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April 26, 2022, 4:35 p.m. EDT

10-Q: MARKEL CORP

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included under Item 1 Financial Statements and our 2021 Annual Report on Form 10-K. The accompanying consolidated financial statements and related notes have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) and include the accounts of Markel Corporation and its consolidated subsidiaries, as well as any variable interest entities that meet the requirements for consolidation. See note 1(b) of the notes to consolidated financial statements for details of recently issued accounting pronouncements that we have not yet adopted and the expected effects on our consolidated financial position, results of operations and cash flows. This section is divided into the following sections:

Our Business

Results of Operations

Financial Condition

Critical Accounting Estimates

Safe Harbor and Cautionary Statement

In February 2022, military conflict escalated between Russia and Ukraine following Russia's invasion of Ukraine. The ongoing conflict that has followed, and related financial and economic sanctions imposed by governments in the U.S., United Kingdom and European Union, among others, in response, have caused disruption in the global economy and have increased global economic and political uncertainty. Our underwriting results for the quarter included $35.0 million of net losses and loss adjustment expenses and $12.3 million of additional reinsurance costs attributed to the Russia-Ukraine conflict. Assumptions used to develop our loss estimate are inherently uncertain and subject to a wide range of variability. See "Results of Operations - Underwriting Results" for further details regarding our underwriting exposures and loss estimates related to this ongoing conflict. For further discussion regarding the Russia-Ukraine conflict and risks related to our businesses, see Item 1A Risk Factors.

Our Business

We are a diverse financial holding company serving a variety of niche markets. We aspire to build one of the world's great companies and deploy three financial engines in pursuit of this goal.

Insurance - Our principal business markets and underwrites specialty insurance products using multiple platforms that enable us to best match risk and capital.

Investments - Our investing activities are primarily related to our underwriting operations. The majority of our investable assets come from premiums paid by policyholders and the remainder is comprised of shareholder funds.

Markel Ventures - Through our Markel Ventures operations, we own controlling interests in a diverse portfolio of businesses that operate outside of the specialty insurance marketplace.

Our financial goals are to earn consistent underwriting and operating profits and superior investment returns to build shareholder value. We measure financial success by our ability to grow book value per common share and the market price per common share of our stock, or total shareholder return, at high rates of return over a long period of time. To mitigate effects of short-term volatility and align with the longer-term perspective we apply to operating our businesses, we generally use five-year time periods to measure our performance. Growth in book value per common share is an important measure of our success because it includes all underwriting, operating and investing results. Over the five-year period ended March 31, 2022, the compound annual growth in book value per common share was 10%. 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. Over the five-year period ended March 31, 2022, our common share price increased at a compound annual rate of 9%.

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Our insurance engine is comprised of the following types of operations:

Underwriting - Our underwriting operations are comprised of our risk-bearing insurance and reinsurance operations.

Insurance-linked securities - Our insurance-linked securities (ILS) operations include investment fund managers that offer a variety of investment products, including insurance-linked securities, catastrophe bonds, insurance swaps and weather derivatives.

Program services - Our program services business serves as a fronting platform that provides other insurance entities access to the U.S. property and casualty insurance market.

Through our underwriting, ILS and program services operations, we have a suite of capabilities through which we can access capital to support our customers' risks, which includes our own capital through our underwriting operations, as well as third-party capital through our ILS and program services operations. Within each of these platforms, 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, including the multiple platforms through which we can manage risk and deploy capital. For example, we may leverage the strength of our underwriting platform to write certain risks on behalf of our ILS operations in accordance with their desired return objectives. We may also cede certain risks written through our underwriting operations to our ILS operations to the extent those risks are more aligned with the risk profile of our ILS investors than our own capital risk tolerance. Our ability to access multiple insurance platforms allows us to achieve income streams from our insurance operations beyond the traditional underwriting model.

Underwriting

Our chief operating decision maker reviews our ongoing underwriting operations on a global basis in the following two segments: Insurance and Reinsurance. In determining how to allocate resources and assess the performance of 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 written on a risk-bearing basis within our underwriting operations. The Reinsurance segment includes all treaty reinsurance written on a risk-bearing basis within our underwriting operations.

