The accompanying consolidated financial statements and related notes have been prepared in accordance withUnited States (U.S. ) generally accepted accounting principles (GAAP) and include the accounts ofMarkel Corporation and its consolidated subsidiaries, as well as any variable interest entities that meet the requirements for consolidation (the Company).
Our Business
We are a diverse financial holding company serving a variety of niche markets. Our principal business markets and underwrites specialty insurance products. We believe that our specialty product focus and niche market strategy enable us to develop expertise and specialized market knowledge. We seek to differentiate ourselves from competitors by our expertise, service, continuity and other value-based considerations. We also own interests in various businesses that operate outside of the specialty insurance marketplace. Our financial goals are to earn consistent underwriting and operating profits and superior investment returns to build shareholder value. Our business is comprised of the following types of operations: •Underwriting - our underwriting operations are comprised of our risk-bearing insurance and reinsurance operations •Investing - our investing activities are primarily related to our underwriting operations •Markel Ventures - ourMarkel 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 (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 theU.S. property and casualty insurance market Underwriting and Investing 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 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 across the Company. The Reinsurance segment includes all treaty reinsurance written across the Company. Results for lines of business discontinued prior to, or in conjunction with, acquisitions, including development on asbestos and environmental loss reserves and the results attributable to the run-off of life and annuity reinsurance business, are monitored separately and are not included in a reportable segment. All investing activities related to our underwriting operations are included in the Investing segment. Our Insurance segment includes both hard-to-place risks written outside of the standard market on an excess and surplus 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 orLloyd'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: general liability, professional liability, primary and excess of loss property, including catastrophe-exposed property, personal property, workers' compensation, marine and energy liability coverages, specialty program insurance for well-defined niche markets, and liability and other coverages tailored for unique exposures. Business in this segment is written through our Markel Specialty,Markel International and State National divisions. The Markel Specialty division was formed effectiveApril 1, 2020 through the combination of our Markel Assurance and Markel Specialty divisions. The newly combined Markel Specialty division creates a unified platform that makes it easier for our customers to access our diverse portfolio of products and capabilities, offered on both an excess and surplus and admitted basis, and provides an improved customer experience. TheMarkel International division writes business worldwide from ourLondon andMunich -based platforms, which include branch offices around the world. The State National division's collateral protection underwriting business also is included in the Insurance segment. 36 -------------------------------------------------------------------------------- Table of Contents 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. Principal lines of business include: property, including catastrophe-exposed property, professional liability, general liability, credit, surety, auto and workers' compensation. InOctober 2020 , we made the decision to discontinue writing catastrophe-exposed property business at our Global Reinsurance division, within our Reinsurance segment, as our Nephila ILS operations will become our single point of entry for serving the property catastrophe reinsurance market. Our reinsurance product offerings are underwritten primarily by our Global Reinsurance division.
Through our wholly-owned subsidiaryMarkel Ventures, Inc. (Markel Ventures ), we own interests in various businesses that we monitor and report in theMarkel Ventures segment. These businesses are viewed by management as separate and distinct from our insurance operations and are comprised of a diverse portfolio of businesses from different industries that offer various types of products and services to businesses and consumers, predominately inthe United States . Our 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, laminated oak and composite wood flooring used in the trucking industry as well as ornamental plants and residential homes. The services group is comprised of businesses that provide healthcare, consulting and other 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. InNovember 2019 , we acquiredVSC Fire & Security, Inc. (VSC), aVirginia -based privately held provider of comprehensive fire protection, life safety and low voltage solutions. Results attributable to VSC are included in ourMarkel Ventures segment. InApril 2020 , we acquired a controlling interest inLansing Building Products, LLC , a supplier of exterior building products and materials to professional contractors throughout theU.S. , which simultaneously acquired the distribution business ofHarvey Building Products to enhance its geographic reach and scale (together, Lansing), bringing our ownership in Lansing to 91%. Results attributable to Lansing are included in ourMarkel Ventures segment.
