Markel (MKL) - 2022 Q4 - Annual Report

PART I Item 1. Business Overview Markel Corporation operates as a diverse financial holding company with three main engines: Insurance, Investments, and Markel Ventures - Markel Corporation operates through three financial engines: Insurance, Investments, and Markel Ventures, aiming for consistent profits and superior investment returns to build shareholder value[9][10][11] 5-Year Compound Annual Growth Rates (CAGR) as of December 31, 2022 | Metric | 5-Year CAGR | | :-------------------------------- | :---------- | | Earned premiums | 12 % | | Net investment income | 3 % | | Markel Ventures operating revenues | 29 % | | Total operating revenues | 14 % | | Total investments, cash and cash equivalents and restricted cash and cash equivalents (invested assets) | 6 % | | Total assets | 9 % | | Unpaid losses and loss adjustment expenses | 9 % | | Shareholders' equity | 7 % | | Book value per common share | 6 % | | Closing stock price | 3 % | Insurance Operations The company's insurance engine encompasses underwriting, insurance-linked securities (ILS), and program services to match diverse risks with capital - Markel's insurance engine includes underwriting, ILS, and program services, leveraging a multi-platform approach to manage risk and deploy capital, focusing on specialty products and niche markets[16][17][19] - In 2022, 80% of gross premium writings from global underwriting operations were attributed to risks or cedents located in the United States[33] 2022 Gross Premium Volume Composition of Underwriting Operations | Segment | Gross Premium Volume (2022) | | :---------------- | :-------------------------- | | Insurance | $8.6 billion | | Reinsurance | $1.2 billion | Underwriting Markel's underwriting operations specialize in hard-to-place risks in both direct insurance and treaty reinsurance markets globally - Markel underwrites specialty insurance products for hard-to-place risks, focusing on expertise and customized solutions in niche markets such as liability for specialized professionals, wind/earthquake-exposed properties, and classic cars[17][18][19] - The company participates in the reinsurance market, primarily in casualty and other specialty lines, writing treaty reinsurance contracts globally on both quota share and excess of loss bases[20][21] Markets and Distribution The company utilizes multiple global distribution channels, including wholesale and retail brokers, and operates in key U.S and international markets - Markel operates globally, utilizing wholesale and retail brokers, and managing general agents for distribution; in the U.S, it writes in E&S and admitted markets, being the third-largest E&S writer in 2021[29][30] - International operations include the London market (2% share in 2021), Bermuda (1% share in 2020), and Europe (Germany, EU, EEA), focusing on innovative and tailored coverage for unique risks[31][32] - In 2022, the top three independent brokers accounted for 28% of gross premiums written in Markel's underwriting segments[33] Ceded Reinsurance Markel uses ceded reinsurance to manage net retention, mitigate loss volatility, and offer high-limit policies while managing credit exposure - Markel purchases reinsurance to manage net retention and overall loss exposure, with net retention of gross premium volume in underwriting segments at 83% in 2022[34][35] - Exposure to catastrophe risk has been significantly reduced by discontinuing retrocessional reinsurance and transitioning property reinsurance to Nephila ILS operations, supported by third-party capital[34] - The company manages credit risk from reinsurers through internal guidelines, selecting well-capitalized reinsurers, and requiring collateral, but remains primarily liable for ceded policies[37] Competition and Underwriting Philosophy The company competes in a highly competitive property and casualty insurance industry by focusing on expertise, service, and specialty products - Markel competes in a highly competitive market, differentiating through expertise, service, and specialty products, aiming for consistent underwriting profits[41] - The property and casualty insurance industry is cyclical; after several years of rate strengthening, rate increases moderated in 2022, with some lines like D&O seeing single-digit decreases[42][43] Underwriting Performance (2022) | Metric | Value | | :---------------- | :---- | | Combined Ratio | 92% | | Underwriting Profit | Yes | Underwriting Segments Underwriting operations are divided into the Insurance and Reinsurance segments, both of which generated underwriting profits in 2022 - The Insurance segment offers a diverse portfolio including professional liability, general liability, personal lines, marine and energy, property, specialty programs, workers' compensation, and credit and surety[51][52][53][54][55][57][58][59] - The Reinsurance segment focuses on professional liability, general liability, and specialty treaty reinsurance, having discontinued risk-bearing property reinsurance in 2021 and property retrocessional reinsurance in 2022[62][63] 2022 Underwriting Segment Performance | Segment | Gross Premium Volume | Underwriting Profit | | :---------------- | :------------------- | :------------------ | | Insurance | $8.6 billion | $549.9 million | | Reinsurance | $1.2 billion | $83.9 million | Insurance-Linked Securities (ILS) The ILS operations provide investment management services for insurance-linked securities, earning management and incentive fees - Markel's ILS operations, primarily Nephila, offer investment management services for insurance-linked securities, catastrophe bonds, and weather