Our Insurance segment includes both hard-to-place risks written outside of the standard market on an excess and surplus lines basis and unique and hard-to-place risks that must be written on an admitted basis due to marketing and regulatory reasons. Risks written in our Insurance segment are written on either a direct basis or a subscription basis, the latter of which means that the loss exposures brought into the market are typically insured by more than one insurance company or Lloyd's of London (Lloyd's) syndicate. When we write business in the subscription market, we prefer to participate as lead underwriter in order to control underwriting terms, policy conditions and claims handling. The following products are included in this segment: professional liability, general liability, personal lines, marine and energy, primary and excess of loss property, workers' compensation, credit and surety coverages, specialty program insurance for well-defined niche markets and liability and other coverages tailored for unique exposures. Business in this segment is primarily written through our Markel Specialty and Markel International divisions. The Markel Specialty division writes business on both an excess and surplus lines and admitted basis, primarily based in the United States, as well as Bermuda, London, and Europe. The Markel International division writes business worldwide from our London and Munich-based platforms, which include branch offices around the world. The Insurance segment also includes collateral protection insurance written on an admitted basis through our State National division.

Our Reinsurance segment includes 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. Business in this segment is primarily written by our Global Reinsurance division. Principal lines of business include: professional liability, general liability, workers' compensation and credit and surety. Previously, we also wrote property reinsurance and retrocessional reinsurance business, however, effective January 1, 2022, we were off-risk for substantially all property loss exposures, including catastrophe exposures, previously written within our Reinsurance segment.

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Our insurance-linked securities operations are primarily comprised of our Nephila operations and are not included in a reportable segment. Nephila Holdings Ltd. (together with its subsidiaries, Nephila) serves as an insurance and investment fund manager and managing general agent 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 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. The Nephila Reinsurers subscribe to various reinsurance contracts based on their investors' risk profiles, including property reinsurance business fronted through our underwriting platform. Nephila also serves as a managing general agent that underwrites and administers property insurance policies and provides delegated underwriting services to providers of insurance capital. In the first quarter of 2022, we completed the sale of our Velocity managing general agent operations, and we have entered into an agreement to to sell our remaining managing general agent operations later in 2022. See "Results of Operations - Other Operations" for further details regarding these transactions. See note 12 of the notes to consolidated financial statements for further details regarding our Nephila operations.

Our insurance-linked securities operations also include our run-off Markel CATCo operations, the results of which are reported separately from our ongoing insurance-linked securities operations. Our Markel CATCo operations are conducted through Markel CATCo Investment Management Ltd. (MCIM), an ILS investment fund manager headquartered in Bermuda. MCIM serves as the insurance manager for Markel CATCo Re Ltd. (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). In July 2019, these operations were placed into run-off. In March 2022, we completed a buy-out transaction that provided for an accelerated return of all remaining capital to investors in the Markel CATCo Funds. See note 11 of the notes to consolidated financial statements for further details regarding our Markel CATCo operations and the buy-out transaction.

Program Services

Our program services business generates fee income in the form of ceding fees in exchange for fronting insurance business to other insurance carriers (capacity providers). In general, fronting refers to business in which we write insurance on behalf of a general agent or capacity provider and then cede all, or substantially all, of the risk under these policies to the capacity provider in exchange for ceding fees. The results of our program services operations are not included in a reportable segment.

Our program services business, which is provided through our State National division, offers issuing carrier capacity to both specialty managing general agents and other producers who sell, control and administer books of insurance business that are supported by third parties that assume reinsurance risk, including Syndicate 2357 and other Nephila Reinsurers. These reinsurers are domestic and foreign insurers and institutional risk investors that want to access specific lines of U.S. property and casualty insurance business but may not have the required licenses and filings to do so.

Through our program services business, we write a wide variety of insurance products, principally including general liability, commercial liability, commercial multi-peril, property and workers' compensation. Program services business written through our State National division is separately managed from our underwriting divisions, which write similar products, in order to protect our program services customers.

In certain instances, we also leverage the strength of our underwriting platform to write business on behalf of our ILS operations in exchange for ceding fees to support their business plans and assist in meeting their desired return objectives. This business is conducted separately from our program services business and primarily consists of catastrophe-exposed property reinsurance business, which we no longer write on a risk-bearing basis.

Although we reinsure substantially all of the risks inherent in our program services business and ILS fronting arrangements, we have certain programs that contain limits on our reinsurers' obligations to us that expose us to underwriting risk, including loss ratio caps, aggregate reinsurance limits or exclusion of the credit risk of producers. Under certain programs, including programs and contracts with Nephila Reinsurers, we also bear underwriting risk for annual aggregate agreement year losses in excess of a limit that we believe is unlikely to be exceeded. See note 12 of the notes to consolidated financial statements for further details regarding our programs with Nephila Reinsurers.

