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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended December 31, 2019
Commission File Number 001-15811
MARKEL CORPORATION
(Exact name of registrant as specified in its charter)
A Virginia Corporation
IRS Employer Identification No. 54-1959284
4521 Highwoods Parkway, Glen Allen, Virginia 23060-6148
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (804747-0136

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of exchange on which registered
Common Stock, no par value
 
MKL
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer  
Non-accelerated filer  
Smaller reporting company
Emerging growth company 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  x
The aggregate market value of the shares of the registrant's Common Stock held by non-affiliates as of June 30, 2019 was approximately $14,711,000,000.
The number of shares of the registrant's Common Stock outstanding at February 4, 2020: 13,782,159.
Documents Incorporated By Reference: The portions of the registrant's Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 11, 2020, referred to in Part III.


Table of Contents

Index and Cross References-Form 10-K Annual Report
Item No.
 
Page
Part I
 
 
1.
Business
1A.
25
1B.
Unresolved Staff Comments
NONE
2.
Properties
NONE
3.
140
4.
Mine Safety Disclosures
NONE
 
145
Part II
 
 
5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
6.
37
7.
7A.
132
8.
Financial Statements and Supplementary Data
The response to this item is submitted in Item 15.
 
9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
NONE
9A.
Controls and Procedures
9B.
Other Information
NONE
Part III
 
 
10.
145
 
143
11.
Executive Compensation*
 
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*
 
13.
Certain Relationships and Related Transactions, and Director Independence*
 
14.
Principal Accounting Fees and Services*
 
*Portions of Item 10 and Items 11, 12, 13 and 14 will be incorporated by reference from the Registrant's Proxy Statement for its 2020 Annual Meeting of Shareholders pursuant to instructions G(1) and G(3) of the General Instructions to Form 10-K.
 
Part IV
 
 
 
 
15.
Exhibits, Financial Statement Schedules
 
 
a.
Documents filed as part of this Form 10-K
 
 
 
(1)
Reports of Independent Registered Public Accounting Firm
41-44
 
 
 
 
 
 
 
45
 
 
 
46
 
 
 
47
 
 
 
48
 
 
 
49
 
 
(2)
Schedules have been omitted since they either are not required or are not applicable, or the information called for is shown in the Consolidated Financial Statements and Notes thereto.
 
 
 
(3)
146
 
b.
See Index to Exhibits and Item 15a(3)
 
 
c.
See Index to Financial Statements and Item 15a(2)
 
16.
Form 10-K Summary
NONE


Table of Contents

BUSINESS OVERVIEW

Markel Corporation is 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
Insurance-linked securities - our insurance-linked securities operations include investment fund managers that offer a variety of investment products, including insurance-linked securities, catastrophe bonds, insurance swaps and weather derivatives
Program services - our program services business serves as a fronting platform that provides other insurance entities access to the 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 larger 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, classic cars, credit and surety-related risks, lender services 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.


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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 reinsurance product offerings include coverage for general liability, professional liability, property, workers' compensation and credit and surety risks.

Markets

In the U.S., we write business in the excess and surplus lines (E&S) and specialty admitted insurance and reinsurance markets. In 2018, the E&S market represented $50 billion, or 7%, of the $678 billion U.S. property and casualty industry.(1) In 2018, we were the second 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), an Illinois domiciled insurance company. 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. Our specialty admitted operations also include Suretec Insurance Company (SIC), State National Insurance Company, Inc. (SNIC) and National Specialty Insurance Company (NSIC), all of which are domiciled in Texas, and Suretec Indemnity Company (SINC), which is domiciled in California. 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. 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 $71 billion of gross written premium in 2018, of which $45 billion was produced by Lloyd's syndicates.(2,3) In 2018, our share of the London market was approximately 2% as measured by gross written premiums.

In Bermuda, we write business in the worldwide insurance and reinsurance markets. The Bermuda property and casualty insurance and reinsurance market produced $82 billion of gross written premium in 2017.(4) In 2017, our share of the Bermuda market was approximately 1% as measured by gross written premiums in our underwriting operations. We conduct our Bermuda underwriting 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.

We also write business through Markel Insurance SE (MISE), a regulated insurance carrier located in Munich, Germany. In anticipation of the U.K.'s exit from the European Union (E.U.), which occurred on January 31, 2020, we established MISE in 2018. From its offices in Germany, MISE transacts business in E.U. member states and throughout the European Economic Area (EEA). MISE has established branches in Ireland, the Netherlands, Spain, Switzerland and the U.K. In order to maintain access to E.U. business for Lloyd's syndicates, the Society of Lloyd's has organized an insurance company in Brussels, Belgium, which supplements, or serves as an alternative to, MISE for access to E.U. markets. For further discussion regarding the exit of the U.K. from the E.U., and its potential impacts to us, see the Risk Factor titled "The exit of the United Kingdom from the European Union could have a material adverse effect on us."

While we operate in various other markets, substantially all of our gross written premiums in 2019 are written from our platforms in the United States, United Kingdom, Bermuda and Germany.

(1) Market Segment Report - U.S. Surplus Lines, A.M. Best (September 13, 2019).
(2) London Company Market Statistics Report, International Underwriting Association (October 2019).
(3) Lloyd's Annual Report 2018.
(4) Bermuda Monetary Authority 2018 Annual Report.


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Our reinsurance operations, which include our operations based in the U.S., the U.K. and Bermuda, as described above, made us the 38th largest reinsurer in 2018, as measured by worldwide gross reinsurance premium writings.(1)  

In 2019, 19% of gross premium writings from our underwriting operations related to foreign risks (i.e., coverage for risks or cedents located outside of the U.S.), of which 36% were from the U.K. and 12% were from Canada. There were no other individual foreign countries from which premium writings were material. Premium writings are attributed to individual countries based upon location of risk or cedent. See note 8(d) of the notes to consolidated financial statements for additional information.

Most of our business is placed through insurance and reinsurance brokers and retail insurance agents. Some of our insurance business is also placed through managing general agents, third parties who have been granted authority to bind risks on our behalf in accordance with underwriting guidelines we prescribe. 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. In 2019, the top three independent brokers accounted for 28% of gross premiums written in our underwriting segments. See note 8(d) of the notes to consolidated financial statements for additional information. Additionally, a significant portion of the reinsurance contracts securitized through our insurance-linked securities operations, for the benefit of third party investors, are placed through these top three independent brokers.

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 on the basis of overall financial strength, ratings assigned by independent rating agencies, development of specialty products to satisfy well-defined market needs and by maintaining relationships with agents, brokers and insureds who rely on our expertise. This expertise is our principal means of competing. We offer a diverse portfolio of products, each with its own distinct competitive environment, which requires us to be responsive to changes in market conditions for individual product lines. With each of our products, we seek to write business that produces underwriting profits by competing 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 within the property and casualty industry. Market conditions and capital capacity influence the degree of competition at any point in time. During periods of excess underwriting capacity, as defined by availability of capital, competition can result in lower pricing and less favorable policy terms and conditions for insurers. During periods of reduced underwriting capacity, pricing and policy terms and conditions are generally more favorable for insurers. Historically, the performance of the property and casualty 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. At any given time, our portfolio of insurance products could be experiencing varying combinations of these characteristics. This cyclical market pattern can be more pronounced in the specialty insurance and reinsurance markets in which we compete than the standard insurance market.

Following the high level of natural catastrophes that occurred in 2017 and 2018, and based on general market conditions, we have seen more favorable rates, particularly on our catastrophe-exposed and loss-affected business. We are also seeing improved pricing on many of our other product lines, the primary exception being workers' compensation, where we continue to see rate decreases given favorable experience in recent years.

We routinely review the pricing of our major product lines and will continue to pursue price increases in 2020, 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.

(1)  Market Segment Report - Global Reinsurance, A.M. Best (August 29, 2019).

 

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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 2019, our combined ratio was 94%. See Management's Discussion & Analysis of Financial Condition and Results of Operations for further discussion of our underwriting results.

Underwriting Segments

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. In determining how to monitor and report our underwriting results, we consider many factors, including the nature of the insurance product sold, the type of account written and the type of customer served.

The Insurance segment includes all direct business and facultative placements and the Reinsurance segment includes all treaty reinsurance. 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 8 of the notes to consolidated financial statements for additional segment reporting disclosures.

Markel Corporation
2019 Gross Premium Volume ($6.4 billion)
CORP2019.JPG

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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 written through our Markel Assurance, Markel Specialty, Markel International and State National divisions. The State National division was created as a result of the acquisition of State National Companies, Inc. (State National) in November 2017. 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.


INSDIV2019.JPG

Our Insurance segment reported gross premium volume of $5.3 billion, earned premiums of $4.1 billion and an underwriting profit of $309.8 million in 2019.

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 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 primarily through MAIC, which is authorized to write business in all 50 states, the District of Columbia and Puerto Rico. 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 Markel Bermuda, MISE 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. 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.


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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 through MIC, Essentia and MAIC. MIC and Essentia, which specializes in coverage for classic cars and boats, are licensed to write property and casualty insurance in all 50 states and the District of Columbia.

Markel International Division
The Markel International division writes business worldwide from our London and Munich-based platforms, which include branch offices around the world. This includes Markel Syndicate 3000, through which our Lloyd's operations are conducted, MIICL and MISE. 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. Through our Munich-based platform, the Markel International division operates a global network of branches that focus on specialty commercial risks in their respective local markets.

State National Division
The State National division writes collateral protection insurance, 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.


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The following chart displays the types of products written in our Insurance segment.

Insurance Segment
2019 Gross Premium Volume ($5.3 billion)

INSSEG2019.JPG

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 excess and umbrella products, products liability products, environmental liability products and casualty facultative reinsurance written for individual casualty risks.

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, 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. 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.

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.

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, railroad-related products and specie coverage for fine art on exhibition and in private collections.


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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.

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.

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 and animal boarding, breeding and training facilities.

Other product lines within the Insurance segment include credit and surety products and collateral protection insurance.

Reinsurance Segment

Our Reinsurance segment includes property, casualty and specialty treaty reinsurance products offered to other insurance and reinsurance companies globally through the broker market. Our treaty reinsurance offerings include both quota share and excess of loss reinsurance and are typically written on a participation basis, which means each reinsurer shares proportionally in the business ceded under the reinsurance treaty written. 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. Substantially all of our reinsurance product offerings are underwritten by our Global Reinsurance 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 Markel Syndicate 3000.

Our Reinsurance segment reported gross premium volume of $1.1 billion, earned premiums of $903.6 million and an underwriting loss of $40.0 million in 2019.


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The following chart displays the types of products written in our Reinsurance segment.

Reinsurance Segment
2019 Gross Premium Volume ($1.1 billion)

RESEG2019.JPG

Our casualty treaty reinsurance programs are written on a quota share and excess of loss basis and include general liability, professional liability, medical malpractice and environmental impairment 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. 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.

