Markel Corporation 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. Markel is a diversified financial holding company focused on specialty insurance, investing, and Markel Ventures. Amounts are U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total operating revenues | $9.735 billion | $9.526 billion |
| Net income to common shareholders | $797.6 million | $1.790 billion |
| Diluted earnings per common share | $55.63 | $129.07 |
| Comprehensive income to shareholders | $1.192 billion | $2.094 billion |
| Net cash from operating activities | $1.738 billion | $1.274 billion |
| Invested assets | $24.927 billion | $22.258 billion |
| Total assets | $41.710 billion | $37.474 billion |
| Shareholders’ equity | $12.800 billion | $11.071 billion |
| Senior long-term and other debt | $3.484 billion | $3.534 billion |
- Underwriting: Earned premiums rose 11% to $5.612 billion. Underwriting profit fell to $127.6 million from $280.5 million; the consolidated combined ratio rose to 98% from 94% (below 100% indicates underwriting profit). Insurance earned a $169.0 million underwriting profit with a 96% combined ratio; Reinsurance had a $34.0 million underwriting loss and a 104% combined ratio.
- Losses and reserves: Underwriting results included $360.4 million of COVID-19-related underwriting losses and $168.9 million of catastrophe losses, versus $100.4 million of catastrophe losses in 2019. Favorable development on prior-year reserves was $606.4 million, up from $535.3 million. Gross unpaid losses and loss adjustment expenses were $16.2 billion; reinsurance recoverables on unpaid losses were $5.7 billion.
- Investments: Net investment income declined 18% to $371.8 million; net investment gains fell to $618.0 million from $1.602 billion, primarily reflecting smaller equity-market gains. Taxable-equivalent total investment return was 9.4%, versus 14.6%. At year-end, portfolio allocation was 43% fixed maturities, 28% equities, and 29% short-term investments, cash and equivalents.
- Markel Ventures: Revenue increased to $2.795 billion from $2.056 billion; operating income was $254.1 million versus $169.4 million, and net income attributable to shareholders was $145.4 million versus $92.9 million. Results included acquisitions, notably Lansing Building Products, acquired in April 2020.
- Liquidity and capital: Cash, cash equivalents and restricted cash totaled $5.217 billion at year-end. The holding company reported $4.1 billion of invested assets; its $300 million revolving credit facility had no borrowings outstanding and expires in April 2024. Debt-to-capital was 21%, compared with 24%. In May 2020, Markel issued preferred shares for $591.9 million net proceeds. The company reported sufficient liquidity and insurance-subsidiary capital significantly above regulatory requirements.
- Shareholder measures: Book value per common share increased 10% to $885.72; the year-end share price declined 10% to $1,033.30. Markel stated it does not expect to pay a common-stock cash dividend. It resumed common-share repurchases in February 2021 after suspending them in March 2020.
Material changes and management commentary
- Operating revenue increased modestly, but common-shareholder net income and comprehensive income declined substantially, mainly because investment gains were lower than in 2019 and 2020 underwriting results included pandemic losses.
- Underwriting gross premium volume rose 11%, led by Insurance growth; program-services gross premiums declined 10% to $2.1 billion, reflecting program run-off and cancellation, including a $55.0 million unfavorable premium adjustment.
- Management described pricing as improving across many lines, particularly catastrophe-exposed, loss-affected, general-liability and professional-liability business. Workers’ compensation remained an exception, with low single-digit rate decreases. Management said it would not write business when pricing failed to meet profit targets.
- Beginning in 2021, Markel planned to stop retaining catastrophe-exposed property reinsurance risk in its Reinsurance segment, with eligible business instead written by or ceded to Nephila for third-party capital. Existing multi-year contracts leave some exposure through 2023.
- Markel Ventures demand was affected by pandemic-related economic disruption, including lower volumes at some transportation and equipment businesses. Management said demand had begun to recover but expected ongoing effects that could remain material.
Outlook, risks, contingencies and unusual items
- The filing provides no formal quantitative earnings or revenue guidance. Management cautioned that pandemic effects, claims, economic conditions and market movements remain uncertain and could materially affect future results, financial condition and cash flows.
- COVID-19 reserves were based on evolving claims, policy interpretation, reinsurance coverage and judicial decisions. The U.K. business-interruption test case, upheld by the U.K. Supreme Court, affected estimates on certain reinsurance treaties. Further reserve revisions could be material; management also expected possible additional indirect pandemic losses.
- Natural catastrophes, long-tail claims, reserve estimation, reinsurance collectability and pricing cycles are key insurance risks. The company’s large equity portfolio is concentrated: its ten largest equity holdings were 44% of the portfolio, and a hypothetical 35% equity-price decline was estimated to reduce shareholders’ equity by 15.1% at year-end 2020.
- Markel CATCo remained in run-off. Governmental inquiries into CATCo loss reserves recorded in late 2017 and early 2018 remained unresolved; the company said it could not predict their duration, scope or outcome. An internal review found no evidence of bad faith by CATCo personnel.
- A disputed contingent-value-rights matter brought by Thomas Yeransian sought damages, interest and other relief. Markel considered the suits without merit and believed a material loss was remote; the valuation process was ongoing.
- A $41.5 million disposal loss was recorded for the planned disposition of Latin American reinsurance operations, primarily reflecting foreign-currency translation adjustments. No goodwill or intangible-asset impairment was recorded in 2020; total goodwill and intangible assets were $4.4 billion, including Nephila goodwill considered sensitive to assumptions about fund assets, flows and valuation.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Lansing, acquired in 2020, was excluded from the internal-control assessment and audit; it represented 2% of consolidated assets and 7% of operating revenues.
Most important facts for investors to verify
- Whether COVID-19 and catastrophe claim estimates develop adversely, including the adequacy of ceded recoveries and remaining multi-year catastrophe exposures.
- Whether favorable prior-year reserve development continues; management cautioned investors not to place undue reliance on the favorable trend.
- Whether improving insurance rates translate into sustained underwriting profitability, particularly as catastrophe exposure shifts toward third-party ILS capital.
- How concentrated equity investments, lower interest rates and market volatility affect investment income, realized gains and shareholders’ equity.
- Whether Markel Ventures acquisitions and operating recovery offset pandemic-related pressures, and whether the CATCo inquiries or CVR litigation lead to material costs or outcomes.