derivatives, generating management and incentive fees[64][65] - The sale of Velocity and Volante MGA operations in 2022 shifted Nephila's focus to fund management; elevated catastrophe losses and capital market volatility led to an $80.0 million goodwill impairment and impacted capital raises, with AUM at $7.2 billion as of December 31, 2022[67][68] - The Markel CATCo operations completed a buy-out transaction in March 2022, accelerating capital return to investors and resulting in the consolidation of Markel CATCo Re[69] Insurance-Linked Securities Operations Revenue (2022) | Metric | Amount | | :-------------------------------- | :----------- | | Total revenues (2022) | $338.3 million | | Gains from MGA sales (included above) | $225.8 million | Program Services and Other Fronting The program services business acts as a fronting platform, issuing insurance policies on behalf of other entities and ceding substantially all risk - Markel's program services business acts as a fronting platform, issuing policies for capacity providers and ceding most risk for ceding fees; it also fronts business for ILS operations[70][71][78] - Despite ceding most risks, Markel is not legally discharged from primary liability and retains some underwriting risk through loss ratio caps, aggregate reinsurance limits, or credit risk exclusions[77][79] Program Services Financials (2022) | Metric | Amount | | :-------------------------- | :------------- | | Total revenues (2022) | $133.3 million | | Gross written premium volume (2022) | $2.8 billion | Ratings Financial strength ratings from agencies like A.M Best, S&P, and Moody's are crucial for the company's competitive position - Financial strength ratings are critical for Markel's competitive standing, with ratings periodically re-evaluated based on operating results and financial condition[80][81] - Markel's Lloyd's syndicate is part of the Lloyd's overall market rating, which is 'A' (excellent) by A.M Best and 'A+' (strong) by S&P[82][83] Insurance Subsidiary Financial Strength Ratings (as of report date) | Rating Agency | FSR | Number of Subsidiaries Rated | | :-------------- | :-- | :--------------------------- | | A.M. Best | A (excellent) | 17 of 18 | | Standard & Poor's | A (strong) | 9 of 18 | | Moody's | A2 (good) | 5 of 18 | Investments The investment strategy focuses on superior returns by investing policyholder funds in fixed income and shareholder funds in equities - Markel's investment strategy prioritizes consistent underwriting profits and superior investment returns, with policyholder funds in high-quality fixed maturity securities and shareholder funds in equity securities for long-term growth[84] - Investment performance is evaluated over the long term, considering net investment income, net investment gains (including unrealized gains on equity), and changes in net unrealized gains on available-for-sale investments[86] Composition of Invested Assets (December 31, 2022) | Asset Type | Percentage of Total | | :-------------------------------------------------------------------------------- | :------------------ | | Fixed maturity securities | 43 % | | Equity securities | 28 % | | Short-term investments, cash and cash equivalents and restricted cash and cash equivalents | 29 % | | Total Invested Assets | $27.4 billion | Markel Ventures Markel Ventures holds controlling interests in a diverse portfolio of businesses operating autonomously across various industries - Markel Ventures owns controlling interests in a diverse portfolio of autonomous businesses, primarily in the U.S, with corporate management overseeing capital allocation for acquisitions[87][88][89] - Markel Ventures businesses face revenue fluctuations due to industry cyclicality (e.g, construction), seasonality (e.g, ornamental plants), and rising input costs (e.g, shipping, labor), which impacted margins in 2021 and 2022[93] Markel Ventures Financial Performance (2022) | Metric | Amount | | :------------------------ | :------------- | | Revenues | $4.8 billion | | Operating income | $325.2 million | | EBITDA | $506.3 million | | Net income to shareholders | $192.6 million | Regulatory Environment The company is subject to extensive state, federal, and international regulation across its diverse insurance, ILS, and Ventures operations - Markel's U.S insurance subsidiaries are subject to state regulation covering solvency, market conduct, licensing, investments, and capital requirements (RBC)[96][101][102] - International insurance operations are regulated in the U.K (PRA, FCA, Solvency II), Bermuda (BMA), and Europe (BaFin, GDPR, Solvency II), with specific capital and conduct requirements[111][112][113][114][115] - ILS operations are regulated by the SEC, CFTC, and BMA, imposing restrictions on fiduciary duties, disclosures, fees, and compliance programs[116][117][118] - Markel Ventures businesses comply with a wide array of U.S federal, state, local, and international laws, including those related to safety, health, employment, environment, and trade[119] Human Capital The company's culture is guided by the 'Markel Style,' emphasizing employee development, teamwork, and diversity and inclusion - Markel's culture, defined by the 'Markel Style,' promotes honesty, fairness, individual self-determination, teamwork, and employee development, encouraging innovation and challenging management[120][121] - The company focuses on diversity and inclusion, community, innovation, well-being, and recognition, supported by global leadership development programs and regular employee engagement surveys (88% participation in early 2022)[124][127][128][129][130] Employee Count (December 31, 2022) | Segment | Employees | | :---------------- | :-------- | | Insurance operations | 5,000 | | Markel Ventures operations | 15,900 | | Total | ~20,900 | Item 1A. Risk Factors Markel faces a broad range of risks across its insurance, investment, and Markel Ventures operations - Markel faces risks from catastrophes, including natural disasters and man-made events, which can lead to significant losses and disruptions, despite catastrophe modeling tools[136] - The company's profitability is vulnerable to inaccuracies in analytical models used for pricing, reserving, and capital modeling, as actual results may differ materially from model outputs[140][141] - Competition in insurance and reinsurance markets, coupled with historical cyclicality, could reduce profits and hinder premium volume growth, especially if the company fails to adapt to technological changes[154][155][157] - Investment results are highly sensitive to changes in interest rates, U.S and international monetary policies, and broader economic conditions, with significant variability possible due to concentrated equity investments[171][172] - Global operations expose Markel to increased political, civil, operational, and economic risks, including the ongoing Russia-Ukraine conflict, which can lead to supply chain disruptions, inflation, and market volatility[184][185][186][187] Risks Primarily Related to Our Insurance Operations Insurance operations face significant risks from unpredictable catastrophe losses, uncertainty in loss reserving, and reinsurance counterparty credit risk - Catastrophes (natural or man-made) pose significant loss and disruption risks, with modeling tools unable to predict severity, potentially leading to claims exceeding expectations[136][137] - Estimating loss reserves is complex and subjective, especially for long-tail coverages and reinsurance, with actual losses potentially differing materially from estimates due to economic/social inflation and reliance on ceding companies[142][145][146] - Dependence on reinsurance creates credit risk if reinsurers fail to meet obligations, and the availability/cost of reinsurance is subject to market conditions beyond Markel's control[149][150][152] - Competition from traditional and InsurTech companies, coupled with industry cyclicality, can lead to lower premium rates and less favorable policy terms, impacting underwriting profits[154][155][156][157] - A downgrade in financial strength or credit ratings could severely impact Markel's competitive position, business volume, liquidity, and cost of capital, potentially triggering contract terminations or collateral requirements[161] - Regulatory challenges to fronting arrangements could prohibit or limit business in certain states, materially affecting results[164][165] - ILS operations face risks from third-party investor decisions, capital market volatility, and elevated catastrophe losses, which have impacted capital raises and redemptions, leading to goodwill impairment[166] Risks Primarily Related to Our Investments and Access to Capital Investment performance is susceptible to interest rate changes and market volatility, while access to capital depends on market conditions and credit ratings - Investment results are vulnerable to changes in interest rates, U.S and international monetary/fiscal policies, and economic conditions, potentially causing material adverse effects on investment returns[171] - A significant portion of shareholders' equity is invested in concentrated equity securities, leading to potential significant variability and declines in net income and shareholders' equity during volatile markets[172] - Future capital needs may not be met on favorable terms, impacting growth and refinancing abilities, especially if cash flows are insufficient or capital position declines[173][174] - Non-compliance with covenants in credit facilities and debt agreements could trigger immediate repayment demands, cancellation of lending commitments, or collateral requirements, materially affecting financial condition[175] - Markel's liquidity and ability to meet obligations depend on funds from subsidiaries, which are subject to regulatory dividend restrictions and capital requirements[176] Risks Related to All of Our Operations All operations are exposed to extensive legal and regulatory requirements, geopolitical risks, acquisition integration challenges, and cybersecurity threats - Failure to comply with extensive legal and regulatory requirements (e.g, privacy, sanctions, anti-corruption) can result in fines, business restrictions, and reputational damage[177][178][181] - Global operations are exposed to political, civil, operational, and economic risks, including the Russia-Ukraine conflict, which can cause investment losses, supply chain disruptions, and increased costs[184][185][186][187] - Acquisitions pose risks related to integration, potential liabilities from acquired companies, and impairment of goodwill and intangible assets, which totaled $4.4 billion (34% of shareholders' equity) as of December 31, 2022[188][189] - Dependence on IT systems and third-party providers exposes Markel to failures, security breaches, cyberattacks, and poor performance, potentially leading to operational disruptions, data loss, and significant financial/reputational harm[191][192][195][196] - Pandemics can cause material adverse effects across all operations, including unexpected claims, governmental interventions, litigation, operational disruptions, and supply chain issues[197][198] Item 3. Legal Proceedings The company is involved in a legal dispute regarding contingent value rights from