Specialty treaty reinsurance products offered in the Reinsurance segment include structured and whole turnover credit, political risk, mortgage and contract and commercial surety reinsurance programs covering worldwide exposures, public entity reinsurance products, workers' compensation excess of loss and quota share treaties, whole account, marine and agriculture reinsurance products. Our mortgage products offer coverage for private mortgage insurers in the U.S., Australia and Europe. Our public entity reinsurance products offer customized programs for government risk pools, including counties, municipalities, schools, public housing authorities and special districts (e.g., water, sewer, parks) located in the U.S. Types of coverage for public entities include general liability, environmental impairment liability, cyber and errors and omissions. Our workers' compensation business includes standard and catastrophe exposed workers' compensation business. Marine reinsurance products include offshore and onshore marine and energy risks on a worldwide basis, including hull, cargo and liability. Agriculture reinsurance covers multi-peril crop insurance, hail and related exposures, for risks located in the U.S. and Canada.


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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.

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 a reinsurance transaction, an insurance company transfers, or cedes, all or part of its exposure in return for a premium. In a retrocessional reinsurance transaction, a reinsured exposure is further ceded to another reinsurer. We purchase reinsurance and retrocessional reinsurance coverage for our catastrophe-exposed policies to ensure that our net retained catastrophe risk is within our corporate tolerances. Beginning in late 2018, we shifted from buying proportional catastrophe reinsurance or retrocessional reinsurance coverages towards excess of loss catastrophe coverages in both our Insurance and Reinsurance segments. On other product lines for which we purchase reinsurance or retrocessional reinsurance, we are also beginning to shift from purchasing coverages related to specific lines of business towards enterprise-wide coverages. Both of these changes allow us to retain more of our profitable business while continuing to manage volatility within our underwriting results. As a result of these changes, we are retaining more gross premium volume and have lower ceding commissions within our underwriting segments. Net retention of gross premium volume in our underwriting segments was 84% in 2019 and 83% in 2018.

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 reinsurance contracts. Our commutation strategy related to ceded reinsurance and retrocessional contracts is to reduce credit exposure and eliminate administrative expenses associated with the run-off of ceded reinsurance placed with certain reinsurers.


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The following table displays balances recoverable from our ten largest reinsurers by group from our underwriting operations at December 31, 2019. 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 62% of our $2.5 billion reinsurance recoverables balance attributed to our underwriting operations, before considering allowances for bad debts.

Reinsurance Group
A.M. Best
Rating
 
Reinsurance
Recoverable
(dollars in thousands)
 
 
 
Fairfax Financial Group
           A
 
$
240,708

RenaissanceRe Holdings Ltd.
           A+
 
222,244

AXIS Capital Holdings Limited
           A+
 
177,019

Lloyd's of London
           A
 
171,306

Munich Re Group
           A+
 
158,406

EXOR S.p.A.
           A+
 
150,993

Alleghany Corporation
           A+
 
123,637

Swiss Re Group
           A+
 
113,014

Liberty Mutual Holding Company
           A
 
99,046

Everest Re Group
           A+
 
95,990

Reinsurance recoverables for ten largest reinsurers
 
1,552,363

Total reinsurance recoverables
 
$
2,522,992


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 11 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 and currency 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.


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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. 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)
2019
 
2018
 
2017
 
2016
 
2015
Net investment income
$
451,888

 
$
434,215

 
$
405,709

 
$
373,230

 
$
353,213

Net investment gains (losses) (1)
$
1,601,722

 
$
(437,596
)
 
$
(5,303
)
 
$
65,147

 
$
106,480

Change in net unrealized investment gains
$
381,890

 
$
(299,446
)
 
$
1,125,440

 
$
342,111

 
$
(457,584
)
Investment yield (2)
3.0
%
 
2.7
%
 
2.6
%
 
2.4
%
 
2.3
%
(1) 
Effective January 1, 2018, we adopted Financial Accounting Standards Board Accounting Standards Update (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.
(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.

Annual Taxable Equivalent Total Investment Returns

 
 
 
 
 
 
 
 
 
 
 
Five-Year
Annual
Return
 
Ten-Year
Annual
Return
 
Years Ended December 31,
 
 
 
2019
 
2018
 
2017
 
2016
 
2015
 
 
Equities
30.0
%
 
(3.5
)%
 
25.5
%
 
13.5
%
 
(2.5
)%
 
11.7
%
 
15.2
%
Fixed maturities, cash and short-term investments (1)
6.5
%
 
1.3
 %
 
3.4
%
 
2.4
%
 
1.6
 %
 
3.0
%
 
3.9
%
Total portfolio, before foreign currency effect
14.4
%
 
(0.7
)%
 
9.2
%
 
5.0
%
 
0.5
 %
 
5.5
%
 
6.7
%
Total portfolio
14.6
%
 
(1.0
)%
 
10.2
%
 
4.4
%
 
(0.7
)%
 
5.3
%
 
6.4
%
Invested assets, end of year (in millions)
$
22,258

 
$
19,238

 
$
20,570

 
$
19,059

 
$18,181
 
 
 
 
(1) 
Includes cash and cash equivalents and restricted cash and cash equivalents.


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The following table reconciles investment yield to taxable equivalent total investment return.

 
Years Ended December 31,
 
2019
 
2018
 
2017
 
2016
 
2015
Investment yield (1)
3.0
 %
 
2.7
 %
 
2.6
 %
 
2.4
 %
 
2.3
 %
Adjustment of investment yield from amortized cost to fair value
(0.7
)%
 
(0.6
)%
 
(0.5
)%
 
(0.4
)%
 
(0.4
)%
Net amortization of net premium on fixed maturities
0.4
 %
 
0.4
 %
 
0.4
 %
 
0.4
 %
 
0.5
 %
Net investment gains (losses) and change in net unrealized investment gains on available-for-sale securities
10.3
 %
 
(3.4
)%
 
5.9
 %
 
2.3
 %
 
(2.0
)%
Taxable equivalent effect for interest and dividends (2)
0.2
 %
 
0.1
 %
 
0.4
 %
 
0.4
 %
 
0.4
 %
Other (3)
1.4
 %
 
(0.2
)%
 
1.4
 %
 
(0.7
)%
 
(1.5
)%
Taxable equivalent total investment return
14.6
 %
 
(1.0
)%
 
10.2
 %
 
4.4
 %
 
(0.7
)%
(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, 2019, 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.

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The following chart presents our fixed maturity portfolio, at estimated fair value, by rating category at December 31, 2019.

2019 Credit Quality of Fixed Maturity Portfolio ($10.0 billion)

CREDIT2019.JPG

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.

Our chief operating decision maker allocates resources to and assesses the performance of these various businesses in the aggregate as the 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 8 of the notes to consolidated financial statements for additional segment reporting disclosures.

During the last three years, our Markel Ventures operations have expanded through acquisitions of majority interests in various businesses, including the Costa Farms companies, Brahmin Leather Works, LLC and VSC Fire & Security, Inc. See note 2 of the notes to consolidated financial statements for additional details related to these acquisitions.

In 2019, our Markel Ventures operations reported revenues of $2.1 billion, operating income of $168.4 million, net income to shareholders of $92.9 million and earnings before interest, income taxes, depreciation and amortization (EBITDA) of $263.9 million. We use Markel Ventures EBITDA, which is a non-GAAP financial measure, as an operating performance measure in conjunction with revenues, operating income and net income. See "Markel Ventures" in Management's Discussion & Analysis of Financial Condition and Results of Operations for more information on EBITDA.




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Table of Contents

The following chart displays the types of offerings within our Markel Ventures segment.

Markel Ventures Segment
2019 Operating Revenues ($2.1 billion)

VENTUREGRP2019.JPG
Our Markel Ventures products group is comprised of businesses that manufacture or produce equipment, transportation-related products, and consumer and building products. For example, types of products offered by businesses in this group include equipment used in baking systems and food processing, over-the-road car haulers and laminated oak and composite wood flooring used in the trucking industry as well as ornamental plants and residential homes.

Our Markel Ventures services group is comprised of businesses that provide healthcare, consulting and others types of services to businesses and consumers. For example, types of services offered by businesses in this group include management and technology consulting, behavioral healthcare and retail intelligence.

The demand for certain of our Markel Ventures products and services is seasonal, with variations in revenues throughout the year depending on the industry, and cyclical based on certain larger economic trends and activity.

The majority of our businesses in this segment are headquartered across the U.S., with subsidiaries of certain businesses located outside of the U.S. 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 include U.S. consumer markets for healthcare, U.S. and international markets for retail, food service, food production, automobile transporters, governments, and truck trailers, as well as U.S. based businesses in a variety of industries including the banking, financial services, and energy industries.

Insurance-Linked Securities

Our insurance-linked securities (ILS) operations are comprised of our Nephila and run-off Markel CATCo operations, as further described below. We receive management fees for investment and insurance management services provided through these operations based on the net asset value of the accounts managed, and for certain funds, incentive fees based on the annual performance of the funds managed. Through our Nephila operations, we also provide managing general agent services and receive commissions based on the direct written premiums of the insurance contracts placed. Total revenues from our insurance-linked securities operations for the year ended December 31, 2019 were $225.6 million, which are included in services and other revenues in our consolidated statement of income and comprehensive income.


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Table of Contents

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 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, 2019, Nephila's net assets under management were $10.4 billion.

See note 17 of the notes to consolidated financial statements for further details regarding our Nephila operations.

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 and, through 2019, was focused on building and managing highly diversified, collateralized retrocession and reinsurance portfolios covering global property catastrophe risks. MCIM serves as the insurance manager for Markel CATCo Re Ltd. (Markel CATCo Re), a Bermuda Class 3 reinsurance company, and as the investment manager for Markel CATCo Reinsurance Fund Ltd., a Bermuda exempted mutual fund company comprised of multiple segregated accounts (Markel CATCo Funds). MCIM also serves as the investment manager to CATCo Reinsurance Opportunities Fund Ltd. (CROF), a limited liability closed-end Bermuda exempted mutual fund company listed on a market operated by the London Stock Exchange and on the Bermuda Stock Exchange. CROF invests substantially all of its assets in Markel CATCo Reinsurance Fund Ltd.

In July 2019, MCIM announced it would cease accepting new investments in the Markel CATCo Funds and would not write any new business in Markel CATCo Re. Both the Markel CATCo Funds and Markel CATCo Re have been placed into run-off, returning capital to investors as it becomes available. For further details regarding developments within our Markel CATCo operations, see note 20 of the notes to consolidated financial statements.

As of December 31, 2019, MCIM's net assets under management were $2.8 billion, a portion of which is attributable to our investments in the Markel CATCo Funds. As of December 31, 2019, the fair value of our investments in the Markel CATCo Funds and CROF totaled $50.6 million, which is included in equity securities on our consolidated balance sheet.

See note 16 and note 17 of the notes to consolidated financial statements for further details regarding our Markel CATCo operations.

Lodgepine

In 2019, we established Lodgepine Capital Management Limited (Lodgepine), our new retrocessional insurance-linked securities fund manager in Bermuda. Lodgepine's initial product offering will be Lodgepine Fund Limited, a property catastrophe retrocessional investment fund, which is expected to launch in 2020. We have committed to invest up to $100 million in Lodgepine Fund Limited. Lodgepine Fund Limited initially plans to subscribe to a portfolio of retrocessional reinsurance, which includes contracts written in our Reinsurance segment.

