tend to be lower than those Going forward, we are revisiting and reexamining the associated with traditional forms of reinsurance processes and elements that go into the setting of coverage. That is one of the reasons the Insurance reserves, pricing decisions, and actuarial matters at Linked Security market developed. The world CATCo. We remain committed to operating with continues to demand better, faster, and cheaper complete integrity and to the very best of our ability. solutions to all problems, and the ILS market addresses that dynamic for insurance products. 10


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    Markel Corporation We understand the trust you have placed in us We occupy a unique position in the insurance/risk and there is nothing more important to us than transfer industry to provide a full and complete deserving it. solution to buyers and sellers in this realm. We are optimistic that we will end up with an State National’s fronting capabilities provide many of improved ILS investment management operation the licensing and regulatory processes and over time. Insurance Linked Securities provide mechanisms necessary to operate in the ILS and fundamentally sound and valuable services for alternative capital world. both buyers and sellers of the product. With our current array of capabilities, we offer the We hope that this discussion helps to provide clarity broadest based, most comprehensive marketplace, to on the nature of the Insurance Linked Security address risks through Insurance Linked Securities. We business and why we believe it to be an important believe that over time, the ILS market addresses more element of our long term platform at Markel. risk areas than just property catastrophe coverages. We are already providing risk transfer products that Nephila and State National deal with areas such as weather and energy, and we expect to continue to increase the percentage of risk In 2018 we purchased Nephila. Nephila literally transfers that might be suitably addressed by the ILS started the ILS market 20 years ago and they are the mechanism. number one player in the ILS industry. As the number one player in this market, we have the Nephila operates in a different portion of the ILS advantage of more flow, and more conversations, market than CATCo. For Nephila, losses tend to be about how we can meet the needs of buyers and more frequent but less severe. As such, the risks and sellers in this marketplace than anyone else. The rewards for both buyers and sellers tend to be more ultimate size and scale of this idea could be one of the tightly dispersed than would be the case at CATCo. most important strategic moves we’ve ever made. Frank Majors and Greg Hagood started Nephila Stay tuned. We’re learning and figuring it out. in 1997 and built a wonderful organization over decades. As they reviewed their options for sustaining Today, we know more about how to price and describe their company and building its future, they believed risk in this marketplace than we did yesterday. We’re that Markel offered the best fit culturally and more sensitive to hidden or previously unthought-of professionally for the Nephila team. We agree. correlations that can cause events to cluster in ways that they did not in the past. We’re more sensitive to We are delighted with the early months of Nephila the implications of climate change, and how that joining Markel and we believe that the combined might increase both loss frequency and severity along platform of Nephila, along with State National, along with more correlation of previously uncorrelated with CATCo, along with our existing reinsurance events. Our predictive models, both within Markel, and operations, gives us the number one market position those available from industry sources, are more robust to meet the needs of buyers and sellers in this arena. now that they’ve been tested and modified based on the experiences of 2017 and 2018. 11


  • Page 14

    And, the prices for transferring these risks are higher while still facing historically high catastrophe losses is in 2019 than what they’ve been in the two previous a marker of the improvement in our capabilities and years. Higher prices help while learning. decisions all around the insurance organization. The Strategic Platforms of Markel 2 - ILS There are five strategic platforms embedded in Markel We expect 2019 to be a year of improving and at this point. In alphabetical order they are as follows expanding our product offerings for the benefit of buyers and investors as we continue to build a robust 1 - Insurance & Reinsurance and important platform for the future (see previous 2 - Insurance Linked Securities discussion). 3 - Investments 4 - Markel Ventures 3 - Investments 5 - Our Mindset In our investment operations we earned a total return 1 - Insurance & Reinsurance of (1.0%) in 2018 compared to 10.2% in 2017. In our equity operations we reported a loss of (3.5%) This is our legacy at Markel and the foundation of our compared to a gain of 25.5% in 2017. As always, company. It’s how we started, and the basis for what equities remain volatile in any given year and the year we’ve been able to do in building up the rest of Markel to year comparison demonstrates both types of over time. volatility (up and down). In our insurance operations we produced Gross Over the longer term we’ve earned excellent returns Written Premiums of $5.8 billion in 2018 compared on our equity investments. In keeping with the five to $5.3 billion in 2017. We operated profitably with a year theme of this letter, we earned 9.7% on our combined ratio of 98% despite six points of equities over the last five years compared to 3% on catastrophe losses during the year and we continued our fixed income portfolio. This is an excellent to adapt and refine our insurance operations on a outcome, and provides evidence for why we continue continuous basis. to commit a higher percentage of our investment portfolio to equities than most insurance based While insurance marketplace conditions remain tough organizations. and hyper competitive, we are pleased to report underwriting profitability for the year. You can observe We continue to follow our longstanding four part that we’ve earned underwriting profits in 14 of the 21 equity investment discipline of seeking investments in years in the chart included in the letter. We remain 1-profitable businesses with good returns on capital committed to earning underwriting profits on a and not too much leverage with 2-management consistent year by year basis. We’ve learned from each teams with equal measures of talent and integrity, episode of higher industry catastrophes and we would 3-with reinvestment opportunities and capital expect to improve this ratio in the years to come. discipline at 4-reasonable prices. We’re especially pleased that we were able to report Long term readers of this letter will recognize that an underwriting profit in 2018 with a combined ratio catechism of how we describe our equity investing of 98% compared to the underwriting loss in 2017 approach. It has not changed in decades and we think and the combined ratio of 105%. Catastrophe losses the thought process remains durable and effective in 12 remained elevated in 2018. For us to be able to move making productive investment decisions. from an underwriting loss to an underwriting profit


  • Page 15

    Markel Corporation While we produced a return of negative (3.5%) in This process repeats itself every year and the swings 2018 on our equities, and we do hate negative of any given year resolve back towards the other returns, we do take some comfort in the fact that this direction in subsequent years. Nothing new to report. performance exceeded the loss of (4.4%) experienced in the S&P 500. We’ve outperformed the S&P 500 More importantly, the recurring dividend and interest index by more than 100 basis points for over 30 years. income from our portfolio totaled $434 million in We are proud of this record. We think it remains one 2018 compared to $406 million in 2017. Over the five of the best in the entire investment industry. We hope year time frame we’ve been talking about total you take comfort that our approach remains sound in recurring dividend and interest income was $1.9 both theory and in execution. billion in the 2014-2018 period compared to $1.4 billion in the 2009-2013 period. The recurring income In our publicly traded fixed income portfolio we is only a portion of the total investment returns, but earned a total return of 1.3% in 2018 compared to we think the increase in that number over time 3.4% in 2017. Just as is the case with equity demonstrates the soundness and productiveness investments, we have a stated discipline to manage of our investment approach. fixed income securities. We allocate enough funds to more than provide for our estimate of the ultimate 4 - Markel Ventures claim payments of our insurance operations. We match those funds in duration and currencies to our In 2018 we reported revenues of $1.9 billion expected liabilities, and we invest them exclusively in compared to $1.3 billion in 2017. EBITDA totaled the highest credit quality investment options that we $170 million compared to $188 million. As we’ve can find. We seek to minimize credit risk and we don’t stated for several years, purchase accounting tends to try to predict or forecast moves in interest rates. create year by year distortions from our view of economic reality. That effect is the largest in the early In a rising interest rate environment, the market value years following an acquisition and bigger deals can of those securities declines. That is what happened in often produce bigger purchase accounting effects. 2018. We normally hold our positions until they That was very much the case in 2018 with the swings mature. As such, those short term fluctuations do not from our largest deal ever, Costa Farms. In 2017, the affect our ability to meet the liabilities of our effects of Hurricane Irma, associated insurance insurance claims and we continue to protect our recoveries from that event, inventory replacements, balance sheet. Mark to market accounting requires us earn out calculations and other items increased to report the market volatility of the bonds that we EBITDA in 2017 and decreased it in 2018. As such the hold for multiple years. Mark to market accounting year by year comparison doesn’t do a good job of does not allow us to adjust the net present value of directionally describing the business. our estimates of future claims payments as interest rates change. In any given year, this causes an When you examine longer periods of time, those accounting presentation mismatch to economic distortions fade away and the economic reality of the reality. We’re following U.S. GAAP accounting and underlying business comes through. Keeping with our adjusting the market value of the bonds on the asset theme of looking at results over five year periods, the side of the balance sheet. We are also following U.S. results from Markel Ventures shine through. Over the GAAP accounting and not adjusting for the change in last five year period, revenues totaled $6.4 billion the economic net present value of the claims compared to $1.7 billion and EBITDA totaled $709 payments on the liability side of the balance sheet. million compared to $206 million. 13


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    The ongoing growth and maturity of Markel Ventures chased after deals. Fortunately, our demonstrated represents a valuable pillar of the long term growth performance, and our values based culture, continues and soundness of the Markel Corporation. The cash to cause our phone to ring with incoming flows from our Markel Ventures operations are opportunities. somewhat independent of insurance cycles, interest rate movements, and public equity volatility. As such, People know about Markel and the values by which the recurring cash flows from the Markel Ventures we run this company. That doesn’t appeal to operations create optionality for Markel to have cash everyone, but it appeals to some. In the highly coming in the door from multiple sources on a competitive arena to purchase wonderful businesses, relatively consistent and recurring basis. this is a profound strategic advantage. Some people value our long term, sustainable approach and we In order to take advantage of opportunities in times continue to answer the phone when they’re looking of crisis or financial market disruptions, you need two for a new home. We will behave in such a way to keep things, Courage and Cash. Markel Ventures helps on that going. both fronts as the growing record of cash consistently coming in provides us with the tangible and the 5 - Mindset intangible materials to make good capital allocation decisions. If you describe something as being in 3D you’re talking about the measurable, tangible elements of height, During the year we also welcomed Brahmin Leather to width, and depth. A common practice is to call time the Markel organization. We’re thrilled to do so. Bill the fourth dimension. Throughout this letter, we’ve and Joan Martin, along with their son Scott, built a written extensively and repeatedly about the concept marvelous organization over 30 years at Brahmin. of time and our approach to thinking in long term Susan Thacker joined as CEO a few years ago. Susan ways. At the same time, we understand and and Scott will continue to lead the company and we’re appreciate the need to make decisions and take delighted to welcome them to Markel. Please check actions constantly, and we’ve written in previous years out their products on Brahmin.com and enjoy the about our dual time horizon of forever and right now quality and style of Brahmin products. in order to provide the right focus to the right time periods for any given decision or process. In our existing Markel Ventures operations we enjoyed a year of overall growth and solid profitability. We We’d like to suggest that the Mindset with which we encountered challenges connected to running operate Markel is something like a fifth dimension. businesses, and we continued to support our There is such a thing, at least conceptually. The fifth managers with capital and the message of consistent dimension is an abstract mathematical concept that long term focus. We want to operate every segment suggests that movement, and change, through time of Markel Ventures with the mindset of doing the and space, alter the easily measured items of the first right thing, and doing things for our customers rather three dimensions. than to them. At the risk of getting too weird, what we mean by this The results of this mindset continue to bear fruit and reference is that our culture, the values we attempt to we expect more growth from Markel Ventures over describe and teach through the written word of the time. As we have said during the last several years, Markel Style, our beliefs, the way we interact with our market prices for acquisitions tend to be quite high. customers and our colleagues, are all examples of this Consequently, we’ve exercised discipline and not fifth dimension of a mindset that pervades Markel. 14


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    Markel Corporation We recruit for people who seem to intuitively When new technology creates new products, new understand this concept. We promote and celebrate services, and new risks, there is “Not Yet” a way to people within the organization who seem to behave in actuarially understand the risks involved and to create ways that make this intangible idea real, and we look an insurance bridge between the capabilities of for acquisitions and new ideas which fit this construct. entrepreneurs and the demand of customers for new products or services. The people of Markel figure out We believe that our purposeful embrace of this ways to create that bridge, and allow for progress that intangible idea is the “secret sauce” of Markel. Our new products and technology bring to society. mindset is a fifth dimension. It guides us as leaders, and provides explicit and implicit forces that help us When people built businesses in diverse fields such as make better decisions that show up in our quantifiable bakery equipment, car hauling trailers, medical measures of the first through fourth dimension i.e. services, truck flooring, houseplants, affordable annual financial results over many years. housing, and other products and services, there was “Not Yet” an obvious home at Markel for those firms Not Yet to continue to serve and prosper as their ownership structure changed and generations passed. The While traveling this year we met a CEO who described people of Markel figured out a way to sustain the his company as a “Not Yet” company. He started values of service and durability through our Markel a business from scratch and has built a global Ventures entity. multi-billion firm from nothing. As he said, he doesn’t say no to new ideas or new opportunities because he Our mindset of “Not Yet” powers our drive to continue is only in the fill in the blank _____ business. He says to build Markel into one of the world’s great that his company has “Not Yet” considered a new companies. So far, so good. potential idea, but perhaps it could and should. He spoke profoundly about the need to embrace change We can’t wait to get to work every day and learn how by reminding us that, “resisting change is like holding to be better. It’s an exhilarating way to live and a great your breath. If you get good at it you’ll die.” formula for building a business. Embracing change, and following the doctrine of “Not Thank you for your support and partnership. Yet”, in many ways describes the history of Markel. Respectfully submitted, When Sam Markel started this business, there was “Not Yet” an insurance product that covered losses and injuries caused by the growing presence of Thomas S. Gayner, Co-Chief Executive Officer automobiles compared to horses. Markel figured out a way to provide that coverage and improve the safety and outcomes for our customers, the drivers and Richard R. Whitt, III, Co-Chief Executive Officer passengers of that day and place. When the interstate highway system came into being, there was “Not Yet” an insurance product that covered the new risk of what happens when heavy trucks hit lighter cars. Markel figured out a way to provide those coverages and help make driving safer for all. 15