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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. 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.

Markel Ventures

Through our wholly owned subsidiary, Markel Ventures, Inc. (Markel Ventures), we own controlling interests in various high-quality businesses that operate outside of the specialty insurance marketplace but have the shared goal of positively contributing to the long-term financial performance of Markel Corporation. Management views these businesses as separate and distinct from our insurance operations. Management teams for each business operate autonomously and are responsible for developing strategic initiatives, managing day-to-day operations and making investment and capital allocation decisions for their respective companies.

Our senior management team is responsible for decisions regarding allocation of capital for acquisitions and new investments. 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 specialized businesses from different industries that offer various types of products and services to businesses and consumers across many markets. The following types of businesses are included in this segment: construction services, consumer and building products, transportation-related products, equipment manufacturing products and consulting services. In December 2021, we acquired a controlling interest in Metromont LLC (Metromont), a precast concrete manufacturer and concrete building solutions provider for commercial projects. In August 2021, we acquired a controlling interest in Buckner HeavyLift Cranes (Buckner), a provider of crane rental services for large commercial contractors. See note 3 of the notes to consolidated financial statements for additional details related to these acquisitions.







        Results of Operations
        The following table presents the components of net income (loss) to
        shareholders, net income (loss) to common shareholders and comprehensive income
        (loss) to shareholders.
                                                                                       Three Months Ended
                                                                                            March 31,
        (dollars in thousands)                                                                   2022                2021
        Insurance segment profit                                                             $  187,494          $ 116,948
        Reinsurance segment profit (loss)                                                        13,283            (23,218)
        Investing segment profit (loss) (1)                                                    (285,672)           623,438
        Markel Ventures segment profit (2)                                                       49,737             51,463
        Other operations (3)                                                                     (6,987)           (23,274)
        Interest expense                                                                        (49,692)           (42,389)
        Net foreign exchange gains                                                               23,494             25,084
        Income tax (expense) benefit                                                             18,429           (148,371)
        Net income attributable to noncontrolling interests                                      (2,929)            (5,987)
        Net income (loss) to shareholders                                                       (52,843)           573,694
        Net income (loss) to common shareholders                                                (52,843)           573,694
        Other comprehensive loss to shareholders                                               (476,184)          (214,697)
        Comprehensive income (loss) to shareholders                                          $ (529,027)         $ 358,997
        (1)  Net investment income and net investment gains (losses), if any,
        attributable to Markel Ventures are included in segment profit for Markel
        Ventures. All other net investment income and net investment gains (losses) are
        included in Investing segment profit (loss).
        (2)  Segment profit for the Markel Ventures segment includes amortization of
        intangible assets attributable to Markel Ventures.
        (3)  Other operations include the results attributable to our operations that
        are not included in a reportable segment, as well as any amortization of
        intangible assets that is not allocated to a reportable segment. Amortization of
        intangible assets attributable to our underwriting segments was $9.8 million and
        $10.4 million for the three months ended March 31, 2022 and 2021, respectively;
        however, we do not allocate amortization of intangible assets between the
        Insurance and Reinsurance segments.
        The change in comprehensive income (loss) to shareholders for the three months
        ended March 31, 2022 compared to the three months ended March 31, 2021 was
        primarily due to pre-tax net investment losses of $358.4 million in 2022
        compared to pre-tax net investment gains of $526.9 million in 2021, as well as
        pre-tax net unrealized losses on our fixed maturity securities of $665.8 million
        in 2022 compared to $321.2 million in 2021.
        The components of net income (loss) to shareholders and comprehensive income
        (loss) to shareholders are discussed in further detail under "Underwriting
        Results," "Investing Results," "Markel Ventures," "Other Operations," "Interest
        Expense and Income Taxes" and "Comprehensive Income (Loss) to Shareholders and
        Book Value per Common Share."
        Underwriting Results
        Underwriting profits are a key component of our strategy to build shareholder
        value. We believe that the ability to achieve consistent underwriting profits
        demonstrates knowledge and expertise, commitment to superior customer service
        and the ability to manage insurance risk. The property and casualty insurance
        industry commonly defines underwriting profit or loss as earned premiums net of
        losses and loss adjustment expenses and underwriting, acquisition and insurance
        expenses. We use underwriting profit or loss and the combined ratio as a basis
        for evaluating our underwriting performance. The U.S. GAAP combined ratio is a
        measure of underwriting performance and represents the relationship of incurred
        losses, loss adjustment expenses and underwriting, acquisition and insurance
        expenses to earned premiums. The combined ratio is the sum of the loss ratio and
        the expense ratio. The loss ratio represents the relationship of incurred losses
        and loss adjustment expenses to earned premiums. The expense ratio represents
        the relationship of underwriting, acquisition and insurance expenses to earned
        premiums. A combined ratio less than 100% indicates an underwriting profit,
        while a combined ratio greater than 100% reflects an underwriting loss.
        In addition to the U.S. GAAP combined ratio, loss ratio and expense ratio, we
        also evaluate our underwriting performance using measures that exclude the
        impacts of certain items on these ratios. We believe these adjusted measures,
        which are non-GAAP measures, provide financial statement users with a better
        understanding of the significant factors that comprise our underwriting results
        and how management evaluates underwriting performance.
                                               31
        --------------------------------------------------------------------------------
        