Program Services

Following the acquisition of State National in 2017, 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 general agent or capacity provider and then cede the risk under these policies to the capacity provider in exchange for ceding fees.

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Table of Contents


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, USIC and ISIC are licensed to write property and casualty insurance in all 50 states and the District of Columbia. USIC is also eligible to write business in the U.S. Virgin Islands. Many of our programs are arranged with the assistance of brokers that are seeking to provide customized insurance solutions for specialty insurance business that requires an A.M. Best "A" rated carrier. Our specialized business model relies on third party producers or capacity providers to provide the infrastructure associated with providing policy administration, claims handling, cash handling, underwriting, or other traditional insurance company services. We 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, 2019 were $108.8 million. Our program services business generated $2.3 billion of gross written premium volume for the year ended December 31, 2019.

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 that expose us to underwriting risk, including loss ratio caps, aggregate reinsurance limits or exclusion of the credit risk of producers. Under certain programs, including 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.


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Table of Contents

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, 2019. 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 71% of our $2.9 billion reinsurance recoverables balance attributed to our program services business, before considering allowances for bad debts.

Reinsurance Group
A.M. Best
Rating
 
Gross Reinsurance Recoverable
 
Collateral Applied (1)
 
Net Reinsurance Recoverable
(dollars in thousands)
 
 
 
 
 
 
 
Fosun International Holdings Ltd.
      A-
 
$
631,205

 
$
631,088

 
$
117

Lloyd's of London (2)
      A
 
454,791

 

 
454,791

Knight Insurance Company Ltd.
      B++
 
379,454

 
379,454

 

James River Group Holdings, Ltd.
      A
 
192,953

 
192,953

 

RenaissanceRe Holdings Ltd.
      A+
 
140,749

 
777

 
139,972

Enstar Group Limited
      A-
 
70,654

 
24,217

 
46,437

Everest Re Group
      A+
 
61,999

 

 
61,999

Greenlight Capital Re, Ltd.
      A-
 
55,907

 
55,907

 

Qatar Insurance Company S.A.Q.
      A
 
54,737

 
54,737

 

MS&AD Insurance Group Holdings, Inc.
      A+
 
52,680

 
52,680

 

Reinsurance recoverables for ten largest gross reinsurers
 
2,095,129

 
1,391,813

 
703,316

Total reinsurance recoverables
 
$
2,936,569

 
$
1,940,691

 
$
995,878

(1) 
Collateral is applied to each reinsurer, up to the amount of the gross recoverable, to determine the net recoverables presented in this table. As of December 31, 2019, we were the beneficiary of letters of credit, trust accounts and funds withheld totaling $1.7 billion collateralizing reinsurance recoverable balances from our top 10 reinsurers and $2.4 billion for our total reinsurance recoverables balance, which in some instances, exceeds the balance of the related reinsurance recoverable.
(2) 
Net reinsurance recoverable from Lloyd’s of London includes $219.5 million attributable to Syndicate 2357, an unconsolidated affiliate.


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Table of Contents

Shareholder Value

Our financial goals are to earn consistent underwriting and operating profits and superior investment returns to build shareholder value. We measure financial success by our ability to grow book value per share and the market price per share of our stock, or total shareholder return, at high rates 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, 2019, book value per share increased 23% primarily due to net income to shareholders of $1.8 billion and a $298.0 million increase in net unrealized gains on investments, net of taxes. Over the past five years, we have grown book value per share at a compound annual rate of 8% to $802.59 per share at December 31, 2019. Growth in total shareholder value is also an important measure of our success, as a significant portion of our operations are not recorded at fair value or otherwise captured in book value. For the year ended December 31, 2019, our stock price per share increased 10%. Over the past five years, our stock price per share increased at a compound annual rate of 11%.

The following graph presents book value per share and stock price per share for the past five years as of December 31.

BKVALUEMKLSHARE2019.JPG

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Table of Contents

Regulatory Environment

We are subject to extensive state, federal and international regulation and supervision in the jurisdictions in which we do business. Regulations vary from jurisdiction to jurisdiction. Additionally, as a company with publicly-traded securities, we are also subject to certain legal and regulatory requirements applicable generally to public companies, including the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and the New York Stock Exchange relating to reporting and disclosure, accounting and financial reporting, corporate governance and other matters.

The following is a summary of significant regulations that apply to our businesses, but it is not intended to be a comprehensive review of every regulation to which we are subject. For information regarding risks associated with regulations applicable to us, see “Item 1A - Risk Factors.”

U.S. Insurance Regulation

State Regulation

Overview. Our U.S. insurance subsidiaries are subject to varying degrees of regulation and supervision by the states and other jurisdictions in which they do business. In the U.S., authority for the regulation, supervision and administration of the business of insurance in each state is generally delegated to a state insurance commissioner who oversees a regulatory body responsible for the supervision of the business of insurance. Through this authority, state regulatory authorities have broad regulatory, supervisory and administrative powers relating to: solvency standards; corporate conduct; market conduct activities; regulating unfair trade and claims practices; licensing of insurers; licensing and appointment of agents; approval of forms and policies used; the nature of, and limitations on, insurers' investments; the form and content of annual statements and other reports on the financial condition of insurers; and establishment of loss reserves. States also regulate various aspects of the contractual relationships between insurers and independent agents. In addition, the National Association of Insurance Commissioners (NAIC), comprised of the insurance commissioners of each U.S. jurisdiction, develops or amends model statutes and regulations that, in turn, most states adopt.

Group Supervision - Global Supervisory College; Global Common Framework. Regulators within and outside the U.S. are increasingly coordinating the regulation of multinational insurers by conducting a supervisory college. A supervisory college is a forum of the regulators having jurisdictional authority over an insurance holding company's worldwide insurance subsidiaries. The supervisory college meets with executive management to evaluate the insurance group on both a group-wide and legal-entity basis, particularly with respect to its financial data, business strategies, enterprise risk management and corporate governance. The Illinois Department of Insurance is our lead insurance regulator for purposes of conducting our supervisory college.

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 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 and international 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.

Holding Company Statutes. In addition to regulatory supervision of our U.S. insurance subsidiaries, we are subject to state statutes governing insurance holding company systems. Typically, those statutes require that we periodically file information with the appropriate state insurance commissioner, including information concerning our capital structure, ownership, financial condition, dividend payments and other material transactions with affiliates, and general business operations. These statutes also require approval of changes in control of an insurer or an insurance holding company. Generally, "control" for these purposes is defined as ownership or voting power of 10% or more of a company's voting shares. Additional requirements include group-level reporting, submission of an annual enterprise risk report by a regulated insurance company's ultimate controlling person and providing information regarding an insurer's non-insurer affiliates.

Risk Based Capital Requirements. The NAIC uses a risk based capital (RBC) formula that is designed to measure the capital of an insurer taking into account the company's investments and products. 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, 2019, the capital and surplus of each of our U.S. insurance subsidiaries was above the minimum regulatory thresholds. See note 21 of the notes to consolidated financial statements.

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Table of Contents

Financial Exams. State insurance regulators also prescribe the form and content of statutory financial statements, perform periodic financial examinations of insurers, set minimum reserve and loss ratio requirements, establish standards for permissible types and amounts of investments and require minimum capital and surplus levels. These statutory capital and surplus requirements include RBC rules promulgated by the NAIC.

Statutory Accounting Principles. Each of our U.S. insurance company subsidiaries is required to file detailed quarterly and annual reports, including financial statements, in accordance with prescribed statutory accounting rules, with regulatory officials in the jurisdictions in which they conduct business. The quarterly and annual financial reports filed with the states utilize statutory accounting principles (SAP) that are different from U.S. GAAP. As a basis of accounting, SAP was developed to monitor and regulate the solvency of insurance companies. In developing SAP, insurance regulators were primarily concerned with assuring an insurer’s ability to pay all its current and future obligations to policyholders. As a result, statutory accounting focuses on conservatively valuing the assets and liabilities of insurers, generally in accordance with standards specified by the insurer’s domiciliary state. The values for assets, liabilities and equity reflected in financial statements prepared in accordance with U.S. GAAP are usually different from those reflected in financial statements prepared under SAP.

Own Risk and Solvency Assessment and Enterprise Risk Management. We must submit an Own Risk and Solvency Assessment Summary Report (ORSA) annually to our lead insurance regulator. The ORSA is a confidential internal assessment of the material and relevant risks associated with an insurer's current business plan and the sufficiency of capital resources to support those risks. In addition, we must file an annual enterprise risk report with our lead insurance regulator. The report must identify the material risks within the insurance holding company system that could pose enterprise risk to the U.S. insurance subsidiaries.

Rates and Form Filings. The policy forms and various premium rates of our U.S. admitted insurance subsidiaries are subject to regulation in every state in which they conduct business. In many states, rates and policy forms must be filed with the applicable insurance regulator prior to their use, and in some states, rates and forms must be affirmatively approved by the applicable insurance regulator prior to use.

Dividends. The laws of the domicile states of our U.S. insurance subsidiaries govern the amount of dividends that may be paid to our holding company, Markel Corporation. Generally, statutes in the domicile states of our insurance subsidiaries require prior approval for payment of extraordinary, as opposed to ordinary, dividends. See note 21 of the notes to consolidated financial statements.

Market Conduct. State insurance laws and regulations include numerous provisions governing trade practices and the marketplace activities of insurers, including provisions governing marketing and sales practices, data security, 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 U.S. insurance companies must comply with applicable laws and regulations that prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate and certain other investments, subject to specified limits and certain other qualifications.

Federal Regulation

The U.S. federal government and its regulatory agencies generally do not directly regulate the business of insurance. However, two federal government bodies, the Federal Insurance Office (FIO) and the Financial Stability Oversight Council (FSOC), each created under The Dodd Frank Wall Street Reform and Consumer Protection Act, may impact the regulation of insurance. Although the FIO is prohibited from directly regulating the business of insurance, it has authority to represent the U.S. in international insurance matters and has limited powers to preempt certain types of state insurance laws. The FIO also can recommend to the FSOC that it designate an insurer as an entity posing risks to the U.S. financial stability in the event of the insurer's material financial distress or failure. We have not been so designated. The U.S. federal laws that most affect our day-to-day insurance operations are: the Gramm-Leach-Bliley Act; the Fair Credit Reporting Act; the Health Insurance Portability and Accounting Act of 1996, as amended; the Terrorism Risk Insurance Act of 2002, as amended; anti-money laundering laws and regulations; the Nonadmitted and Reinsurance Reform Act of 2010, as amended; and the rules and regulations of the Office of Foreign Assets Control.

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Table of Contents

International Insurance Regulation

Overview. Our international insurance operations are subject to regulation and supervision in various jurisdictions. These regulations, which vary depending on the jurisdiction, include, among others, solvency and market conduct regulations; anti-corruption, anti-money laundering, and anti-terrorist financing guidelines, laws and regulations; various privacy, insurance, tax, tariff, trade and sanctions laws and regulations; and corporate, employment, intellectual property and investment laws and regulations. Outside of the U.S., we operate largely in the U.K., Europe and Bermuda, as well as in Canada, Latin America, Asia Pacific and the Middle East, and our businesses are supervised by local regulatory authorities in these jurisdictions.