the 2010 acquisition of Aspen Holdings, Inc - Markel is involved in a legal dispute concerning contingent value rights (CVRs) from the 2010 Aspen Holdings acquisition, with Thomas Yeransian alleging default and seeking $47.3 million in damages plus interest[199][201][202] - Independent experts valued the CVRs at $22.4 million (excluding interest) in September 2021, and Markel has paid $20.1 million for the unpaid portion and additional interest[203] - The three consolidated lawsuits are pending, but Markel believes they are without merit and any material loss is remote[204][205] Information about Our Executive Officers This section provides an overview of Markel Corporation's key executive officers and their roles as of early 2023 - Thomas S. Gayner became Chief Executive Officer in January 2023, previously Co-Chief Executive Officer and Chief Investment Officer[207] - Michael R. Heaton is Executive Vice President (since May 2022), and Andrew G. Crowley is President, Markel Ventures (since May 2022)[208][209] - Jeremy A. Noble became President, Insurance, in January 2023, and Brian J. Costanzo is Senior Vice President, Finance, Chief Accounting Officer, Controller, and Principal Financial Officer (since October 2022/January 2023)[210][211] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Markel's common stock trades on the NYSE under MKL, and the company actively repurchased shares in Q4 2022 - Markel's common stock (MKL) trades on the NYSE, with approximately 270 shareholders of record and over 210,000 total shareholders as of February 1, 2023[216] - The company's strategy is to retain earnings, and it does not expect to pay cash dividends on its common stock[216] - A $750 million share repurchase program was approved in February 2022, with $511.7 million remaining available as of December 31, 2022[218] Common Share Repurchases (Q4 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value Remaining Under Program (thousands) | | :--------------------------------------- | :----------------------------- | :--------------------------- | :----------------------------------------------------------- | | October 1, 2022 through October 31, 2022 | 26,454 | $1,153.94 | $555,120 | | November 1, 2022 through November 30, 2022 | 19,230 | $1,249.81 | $531,086 | | December 1, 2022 through December 31, 2022 | 14,894 | $1,298.94 | $511,740 | | Total | 60,578 | $1,220.02 | $511,740 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial results for FY2022, highlighting the significant negative impact of investment portfolio fair value decreases - Markel's 2022 results were significantly impacted by decreases in the fair value of its investment portfolio, driven by volatility and overall decline in public equity markets and increases in interest rates[229] Total Operating Revenues (2022 vs. 2021) | Segment | 2022 (thousands) | 2021 (thousands) | % Change | | :------------------------------------------------ | :--------------- | :--------------- | :------- | | Insurance segment | $6,528,263 | $5,465,284 | 19 % | | Reinsurance segment | $1,063,347 | $1,042,048 | 2 % | | Insurance-linked securities, program services and other insurance | $493,746 | $342,142 | 44 % | | Insurance operations | $8,085,356 | $6,849,474 | 18 % | | Net investment income | $445,846 | $367,406 | 21 % | | Net investment gains (losses) | $(1,595,733) | $1,978,534 | NM | | Other | $(17,661) | $7,184 | NM | | Investing segment | $(1,167,548) | $2,353,124 | NM | | Markel Ventures segment | $4,757,527 | $3,643,827 | 31 % | | Total operating revenues | $11,675,335 | $12,846,425 | (9) % | Net Income (Loss) to Common Shareholders and Comprehensive Income (Loss) to Shareholders (2022 vs. 2021) | Metric | 2022 (thousands) | 2021 (thousands) | | :------------------------------------ | :--------------- | :--------------- | | Net income (loss) to common shareholders | $(250,123) | $2,389,003 | | Comprehensive income (loss) to shareholders | $(1,308,817) | $2,078,244 | Results of Operations Total operating revenues decreased 9% in 2022, driven by significant net investment losses that overshadowed growth in other segments - The decrease in total operating revenues and the shift to a net loss in 2022 were primarily due to pre-tax net investment losses of $1.6 billion (vs $2.0 billion gains in 2021) and pre-tax net unrealized losses on fixed maturity securities, reflecting public equity market declines and rising interest rates[229][230] Total Operating Revenues (2022 vs. 2021) | Metric | 2022 (thousands) | 2021 (thousands) | % Change | | :------------------- | :--------------- | :--------------- | :------- | | Total operating revenues | $11,675,335 | $12,846,425 | (9) % | Net Income (Loss) to Common Shareholders (2022 vs. 2021) | Metric | 2022 (thousands) | 2021 (thousands) | | :------------------------------------ | :--------------- | :--------------- | | Net income (loss) to common shareholders | $(250,123) | $2,389,003 | Insurance Results The Insurance engine reported a 15% increase in gross premium volume, though the consolidated combined ratio increased to 91.7% - Net losses from Hurricane Ian were $46.2 million, and from the Russia-Ukraine conflict were $35.7 million in 2022; COVID-19 net loss estimates decreased by $5.4 million in 2022[242][243][245] Insurance Engine Gross Premium Volume and Operating Revenues (2022 vs. 2021) | Metric | 2022 (thousands) | 2021 (thousands) | % Change | | :------------------------------------ | :--------------- | :--------------- | :------- | | Gross premium volume: Insurance operations | $13,201,682 | $11,438,682 | 15 % | | Operating revenues: Insurance operations | $8,085,356 | $6,849,474 | 18 % | Consolidated Underwriting Performance (2022 vs. 2021) | Metric | 2022 | 2021 | Point Change | | :---------------------------------------------------------------- | :----- | :----- | :----------- | | Combined ratio | 91.7 % | 90.3 % | 1.4 | | Current accident year loss ratio catastrophe impact | 0.6 % | 3.0 % | (2.4) | | Current accident year loss ratio Russia-Ukraine conflict impact | 0.5 % | — % | 0.5 | | Prior accident years loss ratio COVID-19 impact | (0.1)% | 0.2 % | (0.3) | | Combined ratio, excluding current year catastrophes, Russia-Ukraine conflict and COVID-19 | 90.7 % | 87.1 % | 3.6 | Underwriting Results Consolidated underwriting operations saw a 16% increase in gross premium volume, while the combined ratio rose to 91.7% - Underwriting results in 2022 included $46.2 million net losses from Hurricane Ian and $35.7 million net losses from the Russia-Ukraine conflict[242][243][244] - Rate increases moderated in 2022 across many product lines, with some (e.g, D&O) seeing decreases, while economic and social inflation increased uncertainty for longer-tail lines[241] Consolidated Underwriting Performance (2022 vs. 2021) | Metric | 2022 | 2021 | % Change / Point Change | | :---------------------------------------------------------------- | :----- | :----- | :---------------------- | | Gross premium volume | $9,843,555 | $8,480,494 | 16 % | | Net written premiums | $8,203,390 | $7,119,731 | 15 % | | Earned premiums | $7,587,792 | $6,503,029 | 17 % | | Underwriting profit | $626,620 | $628,085 | — % | | Combined ratio | 91.7 % | 90.3 % | 1.4 | | Net retention of gross premium volume | 83 % | 84 % | (1) ppt | Insurance Segment The Insurance segment reported a 19% increase in gross premium volume, but the combined ratio increased to 91.6% - The segment's 2022 combined ratio included $142.9 million of favorable prior accident year reserve development, a significant decrease from $506.3 million in 2021, primarily due to adverse development in professional and general liability lines impacted by economic and social inflation[249] - The expense ratio decreased in 2022 due to higher earned premiums and consistent general expenses, reflecting a focus on scaling insurance operations[251] Insurance Segment Performance (2022 vs. 2021) | Metric | 2022 (thousands) | 2021 (thousands) | % Change / Point Change | | :-------------------------- | :--------------- | :--------------- | :---------------------- | | Gross premium volume | $8,606,700 | $7,239,676 | 19 % | | Earned premiums | $6,528,263 | $5,465,284 | 19 % | | Underwriting profit | $549,871 | $696,413 | (21)% | | Combined ratio | 91.6 % | 87.3 % | 4.3 | | Net retention | 82 % | 83 % | (1) ppt | Reinsurance Segment The Reinsurance segment's gross premium volume decreased slightly, while the combined ratio significantly improved to 92.1% - The segment's 2022 combined ratio included $26.1 million of favorable prior accident year reserve development, mainly from property (catastrophe events) and credit/surety lines[257] - The current accident year loss ratio in 2022 was consistent with 2021, benefiting from higher premium rates in general and professional liability, but offset by changes in business mix and the absence of significant reinstatement premiums seen in 2021[256] Reinsurance Segment Performance (2022 vs. 2021) | Metric | 2022 (thousands) | 2021 (thousands) | % Change / Point Change | | :-------------------------- | :--------------- | :--------------- | :---------------------- | | Gross premium volume | $1,229,851 | $1,246,143 | (1)% | | Earned premiums | $1,063,347 | $1,042,048 | 2 % | | Underwriting profit (loss) | $83,859 | $(55,238) | NM | | Combined ratio | 92.1 % | 105.3 % | (13.2) | | Net retention | 95 % | 90 % | 5 ppt | Insurance-linked Securities, Program Services and Other Insurance This segment saw a 44% increase in operating revenues, driven by disposition gains and growth in program services - ILS operating revenues decreased due to the disposition of Velocity and Volante MGA operations, which generated $225.8 million in gains; Nephila's fund management operations were impacted by catastrophe losses and market volatility, leading to an $80.0 million goodwill impairment[261][262][263] - Program services revenues increased due to higher gross earned premiums from expanded and new programs, as well as growth in other fronting arrangements[264] - The Markel CATCo buy-out transaction in March 2022 involved $101.9 million in payments (net of insurance proceeds) recognized as an expense and resulted in the consolidation of Markel CATCo Re[265] Insurance-linked Securities, Program Services and Other Insurance Operating Revenues (2022 vs. 2021) | Metric | 2022 (thousands) | 2021 (thousands) | % Change | | :---------------------------------------------------------------- | :--------------- | :--------------- | :------- | | Operating revenues | $493,746 | $342,142 | 44 % | Investing Results The Investing segment shifted to a significant loss in 2022 due to unfavorable market movements in its equity and fixed income portfolios - Net investment losses in 2022 were primarily due to decreases in the fair value of the equity portfolio and fixed maturity portfolio, driven by unfavorable market value movements and rising interest rates[270][271] - Net investment income increased in 2022, mainly from higher interest income on short-term investments and cash equivalents due to rising short-term interest rates[268] Investing Segment Performance (2022 vs. 2021) | Metric | 2022 (thousands) | 2021 (thousands) | | :-------------------------------------------------------------------------------- | :--------------- | :--------------- | | Net