  • Page 18

    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) 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. Our business is comprised of the following types of operations: • Underwriting - our underwriting operations are comprised of our risk-bearing insurance and reinsurance 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 • Investment management - our investment management 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 companies access to the United States (U.S.) property and casualty insurance market Underwriting Specialty Insurance and Reinsurance The specialty insurance market differs significantly from the standard market. In the standard market, insurance rates and forms are highly regulated, products and coverages are largely uniform with relatively predictable exposures and companies tend to compete for customers on the basis of price. In contrast, the specialty market provides coverage for hard-to-place risks that generally do not fit the underwriting criteria of standard carriers. Competition in the specialty insurance market tends to focus less on price than in the standard insurance market and more on other value-based considerations, such as availability, service and expertise. While specialty market exposures may have higher perceived insurance risks than their standard market counterparts, we seek to manage these risks to achieve higher financial returns. To reach our financial and operational goals, we must have extensive knowledge and expertise in our chosen markets. Many of our accounts are considered on an individual basis where customized forms and tailored solutions are employed. By focusing on the distinctive risk characteristics of our insureds, we have been able to identify a variety of niche markets where we can add value with our specialty product offerings. Examples of niche insurance markets that we have targeted include wind and earthquake-exposed commercial properties, liability coverage for highly specialized professionals, equine-related risks, workers’ compensation insurance for small businesses, classic cars and marine, energy and environmental-related activities. Our market strategy in each of these areas of specialization is tailored to the unique nature of the loss exposure, coverage and services required by insureds. In each of our niche markets, we assign teams of experienced underwriters and claims specialists who provide a full range of insurance services. We also participate in the reinsurance market in certain classes of reinsurance product offerings. In the reinsurance market, our clients are other insurance companies, or cedents. We typically write our reinsurance products in the form of treaty reinsurance contracts, which are contractual arrangements that provide for automatic reinsuring of a type or category of risk underwritten by cedents. Generally, we participate on reinsurance treaties with a number of other reinsurers, each with an allocated portion of the treaty, with the terms and conditions of the treaty being substantially the same for each participating reinsurer. With treaty reinsurance contracts, we do not separately evaluate each of the individual risks assumed under the contracts and are largely dependent on the individual underwriting decisions made by the cedent. Accordingly, we review and analyze the cedent’s risk management and underwriting practices in deciding whether to provide treaty reinsurance and in pricing of treaty reinsurance contracts. 16


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    Our reinsurance products are written on both a quota share and excess of loss basis. Quota share contracts require us to share the losses and expenses in an agreed proportion with the cedent. Excess of loss contracts require us to indemnify the cedent against all or a specified portion of losses and expenses in excess of a specified dollar or percentage amount. In both types of contracts, we may provide a ceding commission to the cedent. We distinguish ourselves in the reinsurance market by the expertise of our underwriting teams, our access to global reinsurance markets, our ability to offer large lines and our ability to customize reinsurance solutions to fit our client’s needs. Our specialty reinsurance product offerings include coverage for general casualty, professional liability, property, workers’ compensation and credit and surety risks. Markets In the United States, we write business in the excess and surplus lines (E&S) and specialty admitted insurance and reinsurance markets. In 2017, the E&S market represented $45 billion, or 7%, of the $642 billion U.S. property and casualty industry.(1) In 2017, we were the third largest E&S writer in the U.S. as measured by direct premium writings.(1) Our E&S insurance operations are conducted through Evanston Insurance Company (Evanston), domiciled in Illinois. The majority of our specialty admitted insurance operations are conducted through Markel Insurance Company (MIC), domiciled in Illinois; Markel American Insurance Company (MAIC), domiciled in Virginia; FirstComp Insurance Company (FCIC), domiciled in Nebraska; and Essentia Insurance Company (Essentia), domiciled in Missouri. Beginning in 2017, our specialty admitted operations also include Suretec Insurance Company (SIC), Suretec Indemnity Company (SINC), State National Insurance Company, Inc. (SNIC) and National Specialty Insurance Company (NSIC), all of which are domiciled in Texas. Our U.S. reinsurance operations are conducted through Markel Global Reinsurance Company (Markel Global Re), a Delaware-domiciled reinsurance company. We participate in the London insurance market primarily through Markel Capital Limited (Markel Capital) and Markel International Insurance Company Limited (MIICL). Markel Capital is the corporate capital provider for Markel Syndicate 3000, through which our Lloyd’s of London (Lloyd’s) operations are conducted. Markel Syndicate 3000 is managed by Markel Syndicate Management Limited (MSM). Markel Capital and MIICL are headquartered in London, England and have offices across the United Kingdom (U.K.), Europe, Canada, Latin America, Asia Pacific and the Middle East through which we are able to offer insurance and reinsurance. The London insurance market produced approximately $67 billion of gross written premium in 2017.(2) In 2017, the U.K. non-life insurance market was the largest in Europe and fourth largest in the world.(3) In 2017, gross premium written through Lloyd’s syndicates generated roughly 65% of the London market’s international insurance business,(2) making Lloyd’s the world’s largest commercial surplus lines insurer and sixth largest reinsurer.(4) Corporate capital providers often provide a majority of a syndicate’s capacity and also generally own or control the syndicate’s managing agent. This structure permits the capital provider to exert greater influence on, and demand greater accountability for, underwriting results. In 2017, corporate capital providers accounted for approximately 90% of total underwriting capacity in Lloyd’s.(5) In anticipation of the U.K.’s expected exit from the European Union in 2019, which could impact MIICL and Markel Syndicate 3000’s ability to transact business in the remaining European Union member states and Switzerland, in 2018, we established Markel Insurance SE (MISE), a regulated insurance carrier located in Munich, Germany. From its offices in Germany, MISE can transact business in all remaining European Union member states and throughout the European Economic Area (EEA). MISE has established branches in Ireland, the Netherlands, Spain and the U.K. For further discussion regarding the U.K.’s expected exit from the European Union, see “Brexit Developments” under Management’s Discussion & Analysis of Financial Condition and Results of Operations. (1) Market Segment Report - U.S. Surplus Lines, A.M. Best (September 14, 2018). (2) London Company Market Statistics Report, International Underwriting Association (October 2018). (3) sigma, Swiss Re Institute (March 2018). (4) Market Segment Report - Global Reinsurance, A.M. Best (September 4, 2018). (5) Lloyd’s Annual Report 2017. 17


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) In Latin America, we provide reinsurance through MIICL, using our representative office in Bogota, Colombia and our service company in Buenos Aires, Argentina, and through Markel Resseguradora do Brasil S.A. (Markel Brazil Re), our reinsurance company in Rio de Janeiro, Brazil. MIICL is also able to offer reinsurance in a number of Latin American countries through offices outside of Latin America. We also provide insurance through Markel Seguradora do Brasil S.A. (Markel Brazil), our insurance company in Rio de Janeiro, Brazil. In Bermuda, we write business in the worldwide insurance and reinsurance markets. The Bermuda property and casualty insurance and reinsurance market produced $66 billion of gross written premium in 2016.(1) We conduct our Bermuda operations through Markel Bermuda Limited (Markel Bermuda), which is registered as a Class 4 insurer and Class C long-term insurer under the insurance laws of Bermuda. Our reinsurance operations, which include our operations based in the United States, the United Kingdom, Latin America and Bermuda, as described above, made us the 35th largest reinsurer in 2017, as measured by worldwide gross reinsurance premium writings.(2) In 2018, 21% of gross premium writings from our underwriting segments related to foreign risks (i.e., coverage for risks or cedents located outside of the U.S.), of which 39% were from the U.K. and 11% were from Canada. In 2017, 21% of our premium writings related to foreign risks, of which 34% were from the U.K. and 12% were from Canada. In 2016, 23% of our premium writings related to foreign risks, of which 32% were from the U.K. and 11% were from Canada. In each of these years, there was no other individual foreign country from which premium writings were material. Premium writings are attributed to individual countries based upon location of risk or cedent. Most of our business is placed through insurance and reinsurance brokers. Some of our insurance business is also placed through managing general agents. We seek to develop and capitalize on relationships with insurance and reinsurance brokers, insurance and reinsurance companies, large global corporations and financial intermediaries to develop and underwrite business. A significant volume of premium for the property and casualty insurance and reinsurance industry is produced through a small number of large insurance and reinsurance brokers. During the years ended December 31, 2018, 2017 and 2016, the top three independent brokers accounted for 25%, 27% and 28%, respectively, of gross premiums written in our underwriting segments. Competition We compete with numerous domestic and international insurance companies and reinsurers, Lloyd’s syndicates, risk retention groups, insurance buying groups, risk securitization programs, alternative capital sources and alternative self-insurance mechanisms. We also compete with new companies that continue to be formed to enter the insurance and reinsurance markets, particularly companies with new or “disruptive” technologies or business models. Competition may take the form of lower prices, broader coverages, greater product flexibility, higher coverage limits, higher quality services or higher ratings by independent rating agencies. In all of our markets, we compete by developing specialty products to satisfy well-defined market needs and by maintaining relationships with agents, brokers and insureds who rely on our expertise. This expertise is our principal means of competing. We offer a diverse portfolio of products, each with its own distinct competitive environment, which enables us to be responsive to changes in market conditions for individual product lines. With each of our products, we seek to compete with innovative ideas, appropriate pricing, expense control and quality service to policyholders, agents and brokers. Few barriers exist to prevent insurers and reinsurers from entering our markets of the property and casualty industry. Market conditions and capital capacity influence the degree of competition at any point in time. Periods of intense competition, which typically include broader coverage terms, lower prices and excess underwriting capacity, are referred to as a “soft market.” A favorable insurance market is commonly referred to as a “hard market” and is characterized by stricter coverage terms, higher (1) Bermuda Monetary Authority 2017 Annual Report. (2) Market Segment Report - Global Reinsurance, A.M. Best (September 4, 2018). 18


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    prices and lower underwriting capacity. During soft markets, unfavorable conditions exist due in part to what many perceive as excessive amounts of capital in the industry. In an attempt to use their capital, many insurance companies seek to write additional premiums without appropriate regard for ultimate profitability, and standard insurance companies are more willing to write specialty coverages. The opposite is typically true during hard markets. Historically, the performance of the property and casualty reinsurance and insurance industries has tended to fluctuate in cyclical periods of price competition and excess underwriting capacity, followed by periods of high premium rates and shortages of underwriting capacity. This cyclical market pattern can be more pronounced in the specialty insurance and reinsurance markets in which we compete than the standard insurance market. We experienced soft insurance market conditions across most of our property product lines, as well as on our marine and energy line beginning in 2013 and continuing through 2017. Our large account business has also been subject to more pricing pressure and competition remains strong in the reinsurance market. Following the high level of natural catastrophes that occurred in the third and fourth quarters of 2017, in 2018, we experienced slightly more favorable rates, particularly on our catastrophe exposed and loss affected product lines. However, we also experienced rate decreases on other product lines and the market remains competitive. We routinely review the pricing of our major product lines and will continue to pursue price increases in 2019, when possible. However, 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. Underwriting Philosophy By focusing on market niches where we have underwriting expertise, we seek to earn consistent underwriting profits, which are a key component of our strategy. The property and casualty insurance industry commonly defines underwriting profit or loss as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. We believe that the ability to achieve consistent underwriting profits demonstrates knowledge and expertise, commitment to superior customer service and the ability to manage insurance risk. We use underwriting profit or loss as a basis for evaluating our underwriting performance. The combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums. A combined ratio less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. In 2018, our combined ratio was 98%. See Management’s Discussion & Analysis of Financial Condition and Results of Operations for further discussion of our underwriting results. The following graph compares our combined ratio to the property and casualty industry’s combined ratio for the past five years. Markel Corporation Industry Average* 110% 100% 107% 105% 101% 102% 102% 101% 104% 102% 90% 97% 97% 98% 97% 97% 98% 97% 95% 96% 95% 89% 92% 80% 2014 2015 2016 2017 2018 * Source: A.M. Best Company. Industry Average is estimated for 2018. 19


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) Underwriting Segments Through December 31, 2017, we monitored and reported our ongoing underwriting operations in the following three segments: U.S. Insurance, International Insurance and Reinsurance. In conjunction with the continued growth and diversification of our business, beginning the first quarter of 2018 we changed the way we review our ongoing underwriting operations. In determining how to monitor our underwriting results, management considers many factors, including the nature of the insurance product sold, the type of account written and the type of customer served. Effective January 1, 2018, our chief operating decision maker allocates resources to and assesses the performance of our ongoing underwriting operations on a global basis in the following two segments: Insurance and Reinsurance. The Insurance segment includes all direct business and facultative placements written across the Company. The Reinsurance segment includes all treaty reinsurance written across the Company. 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 monitored separately and are not included in a reportable segment. See note 20 of the notes to consolidated financial statements for additional segment reporting disclosures. M A R K E L C O R P O R AT I O N 2018 G R O S S P R E M I U M V O L U M E ($5.8 BILLION) 82% Insurance Reinsurance 18% Insurance Segment Our Insurance segment includes both hard-to-place risks written outside of the standard market on an E&S basis and unique and hard-to-place risks that must be written on an admitted basis due to marketing and regulatory reasons. Business in this segment is primarily written through our Markel Assurance, Markel Specialty and Markel International divisions. As a result of the acquisition of State National Companies, Inc. (State National), effective November 2017, we created the State National division. The State National division’s collateral protection underwriting business is included in the Insurance segment and its program services business is not included in a reportable segment. 28% Markel Specialty Markel Assurance 44% Markel International 24% 4% 20 State National