European Regulation. We are subject to regulation by the Prudential Regulatory Authority and Financial Conduct Authority in respect of our U.K. insurance businesses. We are also subject to regulation by the Federal Financial Supervisory Authority, better known by its abbreviation BaFin, in respect of our German insurance carrier.

Our U.K. and German insurance businesses are subject to both the E.U.’s General Data Protection Regulation (GDPR) and Solvency II. GDPR came into effect in May 2018, and requires businesses operating in the E.U. to comply with conditions for processing personal data. Solvency II came into effect in January 2016, and requires our U.K. and German businesses to maintain certain capital standards and publish risk-related information in the form of a Solvency and Financial Condition Report.

Bermuda Regulation. The insurance industry in Bermuda is regulated by the Bermuda Monetary Authority (BMA). Under the Bermuda Insurance Act 1978, and related regulations and standards of the BMA, each Bermuda insurance company is subject to, among other things: licensing, capital, surplus and liquidity requirements; solvency standards; restrictions on dividends and distributions; and periodic examinations of the company and its financial condition. In addition, each insurance company must obtain prior approval of ownership and transfer of shares and maintain a principal office and appoint and maintain a principal representative in Bermuda. The BMA also requires that each insurance company contract for local services, such as corporate secretary, insurance manager and registered representative services, at market rates.

ILS Regulation

Our insurance-linked securities operations are subject to regulation and supervision by various regulatory authorities, both in the U.S. and internationally. Certain of our ILS subsidiaries are organized and regulated as follows:
registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended,
registered with the U.S. Commodity Futures Trading Commission as a commodity pool operator or a commodity trading advisor under the Commodity Exchange Act, as amended, or
registered with the BMA as an insurance manager under the Bermuda Insurance Act.

Certain other ILS subsidiaries serve as the investment manager to one or more private funds that are registered with the BMA under the Investment Funds Act of 2006, as amended, or the Segregated Accounts Companies Act 2000, as amended. In addition, these operations include business relationships with certain U.S., U.K. and Bermuda insurance companies that are subject to U.S. and international insurance regulation as described above in this "Regulatory Environment" section.

As a result, subsidiaries involved in our ILS operations are subject to regulations that may impose substantive and material restrictions and requirements on their operations, including, among other things: disclosure of information about our businesses and conflicts of interests to clients; maintenance of written policies and procedures; maintenance of extensive books and records; restrictions on the types of fees we may charge, including performance fees; restrictions on solicitation arrangements; requirements regarding engaging in transactions with clients; maintenance of an effective compliance program; and other restrictions and requirements applicable to custody of client assets, client privacy, advertising, pay-to-play prohibitions and cybersecurity; as well as possible sanctions, disciplinary actions or other penalties for non-compliance.

Markel Ventures Regulation

Our Markel Ventures businesses are subject to a wide variety of U.S. federal, state, and local laws and regulations, as well as international laws and regulations applicable to their international operations. Specifically, the most significant of these laws and regulations cover the following areas: safety, health, employment, the environment, transportation, U.S. and international trade, anti-corruption, data privacy and security and government contracts.


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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).

Eighteen of our nineteen insurance subsidiaries are rated by Best. All eighteen 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.

Nine of our nineteen insurance subsidiaries are rated by S&P. All nine 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 nineteen 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).

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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.

Headings and sub-headings for the Risk Factors below are for reference purposes only and are not intended to limit or affect in any way the meaning or scope of each Risk Factor.

Risks Primarily Related to Our Insurance Operations

Loss Exposures

We may experience losses or disruptions from catastrophes. As a company with significant property and casualty insurance underwriting operations, we may experience losses from man-made or natural catastrophes. Catastrophes include, but are not limited to, windstorms, hurricanes, earthquakes, tornadoes, hail, severe winter weather and wildfires and may include pandemics and events related to terrorism and political unrest. While we employ catastrophe modeling tools in our underwriting process, we cannot predict how severe a potential catastrophe will be before it occurs. The extent of losses from catastrophes is a function of the total amount of losses incurred, the number of insureds affected, the frequency and severity of the events, the effectiveness of our catastrophe risk management program and the adequacy of our reinsurance coverage. 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 ILS operations and returns on our investments in ILS funds. Catastrophes also may result in significant disruptions in our insurance and other operations, as well as loss of income and assets. 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.

The failure of any of the methods we employ to manage our loss exposures could have a material adverse effect on us. We seek to manage our loss exposures in a variety of ways, including adhering to maximum limitations on policies written in defined geographical zones, 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 manage our loss exposures 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 results of operations and financial condition. In addition, we seek to manage our loss exposures by policy terms, coverage exclusions and choice of legal forum. Disputes relating to coverage and choice of legal forum also arise. As a result, various provisions of our policies, such as choice of forum, or coverage limitations or exclusions, may not be enforceable in the manner we intend and some or all of our methods to manage loss exposures may prove ineffective.

The effects of emerging claim and coverage issues on our business are uncertain. As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues 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. For example, many states have recently extended the statute of limitations for certain victims of sexual abuse. This may result in a higher frequency of claims over a more extended reporting period than originally expected.


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We use analytical models to assist our decision making in key areas such as pricing, reserving and capital modeling and actual results may differ materially from the model outputs and related analyses. We use various modeling techniques and data analytics (e.g., scenarios, predictive and stochastic modeling, and forecasting) to analyze and estimate exposures, loss trends and other risks associated with our insurance and ILS businesses. This includes both proprietary and third-party modeled outputs and related analyses to assist us in, among other things, decision-making related to underwriting, pricing, capital allocation, reserving, investing, reinsurance and catastrophe risk. We incorporate numerous assumptions and forecasts about the future level and variability of policyholder behavior, loss frequency and severity, interest rates, equity markets, inflation, capital requirements, and currency exchange rates, among others. The modeled outputs and related analyses from both proprietary models and third party models are subject to various assumptions, uncertainties, model design errors, complexities and the inherent limitations of any statistical analysis, including those arising from the use of historical internal and industry data and assumptions.

In addition, the modeled outputs and related analyses may from time to time contain inaccuracies, perhaps in material respects, including as a result of inaccurate inputs or applications thereof (whether due to data error, human error or otherwise). Consequently, actual results may differ materially from our modeled results. Our profitability and financial condition substantially depend on the extent to which our actual experience is consistent with assumptions we use in our models and ultimate model outputs. If, based upon these models or other factors, we misprice our products or fail to appropriately estimate the risks we are exposed to, our business, results of operations and financial condition may be materially adversely affected.

Loss Reserves

Our results may be affected because actual insured or reinsured losses differ from our loss reserves. Significant periods of time often elapse between the occurrence of an insured or reinsured loss, the reporting of the loss to us and our payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the related loss adjustment expenses. The process of estimating loss reserves is a difficult and complex exercise involving many variables and subjective judgments. This process may also 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 for our underwriting operations will, and for our programs services operations may, 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 and claims decisions made by ceding companies and (ii) information and data from ceding companies. As a result, we are subject to the risk that our ceding companies may not have adequately evaluated the risks reinsured by us and the premiums ceded may not adequately compensate us for the risks we assume. In addition, reinsurance reserves may be less reliable than insurance reserves because there is generally a longer lapse of time from the occurrence of the event to the reporting of the loss or benefit to the reinsurer and ultimate resolution or settlement of the loss.


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Changes in the assumptions and estimates used in establishing reserves for our life and annuity reinsurance book could result in material increases in our estimated loss reserves for such business. Our run-off life and annuity reinsurance book exposes us to mortality risk, which is the risk that the level of death claims may differ from that which we assumed in establishing the reserves for our life and annuity reinsurance contracts. Some of our life and annuity reinsurance contracts expose us to longevity risk, which is the risk that an insured person will live longer than expected when the reserves were established, or morbidity risk, which is the risk that an insured person will become critically ill or disabled. Our reserving process for the life and annuity reinsurance book is designed with the objective of establishing appropriate reserves for the risks we assumed. Among other things, this process relies heavily on analysis of mortality, longevity and morbidity trends, lapse rates, interest rates and expenses. As of December 31, 2019, our reserves for life and annuity benefits totaled $985.7 million.

We expect mortality, morbidity, longevity, and lapse experience to fluctuate somewhat from period to period, but believe they should remain reasonably predictable over a period of many years. Mortality, longevity, morbidity or lapse experience that is less favorable than the mortality, longevity, morbidity or lapse rates that we used in establishing the reserves for a reinsurance agreement will negatively affect our net income because the reserves we originally set for the risks we assumed may not be sufficient to cover the future claims and expense payments. Furthermore, even if the total benefits paid over the life of the contract do not exceed the expected amount, unexpected increases in the incidence of deaths or illness can result in changes to our assumptions in a given reporting period, adversely affecting our net income in any particular reporting period. Fluctuations in interest rates will impact the performance of our investments related to our life and annuity reinsurance book. If there are changes to any of the above factors to the point where a reserve deficiency exists, a charge to earnings will be recorded, which may have a material adverse effect on our results of operations and financial condition.

Ceded Reinsurance

We may be unable to purchase reinsurance protection on terms acceptable to us, or we may be unable to collect on reinsurance we purchase. Our underwriting operations purchase reinsurance and retrocessional reinsurance to manage our net retention on individual risks and mitigate the volatility of losses on our results of operations and financial condition, while providing us with the ability to offer policies with sufficient limits to meet policyholder needs. In addition, we reinsure substantially all of the risks inherent in our program services business, however, we have certain programs that contain limits on our reinsurers' obligations to us that expose us to underwriting risk, including loss ratio caps, aggregate reinsurance limits or exclusion of the credit risk of producers. See note 11 of the notes to consolidated financial statements for information about ceded reinsurance for our program services businesses.

The ceding of insurance does not legally discharge us from our primary liability for the full amount of the policies. Reliance on reinsurance recoveries may create credit risk as a result of the reinsurer's inability or unwillingness to pay reinsurance claims when due. We generally select well capitalized and highly rated reinsurers and in certain instances we require reinsurers to post substantial collateral to secure the reinsured risks. Deterioration in the credit quality of existing reinsurers or disputes over the terms of reinsurance could result in charges to earnings, which may have a material adverse effect on our results of operations and financial condition. In addition, collateral may not be sufficient to cover the reinsurer’s obligation to us, and we may not be able to cause the reinsurer to deliver additional collateral.

As of December 31, 2019, we were the beneficiary of letters of credit, trust accounts and funds withheld in the aggregate amount of $2.9 billion, collateralizing $5.4 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. In addition, available capacity may not be on terms we deem appropriate or acceptable or with companies with whom we want to do business. This could have a material adverse effect on our results of operations and financial condition.


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Market Competition

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, have greater access to “big data,” and may be able to offer a wider range of, or more sophisticated, commercial and personal lines products. Recent industry consolidation, including business combinations among insurance and other financial services companies, has resulted in larger competitors with even greater financial resources. In addition, capital market participants have created alternative products that are intended to compete with reinsurance products.