investment income | $446,755 | $367,417 | | Net investment gains (losses) | $(1,595,733) | $1,978,534 | | Change in net unrealized gains (losses) on available-for-sale investments | $(1,407,316) | $(450,096) | | Taxable equivalent total investment return | (9.5)% | 8.8 % | Markel Ventures Results Markel Ventures reported a 31% increase in operating revenues, driven by recent acquisitions and increased demand in existing businesses - Revenue growth in 2022 was driven by acquisitions (Metromont, Buckner) and increased demand/prices in construction services; however, increased material and labor costs partially offset the positive impact on operating income and margins[279][280][281] - Markel Ventures EBITDA is a non-GAAP measure used to evaluate operating performance, excluding interest, income taxes, depreciation, and amortization[282] Markel Ventures Financial Performance (2022 vs. 2021) | Metric | 2022 (thousands) | 2021 (thousands) | % Change | | :------------------------ | :--------------- | :--------------- | :------- | | Operating revenues | $4,757,527 | $3,643,827 | 31 % | | Operating income | $325,238 | $272,552 | 19 % | | EBITDA | $506,336 | $402,700 | 26 % | | Net income to shareholders | $192,601 | $174,407 | 10 % | Interest Expense, Net Foreign Exchange Gains and Income Taxes Interest expense increased, net foreign exchange gains rose due to a stronger U.S Dollar, and the effective tax rate was 32% - The increase in interest expense was due to higher Markel Ventures interest and new senior notes, partially offset by the retirement of 4.90% unsecured senior notes[291] - Net foreign exchange gains increased due to the U.S Dollar strengthening against the Euro and British Pound, impacting foreign currency denominated insurance reserves[292] - The effective tax rate increased to 32% in 2022, primarily due to various immaterial items magnifying a net tax benefit against a small pre-tax loss; the Inflation Reduction Act of 2022 is not expected to have a material impact[293][294] Interest Expense, Net Foreign Exchange Gains, and Income Tax (2022 vs. 2021) | Metric | 2022 (thousands) | 2021 (thousands) | | :------------------------ | :--------------- | :--------------- | | Interest expense | $196,062 | $183,579 | | Net foreign exchange gains | $140,209 | $72,271 | | Income tax (expense) benefit | $47,636 | $(684,458) | | Effective tax rate | 32% | 22% | Comprehensive Income (Loss) to Shareholders and Book Value per Common Share Comprehensive income shifted to a significant loss, leading to a 10% decrease in book value per common share - Book value per common share decreased by 10% from $1,036.20 at December 31, 2021, to $929.27 at December 31, 2022, primarily due to the other comprehensive loss[296] Comprehensive Income (Loss) to Shareholders (2022 vs. 2021) | Metric | 2022 (thousands) | 2021 (thousands) | | :------------------------------------ | :--------------- | :--------------- | | Net income (loss) to shareholders | $(214,123) | $2,425,003 | | Other comprehensive loss to shareholders | $(1,094,694) | $(346,759) | | Comprehensive income (loss) to shareholders | $(1,308,817) | $2,078,244 | Liquidity and Capital Resources The company maintains prudent liquidity, with a consolidated debt to capital ratio of 24% and increased operating cash flow in 2022 - The holding company made $973.5 million in capital contributions to insurance subsidiaries in 2022 to maintain target excess capital levels, compared to no contributions in 2021[299] - Markel has a $300 million corporate revolving credit facility (undrawn) and $511.7 million remaining under its share repurchase program as of December 31, 2022[302][305] - Primary cash obligations include unpaid losses and loss adjustment expenses ($21.1 billion), senior long-term debt ($4.1 billion), and related interest payments ($3.4 billion)[315] Key Liquidity and Capital Metrics (2022 vs. 2021) | Metric | 2022 | 2021 | | :-------------------------- | :----- | :----- | | Consolidated debt to capital ratio | 24 % | 23 % | | Holding company invested assets | $3.7 billion | $5.3 billion | | Net cash provided by operating activities | $2.7 billion | $2.3 billion | | Net cash used by investing activities | $1.7 billion | $2.9 billion | | Total invested assets | $27.4 billion | $28.3 billion | Critical Accounting Estimates Critical accounting estimates involve significant judgment for unpaid losses and loss adjustment expenses, as well as goodwill and intangible assets - Loss reserves are established at management's best estimate, which typically exceeds the actuarially calculated point estimate (by 5.8% or $688.4 million at Dec 31, 2022), reflecting a philosophy of being more likely redundant than deficient[347][348] - Favorable development on prior years loss reserves was 1% of beginning net loss reserves in 2022 (vs 5% in 2021), impacted by adverse development in professional and general liability lines due to economic/social inflation and court delays[352][358] - An $80.0 million goodwill impairment was recorded for the Nephila reporting unit in 2022, driven by an increased discount rate (rising interest rates) and further declines in investor capital, despite favorable reinsurance rates[363][364][365][366] Key Critical Accounting Estimates (December 31, 2022) | Estimate | Amount (thousands) | | :------------------------------------ | :--------------- | | Unpaid losses and loss adjustment expenses (gross) | $20,947,898 | | Reinsurance recoverables on unpaid losses | $8,446,745 | | Goodwill and intangible assets | $4,386,302 | Safe Harbor and Cautionary Statement This section outlines forward-looking statements and