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    Markel Assurance Division The Markel Assurance division writes commercial and Fortune 1000 accounts for brokers located in the U.S., Bermuda, Ireland and the U.K. In the U.S. accounts are written on an E&S basis and on an admitted basis when a risk must remain with the admitted insurance company for marketing and regulatory reasons. The E&S market focuses on hard-to-place risks and loss exposures that generally cannot be written in the standard market. U.S. insurance regulations generally require an E&S account to be declined by admitted carriers before an E&S company may write the business. E&S eligibility allows our insurance subsidiaries to underwrite unique loss exposures with more flexible policy forms and unregulated premium rates. This typically results in coverages that are more restrictive and more expensive than coverages in the standard market. The Markel Assurance division also writes complex, Fortune 1000 accounts on an admitted and non-admitted basis. Our business that is written in the admitted market is likewise focused on risks that, although unique and hard-to-place, can still be written in the standard market. Markel Assurance business is primarily written through wholesale brokers, retail brokers and surplus lines general agents who have limited quoting and binding authority. Admitted business produced by this division is written through MAIC, which is authorized to write business in all 50 states and the District of Columbia. Business written on a non-admitted basis and in the E&S market is primarily written through Evanston, which is authorized to write business in all 50 states and the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands, as well as MIC, Markel Bermuda and MIICL. Markel Specialty Division The Markel Specialty division writes program insurance and other specialty coverages for well-defined niche markets, primarily on an admitted basis in the U.S. Our business written in the admitted market focuses on risks that, although unique and hard-to-place in the standard market, must remain with an admitted insurance company for marketing and regulatory reasons. Hard-to-place risks written in the admitted market cover insureds engaged in similar, but highly specialized, activities that require a total insurance program not otherwise available from standard insurers or insurance products that are overlooked by large admitted carriers. The admitted market is subject to more state regulation than the E&S market, particularly with regard to rate and form filing requirements, restrictions on the ability to exit lines of business, premium tax payments and membership in various state associations, such as state guaranty funds and assigned risk plans. Business written in the Markel Specialty division is primarily written by retail insurance agents who have very limited or no underwriting authority. We also utilize managing general agents, who have broader underwriting authority, for certain of our product lines. Agents are carefully selected and agency business is controlled through regular audits and pre-approvals. Certain products and programs are marketed directly to consumers or distributed through wholesale producers. Personal lines coverages included in this segment are marketed directly to the consumer using direct mail, internet and telephone promotions, as well as relationships with various motorcycle and boat manufacturers, dealers and associations. The majority of the business produced by this division is written either through MIC, MAIC, FCIC, Essentia, SIC and SINC. MIC, MAIC and Essentia are licensed to write property and casualty insurance in all 50 states and the District of Columbia. MAIC is also licensed to write property and casualty insurance in Puerto Rico. Essentia specializes in coverage for classic cars and boats. FCIC is currently licensed in 28 states and specializes in workers’ compensation coverage. SIC and SINC specialize in surety coverages. SIC is currently licensed in all 50 states and the District of Columbia. SINC is currently licensed in California and Texas. Markel International Division The Markel International division writes business worldwide from our London-based platform and branch offices around the world. This includes Markel Syndicate 3000, through which our Lloyd’s operations are conducted, and MIICL. Beginning in 2018, the Markel International division also includes business written through MISE, our regulated insurance company in Germany. The London insurance market is known for its ability to provide innovative, tailored coverage and capacity for unique and hard-to-place risks. Hard-to-place risks in the London market are generally distinguishable from standard risks due to the complexity or significant size of the risk. It is primarily a broker market, which means that insurance brokers bring most of the business to the market. Risks written in the Markel International division are written on either a direct basis or a subscription basis, the latter of which means that loss exposures brought into the market are typically insured by more than one insurance company or Lloyd’s syndicate, often due to the high limits of insurance coverage required. 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. 21


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) State National Division The State National division writes collateral protection insurance (CPI), which insures personal automobiles and other vehicles held as collateral for loans made by credit unions, banks and specialty finance companies through its lender services product line on both an admitted and non-admitted basis. This business is primarily written on SNIC and NSIC, which are licensed to write property and casualty insurance in all 50 states and the District of Columbia. Our Insurance segment reported gross premium volume of $4.7 billion, earned premiums of $3.8 billion and an underwriting profit of $228.8 million in 2018. INSURANCE SEGMENT 2018 G R O S S P R E M I U M V O L U M E ($4.7 BILLION) 11% 20% Property 11% Professional Personal Liability Lines Marine and 10% Energy General Liability 23% Specialty 7% Programs Other Workers’ 7% Compensation 11% Product offerings within the Insurance segment fall within the following major product groupings: • General Liability • Professional Liability • Property • Personal Lines • Marine and Energy • Specialty Programs • Workers’ Compensation • Other Product Lines General Liability product offerings include a variety of primary and excess liability coverages targeting apartments and office buildings, retail stores, contractors, consultants, construction professionals, financial service professionals, professional practices, social welfare organizations and medical products, as well as businesses in the life sciences, energy, medical, healthcare, pharmaceutical, recreational, transportation, heavy industrial and hospitality industries. Specific products include the following: • excess and umbrella products, which provide coverage over approved underlying insurance carriers on either an occurrence or claims-made basis; • products liability products, which provide coverage on either an occurrence or claims-made basis to manufacturers, distributors, importers and re-packagers of manufactured products; • environmental products, which provide coverage on either an occurrence or claims-made basis and include environmental consultants’ professional liability, contractors’ pollution liability and site-specific environmental impairment liability coverages; and • casualty facultative reinsurance written for individual casualty risks focusing on general liability, products liability, automobile liability and certain classes of miscellaneous professional liability and targeting classes which include low frequency, high severity general liability risks. 22


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    Professional liability coverages include unique solutions for highly specialized professions, including architects and engineers, lawyers, accountants, agents and brokers, service technicians and consultants. We offer claims-made medical malpractice coverage for doctors and dentists; claims-made professional liability coverage to individual healthcare providers such as therapists, pharmacists, physician assistants and nurse anesthetists; and coverages for medical facilities and other allied healthcare risks such as clinics, laboratories, medical spas, home health agencies, small hospitals, pharmacies and senior living facilities. Other professional liability coverages include errors and omissions, union liability, professional indemnity, intellectual property, executive liability for financial institutions and Fortune 1000 companies and management liability. Our management liability coverages, which can be bundled with other coverages or written on a standalone basis, include employment practices liability, directors and officers liability and fiduciary liability coverages. Additionally, we offer cyber liability products, which provide coverage primarily for data breach and privacy liability, data breach loss to insureds and electronic media coverage. Property coverages consist principally of fire, allied lines (including windstorm, hail and water damage) and other specialized property coverages, including catastrophe-exposed property risks such as earthquake and wind on both a primary and excess basis. Catastrophe-exposed property risks are typically lower frequency and higher severity in nature than more standard property risks. Our property coverages are exposed to windstorm losses that, based on the seasonal nature of those events, are more likely to occur in the third and fourth quarters of the year. Our property risks range from small, single-location accounts to large, multi-state, multi-location, multi-national accounts on a worldwide basis. Other types of property products include: • inland marine products, which provide a number of specialty coverages for risks such as motor truck cargo coverage for damage to third party cargo while in transit, warehouseman’s legal liability coverage for damage to third party goods in storage, contractor’s equipment coverage for first party property damage and builder’s risk coverage; • railroad-related products, which provide first party coverages for short-line and regional railroads, scenic and tourist railroads, commuter and light rail trains and railroad equipment; and • specie coverage for fine art on exhibition and in private collections, securities, bullion, precious metals, cash in transit and jewelry. Personal lines products provide first and third party coverages for classic cars, motorcycles and a variety of personal watercraft, including vintage boats, high performance boats and yachts and recreational vehicles, such as motorcycles, snowmobiles and ATVs. Based on the seasonal nature of much of our personal lines business, we generally will experience higher claims activity during the second and third quarters of the year. Additionally, property coverages are offered for mobile homes, dwellings and homeowners that do not qualify for standard homeowner’s coverage. Other products offered include special event protection and pet health coverage. Marine and energy products include a portfolio of coverages for cargo, energy, hull, liability, war and terrorism risks. The cargo product line is an international transit-based book providing coverage for many types of cargo. Energy coverage includes all aspects of oil and gas activities. Hull coverages consist of coverage for physical damage to ocean-going tonnage, yachts and mortgagees’ interests. Liability coverage provides for a broad range of energy liabilities, as well as traditional marine exposures including charterers, terminal operators and ship repairers. War coverage includes protections for the hulls of ships and aircraft, and other related interests, against war and associated perils. Terrorism coverage provides for property damage and business interruption related to political violence including war and civil war. Specialty programs business included in this segment is offered on a standalone or package basis and generally targets specialized commercial markets and customer groups. Targeted groups include youth and recreation oriented organizations and camps, child care operators, schools, social service organizations, museums and historic homes, performing arts organizations, senior living facilities and wineries. Other specialty programs business written in this segment includes: • general agent programs that use managing general agents to offer single source admitted and non-admitted programs for a specific class or line of business; • first and third party coverages for medical transport, small fishing ventures, charters, utility boats and boat rentals; and • property and liability coverages for small to medium-sized commercial risks, including farms, zoos, animal theme parks, safari parks and animal boarding, breeding and training facilities. 23


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) Workers’ compensation products provide wage replacement and medical benefits to employees injured in the course of employment and target main-street, service and artisan contractor businesses, retail stores and restaurants. Other product lines within the Insurance segment include: • surety products, which consist primarily of contract, commercial and court bonds; • CPI, which provides coverage on automobiles or other vehicles held as collateral for loans made by credit unions, banks and specialty finance companies; • coverages for equine-related risks, such as horse mortality, theft, infertility, transit and specified perils; • crime coverage primarily targeting financial institutions and providing protection for bankers’ blanket bond, computer crime and commercial fidelity; • small business owners policies providing property and liability package coverage to small and medium sized businesses; • accident and health coverage targeting affinity groups and schemes, high value and high risks accounts and sports groups; • coverage for legal expenses including before the event products that protect commercial clients in the event of legal actions and after the event products covering a wide range of litigation; and • short-term trade credit coverage for commercial risks, including insolvency and protracted default as well as political risks coverage in conjunction with commercial risks for currency inconvertibility, government action, import and export license cancellation, public buyer default and war. Reinsurance Segment Our Reinsurance segment includes property and casualty 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. Our reinsurance products may include features such as contractual provisions that require our cedent to share in a portion of losses resulting from ceded risks, may require payment of additional premium amounts if we incur greater losses than those projected at the time of the execution of the contract, may require reinstatement premium to restore the coverage after there has been a loss occurrence or may provide for experience refunds if the losses we incur are less than those projected at the time the contract is executed. Our reinsurance product offerings are underwritten by our Global Reinsurance division and our Markel International division. The Global Reinsurance division operates from platforms in the U.S., Bermuda and the U.K. Business written in the Global Reinsurance division is produced primarily through Markel Global Re, which is licensed or accredited to provide reinsurance in all 50 states and the District of Columbia. The Global Reinsurance division also writes business through Markel Bermuda and beginning in 2018, Markel Syndicate 3000. The Markel International division operates primarily from our London-based platform and business is produced primarily through MIICL. Markel International also conducts reinsurance operations from its platform in Latin America, which includes Markel Brazil Re. 93% Global Reinsurance 7% Markel International 24


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    Our Reinsurance segment reported gross premium volume of $1.1 billion, earned premiums of $928.6 million and an underwriting loss of $118.3 million in 2018. REINSURANCE SEGMENT 2018 G R O S S P R E M I U M V O L U M E ($1.1 BILLION) 43% 33% Casualty Property Specialty 24% Product offerings within the Reinsurance segment fall within the following major product groupings: • Casualty • Property • Specialty Our casualty treaty reinsurance programs are written on a quota share and excess of loss basis and include general liability, professional liability, workers’ compensation, medical malpractice, environmental impairment liability and auto liability. General liability reinsurance includes umbrella and excess casualty products that are written worldwide. Our professional liability reinsurance programs are offered worldwide and consist of directors and officers liability, including publicly traded, private, and non-profit companies in both commercial and financial institution arenas; lawyers errors and omissions for small, medium and large-sized law firms; accountants errors and omissions for small and medium-sized firms; technology errors and omissions and cyber liability focusing on network security and privacy exposures. Auto reinsurance treaty products include commercial and non-standard personal auto exposures predominantly in the U.S. Our workers’ compensation business includes standard and catastrophe-exposed workers’ compensation business. Medical malpractice reinsurance products are offered in the United States and include coverage for physician, surgeon, hospital and long term care medical malpractice writers. Environmental treaty reinsurance provides coverage for pollution legal liability, contractors pollution and professional liability exposures on both a nationwide and regional basis within the U.S. Property treaty products are offered on an excess of loss and quota share basis for catastrophe, per risk and retrocessional exposures worldwide. Our catastrophe exposures are generally written on an excess of loss basis and target both personal and commercial lines of business providing coverage for losses from natural disasters, including hurricanes, wind storms and earthquakes. We also reinsure individual property risks such as buildings, structures, equipment and contents and provide coverage for both personal lines and commercial property exposures. Our retrocessional products provide coverage for all types of underlying exposures and geographic zones. A significant portion of the property treaty business covers U.S. exposures, with the remainder coming from international property exposures. Our property products are exposed to windstorm losses that, based on the seasonal nature of those events, are more likely to occur in the third and fourth quarters of the year. 25