Similar to other industries, the insurance industry is undergoing rapid and significant technological and other change. There is increasing focus by traditional insurance industry participants, technology companies, “InsurTech” start-up companies and others on using technology and innovation to simplify and improve the customer experience, increase efficiencies, redesign products, alter business models and effect other potentially disruptive changes in the insurance industry. If we do not anticipate, keep pace with and adapt to technological and other changes impacting the insurance industry, it will harm our ability to compete, decrease the value of our products to customers, and materially and adversely affect our business. Furthermore, innovation, technological change and changing customer preferences in the markets in which we operate also pose other risks to our businesses. For example, they could result in increasing our service, administrative, policy acquisition or general expenses as we seek to distinguish our products and services from those of our competitors or otherwise keep up with such innovation and changes.

Increased competition could result in fewer submissions, lower premium rates, and less favorable policy terms and conditions, which could reduce our underwriting profits and have a material adverse effect on our results of operations and financial condition.

The historical cyclicality in the property and casualty insurance industry could have a material adverse effect on our ability to improve or maintain underwriting profits or to grow or maintain premium volume. The insurance and reinsurance markets have historically been cyclical, characterized by extended periods of intense price competition due to excessive underwriting capacity, and more recently alternative sources of capital, as well as brief periods when shortages of capacity permitted more favorable rate levels. Among our competitive strengths have been our specialty product focus and our niche market strategy. These strengths also make us vulnerable in periods of intense competition to actions by other insurance companies who seek to write additional premiums without appropriate regard for underwriting profitability. At times it could be very difficult for us to grow or maintain premium volume levels without sacrificing underwriting profits. If we are not successful in maintaining rates or achieving rate increases, it may be difficult for us to improve or maintain underwriting profits or to grow or maintain premium volume levels.


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Insurance Operations

Our efforts to develop new products, expand in targeted markets or improve business processes and workflows may not be successful and may increase or create new risks. From time to time, to protect and grow market share or improve our efficiency, we invest in strategic initiatives to:
develop products that insure risks we have not previously insured, include new coverages or change coverage terms;
change commission terms;
change our underwriting processes;
improve business processes and workflow to increase efficiencies and productivity and to enhance the experience of our customers and producers;
expand distribution channels; and
enter geographic markets where we previously have had relatively little or no market share.

We may not be successful in these efforts, and even if we are successful, they may increase or create the following risks, among others:
demand for new products or expansion into new markets may not meet our expectations;
new products and expansion into new markets may increase or change our risk exposures, and the data and models we use to manage those exposures may not be as effective as those we use in existing markets or with existing products;
models underlying automated underwriting and pricing decisions may not be effective;
efforts to develop new products or markets or to change commission terms may create or increase distribution channel conflicts;
in connection with the conversion of existing policyholders to a new product, some policyholders’ pricing may increase while the pricing for other policyholders may decrease, the net impact of which could negatively impact retention and profit margins; and
changes to our business processes or workflow, including the use of new technologies, may give rise to execution risk.

These efforts may require us to make substantial expenditures, which may negatively impact results in the near term, and if not successful, could materially and adversely affect our results of operations.

We depend on a few brokers for a large portion of our revenues and the loss of business provided by any one of them could have a material adverse effect on us. We market our insurance and reinsurance worldwide through insurance and reinsurance brokers. For the year ended December 31, 2019, our top three independent brokers represented 28% of the gross premiums written by our underwriting operations. Loss of all or a substantial portion of the business provided by one or more of these brokers could have a material adverse effect on our business.

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.


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The amount of capital that our insurance subsidiaries have and must hold to maintain their financial strength and credit ratings and meet other requirements can vary significantly from time to time and is sensitive to a number of factors, some of which are outside of our control. Capital requirements for our insurance subsidiaries are prescribed by the applicable insurance regulators, while rating agencies establish requirements that inform ratings for our insurance subsidiaries and senior debt securities. Projecting surplus and the related capital requirements is complex and requires making assumptions regarding how our business will perform within the broader macroeconomic environment. Insurance regulators and rating agencies evaluate company capital through financial models that calculate minimum capitalization requirements based on risk-based capital formulas for property and casualty insurance groups and their subsidiaries. In any particular year, capital levels and risk-based capital requirements may increase or decrease depending on a variety of factors including the mix of business written by our insurance subsidiaries and correlation or diversification in the business profile, the amount of additional capital our insurance subsidiaries must hold to support business growth, the value of securities in our investment portfolio, changes in interest rates and foreign currency exchange rates, as well as changes to the regulatory and rating agency models used to determine our required capital. In addition, the NAIC is developing a group capital calculation for U.S. based global insurance groups, and expects to implement a new standard in 2020. 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.

Insurance Regulation

Our insurance subsidiaries are subject to supervision and regulation that may have a material adverse effect on our operations and financial condition. Our insurance subsidiaries are subject to supervision and regulation by the regulatory authorities in the various jurisdictions in which they conduct business, including state, national and international insurance regulators. 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, in certain instances 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 effect on our results of operations and financial condition.

Regulators may challenge our use of fronting arrangements in states in which our capacity providers are not licensed. Our program services business enters into fronting arrangements with general agents and domestic and foreign insurers that want to access specific U.S. property and casualty insurance business in states in which the capacity providers are not licensed or are not authorized to write particular lines of insurance. Some state insurance regulators may object to these fronting arrangements. In certain states, an insurance commissioner has the authority to prohibit an authorized insurer from acting as an issuing carrier for an unauthorized insurer. In addition, insurance departments in states in which there is no such statutory or regulatory prohibition, could deem the assuming insurer to be transacting insurance business without a license and the issuing carrier to be aiding and abetting the unauthorized sale of insurance.

If regulators in any of the states where we conduct our fronting business were to prohibit or limit those arrangements, we would be prevented or limited from conducting that business for which a capacity provider is not authorized in those states, unless and until the capacity provider is able to obtain the necessary licenses. This could have a material adverse effect on our results of operations and financial condition.

Risks Primarily Related to Our Investments and Access to Capital

Changes in Economic Conditions

Our investment results may be impacted by changes in interest rates, U.S. and international monetary and fiscal policies as well as broader economic conditions. We receive premiums from customers for insuring their risks. We invest these funds until they are needed to pay policyholder claims. Fluctuations in the value of our investment portfolio can occur as a result of changes in interest rates and U.S. and international fiscal, monetary and trade policies as well as broader economic conditions (including, for example, equity market conditions and significant inflation or deflation). Although we attempt to take measures to manage the risks of investing in these changing environments, we may not be able to mitigate our sensitivity to them effectively. Despite our mitigation efforts, which include duration and currency targets for asset portfolios, compliance monitoring of these targets and means to reasonably and effectively match asset duration and currency to the duration and currency of the loss reserves, changes in interest rates and U.S. and international fiscal, monetary and trade policies as well as broader economic conditions could have a material adverse effect on our investment results.


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We invest a significant portion of our shareholders' equity in equity securities, which may result in significant variability in our investment results and net income and may have a material adverse effect on shareholders' equity. Additionally, our equity investment portfolio is concentrated, and declines in the value of these significant investments could have a material adverse effect on our financial results. Equity securities were 69% and 63% of our shareholders' equity at December 31, 2019 and 2018, respectively. 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.

Access to Capital

We may require additional capital in the future, which may not be available or may only be available on unfavorable terms. To the extent that cash flows generated by our operations are insufficient to fund future operating requirements, or that our capital position is adversely impacted by a decline in the fair value of our investment portfolio, losses from catastrophe events or otherwise, we may need to raise additional funds through financings or curtail our growth. We also may be required to liquidate fixed maturities or equity securities, which may result in realized investment losses. Any further sources of capital, including capacity needed for letters of credit, if available at all, may be on terms that are unfavorable to us. Our access to additional sources of capital will depend on a variety of factors, such as market conditions, the general availability of credit, the availability of credit to the industries in which we operate, our results of operations, financial condition, credit ratings and credit capacity, as well as pending litigation or regulatory investigations. Our ability to borrow under our revolving credit facility and letter of credit facilities is contingent on our compliance with the covenants and other requirements under those facilities. Similarly, our access to capital may be impaired if regulatory authorities or rating agencies take negative actions against us. Our inability to obtain adequate capital when needed could have a negative impact on our ability to invest in, or take advantage of opportunities to expand, our businesses, such as possible acquisitions or the creation of new ventures, and inhibit our ability to refinance our existing indebtedness on terms acceptable to us. Any of these effects could have a material adverse effect on our results of operations and financial condition.

Our failure to comply with covenants and other requirements under our revolving credit facility, senior debt and other indebtedness could have a material adverse effect on us. The agreements and indentures relating to our revolving credit facility, senior debt and other indebtedness, including letter of credit facilities used by certain of our insurance subsidiaries, contain covenants and other requirements. If we fail to comply with those covenants or requirements, the lenders, noteholders or counterparties under those agreements and indentures could declare a default and demand immediate repayment of all amounts owed to them. In addition, where applicable, our lenders may cancel their commitments to lend or issue letters of credit or require us to pledge additional or a different type of collateral. A default under one debt agreement may also put us at risk of a cross-default under other debt agreements or other arrangements. Any of these effects could have a material adverse effect on our results of operations and financial condition.

Our liquidity and our ability to make payments on debt or other obligations depend on the receipt of funds from our subsidiaries. We are a holding company, and as a result, our cash flow and our ability to service our debt and pay our other obligations depend upon the earnings of our subsidiaries and on the distribution of earnings, loans or other payments by our subsidiaries to us. The payment of dividends by our insurance subsidiaries, which account for a significant portion of our operating cash flows, may require prior regulatory notice or approval or may be restricted by capital requirements imposed by regulatory authorities. Similarly, our insurance subsidiaries may require capital contributions from us to satisfy their capital requirements. In addition, our reinsurance contracts typically allow the cedent, upon a reduction in an insurance company's capital in excess of specified amounts, to terminate its contract on terms disadvantageous to us or to exercise other remedies that may adversely affect us. Those contract provisions may have the effect of limiting distributions by our insurance subsidiaries to us.


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Risks Primarily Related to Our ILS Operations

We may be exposed to risk in connection with our management of third party capital. Some of our operating subsidiaries may owe certain legal duties and obligations to third party investors. A failure to fulfill any of those duties or obligations could result in significant liabilities, penalties or other losses, and harm our businesses and results of operations. In addition, third party investors may decide not to renew their investments in the funds we manage, which could materially impact the financial condition of those funds, and could, in turn, have a material adverse effect on our results of operations and financial condition. Moreover, we may not be able to maintain or raise additional third party capital for the funds we manage or for potential new funds and therefore we may forego existing or potential fee income and other income generating opportunities.