the various risks and uncertainties that could cause actual results to differ materially - Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from predictions[367][368] - Key risk factors include cyclical trends, competition (including technological disruption), success of new products, unpredictable catastrophes (including climate change), emerging claim issues, adequacy of loss reserves, and reinsurance availability/collectibility[369] - Other significant risks encompass economic and market conditions, government intervention, geopolitical conflicts (Russia-Ukraine), tax law changes, cybersecurity, acquisition integration, goodwill impairment, and loss of key personnel[370][372] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Markel is exposed to market risks primarily from equity price, interest rate, and foreign currency exchange rate fluctuations - Markel's primary market risks are equity price risk, interest rate risk, and foreign currency exchange rate risk[373] - The equity portfolio is concentrated (42% in top ten holdings, 19% in P&C insurance, including Berkshire Hathaway), leading to higher volatility; a hypothetical 35% decrease in market prices could reduce shareholders' equity by 16.2%[376][378] - Foreign currency exchange rate risk is managed by matching foreign currency denominated assets and liabilities, which were substantially matched or hedged at December 31, 2022 and 2021[385][387] - Credit risk in the fixed maturity portfolio is minimized by investing in high-quality, diversified, investment-grade securities (99% rated 'A' or better)[389][390] - Credit risk from reinsurance recoverables is mitigated by selecting well-capitalized, highly-rated reinsurers and requiring substantial collateral, especially for program services and ILS fronting arrangements[393][395][397][398] Hypothetical Impact of Interest Rate Changes on Fixed Maturity Securities (December 31, 2022) | Hypothetical Change in Interest Rates | Estimated Fair Value after Change | Percentage Change in Fair Value | Percentage Change in Shareholders' Equity | | :------------------------------------ | :-------------------------------- | :------------------------------ | :---------------------------------------- | | 200 bp decrease | $12,843 million | 8.3 % | 6.0 % | | 100 bp decrease | $12,334 million | 4.0 % | 2.9 % | | 100 bp increase | $11,406 million | (3.8)% | (2.7)% | | 200 bp increase | $10,972 million | (7.5)% | (5.3)% | Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements and extensive notes for the year ended December 31, 2022 - KPMG LLP issued an unqualified opinion on the consolidated financial statements for the three-year period ended December 31, 2022, confirming fair presentation in conformity with U.S GAAP[399] - The financial statements include Consolidated Balance Sheets, Statements of Income (Loss) and Comprehensive Income (Loss), Statements of Changes in Equity, and Statements of Cash Flows for the specified periods[409][411][413][415] - Notes to the financial statements provide detailed information on significant accounting policies, segment performance, acquisitions, investment portfolio composition, fair value measurements, and critical accounting estimates such as unpaid losses and goodwill[416][466][489][497][514][547][532] Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting - KPMG LLP issued an unqualified opinion on Markel's consolidated financial statements for the three-year period ended December 31, 2022, and on the effectiveness of internal control over financial reporting as of December 31, 2022[399][400] - The estimation of the liability for unpaid losses and loss adjustment expenses for underwriting operations was identified as a critical audit matter due to significant measurement uncertainty and subjective actuarial judgments[404][405] - Audit procedures included evaluating internal controls, comparing actuarial methodologies to industry standards, developing independent actuarial estimates, and assessing assumptions about future claims[406][407] Consolidated Balance Sheets Total assets increased to $49.8 billion in 2022, while shareholders' equity decreased to $13.1 billion - Shareholders' equity decreased by $1.65 billion, primarily due to a shift from accumulated other comprehensive income to a loss position[409] Consolidated Balance Sheet Summary (December 31, 2022 vs. 2021) | Metric | 2022 (thousands) | 2021 (thousands) | | :-------------------------------------------------------------------------------- | :--------------- | :--------------- | | Total Assets | $49,791,259 | $48,477,096 | | Total Liabilities | $36,139,780 | $33,275,508 | | Shareholders' Equity | $13,065,534 | $14,717,350 | | Unpaid losses and loss adjustment expenses | $20,947,898 | $18,178,894 | | Unearned premiums | $6,220,748 | $5,383,619 | | Total Investments | $22,198,009 | $23,411,220 | Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) The company reported a net loss of $(250.1) million in 2022, a significant decline from a $2.39 billion net income in 2021 - The significant decline in net income and comprehensive income in 2022 was primarily driven by net investment losses, a reversal from substantial gains in prior years[411] Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Summary (2022 vs. 2021 vs. 2020) | Metric | 2022 (thousands) | 2021 (thousands) | 2020 (thousands) | | :------------------------------------ | :--------------- | :--------------- | :--------------- | | Total Operating Revenues | $11,675,335 | $12,846,425 | $9,735,066 | | Net investment gains (losses) | $(1,595,733) | $1,978,534 | $617,979 | | Net Income (Loss) to Common Shareholders | $(250,123) | $2,389,003 | $797,630 | | Comprehensive Income (Loss) to Shareholders | $(1,308,817) | $2,078,244 | $1,191,634 | | Diluted net income (loss) per common share | $(23.57) | $176.51 | $55.63 | Consolidated Statements of Changes in Equity Total equity decreased to $13.13 billion in 2022, primarily due to a comprehensive loss of $(1.31) billion - The decrease in total equity in 2022 was primarily driven by the comprehensive loss, particularly the other comprehensive loss component related to unrealized investment losses[413] Consolidated Statements of Changes in Equity Summary (December 31, 2022 vs. 2021) | Metric | 2022 (thousands) | 2021 (thousands) | | :------------------------------------ | :--------------- | :--------------- | | Total Equity | $13,128,325 | $14,740,210 | | Comprehensive Income (Loss) | $(1,308,817) | $2,078,244 | | Repurchase of common stock | $(290,796) | $(206,518) | Consolidated Statements of Cash Flows Net cash provided by operating activities increased to $2.71 billion in 2022, driven by higher net premiums in the Insurance segment - Operating cash flow increased due to higher net premiums in the Insurance segment, partially offset by payments for the Markel CATCo buy-out[309] - Investing cash flow decreased, reflecting net purchases of fixed maturity and equity securities, and the consolidation of Markel CATCo Re, partially offset by distributions to noncontrolling interests[310] - Financing cash flow was negative in 2022 due to repayment of senior notes and common stock repurchases[313] Consolidated Statements of Cash Flows Summary (2022 vs. 2021 vs. 2020) | Metric | 2022 (thousands) | 2021 (thousands) | 2020 (thousands) | | :------------------------------------ | :--------------- | :--------------- | :--------------- | | Net Cash Provided By Operating Activities | $2,709,442 | $2,274,067 | $1,737,587 | | Net Cash Used By Investing Activities | $(1,670,204) | $(2,937,802) | $(511,748) | | Net Cash Provided (Used) By Financing Activities | $(595,311) | $369,767 | $434,556 | | Cash, cash equivalents, restricted cash and restricted cash equivalents at end of year | $5,221,513 | $4,880,947 | $5,216,649 | Notes to Consolidated Financial Statements The notes provide detailed explanations of accounting policies, segment performance, and financial statement line items - The notes detail significant accounting policies, including the basis of presentation, use of estimates, and accounting for investments, cash, receivables, and reinsurance recoverables[416][417][418][419][421][422][423][425][426] - Disclosures cover segment reporting, acquisitions (Volante, Velocity, Metromont, Buckner, Lansing), goodwill and intangible assets (including Nephila impairment), and leases[466][489][490][491][493][495][532][534][541] - Critical estimates for unpaid losses and loss adjustment expenses, life and annuity benefits, and the impact of the Markel CATCo buy-out are explained[547][595][624][626] - Information on senior long-term debt, income taxes, employee benefit plans, variable interest entities, related party transactions, shareholders' equity, and statutory financial information is provided[600][608][622][624][632][638][650] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective - Management, including the PEO and PFO, concluded that Markel's disclosure controls and procedures were effective as of December 31, 2022[671][672] - Management affirmed the effectiveness of internal control over financial reporting as of December 31, 2022, based on the COSO framework, designed to provide reasonable assurance regarding financial reporting reliability[673][675] - KPMG LLP issued an unqualified attestation report on the effectiveness of Markel's internal control over financial reporting as of December 31, 2022[676][679] - No material changes in internal control over financial reporting occurred during the fourth quarter of 2022[677] PART III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement, except for executive officer details in Part I[686] Item 11. Executive Compensation Details concerning executive compensation are incorporated by reference from the company's 2023 Proxy Statement - Executive compensation information (excluding Item 402(v) of Regulation S-K) is incorporated by reference from the 2023 Proxy Statement[686] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's 2023 Proxy Statement - Information on security ownership of beneficial owners, management, and related stockholder matters is incorporated by reference from the 2023 Proxy Statement[686] Item 13. Certain Relationships and Related Transactions, and Director Independence Details on related transactions and director independence are incorporated by reference from the company's 2023 Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2023 Proxy Statement[686] Item 14. Principal Accounting Fees and Services Information concerning principal accounting fees and services is incorporated by reference from the company's 2023 Proxy Statement - Information on principal accounting fees and services is incorporated by reference from the 2023 Proxy Statement[686] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the company's Form 10-K - The section confirms the inclusion of the Report of Independent Registered Public Accounting Firm and the consolidated financial statements (Balance Sheets, Statements of Income, Changes in Equity, Cash Flows, and Notes) in Item 8[688][689] - An Exhibit Index provides a comprehensive list of corporate documents, indentures, employment agreements, incentive plans, and certifications, with some exhibits filed concurrently with this report[692][693][695][696]