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) Specialty treaty reinsurance products offered in the Reinsurance segment include structured and whole turnover credit, political risk, mortgage and contract and commercial surety reinsurance programs covering worldwide exposures, public entity reinsurance products, aviation, whole account, accident and health coverage, marine and agriculture reinsurance products. Our mortgage products offer coverage for private mortgage insurers in the U.S., Australia and Europe. Our public entity reinsurance products offer customized programs for government risk pools, including counties, municipalities, schools, public housing authorities and special districts (e.g. water, sewer, parks) located in the U.S. Types of coverage for public entities include general liability, environmental impairment liability, cyber and errors and omissions. Our aviation business includes commercial airline hull and liability coverage as well as general aviation for risks worldwide. Our accident and health products cover personal accident, life, medical and workers’ compensation coverage, predominately on a per-event basis. Marine reinsurance products include offshore and onshore marine and energy risks on a worldwide basis, including hull, cargo and liability. Agriculture reinsurance covers multi-peril crop insurance, hail and related exposures, for risks located in the U.S. and Canada. Ceded Reinsurance Within our underwriting operations, we purchase reinsurance and retrocessional reinsurance to manage our net retention on individual risks and overall exposure to losses, while providing us with the ability to offer policies with sufficient limits to meet policyholder needs. See “Program Services” section below for an overview of ceded reinsurance within our program services business, which is managed separately from our underwriting operations. In reinsurance and retrocession transactions, an insurance or reinsurance company transfers, or cedes, all or part of its exposure in return for a portion of the premium. We purchase catastrophe reinsurance coverage for our catastrophe-exposed policies to ensure that our net retained catastrophe risk is within our corporate tolerances. Net retention of gross premium volume in our underwriting segments was 83% in 2018 and 84% in 2017. We do not purchase or sell finite reinsurance products or use other structures that would have the effect of discounting loss reserves. Our ceded reinsurance and retrocessional contracts do not legally discharge us from our primary liability for the full amount of the policies, and we will be required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. We attempt to minimize credit exposure to reinsurers through adherence to internal ceded reinsurance guidelines. We manage our exposures so that no exposure to any one reinsurer is material to our ongoing business. To participate in our reinsurance program, prospective companies generally must: (i) maintain an A.M. Best Company (Best) or Standard & Poor’s (S&P) rating of “A” (excellent) or better; (ii) maintain minimum capital and surplus of $500 million and (iii) provide collateral for recoverables in excess of an individually established amount. In addition, certain foreign reinsurers for our U.S. insurance operations must provide collateral equal to 100% of recoverables, with the exception of reinsurers who have been granted certified or authorized status by an insurance company’s state of domicile. Our credit exposure to Lloyd’s syndicates is managed through individual and aggregate exposure thresholds. When appropriate, we pursue reinsurance commutations that involve the termination of ceded reinsurance and retrocessional contracts. Our commutation strategy related to ceded reinsurance and retrocessional contracts is to reduce credit exposure and eliminate administrative expenses associated with the run-off of ceded reinsurance placed with certain reinsurers. The following table displays balances recoverable from our ten largest reinsurers by group from our underwriting operations at December 31, 2018. The contractual obligations under reinsurance and retrocessional contracts are typically with individual subsidiaries of the group or syndicates at Lloyd’s and are not typically guaranteed by other group members or syndicates at Lloyd’s. Reinsurance recoverable balances are shown before consideration of balances owed to reinsurers and any potential rights of offset, any collateral held by us and allowances for bad debts. These ten reinsurance groups represent approximately 61% of our $2.7 billion reinsurance recoverables balance attributed to our underwriting operations, before considering allowances for bad debts. 26


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    Reinsurance Group A.M. Best Rating Reinsurance Recoverable (dollars in thousands) Fairfax Financial Group A $ 251,692 AXIS Capital Holdings Limited A+ 195,608 Munich Re Group A+ 193,690 Lloyd’s of London A 183,033 RenaissanceRe Holdings Ltd. A+ 159,469 Alleghany Corporation A+ 143,913 EXOR S.p.A A 141,452 Liberty Mutual Holding Company A 133,648 Swiss Re Group A+ 127,578 Everest Re Group A+ 107,353 Reinsurance recoverables for ten largest reinsurers 1,637,436 Total reinsurance recoverables $ 2,691,888 Reinsurance and retrocessional treaties are generally purchased on an annual or biennial basis and are subject to renegotiations at renewal. In most circumstances, the reinsurer remains responsible for all business produced before termination. Treaties typically contain provisions concerning ceding commissions, required reports to reinsurers, responsibility for taxes, arbitration in the event of a dispute and provisions that allow us to demand that a reinsurer post letters of credit or assets as security if a reinsurer becomes an unauthorized reinsurer under applicable regulations or if its rating falls below an acceptable level. See note 15 of the notes to consolidated financial statements and Management’s Discussion & Analysis of Financial Condition and Results of Operations for additional information about our ceded reinsurance programs and exposures. Investments 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. The majority of our investable assets come from premiums paid by policyholders. Policyholder funds are invested predominantly in high-quality government, municipal and corporate bonds that generally match the duration of our loss reserves. The balance, comprised of shareholder funds, is available to be invested in equity securities, which over the long run, have produced higher returns relative to fixed maturity investments. When purchasing equity securities, we seek to invest in profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline, at reasonable prices. We intend to hold these investments over the long term. Substantially all of our investment portfolio is managed by company employees. We evaluate our investment performance by analyzing net investment income and net investment gains (losses) as well as our taxable equivalent total investment return, which is a non-GAAP financial measure. Taxable equivalent total investment return includes items that impact net income, such as coupon interest on fixed maturities, dividends on equity securities and investment gains or losses, as well as changes in unrealized gains or losses on available-for-sale securities, which do not impact net income. Certain items that are included in net investment income have been excluded from the calculation of taxable equivalent total investment return, such as amortization and accretion of premiums and discounts on our fixed maturity portfolio, to provide a comparable basis for measuring our investment return against industry investment returns. The calculation of taxable equivalent total investment return also includes the current tax benefit associated with income on certain investments that is either taxed at a lower rate than the statutory income tax rate or is not fully included in U.S. taxable income. 27


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) 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 do not lower the quality of our investment portfolio in order to enhance or maintain yields. We focus on long-term total investment return, understanding that the level of investment gains or losses and unrealized gains or losses on available-for-sale securities may vary from one period to the next. The following table summarizes our investment performance. Years Ended December 31, (dollars in thousands) 2018 2017 2016 2015 2014 Net investment income $ 434,215%)) $ 405,709%) $ 373,230% $ 353,213%) $ 363,230% Net investment gains (losses) (1) $ (437,596)%) $ (5,303)% $ 65,147% $ 106,480%) $ 46,000% Change in net unrealized investment gains on available-for-sale securities $ (299,446)%) $ 1,125,440%) $ 342,111% $ (457,584)% $ 981,035% Investment yield (2) 2.7%)) 2.6%) 2.4% 2.3%) 2.4% (1) Effective January 1, 2018, we adopted ASU No. 2016-01. As a result, equity securities are no longer classified as available-for-sale with unrealized gains and losses recognized in other comprehensive income; rather, all changes in the fair value of equity securities are now recognized in net income. Prior periods have not been restated to conform to the current presentation. See note 1 of the notes to consolidated financial statements. (2) Investment yield reflects net investment income as a percentage of monthly average invested assets at amortized cost. We believe our investment performance is best analyzed from the review of taxable equivalent total investment return over several years. The following table presents taxable equivalent total investment return before and after the effects of foreign currency movements. A N N U A L T A X A B L E E Q U I VA L E N T T O TA L I N V E S T M E N T R E T U R N S Years Ended December 31, Five-Year Ten-Year Annual Annual 2018 2017 2016 2015 2014 Return Return Equities (3.5)% 25.5% 13.5% (2.5)% 18.6% 9.7% 14.9% Fixed maturities (1) 1.3% 3.4% 2.4% 1.6% 6.5% 3.0% 4.3% Total portfolio, before foreign currency effect (0.7)% 9.2% 5.0% 0.5% 8.9% 4.5% 6.4% Total portfolio (1.0)% 10.2% 4.4% (0.7)% 7.4% 3.9% 6.3% Invested assets, end of year (in millions) $19,238)% $20,570 $19,059 $18,181 $18,638 (1) Includes short-term investments, cash and cash equivalents and restricted cash and cash equivalents. 28


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    The following table reconciles investment yield to taxable equivalent total investment return. Years Ended December 31, 2018 2017 2016 2015 2014 Investment yield (1) 2.7% 2.6% 2.4% 2.3% 2.4% Adjustment of investment yield from amortized cost to fair value (0.6)% (0.5)% (0.4)% (0.4)% (0.4)% Net amortization of net premium on fixed maturities 0.4% 0.4% 0.4% 0.5% 0.6% Net investment gains (losses) and change in net unrealized investment gains on available-for-sale securities (3.4)% 5.9% 2.3% (2.0)% 5.9% Taxable equivalent effect for interest and dividends (2) 0.1% 0.4% 0.4% 0.4% 0.4% Other (3) (0.2)% 1.4% (0.7)% (1.5)% (1.5)% Taxable equivalent total investment return (1.0)% 10.2% 4.4% (0.7)% 7.4% (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. We monitor our investment portfolio to ensure that credit risk does not exceed prudent levels. S&P and Moody’s provide corporate and municipal debt ratings based on their assessments of the credit quality of an obligor with respect to a specific obligation. S&P’s ratings range from “AAA” (capacity to pay interest and repay principal is extremely strong) to “D” (debt is in payment default). Securities with ratings of “BBB” or higher are referred to as investment grade securities. Debt rated “BB” and below is regarded by S&P as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. Moody’s ratings range from “Aaa” to “C” with ratings of “Baa” or higher considered investment grade. 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 maturities that are unrated or rated below investment grade. At December 31, 2018, 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 maturities based on our assessment of the credit quality of the underlying assets without regard to insurance. 29


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) The following chart presents our fixed maturity portfolio, at estimated fair value, by rating category at December 31, 2018. 2018 C R E D I T Q UA L I T Y OF F I X E D M AT U R I T Y P O RT F O L I O ($10.0 BILLION) 93% AAA/AA A 5% 1% 1% BBB Other See “Market Risk Disclosures” in Management’s Discussion & Analysis of Financial Condition and Results of Operations for additional information about investments. Markel Ventures Through our wholly owned subsidiary Markel Ventures, Inc. (Markel Ventures), we own interests in various businesses that operate outside of the specialty insurance marketplace. These businesses are viewed by management as separate and distinct from our insurance operations. Local management teams oversee the day-to-day operations of these companies, while strategic decisions, including investment and capital allocation decisions, are made by our senior management team. Our strategy in making these investments is similar to our strategy for purchasing equity securities. We seek to invest in profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline, at reasonable prices. We intend to own the businesses acquired for a long period of time. We monitor and report our Markel Ventures operations in our Markel Ventures segment. This segment includes a diverse portfolio of businesses from different industries that offer various types of products and services to businesses and consumers. See note 20 of the notes to consolidated financial statements for additional segment reporting disclosures. In 2018, our Markel Ventures operations reported revenues of $1.9 billion, net income to shareholders of $35.3 million, operating income of $77.5 million and earnings before interest, income taxes, depreciation and amortization (EBITDA) of $169.9 million. We use Markel Ventures EBITDA as an operating performance measure in conjunction with revenues, operating income and net income. See “Markel Ventures” in Management’s Discussion & Analysis of Financial Condition and Results of Operations for more information on EBITDA. 30


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    MARKEL VENTURES SEGMENT 2018 O P E R AT I N G R E V E N U E S ($1.9 BILLION) 78% Products Services 22% Our Markel Ventures products include: • equipment used in baking systems and food processing; • portable dredges; • over-the-road car haulers and equipment; • laminated oak and composite wood flooring used in the trucking industry; • dormitory furniture, wall systems, medical casework and marine panels; • storage and transportation equipment for specialty gas; • ornamental plants; • fashion handbags; and • residential homes. Our Markel Ventures services include: • leasing and management of manufactured housing communities; • behavioral healthcare; • concierge health programs; • retail intelligence; and • management and technology consulting. The majority of our businesses in this segment are headquartered across the United States, with subsidiaries of certain businesses located outside of the United States. This segment offers a wide range of products and services across many markets and encounters a variety of competitors that vary by product line, end market and geographic area. Each business within the segment has several main competitors and numerous smaller ones in most of their end markets and geographic areas. Examples of the end markets are as follows: • U.S. consumer markets for residential construction, housing and healthcare; • U.S. and international markets for food service, food production, automobile transporters, governments, miners, marine operators, truck trailers and inter-modal containers and industrial and specialty gas; • U.S. and international retail markets; and • U.S. based businesses in the banking, financial services, energy, utilities, governments, retail and consumer goods, healthcare, travel, and hospitality industries. 31


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) Investment Management Our investment management operations are comprised of our Markel CATCo operations, and effective November 2018, the operations of Nephila Holdings Ltd. Markel CATCo Our Markel CATCo operations are conducted through Markel CATCo Investment Management Ltd. (MCIM). MCIM is an insurance-linked securities investment fund manager headquartered in Bermuda 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. While the voting shares in Markel CATCo Re and Markel CATCo Funds are held by MCIM, the underwriting results of Markel CATCo Re are attributed to Markel CATCo Funds through the issuance of nonvoting preference shares. The performance of the Markel CATCo Funds is attributed to its nonvoting preference shares, which are held by third party investors, including CROF, and by us. As of December 31, 2018, MCIM’s net assets under management were $3.4 billion, a portion of which is attributable to our investments in the Markel CATCo Funds. As of December 31, 2018, the fair value of our investments in the Markel CATCo Funds and CROF totaled $58.2 million, which is included in equity securities on our consolidated balance sheet. MCIM receives management fees for its investment management services based on the net asset value of the accounts managed, as well as incentive fees based on the annual performance of the Markel CATCo Funds. Total revenues attributed to MCIM for the year ended December 31, 2018 were $66.2 million, which are included in services and other revenues in our consolidated statement of income and comprehensive income. See note 16 and note 17 of the notes to consolidated financial statements for further details regarding our Markel CATCo operations. For further details regarding recent developments within our Markel CATCo operations, see note 18 of the notes to consolidated financial statements. Nephila In November 2018, we completed the acquisition of all of the outstanding shares of Nephila Holdings Ltd. (together with its subsidiaries, Nephila). Through its subsidiaries, 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 acts as an insurance manager to certain Bermuda Class 3 and 3A reinsurance companies and as both a service company coverholder and agent with binding authority for Lloyd’s Syndicate 2357 (Syndicate 2357) (collectively, the Nephila Reinsurers). The results of the Nephila Reinsurers are attributed to the Nephila Funds primarily through derivative transactions between these entities. Neither the Nephila Funds nor the Nephila Reinsurers are subsidiaries of Markel Corporation, and as such, these entities are not included in our consolidated financial statements. As of December 31, 2018, Nephila’s net assets under management were $11.6 billion. Nephila receives management fees for its investment and insurance management services based on the net asset value of the accounts managed, and for certain funds, incentive fees based on the annual performance of the funds it manages. Total revenues attributed to Nephila from the acquisition date to December 31, 2018 were $25.3 million, which are included in 32 services and other revenues in our consolidated statements of income and other comprehensive income. See note 17 of the notes to consolidated financial statements for further details regarding our Nephila operations.