Our insurance-linked securities operations are primarily comprised of our Nephila and run-offMarkel CATCo operations. InNovember 2018 , we completed the acquisition of all of the outstanding shares ofNephila Holdings Ltd. (together with its subsidiaries, Nephila). Nephila primarily serves as an insurance and investment fund manager headquartered inBermuda 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 severalBermuda ,Ireland andU.S. based private funds (the Nephila Funds). To provide access for the Nephila Funds to the insurance, reinsurance and weather markets, Nephila also provides managing general agent services and 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 ofMarkel Corporation , and as such, these entities are not included in our consolidated financial statements. OurMarkel CATCo operations are conducted throughMarkel CATCo Investment Management Ltd. (MCIM). MCIM is an insurance-linked securities investment fund manager headquartered inBermuda 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 forMarkel CATCo Re Ltd. (Markel CATCo Re), a Bermuda Class 3 reinsurance company, and as the investment manager forMarkel CATCo Reinsurance Fund Ltd. , aBermuda 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-endBermuda exempted mutual fund company listed on a market operated by theLondon Stock Exchange and on theBermuda Stock Exchange . CROF invests substantially all of its assets inMarkel CATCo Reinsurance Fund Ltd. Both Markel CATCo Re and the Markel CATCo Funds are unconsolidated subsidiaries ofMarkel Corporation . 37 -------------------------------------------------------------------------------- Table of Contents InJuly 2019 , MCIM announced it would cease accepting new investments in the Markel CATCo Funds and would not write any new business inMarkel 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. See note 15 of the notes to consolidated financial statements for further details regarding other developments within our Markel CATCo operations. In 2019, we establishedLodgepine Capital Management Limited (Lodgepine), a new retrocessional insurance-linked securities fund manager inBermuda . Lodgepine's initial product offering will beLodgepine Fund Limited , a property catastrophe retrocessional investment fund, and subject to certain conditions, we have committed to invest up to$100 million inLodgepine 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
Our program services business is conducted through our State National division and is separately managed from our underwriting operations. 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 producerswho sell, control, and administer books of insurance business that are supported by third parties that assume reinsurance risk, including Syndicate 2357. 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, substantially all of which is ceded to third parties. 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. Under certain programs, including one program with Syndicate 2357, an unconsolidated affiliate, we 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 13 of the notes to consolidated financial statements for further details regarding our program with Syndicate 2357.
Critical Accounting Estimates
Critical accounting estimates are those estimates that both are important to the portrayal of our financial condition and results of operations and require us to exercise significant judgment. The preparation of financial statements in accordance withU.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of material contingent assets and liabilities, including litigation contingencies. These estimates, by necessity, are based on assumptions about numerous factors. Our critical accounting estimates consist of estimates and assumptions used in determining the reserves for unpaid losses and loss adjustment expenses and life and annuity reinsurance benefit reserves as well as estimates and assumptions used in the valuation of goodwill and intangible assets. We review the adequacy of reserves for unpaid losses and loss adjustment expenses and life and annuity reinsurance benefit reserves quarterly. Estimates and assumptions for goodwill and intangible assets are reviewed in conjunction with acquisitions and goodwill and indefinite-lived intangible assets are reassessed for impairment at least annually or when events or circumstances indicate that their carrying value may not be recoverable. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements.
Readers are urged to review our 2019 Annual Report on Form 10-K for a more complete description of our critical accounting estimates. Additionally, see "Developments Related to COVID-19" for further discussion on our interim considerations around the evaluation of goodwill and intangible assets for impairment.
Recent Accounting Pronouncements
See note 2 of the notes to consolidated financial statements for discussion 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. 38 -------------------------------------------------------------------------------- Table of Contents Results of Operations
The following table presents the components of net income (loss) to shareholders and comprehensive income to shareholders.
Nine Months Ended Quarter Ended September 30, September 30, (dollars in thousands) 2020 2019 2020 2019 Insurance segment underwriting profit$ 74,960 $ 81,285 $ 3,659 $ 180,945 Reinsurance segment underwriting profit (loss) (34,881) (6,475) (44,085) 5,697 Investing segment profit (1) 629,682 145,364 43,104 1,408,771 Markel Ventures segment profit (2) 79,605 35,467 200,766 147,056 Other operations (3) (56,974) 6,607 (74,122) (18,945) Interest expense (42,744) (47,465) (133,201) (129,022) Net foreign exchange gains (losses) (65,577) 53,850 (8,736) 57,001 Loss on early extinguishment of debt - (6,705) - (6,705) Income tax expense (130,028) (57,975) (3,047) (356,849) Net loss (income) attributable to noncontrolling interests (1,317) 1,684 (15,607) (8,587) Net income (loss) to shareholders 452,726 205,637 (31,269) 1,279,362 Net income (loss) to common shareholders 452,726 205,637 (31,269) 1,279,362 Other comprehensive income to shareholders 67,363 44,432 290,942 326,282 Comprehensive income to shareholders$ 520,089 $