Developments at our Markel CATCo operations could have a material adverse effect on us. The U.S. Department of Justice, U.S. Securities and Exchange Commission and Bermuda Monetary Authority are conducting inquiries into loss reserves recorded in late 2017 and early 2018 at Markel CATCo Re (the Markel CATCo Inquiries). Subsequently, several related putative class actions were filed against Markel Corporation and certain present or former officers and directors alleging violations of the federal securities laws relating to the matters that are the subject of the Markel CATCo Inquiries. Those actions were consolidated and were voluntarily dismissed. See “Legal Proceedings” in this report and note 20 of the notes to consolidated financial statements for more information regarding the Markel CATCo Inquiries and other matters related to Markel CATCo. The Markel CATCo Inquiries and the related matters, as well as other matters of which we are currently unaware, could result in additional claims, litigation, investigations, enforcement actions or proceedings. For example, additional litigation may be filed by investors in the Markel CATCo Funds. We also could become subject to increased regulatory scrutiny, investigations or proceedings in any of the jurisdictions where we operate. If any regulatory authority takes action against us or we enter into an agreement to settle a matter, we may incur sanctions or be required to pay substantial fines or implement remedial measures that could prove costly or disruptive to our businesses and operations. An unfavorable outcome in one or more of these matters, and others we cannot anticipate, could have a material adverse effect on our results of operations and financial condition. In addition, we may take steps to mitigate potential risks or liabilities that may arise from the Markel CATCo Inquiries and related developments, and some of those steps may have a material impact on our results of operations or financial condition. Even if an unfavorable outcome does not materialize, these matters, and actions we may take in response, could have an adverse impact on our reputation, limit our access to capital markets and result in substantial expense and disruption.

Risks Related to All of Our Operations

Legal and Regulatory Risks

The legal and regulatory requirements applicable to our businesses are extensive. Failure to comply could have a material adverse effect on us. Each of our businesses is highly dependent on the ability to engage on a daily basis in a large number of financial and operational activities, including, among others, insurance underwriting, claim processing, investment activities, the management of third party capital and providing products and services to businesses and consumers, many of which are highly complex. These activities are subject to internal guidelines and policies, as well as legal and regulatory 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. Shareholder activism, the current political environment, and the current high level of government intervention and regulatory reform may lead to substantial new regulations and compliance obligations. Any changes in, or the enactment of new, applicable laws and regulations may increase the complexity of the regulatory environment in which we operate, which could materially increase our direct and indirect compliance costs and other expenses of doing business, and have a material adverse effect on our results of operations and financial condition.


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Losses from legal and regulatory actions may have a material adverse effect on us. From time to time we may be involved in various legal actions, including at times multi-party or class action litigation, some of which involve claims for substantial or indeterminate amounts. A significant unfavorable outcome in one or more of these actions could have a material adverse effect on our results of operations and financial condition. We are also involved from time to time in various regulatory actions, investigations and inquiries, including market conduct exams by insurance regulatory authorities. If a regulatory authority takes action against us or we enter into a consent order or agreement to settle a matter, a regulatory authority has the option to require us to pay substantial fines or implement remedial measures that could prove costly or disruptive to our businesses and operations. Even if an unfavorable outcome does not materialize, these matters could have an adverse impact on our reputation and result in substantial expense and disruption. See note 20 of the notes to consolidated financial statements and "Legal Proceedings."

We are subject to laws and regulations relating to economic and trade sanctions and bribery and corruption, the violation of which could have a material adverse effect on us. We are required to comply with the economic and trade sanctions and embargo programs administered by the U.S. Department of the Treasury's Office of Foreign Assets Control and similar multi-national bodies and governmental agencies worldwide, as well as applicable anti-corruption laws and anti-bribery and regulations of the U.S., the U.K. and other jurisdictions where we operate. A violation of a sanction, embargo program, or anti-corruption law, could subject us, and individual employees, to a regulatory enforcement action as well as significant civil and criminal penalties. In addition, a violation could result in defaults under our outstanding indebtedness or credit facilities or damage our businesses or our reputation. Those penalties or defaults, or damage to our businesses or reputation, could have a material adverse effect on our results of operations and financial condition. In some cases the requirements and limitations applicable to the global operations of U.S. companies and their affiliates are more restrictive than, and may even conflict with, those applicable to non-U.S. companies and their affiliates, which also could have a material adverse effect on our results of operations and financial condition.

Employee error and misconduct may be difficult to detect and prevent and may result in significant losses. There have been a number of cases involving misconduct by employees in a broad range of industries in recent years, and we run the risk of misconduct by our employees. Instances of fraud, illegal acts, errors, failure to document transactions properly or to obtain proper internal authorization, or failure to comply with regulatory requirements or our internal policies may result in losses. It is not always possible to deter or prevent employee errors or misconduct, and the controls that we have in place to prevent and detect this activity may not be effective in all cases.

Global Operations

We manage our global operations through a network of business entities, which could result in inconsistent management, governance and oversight practices. We manage our global operations through a network of business entities throughout the U.S., Bermuda, the U.K., Europe, Canada, Latin America, Asia Pacific and the Middle East. These business entities are managed by executives, and supported by shared and centralized services, primarily at the holding company level; however, for certain of our businesses subsidiary-level management is responsible for day-to-day operations, profitability, personnel decisions, the growth of the business, and legal and regulatory compliance, including adherence to applicable local laws. Operating through subsidiary-level management can make it difficult for us to implement strategic decisions and coordinated procedures throughout our global operations. In addition, some of our business entities operate with management, sales, and support personnel that may be insufficient to support growth in their respective locations and industries, without significant central oversight and coordination. We continue to enhance our operating, governance and oversight procedures to effectively support, and improve transparency throughout, our global operations and network of business entities; however, our operating strategy nonetheless could result in inconsistent management, governance, and oversight practices, which may have a material adverse effect on our results of operations and financial condition.

We have substantial international operations and investments, which expose us to increased political, 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 may contribute 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.

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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; the imposition of tariffs and other changes in international trade regulation and other factors, could lead to: substantial realized and unrealized investment losses in future periods; declines in demand for, or increased frequency and severity of claims made under, our insurance products; disruptions in global supply chains and increased costs of inputs for our products and services; reduced demand for our services and the products we sell and distribute; and limited or no access to the capital markets. Any of these impacts could have a material adverse effect on our results of operations, financial condition, debt and financial strength ratings or our insurance subsidiaries' capital.

The exit of the United Kingdom from the European Union could have a material adverse effect on us. On June 23, 2016, the U.K. voted to exit the E.U. (Brexit). The effects of Brexit will depend in part on agreements, if any, the U.K. makes to retain access to E.U. markets. A Withdrawal Agreement was agreed between the U.K. government and the E.U. in October 2019 and was approved by the U.K. Parliament on January 23, 2020. Under the Withdrawal Agreement, the U.K. left the E.U. on January 31, 2020. The effect of the Withdrawal Agreement is that E.U. laws continue to have effect in the U.K. during a transition period until December 31, 2020. The final terms of the future relationship between the U.K. and the E.U. remain to be negotiated. Ultimately, all Brexit terms also must be ratified by the legislative bodies of the 27 E.U. member states.

The U.K.’s exit from the E.U., and negotiations regarding the future terms of trade between the U.K. and the E.U., could continue to contribute to instability in global financial markets, including foreign currency markets, and adversely affect European and worldwide economic or market conditions. Significant uncertainties remain related to the political, monetary and economic impacts of Brexit, including related tax, accounting and financial reporting implications. Brexit could also lead to legal and regulatory uncertainty and potentially a large number of new and divergent national laws and regulations, including new tax rules, as the U.K. determines which E.U. laws to replace or replicate. These impacts, combined with the legal and regulatory uncertainty, may adversely affect our operations and also may result in increased claims arising from the impact on our policyholders. For example, in the absence of an agreement or a waiver for cross border data transfers, many U.K. and E.U. companies, including our U.K. and E.U. based operations, may not be able to comply with E.U. data privacy laws immediately after the transition period ends on December 31, 2020.

Without a Brexit agreement on future terms of trade, U.K. based insurers may be prohibited from administering policies for, or paying claims to, EEA policyholders post Brexit. In order to provide certainty for its EEA policyholders, MIICL transferred its legacy EEA exposures, claims and policies to MISE. This transfer was approved by the U.K. High Court and became effective on March 29, 2019. Lloyd’s also has commenced its transfer of legacy EEA exposures. That transfer is expected to be completed prior to December 31, 2020, however there is no assurance that approval of that transfer will be granted or on what terms and conditions. Lloyd’s has indicated that it intends to honor contractual commitments, including the payment of valid claims, and expects that its approach will be respected by EEA regulators pending the completion of its transfer of legacy EEA exposures. The European Insurance and Occupational Pensions Authority has issued its recommendation to E.U. member states that they adopt legislation to permit the orderly run-off of legacy EEA exposures, claims and policies by U.K. insurers. While some E.U. member states have adopted such legislation, no E.U. member state is obligated to do so, and the terms of any such legislation may vary significantly among the E.U. member states. Without an orderly run-off regime for legacy business in every E.U. member state, Lloyd’s, and in turn, Syndicate 3000, may be impaired in running-off business, including paying claims, in the E.U. member states.

Any of these effects of Brexit, and others we cannot anticipate, could have a material adverse effect on our results of operations and financial condition.

Acquisitions, Integration and Retention

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.


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The integration of acquired companies may not be as successful as we anticipate. We have completed, and expect to complete, acquisitions in an effort to achieve profitable growth in our underwriting and other insurance operations and to create additional value on a diversified basis in our Markel Ventures operations. Acquisitions present operational, strategic and financial risks, as well as risks associated with liabilities arising from the previous operations of the acquired companies. We also must make decisions about the degree to which we integrate acquisitions into our existing businesses, operations and systems, and over what timeframe. Those decisions may adversely affect how successfully the acquired businesses perform, both in the short term and in the long term. All of these risks are magnified in the case of a large acquisition. Integration of the operations 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. See note 2 of the notes to consolidated financial statements for information about our recent acquisitions.

Impairment in the value of our goodwill or other intangible assets could have a material adverse effect on our operating results and financial condition. As of December 31, 2019, goodwill and intangible assets totaled $4.0 billion and represented 37% of shareholders' equity. We record goodwill and intangible assets at fair value upon the acquisition of a business. Goodwill represents the excess of amounts paid to acquire businesses over the fair value of the net assets acquired. Goodwill and indefinite-lived intangible assets are evaluated for impairment annually, or more frequently if events or circumstances indicate that their carrying value may not be recoverable. Declines in operating results, divestitures, sustained market declines and other factors that impact the fair value of a reporting unit could result in an impairment of goodwill or intangible assets and, in turn, a charge to net income. Such a charge could have a material adverse effect on our results of operations or financial condition. Developments that adversely affect the future cash flows or earnings of an acquired business may cause the goodwill or intangible assets recorded for it to be impaired. See note 6 of the notes to consolidated financial statements.

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.

Information Technology Systems and Third-Party Systems and Service Providers

Information technology systems that we use could fail or suffer a security breach, which could have a material adverse effect on us or result in the loss of regulated or sensitive information. 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 those 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.


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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 or result in regulatory intervention, which could have a material adverse effect on our results of operations and financial condition.

Further, we routinely transmit, receive and store personal, confidential and proprietary information by email and other 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, that 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.