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    Program Services In November 2017, we completed the acquisition of State National. Following the acquisition, our operations expanded to include a program services business, which is provided through our State National division. 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. These reinsurers are domestic and foreign insurers and institutional risk investors (capacity providers) that want to access specific lines of U.S. property and casualty insurance business. Fronting refers to business in which we write insurance on behalf of a capacity provider and then cede the risk under these policies to the capacity provider in exchange for program services fees. 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. Program services business written through our State National division is separately managed from our underwriting divisions, which write similar products, in order to protect our program services customers and eliminate internal competition for this business. Our program services business is primarily written through SNIC, NSIC and City National Insurance Company (CNIC), all of which are domiciled in Texas, and United Specialty Insurance Company (USIC) and Independent Specialty Insurance Company (ISIC), which are domiciled in Delaware. SNIC, NSIC, CNIC and ISIC are licensed to write property and casualty insurance in all 50 states and the District of Columbia. USIC is eligible to write business in all 50 states, the District of Columbia and the U.S. Virgin Islands. Many of our programs are arranged with the assistance of brokers that are seeking to provide customized insurance solutions for specialty insurance business that requires an A.M. Best “A” rated carrier. Our specialized business model relies on our producers or capacity providers to provide the infrastructure associated with providing policy administration, claims handling, cash handling, underwriting, or other traditional insurance company services. We believe there are relatively few active competitors in the fronting business. We compete primarily on the basis of price, customer service, geographic coverage, financial strength ratings, licenses, reputation, business model and experience. Total revenues attributed to our program services business for the year ended December 31, 2018 were $95.7 million. Our program services business generated $2.1 billion of gross written premium volume for the year ended December 31, 2018. In our program services business, we generally enter into a 100% quota share reinsurance agreement whereby we cede to the capacity provider substantially all of our gross liability under all policies issued by and on behalf of us by the producer. The capacity provider is generally entitled to 100% of the net premiums received on policies reinsured, less the ceding fee to us, the commission paid to the producer and premium taxes on the policies. In connection with writing this business, we also enter into agency agreements with both the producer and the capacity provider whereby the producer and capacity provider are generally required to deal directly with each other to develop business structures and terms to implement and maintain the ongoing contractual relationship. In a number of cases, the producer and capacity provider for a program are part of the same organization or are otherwise affiliated. As a result of our contract design, substantially all of the underwriting risk and operational risk inherent in the arrangement is borne by the capacity provider. The capacity provider assumes and is liable for substantially all losses incurred in connection with the risks under the reinsurance agreement, including judgments and settlements. Our contracts with capacity providers do not legally discharge us from our primary liability for the full amount of the policies, and we will be required to pay the loss and bear collection risk if the capacity provider fails to meet its obligations under the reinsurance agreement. As a result, we remain exposed to the credit risk of capacity providers, or the risk that one of our capacity providers becomes insolvent or otherwise unable or unwilling to pay policyholder claims. We mitigate this credit risk generally by either selecting well capitalized, highly rated authorized capacity providers or requiring that the capacity provider post substantial collateral to secure the reinsured risks. 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, including loss ratio caps, aggregate reinsurance limits or exclusion of the credit risk of producers. Under certain programs, including one program with Syndicate 2357, an unconsolidated affiliate, we also 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 17 of the notes to consolidated financial statements for further details regarding our program with Syndicate 2357. 33


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) The following table displays balances recoverable from our ten largest reinsurers by group for our program services business, based on gross reinsurance recoverable balances at December 31, 2018. The contractual obligations under reinsurance and retrocessional contracts are typically with individual subsidiaries of the group or syndicates at Lloyd’s and are not typically guaranteed by other group members or syndicates at Lloyd’s. Reinsurance recoverable balances are shown before consideration of balances owed to reinsurers and any potential rights of offset, and allowances for bad debts. These ten reinsurance groups represent 75% of our $2.5 billion reinsurance recoverables balance attributed to our program services business, before considering allowances for bad debts. Gross Net A.M. Best Reinsurance Collateral Reinsurance Reinsurance Group Rating Recoverable Applied (1) Recoverable (dollars in thousands) Fosun International Holdings Ltd. A- $ 603,140 $ 603,140 $ — Knight Insurance Company Ltd. B++ 406,783 406,783 — Lloyd’s of London(2) A 370,874 — 370,874 James River Group Holdings, Ltd. A 170,808 170,808 — Tokio Marine Holdings, Inc. A+ 123,664 815 122,849 Greenlight Capital Re, Ltd. A- 54,892 54,892 — SOMPO Holdings, Inc. A+ 47,204 — 47,204 Enstar Group Limited A- 45,586 28,022 17,564 MS&AD Insurance Group Holdings, Inc. A 39,472 39,472 — Allianz SE A+ 37,688 — 37,688 Reinsurance recoverables for ten largest gross reinsurers 1,900,111 1,303,932 596,179 Total reinsurance recoverables $ 2,535,392 $ 1,751,098 $ 784,294 (1) Collateral is applied to each reinsurer, up to the amount of the gross recoverable, to determine the net recoverable for each reinsurer presented in this table. As of December 31, 2018, we were the beneficiary of letters of credit, trust accounts and funds withheld in the aggregate amount of $1.6 billion collateralizing reinsurance recoverable balances from our top 10 reinsurers and $2.2 billion for our total reinsurance recoverables balance. (2) Net reinsurance recoverable from Lloyd’s of London includes $179.8 million attributable to Syndicate 2357, an unconsolidated affiliate. Shareholder Value Our financial goals are to earn consistent underwriting and operating profits and superior investment returns to build shareholder value. One of the ways we measure financial success is by our ability to grow book value per share at a high rate of return over a long period of time. To mitigate the effects of short-term volatility, we generally use five-year time periods to measure ourselves. Growth in book value per share is an important measure of our success because it includes all underwriting, operating and investing results. For the year ended December 31, 2018, book value per share decreased 4% primarily due to a $233.5 million decrease in net unrealized gains on investments, net of taxes, and net loss to shareholders of $128.2 million. For the year ended December 31, 2017, book value per share increased 13% primarily due to a $763.0 million increase in net unrealized gains on investments, net of taxes, and net income to shareholders of $395.3 million. Over the past five years, we have grown book value per share at a compound annual rate of 7% to $653.85 per share. As we continue to expand our operations beyond underwriting and investing, we recognize that book value per share does not capture all of the economic value in our business, as a growing portion of our operations are not recorded at fair value or otherwise captured in book value. As a result, we also measure our financial success through the growth in the market price of a share of our stock, or total shareholder return, over a long period of time. For the year ended December 31, 2018, our share price decreased 9%. Over the past five years, our share price increased at a compound annual rate of 12%. 34


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    The following graph presents book value per share and share price for the past five years as of December 31. $1,200 1,139.13 Book Value Per Share Share Price $1,000 904.50 1,038.05 883.35 $800 682.84 $600 $400 683.55 653.85 561.23 606.30 543.96 $200 $0 2014 2015 2016 2017 2018 Regulatory Environment Our insurance subsidiaries are subject to regulation and supervision by the insurance regulatory authorities of the various jurisdictions in which they conduct business. This regulation is intended for the benefit of policyholders rather than shareholders or holders of debt securities. The jurisdictions of our principal insurance subsidiaries are the United States, the United Kingdom, Germany and Bermuda. Our Markel Ventures, investment fund management and other businesses also are subject to regulation and supervision by regulatory authorities of the various jurisdictions in which they conduct business. United States Insurance Regulation Overview. Our U.S. insurance subsidiaries are subject to varying degrees of regulation and supervision in the jurisdictions in which they do business. Each state has its own regulatory authority for insurance that is generally responsible for the direct regulation of the business of insurance conducted in that state. In addition, the National Association of Insurance Commissioners (NAIC), comprised of the insurance commissioners of each U.S. jurisdiction, develops or amends model statutes and regulations that in turn most states adopt. While the U.S. federal government and its regulatory agencies generally do not directly regulate the business of insurance, there have been recent federal initiatives that impact the business of insurance. State Insurance Regulation. In the United States, authority for the regulation, supervision and administration of the business of insurance in each state is generally delegated to a state commissioner heading a regulatory body responsible for the business of insurance. Through this authority, state regulatory authorities have broad regulatory, supervisory and administrative powers relating to solvency standards; the licensing of insurers and their agents; the approval of forms and policies used; the nature of, and limitations on, insurers’ investments; the form and content of annual statements and other reports on the financial condition of insurers; and the establishment of loss reserves. Our U.S. insurance subsidiaries that operate on an admitted basis are typically subject to regulatory rate and form review, while our U.S. excess and surplus lines insurance subsidiaries generally operate free of rate and form regulation. Holding Company Statutes. In addition to regulatory supervision of our domestic insurance subsidiaries, we are subject to state statutes governing insurance holding company systems. Typically, such statutes require that we periodically file information with the appropriate state insurance commissioner, including information concerning our capital structure, ownership, financial condition, material transactions with affiliates and general business operations. In addition, these statutes also require approval of changes in control of an insurer or an insurance holding company. Generally, control for these purposes is defined as ownership or voting power of 10% or more of a company’s voting shares. Additional requirements include group-level reporting, submission of an annual enterprise risk report by a regulated insurance company’s ultimate controlling person and information 35 regarding an insurer’s non-insurer affiliates.


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) Risk Based Capital Requirements. The NAIC uses a risk based capital formula that is designed to measure the capital of an insurer taking into account the company’s investments and products. These requirements provide a formula which, for property and casualty insurance companies, establishes capital thresholds for four categories of risk: asset risk, insurance risk, interest rate risk and business risk. At December 31, 2018, the capital and surplus of each of our U.S. insurance subsidiaries was above the minimum regulatory thresholds. Own Risk and Solvency Assessment. We must submit an Own Risk and Solvency Assessment Summary Report (ORSA) annually to the Illinois Department of Insurance, our lead state insurance regulator. The ORSA is a confidential internal assessment of the material and relevant risks associated with an insurer’s current business plan and the sufficiency of capital resources to support those risks. Corporate Governance Annual Disclosure. We must submit a Corporate Governance Annual Disclosure (CGAD) annually to California, Delaware, Nebraska and Virginia. The CGAD has not been adopted by Illinois, our lead state insurance regulator. The CGAD describes the insurers or insurance group’s corporate governance framework and structure. Excess and Surplus Lines. The regulation of our U.S. insurance subsidiaries’ excess and surplus lines insurance business differs significantly from the regulation of our admitted business. Our surplus lines subsidiaries are subject to the surplus lines regulation and reporting requirements of the jurisdictions in which they are eligible to write surplus lines insurance. Although the surplus lines business is generally less regulated than admitted business, regulations apply to surplus lines placements under the laws of every state. Dividends. The laws of the domicile states of our U.S. insurance subsidiaries govern the amount of dividends that may be paid to our holding company, Markel Corporation. Generally, statutes in the domicile states of our insurance subsidiaries require prior approval for payment of extraordinary, as opposed to ordinary, dividends. At December 31, 2018, our U.S. insurance subsidiaries could pay up to $466.0 million during the following 12 months under the ordinary dividend regulations. Trade Practices. State insurance laws and regulations include numerous provisions governing trade practices and the marketplace activities of insurers, including provisions governing marketing and sales practices, data security, policyholder services, claims management, anti-fraud controls and complaint handling. State regulatory authorities generally enforce these provisions through periodic market conduct examinations. Investment Regulation. Investments by our domestic insurance companies must comply with applicable laws and regulations that prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate and certain other investments, subject to specified limits and certain other qualifications. The Terrorism Risk Insurance Act. The Terrorism Risk Insurance Act of 2002, as amended (TRIA), has established a federal program that provides for a system of shared public and private compensation for certain insured losses resulting from acts of terrorism. The threshold for the program to go into effect (the triggering event) was $160 million in losses for 2018 and increases to $180 million for 2019 and $200 million for 2020. Starting in January 2016, the amount that insurers must cover as a whole through co-payments and deductibles, which is known as the aggregate retention amount, was established at $27.5 billion and rises by $2 billion a year up to $37.5 billion. TRIA is applicable to almost all commercial lines of property and casualty insurance but excludes commercial auto, burglary and theft, surety, professional liability and farm owners’ multi-peril insurance. Insurers with direct commercial property and casualty insurance exposure in the United States are required to participate in the program and make available coverage for certified acts of terrorism. Federal participation will be triggered under TRIA when the Secretary of Treasury certifies an act of terrorism. The program is scheduled to expire in 2020. Cybersecurity. The New York Department of Financial Services (NYDFS) has issued Cybersecurity Requirements for Financial Services Companies that require certain of our insurance operations to, among other things, establish and maintain a cybersecurity policy designed to protect consumers and ensure the safety and soundness of New York State’s financial services industry. The regulation went into effect on March 1, 2017 and has transition periods ranging from 180 days to two years. In addition, the NAIC adopted the Insurance Data Security Model Law in October 2017. The purpose of the model law is to 36