When analyzing our combined ratio, we exclude current accident year losses and loss adjustment expenses attributed to natural catastrophes. We also exclude losses and loss adjustment expenses attributed to certain significant, infrequent loss events, for example, the COVID-19 pandemic and the Russia-Ukraine conflict. Due to the unique characteristics of a catastrophe loss and other significant, infrequent events, there is inherent variability as to the timing or loss amount, which cannot be predicted in advance. We believe measures that exclude the effects of catastrophe events, the Russia-Ukraine conflict and COVID-19 are meaningful to understand the underlying trends and variability in our underwriting results that may be obscured by these items.

When analyzing our loss ratio, we evaluate losses and loss adjustment expenses attributable to the current accident year separate from losses and loss adjustment expenses attributable to prior accident years. Prior accident year reserve development, which can either be favorable or unfavorable, represents changes in our estimates of losses and loss adjustment expenses related to loss events that occurred in prior years. We believe a discussion of current accident year loss ratios, which exclude prior accident year reserve development, is helpful since it provides more insight into estimates of current underwriting performance and excludes changes in estimates related to prior year loss reserves. We also analyze our current accident year loss ratio excluding losses and loss adjustment expenses attributable to catastrophes and, in 2022, the Russia-Ukraine conflict. The current accident year loss ratio excluding the impact of catastrophes and other significant, infrequent loss events is also commonly referred to as an attritional loss ratio within the property and casualty insurance industry.







        Consolidated
                                                                                Three Months Ended March
                                                                                          31,
        (dollars in thousands)                                                                  2022                 2021              % Change
        Gross premium volume (1)                                                           $ 2,518,116          $ 2,170,383                  16  %
        Net written premiums                                                               $ 2,164,734          $ 1,881,070                  15  %
        Earned premiums                                                                    $ 1,759,770          $ 1,497,695                  17  %
        Underwriting profit                                                                $   197,033          $    91,034                 116  %
        Underwriting Ratios (2)                                                                                                      Point Change
        Loss ratio
        Current accident year loss ratio                                                          60.7  %              64.8  %             (4.1)
        Prior accident years loss ratio                                                           (5.5) %              (6.1) %              0.6
        Loss ratio                                                                                55.3  %              58.8  %             (3.5)
        Expense ratio                                                                             33.5  %              35.2  %             (1.7)
        Combined ratio                                                                            88.8  %              93.9  %             (5.1)
        Current accident year loss ratio catastrophe impact (3)                                      -  %               4.3  %             (4.3)
        Current accident year loss ratio Russia-Ukraine conflict impact
        (3)                                                                                        2.0  %                 -  %              2.0
        Prior accident years loss ratio COVID-19 impact (3)                                          -  %               1.2  %             (1.2)
        Current accident year loss ratio, excluding catastrophes and
        Russia-Ukraine conflict                                                                   58.7  %              60.5  %             (1.8)
        Combined ratio, excluding current year catastrophes,
        Russia-Ukraine conflict and COVID-19                                                      86.8  %              88.4  %             (1.6)
        (1)  Gross premium volume excludes $880.2 million and $634.5 million for the
        three months ended March 31, 2022 and 2021, respectively, of written premiums
        attributable to our program services business and other fronting arrangements
        that were ceded.
        (2)  Amounts may not reconcile due to rounding.
        . . .
        


Apr 26, 2022

COMTEX_406278962/2041/2022-04-26T16:35:13

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