Outsourced providers may perform poorly, breach their obligations to us or expose us to enhanced risks. We outsource certain business functions to third-party providers, and these providers may not perform as anticipated or may fail to adhere to the obligations owed to us. For example, certain of our business units rely on relationships with a number of third-party administrators under contracts pursuant to which these third-party administrators manage and pay claims on our behalf and advise us with respect to case reserves. In these relationships, we rely on controls incorporated in the provisions of the administration agreement, as well as on the administrator's internal controls, to manage the claims process within our prescribed parameters. In addition, certain of our business units use managing general agents, general agents and other producers to write and administer business on our behalf within prescribed underwriting authorities. Although we monitor these administrators, agents, producers and other service providers on an ongoing basis, our monitoring efforts may not be adequate, or our service providers could exceed their authorities or otherwise breach obligations owed to us, which could result in operational disruption, reputational damage and regulatory intervention and otherwise have a material adverse effect on our results of operation and financial condition.

In addition, we outsource certain technology and business process functions to third parties and may do so increasingly in the future. If we do not effectively develop and implement our outsourcing strategy, third party providers do not perform as anticipated or we experience technological or other problems with a transition, we may not realize productivity improvements or cost efficiencies and may experience operational difficulties, increased costs and a loss of business. Our outsourcing of certain technology and business process functions to third parties may expose us to enhanced risk related to data security, which could result in monetary and reputational damages. In addition, our ability to receive services from third party providers might be impacted by cultural differences, political instability, unanticipated regulatory requirements or policies. As a result, our ability to conduct our business may be adversely affected.

Employees

At December 31, 2019, we had approximately 18,600 employees, of whom approximately 14,000 were employed within our Markel Ventures operations.


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SELECTED FINANCIAL DATA (dollars in millions, except per share data) (1) 

 
2019
 
2018
 
2017
 
2016
Results of Operations
 
 
 
 
 
 
 
Earned premiums
$
5,050

 
$
4,712

 
$
4,248

 
$
3,866

Net investment income
452

 
434

 
406

 
373

Products revenues
1,610

 
1,498

 
951

 
885

Services and other revenues
813

 
635

 
462

 
422

Total operating revenues (2)
9,526

 
6,841

 
6,062

 
5,612

Net income (loss) to shareholders (2)
1,790

 
(128
)
 
395

 
456

Comprehensive income (loss) to shareholders
2,094

 
(376
)
 
1,175

 
667

Diluted net income (loss) per share
$
129.07

 
$
(9.55
)
 
$
25.81

 
$
31.27

Financial Position
 
 
 
 
 
 
 
Total investments, cash and cash equivalents and restricted cash and cash equivalents (invested assets)
$
22,258

 
$
19,238

 
$
20,570

 
$
19,059

Total assets
37,474

 
33,306

 
32,805

 
25,875

Unpaid losses and loss adjustment expenses
14,729

 
14,276

 
13,584

 
10,116

Senior long-term debt and other debt
3,534

 
3,010

 
3,099

 
2,575

Shareholders' equity
11,071

 
9,081

 
9,504

 
8,461

Common shares outstanding (at year end, in thousands)
13,794

 
13,888

 
13,904

 
13,955

OPERATING PERFORMANCE MEASURES (1,3)
 
 
 
 
 
 
 
Operating Data
 
 
 
 
 
 
 
Book value per common share outstanding
$
802.59

 
$
653.85

 
$
683.55

 
$
606.30

5-Year CAGR in book value per share (4)
8
%
 
7
 %
 
11
%
 
11
%
Closing stock price
$
1,143.17

 
$
1,038.05

 
$
1,139.13

 
$
904.50

5-Year CAGR in closing stock price (4)
11
%
 
12
 %
 
21
%
 
17
%
Ratio Analysis
 
 
 
 
 
 
 
U.S. GAAP combined ratio (5)
94
%
 
98
 %
 
105
%
 
92
%
Investment yield (6)
3
%
 
3
 %
 
3
%
 
2
%
Taxable equivalent total investment return (7)
15
%
 
(1
)%
 
10
%
 
4
%
Investment leverage (8)
2.0

 
2.1

 
2.2

 
2.3

Debt to capital
24
%
 
25
 %
 
25
%
 
23
%
(1) 
Reflects the acquisition of Alterra Capital Holdings Limited effective May 1, 2013, which included the issuance of equity totaling $2.3 billion.
(2) 
In accordance with the provisions of ASU No. 2016-01, beginning January 1, 2018, all changes in the fair value of equity securities are recognized in net income.
(3) 
Operating Performance Measures provide a basis for management to evaluate our performance. The method we use to compute these measures may differ from the methods used by other companies. See further discussion of management's evaluation of these measures in Management's Discussion & Analysis of Financial Condition and Results of Operations.
(4) 
CAGR—compound annual growth rate.
(5) 
The U.S. GAAP combined ratio measures the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.
(6) 
Investment yield reflects net investment income as a percentage of monthly average invested assets at amortized cost.
(7) 
See "Investing Results" in Management's Discussion & Analysis of Financial Condition and Results of Operations for detail regarding the calculation of taxable equivalent total investment return.
(8) 
Investment leverage represents total invested assets divided by shareholders' equity.

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SELECTED FINANCIAL DATA (dollars in millions, except per share data) (1) 
 
2015
 
2014
 
2013
 
2012
Results of Operations
 
 
 
 
 
 
 
Earned premiums
$
3,824

 
$
3,841

 
$
3,232

 
$
2,147

Net investment income
353

 
363

 
317

 
282

Products revenues
872

 
681

 
550

 
367

Services and other revenues
215

 
203

 
161

 
172

Total operating revenues (2)
5,370

 
5,134

 
4,323

 
3,000

Net income to shareholders (2)
583

 
321

 
281

 
253

Comprehensive income to shareholders
233

 
936

 
459

 
504

Diluted net income per share
$
41.74

 
$
22.27

 
$
22.48

 
$
25.89

Financial Position
 
 
 
 
 
 
 
Total investments, cash and cash equivalents and restricted cash and cash equivalents (invested assets)
$
18,181

 
$
18,638

 
$
17,612

 
$
9,333

Total assets
24,939

 
25,198

 
23,956

 
12,557

Unpaid losses and loss adjustment expenses
10,252

 
10,404

 
10,262

 
5,371

Senior long-term debt and other debt
2,239

 
2,251

 
2,256

 
1,493

Shareholders' equity
7,834

 
7,595

 
6,674

 
3,889

Common shares outstanding (at year end, in thousands)
13,959

 
13,962

 
13,986

 
9,629

OPERATING PERFORMANCE MEASURES (1,3)
 
 
 
 
 
 
 
Operating Data
 
 
 
 
 
 
 
Book value per common share outstanding
$
561.23

 
$
543.96

 
$
477.16

 
$
403.85

5-Year CAGR in book value per share (4)
11
 %
 
14
%
 
17
%
 
9
 %
Closing stock price
$
883.35

 
$
682.84

 
$
580.35

 
$
433.42

5-Year CAGR in closing stock price (4)
18
 %
 
15
%
 
14
%
 
(2
)%
Ratio Analysis
 
 
 
 
 
 
 
U.S. GAAP combined ratio (5)
89
 %
 
95
%
 
97
%
 
97
 %
Investment yield (6)
2
 %
 
2
%
 
3
%
 
4
 %
Taxable equivalent total investment return (7)
(1
)%
 
7
%
 
7
%
 
9
 %
Investment leverage (8)
2.3

 
2.5

 
2.6

 
2.4

Debt to capital
22
 %
 
23
%
 
25
%
 
28
 %
(1) 
Reflects the acquisition of Alterra Capital Holdings Limited effective May 1, 2013, which included the issuance of equity totaling $2.3 billion.
(2) 
In accordance with the provisions of ASU No. 2016-01, beginning January 1, 2018, all changes in the fair value of equity securities are recognized in net income.
(3) 
Operating Performance Measures provide a basis for management to evaluate our performance. The method we use to compute these measures may differ from the methods used by other companies. See further discussion of management's evaluation of these measures in Management's Discussion & Analysis of Financial Condition and Results of Operations.
(4) 
CAGR—compound annual growth rate.
(5) 
The U.S. GAAP combined ratio measures the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.
(6) 
Investment yield reflects net investment income as a percentage of monthly average invested assets at amortized cost.
(7) 
See "Investing Results" in Management's Discussion & Analysis of Financial Condition and Results of Operations for detail regarding the calculation of taxable equivalent total investment return.
(8) 
Investment leverage represents total invested assets divided by shareholders' equity.


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Table of Contents

 
2011
 
2010
 
5-Year CAGR (4)
 
10-Year CAGR (4)
Results of Operations
 
 
 
 
 
 
 
Earned premiums
$
1,979

 
$
1,731

 
6
%
 
11
%
Net investment income
264

 
273

 
4
%
 
6
%
Products revenues
215

 
156

 
19
%
 
35
%
Services and other revenues
136

 
30

 
32
%
 
61
%
Total operating revenues (2)
2,630

 
2,225

 
13
%
 
16
%
Net income to shareholders (2)
142

 
267

 
 
 
 
Comprehensive income to shareholders
252

 
431

 
 
 
 
Diluted net income per share
$
14.60

 
$
27.27

 
 
 
 
Financial Position
 
 
 
 
 
 
 
Total investments, cash and cash equivalents and restricted cash and cash equivalents (invested assets)
$
8,728

 
$
8,224

 
4
%
 
11
%
Total assets
11,532

 
10,826

 
8
%
 
14
%
Unpaid losses and loss adjustment expenses
5,399

 
5,398

 
7
%
 
10
%
Senior long-term debt and other debt
1,294

 
1,016

 
 
 
 
Shareholders' equity
3,388

 
3,172

 
8
%
 
15
%
Common shares outstanding (at year end, in thousands)
9,621

 
9,718

 
 
 
 
OPERATING PERFORMANCE MEASURES (1,3)
 
 
 
 
 
 
 
Operating Data
 
 
 
 
 
 
 
Book value per common share outstanding
$
352.10

 
$
326.36

 
8
%
 
11
%
5-Year CAGR in book value per share (4)
9
 %
 
13
%
 
 
 
 
Closing stock price
$
414.67

 
$
378.13

 
11
%
 
13
%
5-Year CAGR in closing stock price (4)
(3
)%
 
4
%
 
 
 
 
Ratio Analysis
 
 
 
 
 
 
 
U.S. GAAP combined ratio (5)
102
 %
 
97
%
 
 
 
 
Investment yield (6)
4
 %
 
4
%
 
 
 
 
Taxable equivalent total investment return (7)
7
 %
 
8
%
 
 
 
 
Investment leverage (8)
2.6

 
2.6

 
 
 
 
Debt to capital
28
 %
 
24
%
 
 
 
 
(1) 
Reflects the acquisition of Alterra Capital Holdings Limited effective May 1, 2013, which included the issuance of equity totaling $2.3 billion.
(2) 
In accordance with the provisions of ASU No. 2016-01, beginning January 1, 2018, all changes in the fair value of equity securities are recognized in net income.
(3) 
Operating Performance Measures provide a basis for management to evaluate our performance. The method we use to compute these measures may differ from the methods used by other companies. See further discussion of management's evaluation of these measures in Management's Discussion & Analysis of Financial Condition and Results of Operations.
(4) 
CAGR—compound annual growth rate.
(5) 
The U.S. GAAP combined ratio measures the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.
(6) 
Investment yield reflects net investment income as a percentage of monthly average invested assets at amortized cost.
(7) 
See "Investing Results" in Management's Discussion & Analysis of Financial Condition and Results of Operations for detail regarding the calculation of taxable equivalent total investment return.
(8) 
Investment leverage represents total invested assets divided by shareholders' equity.