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    establish standards for data security and for the investigation and notification of insurance commissioners of cybersecurity events involving unauthorized access to, or the misuse of, certain nonpublic information. South Carolina adopted the model law effective January 1, 2019. It is not clear whether other state legislatures will begin adopting the model law, or in what form or when they will do so. Consumer Privacy. California amended its existing Consumer Privacy Act of 2018 (Act) on September 23, 2018 to commence on January 1, 2020. The Act will require a business collecting personal information about a consumer to disclose the consumer’s right to delete personal information in a form that is reasonably accessible to consumers and in accordance with a specified process. However, the Act is not applicable to a business collecting personal information pursuant to Federal law including the Gramm Leach Bliley Act. Federal Regulation. The federal government and its regulatory agencies generally do not directly regulate the business of insurance. However, two federal government bodies, the Federal Insurance Office (FIO) and the Financial Stability Oversight Council (FSOC), each created under The Dodd Frank Wall Street Reform and Consumer Protection Act, may impact the regulation of insurance. Although the FIO is prohibited from directly regulating the business of insurance, it has authority to represent the United States in international insurance matters and has limited powers to preempt certain types of state insurance laws. The FIO also can recommend to the FSOC that it designate an insurer as an entity posing risks to the United States financial stability in the event of the insurer’s material financial distress or failure. We have not been so designated. United Kingdom Insurance Regulation Under the Financial Services and Markets Act 2000 (FSMA), it is unlawful to carry on insurance business in the United Kingdom without permission to do so from the relevant regulators, currently the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). An independent Financial Policy Committee at the Bank of England supervises the financial services sector at a macro level, responding to sectoral issues that could threaten economic and financial stability. MIICL, MSM, our Lloyd’s managing agent, and E.C. Insurance Company Limited (ECIC) are authorized by the PRA and regulated by both the PRA and the FCA. In addition, our United Kingdom insurance operations include FCA-authorized insurance intermediaries that produce insurance for MIICL, Syndicate 3000 and third party insurance carriers. The PRA is a subsidiary of the Bank of England and is responsible for the prudential regulation and supervision of banks, building societies, credit unions, major investment firms and insurers, including the Society of Lloyd’s and managing agents that participate in the Lloyd’s market. The two primary statutory objectives of the PRA are to promote the safety and soundness of the firms it regulates and, specific to insurers, to contribute to securing an appropriate degree of protection for those who are, or may become, policyholders. A secondary objective of the PRA is to facilitate effective competition. The FCA, which is separate from the Bank of England, is accountable to HM Treasury and ultimately the United Kingdom Parliament. The FCA supervises the day-to-day conduct of insurance firms and other authorized firms operating in the U.K., including those participating in the Lloyd’s market and U.K. insurance intermediaries. The overarching strategic objective of the FCA is to ensure that the relevant markets function well. The FCA also has three operational objectives: securing an appropriate degree of protection for consumers, protecting and enhancing the integrity of the U.K. financial system, and promoting effective competition in the interests of consumers. The PRA assesses the insurance firms it regulates on a continuous cycle, requiring firms to submit sufficient data of appropriate quality to support their judgments about key risks, through meetings of directors, officers and other employees with PRA supervisors. The PRA also oversees compliance with minimum solvency and capital requirements under the Solvency II Directive (Solvency II) and imposes dividend restrictions. Both the PRA and the FCA oversee compliance with risk assessment reviews, restrictions governing the appointment of key officers, restrictions governing controlling ownership interests and various other requirements. In addition, both the PRA and FCA have arrangements with Lloyd’s for cooperation on supervision and enforcement of the Lloyd’s market. 37


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) MSM is required to satisfy the solvency requirements of Lloyd’s. In addition, our U.K. subsidiaries must comply with the United Kingdom Companies Act of 2006, which provides that dividends may only be paid out of profits available for that purpose. At least annually, MIICL and ECIC each submit an ORSA to the PRA and MSM submits an ORSA to Lloyd’s. The ORSA is a confidential internal assessment of the material risks associated with the current business plans for MIICL, MSM and ECIC and the sufficiency of capital resources in place to support those risks. In addition, to comply with Solvency II regulations, MIICL and ECIC must publish an annual solvency and financial condition report (SFCR). On June 23, 2016, the U.K. voted to exit the European Union (E.U.) (Brexit). For discussion regarding Brexit, see “Brexit Developments” under Management’s Discussion & Analysis of Financial Condition and Results of Operations and the Risk Factor titled “The exit of the United Kingdom from the European Union could have a material adverse effect on us.” Bermuda Insurance Regulation The insurance and reinsurance industry in Bermuda is regulated by the Bermuda Monetary Authority (BMA). Markel Bermuda is licensed by the BMA to conduct insurance business as a Class 4 general business and Class C long-term business insurer under the Insurance Act 1978 of Bermuda and its related regulations (Bermuda Insurance Act). The term insurance business also includes reinsurance business. The Bermuda Insurance Act imposes on Markel Bermuda solvency and liquidity standards, restrictions on the reduction of statutory capital and auditing and reporting requirements. The Bermuda Insurance Act grants to the BMA powers to cancel insurance licenses, supervise, investigate and intervene in the affairs of Bermuda insurance and reinsurance companies and, in certain circumstances, share information with foreign regulators. Bermuda’s prudential framework for the supervision of insurance and reinsurance companies and groups is deemed to be fully equivalent to the regulatory standards applied to European insurance and reinsurance companies and groups under Solvency II. As a result, Bermuda is considered by European member states as applying an equivalent statutory insurance regime in accordance with the requirements of Solvency II with respect to reinsurance, group solvency calculations and group supervision. The equivalence recognition applies to Bermuda’s commercial Class 3A, Class 3B, Class 4, Class C, Class D and Class E insurers and reinsurers and groups. As a Class 4 general business and Class C long-term business insurer, Markel Bermuda is required to prepare and file with the BMA statutory financial statements and additional audited GAAP financial statements that the BMA publishes with a copy of the declaration of compliance required to be filed under the Bermuda Insurance Act and the auditor’s report. Markel Bermuda is subject to enhanced capital requirements (ECR) in addition to the minimum solvency and liquidity requirements prescribed by the Bermuda Insurance Act for all insurers. The ECR are determined by reference to a risk-based capital model that determines a control threshold for statutory capital and surplus by taking into account the risk characteristics of different aspects of the insurer’s business. At December 31, 2018, Markel Bermuda satisfied both the ECR and the minimum solvency and liquidity requirements. Markel Bermuda also must submit annually to the BMA a Commercial Insurer Solvency Self-Assessment (CISSA) and a Financial Condition Report (FCR). The CISSA is a confidential internal assessment of the material and relevant risks associated with an insurer’s current business plan and the sufficiency of capital resources to support those risks. The FCR is an assessment of the insurer’s business and performance, governance structure, risk profile, solvency valuation and capital management, and is available to the public upon written request. Under the Bermuda Insurance Act, Markel Bermuda is prohibited from paying or declaring dividends during a fiscal year if it is in breach of its solvency margin or minimum liquidity ratio or if the declaration or payment of the dividend would cause a breach of those requirements. In the case of a breach by Markel Bermuda of its applicable ECR, it will not declare or pay dividends until the failure is rectified. If an insurer fails to meet its solvency margin or minimum liquidity ratio on the last day of any financial year, it is prohibited from declaring or paying any dividends during the next financial year without the prior approval of the BMA. Further, Markel Bermuda is prohibited from declaring or paying in any financial year dividends of more than 25% of its total statutory capital and surplus as set forth in its previous year’s statutory balance sheet unless at 38


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    least seven days before payment of those dividends it files with the BMA an affidavit stating that it will continue to meet its solvency margin and minimum liquidity ratio. Markel Bermuda must obtain the BMA’s prior approval for a reduction by 15% or more of the total statutory capital as set forth in its previous year’s financial statements. In addition, as a Class C long-term insurer, Markel Bermuda may not declare or pay a dividend to any person other than a policyholder unless the value of the assets in its long-term business fund, as certified by Markel Bermuda’s approved actuary, exceeds the liabilities of its long-term business. The amount of the dividend cannot exceed the aggregate of that excess and any other funds legally available for the payment of the dividend. At December 31, 2018, Markel Bermuda could pay up to $373.9 million in dividends during the following 12 months without making any additional filings with the BMA. Other Insurance Jurisdictions The European Union implemented Solvency II effective January 1, 2016. Solvency II replaces existing insurance directives and creates a pan-European, risk based solvency regime which affects all insurers and reinsurers throughout the E.U. The Solvency II regime is based on three pillars: financial requirements; governance and risk management requirements; and disclosure requirements. The European Commission has developed detailed rules that complement the high-level principles of Solvency II. At present the United States is not recognized as Solvency II “equivalent.” Therefore, MIICL has agreed on “other methods” with the PRA under the EU-US Covered Agreement which includes the provision to the PRA of certain specified information regarding Markel Corporation and its insurance companies. In addition, as a global provider of specialty insurance and reinsurance, our insurance subsidiaries must comply with various regulatory requirements in jurisdictions where they conduct business in addition to the jurisdictions in which they are domiciled. For example, MIICL and our Lloyd’s operations must comply with applicable Latin America regulatory requirements in connection with our Latin American reinsurance operations. In addition to the regulatory requirements imposed by the jurisdictions in which an insurer or reinsurer is licensed, a reinsurer’s business operations are affected by regulatory requirements governing credit for reinsurance in other jurisdictions in which its ceding companies are located. In general, a ceding company that obtains reinsurance from a reinsurer that is licensed, accredited or approved by the jurisdiction in which the ceding company files statutory financial statements is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the liability for unearned premiums and loss reserves and loss expense reserves ceded to the reinsurer. Many jurisdictions also permit ceding companies to take credit on their statutory financial statements for reinsurance obtained from unlicensed or non-admitted reinsurers if certain prescribed security arrangements are made. As an example, Markel Bermuda currently is not licensed, accredited or approved in every jurisdiction where its reinsurance customers are domiciled. As a result, Markel Bermuda may be required to provide a letter of credit or other security arrangement for its reinsurance customers domiciled in those jurisdictions. In most U.S. states Markel Bermuda has obtained approval of a trust arrangement that satisfies the credit for reinsurance requirements for Markel Bermuda’s customers domiciled in those states. The insurance and reinsurance industry in Brazil is regulated by the Conselho Nacional de Seguros Privados (CNSP) and supervised by the Superintendência de Seguros Privados (SUSEP) on behalf of the Ministry of Finance. Markel Brazil and Markel Brazil Re are each authorized by SUSEP as a local Brazilian insurance company and reinsurance company, respectively. Markel Brazil and Markel Brazil Re are required to submit monthly returns, audited annual returns and annual financial statements to SUSEP. On June 23, 2016, the U.K. voted to exit the European Union (Brexit). For discussion regarding Brexit, see “Brexit Developments” under Management’s Discussion & Analysis of Financial Condition and Results of Operations and the Risk Factor titled “The exit of the United Kingdom from the European Union could adversely affect us.” MISE is subject to both financial and non-financial supervision by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), which has licensed it to carry on insurance and reinsurance business in defined classes. MISE is required to submit quarterly and annual financial statements to BaFin. MISE also must regularly submit an ORSA, a regular supervisory report and a SFCR, as well as tax returns and additional financial disclosures. MISE also operates or has branch offices in other E.U. and EEA countries. MISE’s activities in each E.U. and EEA country are subject to regulatory supervision by the regulator in that country. 39


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) Global Supervisory College; Global Common Framework The global insurance regulatory framework now also includes supervisory colleges. A supervisory college is a forum of the regulators having jurisdictional authority over an insurance holding company’s worldwide insurance subsidiaries. The supervisory college meets with executive management to evaluate the insurance group on both a group-wide and legal-entity basis, particularly with respect to its financial data, business strategies, enterprise risk management and corporate governance. The Illinois Department of Insurance is our lead insurance regulator for purposes of conducting the supervisory college along with several other regulators. The NAIC and state insurance regulators, as well as regulators in countries where we have operations, are currently working with the International Association of Insurance Supervisors (IAIS) to develop a global common framework (ComFrame) for the supervision of internationally active insurance groups (IAIGs). If adopted, ComFrame would require the designation of a group-wide supervisor (regulator) for each IAIG and would impose a group capital requirement that would be applied to an IAIG in addition to the current legal entity capital requirements imposed by state insurance regulators. In response to ComFrame, the NAIC revised the model Insurance Holding Company System Regulatory Act to allow state insurance regulators in the U.S. to be designated as group-wide supervisors for U.S. based IAIGs. Additionally, the NAIC is developing a group capital standard that would be applied to U.S. based insurance groups. Other Regulation Markel Ventures. Our Markel Ventures businesses are subject to a wide variety of U.S. federal, state, and local laws and regulations, as well as foreign laws and regulations applicable to their non-U.S. operations. Specifically, these laws and regulations cover the following areas: safety, health, employment, the environment, U.S. and international trade, anti-corruption, data privacy and security, government contracts as well as other specific regulatory areas applicable to the companies’ operations. Solicitors Regulation Authority. Markel Law LLP (ML), a wholly owned subsidiary, is a full service commercial law firm with offices in Manchester and Croydon, England. ML employs more than 50 lawyers who provide legal services to small and medium-sized enterprises in the U.K. ML is authorized and regulated by the Solicitors Regulation Authority (SRA). The SRA is an independent regulatory body of the Law Society of England and Wales which regulates the conduct of solicitors and law firms to protect consumers and to support the rule of law and the administration of justice. The SRA works within a statutory framework for regulation provided by the Solicitors Act 1974, the Administration of Justice Act 1985 and, primarily, by the Legal Services Act 2007. Markel CATCo. MCIM is a Bermuda exempted company with limited liability. MCIM holds investment business and insurance management licenses, issued by the BMA under the Investment Business Act 2003 and the Insurance Act 1978, respectively, and is regulated by the BMA. MCIM is not registered as an investment company under the U.S. Investment Company Act of 1940, an investment adviser under the U.S. Investment Advisers Act of 1940 (as amended, the Advisers Act) or as a “commodity pool operator” or “commodity trading adviser” with the U.S. Commodity Futures Trading Commission (CFTC). However, MCIM is an “exempt reporting adviser” under the Advisers Act and as such is subject to regulation by the U.S. Securities and Exchange Commission (SEC) and certain requirements under the Advisers Act. In addition, as an exempt commodity pool operator, MCIM is subject to regulation by the CFTC and to certain requirements under the Commodity Exchange Act of 1936, as amended. MCIM serves as the investment manager for Markel CATCo Reinsurance Fund Ltd., a Bermuda exempted mutual fund company comprised of multiple segregated accounts with limited liability under the Companies Act 1981 of Bermuda that is registered as a segregated accounts company under the Bermuda Segregated Accounts Companies Act 2000. MCIM also serves as the investment manager for CROF, a limited liability closed-ended exempted mutual fund company of unlimited duration under the Companies Act 1981 of Bermuda. CROF’s shares are listed on a market operated by the London Stock Exchange and on the Bermuda Stock Exchange. 40


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    Markel CATCo Re is also registered as a segregated accounts company under the Bermuda Segregated Accounts Companies Act 2000 and is licensed as a Bermuda Class 3 reinsurance company subject to regulation and supervision of the BMA. Under the Bermuda Insurance Act, and related regulations and policies of the BMA, Markel CATCo Re is subject to, among other things, capital, surplus and liquidity requirements, solvency standards, restrictions on dividends and distributions and certain periodic examinations of the company and its financial condition. In addition, Markel CATCo Re must obtain prior approval of ownership and transfer of shares and maintain a principal office and appoint and maintain a principal representative in Bermuda. The BMA also requires that Markel CATCo Re contract for local services, such as corporate secretary, insurance manager and registered representative, at market rates. Nephila. Two of Nephila’s subsidiaries, Nephila Capital Ltd. (Nephila Capital), a Bermuda exempted company with limited liability, and Nephila Advisors LLC (Nephila Advisors), a Delaware limited liability company, are registered with the SEC as investment advisers under the Advisers Act. In addition, Nephila Capital is registered as a “commodity pool operator” and Nephila Advisors is registered as a “commodity trading advisor,” each with the U.S. CFTC. Nephila Capital is also a registered insurance manager under the Bermuda Insurance Act. Nephila serves as the investment manager to the Nephila Funds, which are subject to regulation in the U.S., U.K., Bermuda and Ireland. With the exception of Syndicate 2357, the Nephila Reinsurers are subject to regulation and supervision of the BMA. Under the Bermuda Insurance Act, and related regulations and policies of the BMA, each reinsurance company is subject to, among other things, capital, surplus and liquidity requirements, solvency standards, restrictions on dividends and distributions and certain periodic examinations of the company and its financial condition. In addition, each reinsurance company must obtain prior approval of ownership and transfer of shares and maintain a principal office and appoint and maintain a principal representative in Bermuda. The BMA also requires that each reinsurance company contract for local services, such as corporate secretary, insurance manager and registered representative, at market rates. Syndicate 2357 is subject to regulation and supervision of the PRA, FCA and Lloyd’s. Through its subsidiary, Nautical Management Ltd. (Nautical), Nephila acts as the service company coverholder for Syndicate 2357. Nautical is a Bermuda exempted company with limited liability that is licensed as an insurance agent and insurance manager under the Bermuda Insurance Act. A third party acts as the registered Lloyd’s managing agent of Syndicate 2357. The managing agent is authorized by the PRA and Lloyd’s and regulated by the PRA, the FCA and Lloyd’s. The managing agent is responsible for Syndicate 2357’s compliance with applicable PRA, FCA and Lloyd’s rules and requirements. However, the managing agent has delegated its authority for binding risks into Syndicate 2357 to a subsidiary of Nephila. 41


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) Ratings Financial stability and strength are important purchase considerations of policyholders, cedents and insurance agents and brokers. Because an insurance premium paid today purchases coverage for losses that might not be paid for many years, the financial viability of the insurer is of critical concern. Various independent rating agencies provide information and assign ratings to assist buyers in their search for financially sound insurers. Rating agencies periodically re-evaluate assigned ratings based upon changes in the insurer’s operating results, financial condition or other significant factors influencing the insurer’s business. Changes in assigned ratings could have an adverse impact on an insurer’s ability to write new business. Best assigns financial strength ratings (FSRs) to property and casualty insurance companies based on quantitative criteria such as profitability, leverage and liquidity, as well as qualitative assessments such as the spread of risk, the adequacy and soundness of ceded reinsurance, the quality and estimated market value of assets, the adequacy of loss reserves and surplus and the competence, experience and integrity of management. Best’s FSRs range from “A++” (superior) to “F” (in liquidation). Seventeen of our twenty insurance subsidiaries are rated by Best. All seventeen of our insurance subsidiaries rated by Best have been assigned an FSR of “A” (excellent). Our Lloyd’s syndicate is part of a group rating for the Lloyd’s overall market, which has been assigned an FSR of “A” (excellent) by Best. Ten of our twenty insurance subsidiaries are rated by S&P. All ten of our insurance subsidiaries rated by S&P have been assigned an FSR of “A” (strong). Our Lloyd’s syndicate is part of a group rating for the Lloyd’s overall market, which has been assigned an FSR of “A+” (strong) by S&P. Five of our twenty insurance subsidiaries are rated by Moody’s Corporation (Moody’s). All five insurance subsidiaries rated by Moody’s have been assigned an FSR of “A2” (good). Risk Factors A wide range of factors could materially affect our future prospects and performance. The matters addressed under “Safe Harbor and Cautionary Statement,” “Critical Accounting Estimates” and “Market Risk Disclosures” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and other information included or incorporated in this report describe many of the significant risks that could affect our operations and financial results. We are also subject to the following risks. We may experience losses or disruptions from catastrophes. As a company with significant property and casualty insurance underwriting operations, we may experience losses from man-made or natural catastrophes. Catastrophes include, but are not limited to, windstorms, hurricanes, earthquakes, tornadoes, hail, severe winter weather and fires and may include events related to terrorism and political unrest. While we employ catastrophe modeling tools in our underwriting process, we cannot predict how severe a particular catastrophe will be before it occurs. The extent of losses from catastrophes is a function of the total amount of losses incurred, the number of insureds affected, the frequency and severity of the events, the effectiveness of our catastrophe risk management program and the adequacy of our reinsurance coverage. Most catastrophes occur over a small geographic area; however, some catastrophes may produce significant damage in large, heavily populated areas. In addition, catastrophes may have a material adverse effect on the investment management and incentive fees earned by our investment management businesses and returns on our investments in insurance-linked securities. Catastrophes also may result in significant disruptions in our insurance and other operations, as well as loss of income and assets. If climate change results in an increase in the frequency and severity of weather-related catastrophes, we may experience additional catastrophe-related losses or disruptions, which may be material. Our results may be affected because actual insured or reinsured losses differ from our loss reserves. Significant periods of time often elapse between the occurrence of an insured or reinsured loss, the reporting of the loss to us and our payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities representing estimates of 42


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    amounts needed to pay reported and unreported losses and the related loss adjustment expenses. The process of estimating loss reserves is a difficult and complex exercise involving many variables and subjective judgments. This process may become more difficult if we experience a period of rising inflation. As part of the reserving process, we review historical data and consider the impact of such factors as: • trends in claim frequency and severity, • changes in operations, • emerging economic and social trends, • trends in insurance rates, • inflation or deflation, and • changes in the regulatory and litigation environments. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves, and actual results will differ from original estimates. As part of the reserving process, we regularly review our loss reserves and make adjustments as necessary. Future increases in loss reserves will result in additional charges to earnings, which may be material. In addition, reinsurance reserves are subject to greater uncertainty than insurance reserves primarily because a reinsurer relies on (i) the original underwriting decisions made by ceding companies and (ii) information and data from ceding companies. As a result, we are subject to the risk that our ceding companies may not have adequately evaluated the risks reinsured by us and the premiums ceded may not adequately compensate us for the risks we assume. In addition, reinsurance reserves may be less reliable than insurance reserves because there is generally a longer lapse of time from the occurrence of the event to the reporting of the loss or benefit to the reinsurer and ultimate resolution or settlement of the loss. Changes in the assumptions and estimates used in establishing reserves for our life and annuity reinsurance book could result in material increases in our estimated loss reserves for such business. Our run-off life and annuity reinsurance book exposes us to mortality risk, which is the risk that the level of death claims may differ from that which we assumed in establishing the reserves for our life and annuity reinsurance contracts. Some of our life and annuity reinsurance contracts expose us to longevity risk, which is the risk that an insured person will live longer than expected when the reserves were established, or morbidity risk, which is the risk that an insured person will become critically ill or disabled. Our reserving process for the life and annuity reinsurance book is designed with the objective of establishing appropriate reserves for the risks we assumed. Among other things, these processes rely heavily on analysis of mortality, longevity and morbidity trends, lapse rates, interest rates and expenses. As of December 31, 2018, our reserves for life and annuity benefits totaled $1.0 billion. We expect mortality, morbidity, longevity, and lapse experience to fluctuate somewhat from period to period, but believe they should remain reasonably predictable over a period of many years. Mortality, longevity, morbidity or lapse experience that is less favorable than the mortality, longevity, morbidity or lapse rates that we used in establishing the reserves for a reinsurance agreement will negatively affect our net income because the reserves we originally set for the risks we assumed may not be sufficient to cover the future claims and expense payments. Furthermore, even if the total benefits paid over the life of the contract do not exceed the expected amount, unexpected increases in the incidence of deaths or illness can cause us to pay more benefits in a given reporting period than expected, adversely affecting our net income in any particular reporting period. Fluctuations in interest rates will impact the performance of our investments. If there are changes to any of the above factors to the point where a reserve deficiency exists, a charge to earnings will be recorded, which may have a material adverse effect on our results of operations and financial condition. Our ability to make payments on debt or other obligations depends on the receipt of funds from our subsidiaries. We are a holding company, and as a result, our cash flow and our ability to service our debt depend upon the earnings of our subsidiaries and on the distribution of earnings, loans or other payments by our subsidiaries to us. In addition, payment of dividends by our insurance subsidiaries, which account for a significant portion of our operating cash flows, may require prior regulatory notice or approval or may be restricted by capital requirements imposed by regulatory authorities. In addition, our reinsurance contracts typically allow the cedent, upon a reduction in an insurance company’s capital in excess of specified amounts, to terminate its contract on terms disadvantageous to us or to exercise other remedies that may adversely affect us. Those contract provisions may have the effect of limiting distributions by our insurance subsidiaries to us. 43


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) Our investment results may be impacted by changes in interest rates, U.S. and international monetary and fiscal policies as well as broader economic conditions. We receive premiums from customers for insuring their risks. We invest these funds until they are needed to pay policyholder claims or until they are recognized as profits. Fluctuations in the value of our investment portfolio can occur as a result of changes in interest rates and U.S. and international monetary and fiscal policies as well as broader economic conditions (including, for example, equity market conditions and significant inflation or deflation). Our investment results may be materially impacted by one or more of these factors. Competition in the insurance and reinsurance markets could reduce our underwriting profits. Insurance and reinsurance markets are highly competitive. We compete on an international and regional basis with major U.S., Bermuda, European, and other international insurers and reinsurers and with underwriting syndicates, some of which have greater financial, marketing, and management resources than we do. Recent industry consolidation, including business combinations among insurance and other financial services companies, has resulted in larger competitors with even greater financial resources. We also compete with new companies that continue to be formed to enter the insurance and reinsurance markets, particularly companies with new or “disruptive” technologies or business models. In addition, capital market participants have created alternative products that are intended to compete with reinsurance products. Increased competition could result in fewer submissions, lower premium rates, and less favorable policy terms and conditions, which could reduce our underwriting profits and have a material adverse effect on our results of operations and financial condition. The historical cyclicality in the property and casualty insurance industry could have a material adverse effect on our ability to improve or maintain underwriting profits or to grow or maintain premium volume. The insurance and reinsurance markets have historically been cyclical, characterized by extended periods of intense price competition due to excessive underwriting capacity as well as brief periods when shortages of capacity permitted more favorable rate levels. Among our competitive strengths have been our specialty product focus and our niche market strategy. These strengths also make us vulnerable in periods of intense competition to actions by other insurance companies who seek to write additional premiums without appropriate regard for underwriting profitability. During soft markets, it could be very difficult for us to grow or maintain premium volume levels without sacrificing underwriting profits. If we are not successful in maintaining rates or achieving rate increases, it may be difficult for us to improve or maintain underwriting profits or to grow or maintain premium volume levels. We invest a significant portion of our invested assets 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. Equity securities were 63% of our shareholders’ equity at both December 31, 2018 and 2017. Equity securities have historically produced higher returns than fixed maturities over long periods of time; however, investing in equity securities may result in significant variability in investment returns from one period to the next. In volatile financial markets, we could experience significant declines in the fair value of our equity investment portfolio, which would result in a material decrease in net income and shareholders’ equity. Our equity portfolio is concentrated in particular issuers and industries and, as a result, a decline in the fair value of these concentrated investments also could result in a material decrease in net income and shareholders’ equity. A material decrease in shareholders’ equity may have a material adverse effect on our ability to carry out our business plans. General economic, market or industry conditions could lead to investment losses, adverse effects on our businesses and limit our access to the capital markets. General economic and market conditions and industry specific conditions, including extended economic recessions or expansions; prolonged periods of slow economic growth; inflation or deflation; fluctuations and volatility in foreign currency exchange rates, commodity and energy prices and interest rates; volatility in the credit and capital markets; and other factors, could lead to substantial realized and unrealized investment losses in future periods, declines in demand for or increased claims made under our insurance products or limited or no access to the capital markets, any of which could have a material adverse effect on our results of operations, financial condition, debt and financial strength ratings or our insurance subsidiaries’ capital. We rely on the purchase of reinsurance and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. Our underwriting operations purchase reinsurance and retrocessional reinsurance to manage our net 44 retention on individual risks and overall exposure to losses, while providing us with the ability to offer policies with