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MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

MARKELLOGO2019.JPG

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Management does not expect that its internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. The design of any system of internal control over financial reporting also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Under the supervision and with the participation of management, including the Co-Principal Executive Officers and the Principal Financial Officer, we evaluated the effectiveness of our internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, we have concluded that we maintained effective internal control over financial reporting as of December 31, 2019.

KPMG LLP, our independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company's internal control over financial reporting as of December 31, 2019, which is included herein.



SIGNATURE032019.JPG
 
SIGNATURE022019.JPG
 
SIGNATURE042019.JPG
Thomas S. Gayner
 
Richard R. Whitt, III
 
Jeremy A. Noble
Co-Chief Executive Officer
 
Co-Chief Executive Officer
 
Senior Vice President and Chief Financial Officer
(Co-Principal Executive Officer)
 
(Co-Principal Executive Officer)
 
(Principal Financial Officer)
 
 
 
 
 
February 21, 2020
 
 
 
 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

KPMGREPORTLOGO2019.JPG

To the Shareholders and Board of Directors
Markel Corporation:

Opinion on Internal Control Over Financial Reporting

We have audited Markel Corporation and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of income (loss) and comprehensive income (loss), changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated February 21, 2020 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.


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Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

SIGNATURE012019.JPG

Richmond, Virginia
February 21, 2020

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

KPMGREPORTLOGO2019.JPG

To the Shareholders and Board of Directors
Markel Corporation:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Markel Corporation and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income (loss) and comprehensive income (loss), changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 21, 2020 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for investments in equity securities as of January 1, 2018 due to the adoption of Accounting Standards Update No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.


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Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of the estimation of the liability for unpaid losses and loss adjustment expenses for the Company’s underwriting operations
As described in Note 10, the Company has recorded a liability for unpaid losses and loss adjustment expenses (loss reserves) of $14.7 billion as of December 31, 2019, of which $11.8 billion represents loss reserves for the Company’s underwriting operations. The Company’s actuaries use established actuarial methods and patterns of past claims activity to estimate ultimate losses to be paid. The actuarial point estimate represents the actuaries’ estimate of the most likely amount that will ultimately be paid to settle the losses that have occurred at a particular point in time. Loss reserves are established at the Company’s best estimate, which is generally higher than the actuarial point estimate for its underwriting operations.
We identified the evaluation of the estimation of loss reserves for the Company’s underwriting operations as a critical audit matter. The assessment of actuarial methods and key assumptions about future claim reporting and payment patterns, which were used to estimate ultimate losses, required specialized actuarial skills and knowledge. In addition, the Company’s best estimate incorporated additional or different perspectives from its actuaries on certain subjective factors, such as credibility and timeliness of claims information received from third parties, economic and social inflation, judicial decisions, changes in law, and other internal and external factors that affect loss development. The evaluation of these perspectives and their impact on certain assumptions utilized by the Company to estimate the loss reserves required subjective auditor judgment.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s loss reserving process, including internal controls related to methods and assumptions used to derive the actuarial point estimate and the Company’s best estimate of loss reserves for its underwriting operations. We also involved actuarial professionals with specialized skills and knowledge, who assisted in:
Assessing the Company’s actuarial methodologies by comparing to generally accepted actuarial methodologies;
Evaluating whether certain assumptions about future claims reporting and payment patterns used to determine the Company’s actuarial point estimate are consistent with the Company’s historical loss reporting and payment patterns;
Developing an independent range of consolidated loss reserves by:
Developing independent actuarial estimates for certain product lines with long-tail loss reporting and payment patterns using the Company’s underlying historical claims and policy data, as well as industry loss reporting and payment data for workers' compensation lines;
Assessing the Company’s actuarial analyses, including their actuarial methods and assumptions discussed above, for certain remaining product lines comprised of those with smaller balances or shorter tail loss reporting and payment patterns; and
Evaluating the movement of the Company’s best estimate within our independently calculated range of consolidated loss reserves between reporting periods.

SIGNATURE012019.JPG

We have served as the Company's auditor since 1980.

Richmond, Virginia
February 21, 2020

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MARKEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 
December 31,
 
2019
 
2018
 
(dollars in thousands)
ASSETS
 
 
 
Investments, at estimated fair value:
 
 
 
Fixed maturities, available-for-sale (amortized cost of $9,448,840 in 2019 and $9,950,773 in 2018)
$
9,970,909

 
$
10,043,188

Equity securities (cost of $3,266,735 in 2019 and $2,971,856 in 2018)
7,590,755

 
5,720,945

Short-term investments, available-for-sale (estimated fair value approximates cost)
1,196,248

 
1,077,696

Total Investments
18,757,912

 
16,841,829

Cash and cash equivalents
3,072,807

 
2,014,168

Restricted cash and cash equivalents
427,546

 
382,264

Receivables
1,847,802

 
1,692,526

Reinsurance recoverables
5,432,712

 
5,221,947

Deferred policy acquisition costs
566,042

 
474,513

Prepaid reinsurance premiums
1,415,857

 
1,331,022

Goodwill
2,308,548

 
2,237,975

Intangible assets
1,738,474

 
1,726,196

Other assets
1,906,115

 
1,383,823

Total Assets
$
37,473,815

 
$
33,306,263

LIABILITIES AND EQUITY
 
 
 
Unpaid losses and loss adjustment expenses
$
14,728,676

 
$
14,276,479

Life and annuity benefits
985,729

 
1,001,453

Unearned premiums
4,057,727

 
3,611,028

Payables to insurance and reinsurance companies
406,720

 
337,326

Senior long-term debt and other debt (estimated fair value of $3,907,000 in 2019 and $3,030,000 in 2018)
3,534,183

 
3,009,577

Other liabilities
2,504,802

 
1,796,036

Total Liabilities
26,217,837

 
24,031,899

Redeemable noncontrolling interests
177,562

 
174,062

Commitments and contingencies

 

Shareholders' equity:
 
 
 
Common stock
3,404,919

 
3,392,993

Retained earnings
7,457,176

 
5,782,310

Accumulated other comprehensive income (loss)
208,772

 
(94,650
)
Total Shareholders' Equity
11,070,867

 
9,080,653

Noncontrolling interests
7,549

 
19,649

Total Equity
11,078,416

 
9,100,302

Total Liabilities and Equity
$
37,473,815

 
$
33,306,263


See accompanying notes to consolidated financial statements.


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MARKEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

 
Years Ended December 31,
 
2019
 
2018
 
2017
 
(dollars in thousands, except per share data)
OPERATING REVENUES
 
 
 
 
 
Earned premiums
$
5,049,793

 
$
4,712,060

 
$
4,247,978

Net investment income
451,888

 
434,215

 
405,709

Net investment gains (losses):
 
 

 
 
Other-than-temporary impairment losses

 

 
(7,589
)
Net realized investment gains (losses), excluding other-than-temporary impairment losses
(1,482
)
 
(11,974
)
 
47,174

Change in fair value of equity securities
1,603,204

 
(425,622
)
 
(44,888
)
Net investment gains (losses)
1,601,722

 
(437,596
)
 
(5,303
)
Products revenues
1,609,586

 
1,497,523

 
951,012

Services and other revenues
813,202

 
635,083

 
462,263

Total Operating Revenues
9,526,191

 
6,841,285

 
6,061,659

OPERATING EXPENSES
 
 
 
 
 
Losses and loss adjustment expenses
2,891,190

 
2,820,715

 
2,865,761

Underwriting, acquisition and insurance expenses
1,878,093

 
1,777,511

 
1,589,464

Products expenses
1,455,245

 
1,413,248

 
850,449

Services and other expenses
675,679

 
474,924

 
458,621

Amortization of intangible assets
148,638

 
115,930

 
80,758

Impairment of goodwill and intangible assets

 
199,198

 

Total Operating Expenses
7,048,845

 
6,801,526

 
5,845,053

Operating Income
2,477,346

 
39,759

 
216,606

Interest expense
(171,687
)
 
(154,212
)
 
(132,451
)
Net foreign exchange gains (losses)
(2,265
)
 
106,598

 
3,140

Loss on early extinguishment of debt
(17,586
)
 

 

Income (Loss) Before Income Taxes
2,285,808

 
(7,855
)
 
87,295

Income tax (expense) benefit
(486,346
)
 
(122,498
)
 
313,463

Net Income (Loss)
$
1,799,462

 
$
(130,353
)
 
$
400,758

Net (income) loss attributable to noncontrolling interests
(8,996
)
 
2,173

 
(5,489
)
Net Income (Loss) to Shareholders
$
1,790,466

 
$
(128,180
)
 
$
395,269

 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
Change in net unrealized gains on available-for-sale investments, net of taxes:
 
 
 
 
 
Net holding gains (losses) arising during the period
$
299,125

 
$
(241,325
)
 
$
787,339

Reclassification adjustments for net gains (losses) included in net income (loss)
(1,148
)
 
7,849

 
(24,296
)
Change in net unrealized gains on available-for-sale investments, net of taxes
297,977

 
(233,476
)
 
763,043

Change in foreign currency translation adjustments, net of taxes
382

 
(16,495
)
 
10,449

Change in net actuarial pension loss, net of taxes
5,042

 
2,341

 
6,259

Total Other Comprehensive Income (Loss)
303,401

 
(247,630
)
 
779,751

Comprehensive Income (Loss)
$
2,102,863

 
$
(377,983
)
 
$
1,180,509

Comprehensive (income) loss attributable to noncontrolling interests
(8,975
)
 
2,213

 
(5,535
)
Comprehensive Income (Loss) to Shareholders
$
2,093,888

 
$
(375,770
)
 
$
1,174,974

 
 
 
 
 
 
NET INCOME (LOSS) PER SHARE
 
 
 
 
 
Basic
$
129.25

 
$
(9.55
)
 
$
25.89

Diluted
$
129.07

 
$
(9.55
)
 
$
25.81


See accompanying notes to consolidated financial statements.

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MARKEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands)
Common
Shares
 
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders'
Equity
 
Noncontrolling
Interests
 
Total Equity
 
Redeemable Noncontrolling Interests
December 31, 2016
13,955

 
$
3,368,666

 
$
3,526,395

 
$
1,565,866

 
$
8,460,927

 
$
6,484

 
$
8,467,411

 
$
73,678

Net income (loss)
 
 
 
 
395,269

 

 
395,269

 
(895
)
 
394,374

 
6,384

Other comprehensive income
 
 
 
 

 
779,705

 
779,705

 

 
779,705

 
46

Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
1,174,974

 
(895
)
 
1,174,079

 
6,430

Issuance of common stock
58

 
552

 

 

 
552

 

 
552

 

Repurchase of common stock
(109
)
 

 
(110,838
)
 

 
(110,838
)
 

 
(110,838
)
 

Restricted stock awards expensed