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    sufficient limits to meet policyholder needs. Our program services business reinsures substantially all of its underwriting and operating risks in connection with its fronting arrangements. The ceding of insurance does not legally discharge us from our primary liability for the full amount of the policies. Reliance on reinsurance may create credit risk as a result of the reinsurer’s inability or unwillingness to pay reinsurance claims when due. We generally select well capitalized and highly rated reinsurers and in certain instances we require reinsurers to post substantial collateral to secure the reinsured risks. Deterioration in the credit quality of existing reinsurers or disputes over the terms of reinsurance could result in charges to earnings, which may have a material adverse effect on our results of operations and financial condition. In addition, collateral may not be sufficient to cover our liability, and we may not be able to cause the reinsurer to deliver additional collateral. As of December 31, 2018, we were the beneficiary of letters of credit, trust accounts and funds withheld in the aggregate amount of $3.2 billion, collateralizing $5.2 billion in reinsurance recoverables. The remaining unsecured reinsurance recoverables are ceded to highly-rated, well capitalized reinsurers. Our reinsurance recoverables are based on estimates, and our actual liabilities may exceed the amount we are able to recover from our reinsurers or any collateral securing the liabilities. The failure of a reinsurer to meet its obligations to us, whether due to insolvency, dispute or other unwillingness or inability to pay, or due to our inability to access sufficient collateral to cover our liabilities, could have a material adverse effect on our results of operations and financial condition. The availability and cost of reinsurance are determined by market conditions beyond our control. There is no guarantee that our desired amounts of reinsurance or retrocessional reinsurance will be available in the marketplace in the future. Our insurance subsidiaries are subject to extensive supervision and regulation that may have a material adverse effect on our ability to implement and achieve our business objectives. Our insurance subsidiaries are subject to extensive supervision and regulation by the regulatory authorities in the various jurisdictions in which they conduct business, including state, national and international insurance regulators. This supervision and regulation is intended for the benefit of policyholders rather than shareholders or holders of debt securities. Regulatory authorities have broad regulatory, supervisory and administrative powers relating to, among other things, data protection and data privacy, solvency standards, licensing, coverage requirements, policy rates and forms and the form and content of financial reports. Regulatory and legislative authorities continue to implement enhanced or new regulatory requirements intended to prevent future financial crises or otherwise assure the stability of financial institutions. Regulatory authorities also may seek to exercise their supervisory or enforcement authority in new or more extensive ways, such as imposing increased capital requirements. These actions, if they occur, could affect the competitive market and the way we conduct our business and manage our capital and could result in lower revenues and higher costs. As a result, such actions could have a material adverse effect on our results of operations and financial condition. The legal and regulatory requirements applicable to our businesses are extensive. Failure to comply could have a material adverse effect on us. Each of our businesses is highly dependent on the ability to engage on a daily basis in a large number of financial and operational activities, including among others insurance underwriting, claim processing, investment activities, the management of third party capital and providing products and services to businesses and consumers, many of which are highly complex. These activities are subject to internal guidelines and policies, as well as legal and regulatory standards, including, among others, those related to privacy, anti-corruption, anti-bribery and global finance and investments and insurance matters. Our continued expansion into new businesses and markets has brought about additional requirements. While we believe that we have adopted appropriate risk management and compliance programs, compliance risks will continue to exist, particularly as we become subject to new rules and regulations. Failure to comply with, or to obtain, appropriate authorizations or exemptions under any applicable laws and regulations could result in restrictions on our ability to do business or undertake activities that are regulated in one or more of the jurisdictions in which we conduct business. Any such failure could also subject us to fines, penalties, equitable relief and changes to our business practices. In addition, a failure to comply could result in defaults under our senior unsecured debt agreements or credit facilities or damage our businesses or our reputation. Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations could materially increase our direct and indirect compliance costs and other expenses of doing business, and have a material adverse effect on our results of operations and financial condition. 45


  • Page 48

    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) 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 outside of our control. Capital requirements for our insurance subsidiaries are prescribed by the applicable insurance regulators and the NAIC, while rating agencies establish requirements that inform ratings for our insurance subsidiaries and senior debt securities. Projecting surplus and the related capital requirements is complex and requires making assumptions regarding how our business will perform within the broader macroeconomic environment. Insurance regulators and rating agencies evaluate company capital through financial models that calculate minimum capitalization requirements based on risk-based capital formulas for property and casualty insurance groups and their subsidiaries. In any particular year, capital levels and risk-based capital requirements may increase or decrease depending on a variety of factors including the amount of income or losses generated by our insurance subsidiaries, the amount of additional capital our insurance subsidiaries must hold to support business growth, the value of certain fixed maturities and equity securities in our investment portfolio, changes in interest rates and foreign currency exchange rates, as well as changes to the regulatory and rating agency models used to determine our required capital. In addition, the NAIC is developing a group capital calculation for U.S. based global insurance groups. While still in its early stage, and even though it is not intended to be a prescribed capital requirement, this calculation could have an impact on the amount of group capital we are required to hold and how it is allocated. 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 sensitive information. Our businesses are dependent upon the operational effectiveness and security of our enterprise systems and those maintained by third parties. Among other things, we rely on these systems to interact with producers, insureds, customers, clients, and other third parties, to perform actuarial and other modeling functions, to underwrite business, to prepare policies and process premiums, to process claims and make claims payments, to prepare internal and external financial statements and information, as well as to engage in a wide variety of other business activities. A significant failure of our enterprise systems, or those of third parties upon which we may rely, whether because of a natural disaster, network outage or a cyber-attack on our systems, could compromise our personal, confidential and proprietary information as well as that of our customers and business partners, impede or interrupt our business operations and could result in other negative consequences, including remediation costs, loss of revenue, additional regulatory scrutiny and fines, litigation and monetary and reputational damages. Although we have implemented controls and take protective actions to reduce the risk of an enterprise failure and protect against a security breach, such measures may be insufficient to prevent, or mitigate the effects of, a natural disaster, network outage or a cyber-attack on our systems that could result in liability to us, cause our data to be corrupted or stolen and cause us to commit resources, management time and money to prevent or correct those failures. In addition, we are subject to numerous data privacy laws and regulations enacted in the jurisdictions in which we do business. A misuse or mishandling of confidential or proprietary information being sent to or received from a client, employee or third party could damage our businesses or our reputation or result in significant monetary damages, regulatory enforcement actions, fines and criminal prosecution in one or more jurisdictions. For example, under the European General Data Protection Regulation there are significant new punishments for non-compliance which could result in a penalty of up to 4% of a firm’s global annual revenue. In addition, a violation of data privacy laws and regulations could result in defaults under our outstanding indebtedness or credit facilities. Those monetary damages, penalties, regulatory or legal actions or defaults, or the damage to our businesses or reputation, could have a material adverse effect on our results of operations and financial condition. Third parties to whom we outsource certain functions are also subject to these risks, and their failure to adhere to these laws and regulations also could damage our businesses or reputation, could have a material adverse effect on our results of operations and financial condition. Further, we routinely transmit, receive and store personal, confidential and proprietary information by email and other electronic means. Although we attempt to protect this confidential and proprietary information, we may be unable to do so in all cases, especially with customers, business partners and other third parties who may not have or use appropriate controls to protect confidential information. While we maintain cyber risk insurance providing first party and third party coverages, such insurance may not cover all costs associated with the consequences of personal and confidential and proprietary information being compromised. A material cyber security breach could have a material adverse effect on our results of operations and financial condition. 46


  • Page 49

    We may not find suitable acquisition candidates or new ventures. As part of our growth strategy, we continue to evaluate possible acquisition transactions on an ongoing basis, and at any given time we may be engaged in discussions with respect to possible acquisitions and new ventures. We may not be able to identify suitable acquisition targets or ventures, any such transactions may not be financed or completed on acceptable terms and our future acquisitions or ventures may not be successful. The integration of acquired companies may not be as successful as we anticipate. We have recently engaged in a number of acquisitions in an effort to achieve profitable growth in our underwriting operations and to create additional value on a diversified basis in our Markel Ventures and other operations. Acquisitions present operational, strategic and financial risks, as well as risks associated with liabilities arising from the previous operations of the acquired companies. All of these risks are magnified in the case of a large acquisition. Assimilation of the operations and personnel of acquired companies may prove more difficult than anticipated, which may result in failure to achieve financial objectives associated with the acquisition or diversion of management attention. In addition, integration of formerly privately-held companies into the management and internal control and financial reporting systems of a publicly-held company presents additional risks. Impairment in the value of our goodwill or other intangible assets could have a material adverse effect on our operating results and financial condition. As of December 31, 2018, goodwill and intangible assets totaled $4.0 billion and represented 44% of shareholders’ equity. We record goodwill and intangible assets at fair value upon the acquisition of a business. Goodwill represents the excess of amounts paid for acquiring businesses over the fair value of the net assets acquired. Goodwill and indefinite-lived intangible assets are evaluated for impairment annually, or more frequently if conditions warrant, by comparing the carrying value of a reporting unit to its estimated fair value for goodwill and by comparing the carrying value of the asset to its fair value for indefinite-lived intangible assets. Intangible assets with definite lives are reviewed for impairment when events or circumstances indicate that their carrying value may not be recoverable. Declines in operating results, divestitures, sustained market declines and other factors that impact the fair value of a reporting unit could result in an impairment of goodwill or intangible assets and, in turn, a charge to net income. Such a charge could have a material adverse effect on our results of operations or financial condition. For example, in 2018 and 2017 we recorded $1.1 billion and $1.3 billion, respectively, of goodwill and intangible assets in connection with the acquisitions of Nephila and Brahmin in 2018 and SureTec, Costa Farms and State National in 2017. Developments that adversely affect the future cash flows or earnings of an acquired business may cause the goodwill or intangible assets recorded for it to be impaired. For example, in 2018 we reduced the carrying value of the goodwill and intangible assets of the MCIM reporting unit, acquired in 2015, to zero, which resulted in a combined goodwill and intangible assets impairment charge of $179.0 million. The failure of any of the loss limitation methods we employ could have a material adverse effect on us. We seek to limit our loss exposure in a variety of ways, including adhering to maximum limitations on policies written in defined geographical zones, limiting program size for each client, establishing per risk and per occurrence limitations for each event, employing coverage restrictions and following prudent underwriting guidelines for each program written. We also seek to limit our loss exposure through geographic diversification. Underwriting is a matter of judgment, involving assumptions about matters that are inherently unpredictable and beyond our control, and for which historical experience and probability analysis may not provide sufficient guidance. One or more future events could result in claims that substantially exceed our expectations, which could have a material adverse effect on our financial condition and our results of operations, possibly to the extent of eroding away our shareholders’ equity. In addition, we seek to limit loss exposures by policy terms, exclusion from coverage and choice of legal forum. Disputes relating to coverage and choice of legal forum also arise. As a result, various provisions of our policies, such as choice of forum, limitations or exclusions from coverage may not be enforceable in the manner we intend and some or all of our loss limitation methods may prove ineffective. The effects of emerging claim and coverage issues on our business are uncertain. As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may have a material adverse effect on our business by either broadening coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until after we have issued insurance or reinsurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance or reinsurance contracts may not be known for many years after a contract is issued. 47


  • Page 50

    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) 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. Our success depends on our ability to retain the services of our existing key executives and to attract and retain additional qualified personnel in the future. The loss of the services of any of our key executives or the inability to hire and retain other highly qualified personnel in the future could have a material adverse effect on our ability to conduct or grow our business. We have substantial international operations and investments, which expose us to increased political, operational and economic risks. A substantial portion of our revenues and income is derived from our operations and investments outside the U.S., including from the U.K., Bermuda, Europe, Canada, Latin America, Asia Pacific and the Middle East. Our international operations and investments expose us to increased political, operational and economic risks. Deterioration or volatility in foreign and international financial markets or general economic and political conditions could adversely affect our operating results, financial condition and liquidity. Concerns about the economic conditions, capital markets, political and economic stability and solvency of certain countries have contributed to global market volatility. Political changes in the jurisdictions where we operate and elsewhere, some of which may be disruptive, can also interfere with our customers and our activities in a particular location. Our international operations also may be subject to a number of additional risks, particularly in emerging economies, including restrictions such as price controls, capital controls, currency exchange limits, ownership limits and other restrictive or anti-competitive governmental actions or requirements, which could have a material adverse effect on our businesses. Changes in regulations and interpretations relating to the Tax Cuts and Jobs Act could have a material adverse effect on us. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (TCJA), which made significant modifications to U.S. federal income tax law, most of which were effective January 1, 2018. The U.S. Treasury Department and the Internal Revenue Service continue to issue guidance and interpretations of how provisions of the TCJA will be applied or otherwise administered. Changes in regulations and interpretations relating to the TCJA could have a material adverse effect on our results of operation and financial condition. Our insurance companies and senior debt are rated by various rating agencies, and a downgrade or potential downgrade in one or more of these ratings could have a material adverse effect on us. Financial strength ratings are an important factor in establishing the competitive position of insurance and reinsurance companies. Our senior debt ratings also affect the availability and cost of capital. Certain of our insurance and reinsurance company subsidiaries and our senior debt securities are rated by various rating agencies. Our financial strength and debt ratings are subject to periodic review, and are subject to revision or withdrawal at any time. The financial strength ratings of our insurance subsidiaries are significantly influenced by their statutory surplus amounts and leverage and capital adequacy ratios and other financial metrics. Rating agencies may implement changes to their ratings methodologies or internal models that have the effect of increasing or decreasing the amount of capital our insurance subsidiaries must hold or restrict how the company may deploy its capital in order to maintain its current ratings. For example, for certain of our insurance subsidiaries, rating agencies may take into account in their calculations the collateral provided to us by reinsurers. A change in this practice could adversely impact our ratings. We cannot be sure that we will be able to retain our current or any future ratings. If our ratings are reduced from their current levels by one or more rating agencies, our competitive position in our target markets within the insurance industry could suffer and it would be more difficult for us to market our products. A ratings downgrade could result in a substantial loss of business as policyholders and ceding company clients move to other companies with higher claims-paying and financial strength ratings. In addition a downgrade could trigger contract provisions that allow cedents to terminate their reinsurance contracts on terms disadvantageous to us or require us to collateralize our obligations through trusts or letters of credit. A ratings downgrade could also have a material adverse effect on our liquidity, including the availability of our letter of credit facilities, and limit our access to capital markets, increase our cost of borrowing or issuing debt and require us to post collateral. We may require additional capital in the future, which may not be available or may only be available on unfavorable terms. To the extent that cash flows generated by our operations are insufficient to fund future operating requirements, or that our capital position is adversely impacted by a decline in the fair value of our investment portfolio, losses from catastrophe events or otherwise, we may need to raise additional funds through financings or curtail our growth. We also may be required to liquidate fixed maturities or equity securities, which may result in realized investment losses. Any further 48 sources of liquidity, including capacity needed for letters of credit, if available at all, may be on terms that are unfavorable to

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