250,069
(1)Net investment income and net investment gains (losses), if any, attributable toMarkel Ventures are included in segment profit forMarkel Ventures . All other net investment income and net investment gains (losses) are included in Investing segment profit. (2)Segment profit for theMarkel Ventures segment includes amortization of intangible assets attributable toMarkel Ventures . Amortization of intangible assets is not allocated to our Insurance and Reinsurance segments. (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$10.4 million and$31.5 million for the quarter and nine months endedSeptember 30, 2020 , respectively, and$9.8 million and$29.5 million for the quarter and nine months endedSeptember 30, 2019 ; however, we do not allocate amortization of intangible assets between the Insurance and Reinsurance segments. Comprehensive income to shareholders for the nine months endedSeptember 30, 2020 reflects significant investing and underwriting losses attributed to COVID-19, a novel coronavirus outbreak that was declared a pandemic by theWorld Health Organization onMarch 11, 2020 , which has caused unprecedented social and economic disruption, increased volatility of capital markets and intervention by various governments and central banks around the world. The components of net income (loss) to shareholders and comprehensive income to shareholders for the quarter and nine months endedSeptember 30, 2020 and 2019 are discussed in detail under "Underwriting Results," "Investing Results," "Markel Ventures ," "Other Operations," "Interest Expense, Loss on Early Extinguishment of Debt and Income Taxes" and "Comprehensive Income to Shareholders." 39 -------------------------------------------------------------------------------- Table of Contents 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 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. The following table presents selected data from our underwriting operations. Nine Months Ended Quarter Ended September 30, September 30, (dollars in thousands) 2020 2019 2020 2019 Gross premium volume (1)$ 1,734,457
$ 1,397,276 $ 1,370,384 $ 4,500,149 $ 4,153,115 Net retention (1) 81 % 83 % 83 % 84 % Earned premiums$ 1,394,428
$ 863,247
$ 38,357
U.S. GAAP Combined Ratios Insurance 94 % 92 % 100 % 94 % Reinsurance 116 % 103 % 106 % 99 % Consolidated 97 % 94 % 101 % 95 %
(1)Gross premium volume and net retention exclude
Combined Ratio
Our consolidated combined ratio was 97% for the quarter endedSeptember 30, 2020 compared to 94% for the same period of 2019. The increase in the combined ratio was driven by higher catastrophe losses in 2020 compared to 2019 and an increase in our estimate of net losses and loss adjustment expenses attributed to COVID-19 during the third quarter of 2020, partially offset by a lower attritional loss ratio and a lower expense ratio within our Insurance segment in 2020 compared to 2019 . Our consolidated combined ratio was 101% for the nine months endedSeptember 30, 2020 compared to 95% for the same period of 2019. The increase in the consolidated combined ratio was driven by losses attributed to COVID-19 in 2020 and higher catastrophe losses in 2020 compared to 2019, partially offset by more favorable development on prior accident years' loss reserves and a lower attritional loss ratio and a lower expense ratio within our Insurance segment in 2020 compared to 2019. 40 -------------------------------------------------------------------------------- Table of Contents Catastrophe Losses Underwriting results for the quarter and nine months endedSeptember 30, 2020 included$101.0 million of underwriting loss from Hurricanes Laura, Sally and Isaias, as well as the derecho inIowa and wildfires in the westernU.S. (2020 Catastrophes). The net loss estimates on the 2020 Catastrophes represent our best estimates based upon information currently available. Our estimates for these losses are based on preliminary industry loss estimates, output from both industry and proprietary models, claims received to date and detailed policy and reinsurance contract level reviews. Due to limited claims activity thus far on the 2020 Catastrophes, these loss estimates are still dependent on broad assumptions about coverage, liability and reinsurance and are therefore subject to a wide range of variability. While we believe our reserves for the 2020 Catastrophes as ofSeptember 30, 2020 are adequate, we continue to closely monitor industry loss estimates and reported claims and will adjust our estimates of gross and net losses as new information becomes available. Underwriting results for the quarter and nine months endedSeptember 30, 2019 included$42.6 million of underwriting loss from Hurricane Dorian and Typhoon Faxai (2019 Catastrophes). The following table summarizes, by segment, the components of the underwriting losses related to the 2020 Catastrophes and 2019 Catastrophes for the quarter and nine months endedSeptember 30, 2020 and 2019, respectively.
Quarter and Nine Months Ended
2020 2019 2020 Catastrophes 2019 Catastrophes (dollars in thousands) Insurance Reinsurance Consolidated Insurance Reinsurance Consolidated Losses and loss adjustment expenses$ 66,581 $ 35,211 $
101,792
- (750) (750) - (2,475) (2,475) Underwriting loss$ 66,581 $ 34,461 $ 101,042 $ 13,868 $ 28,778 $ 42,646 Impact on quarter to date combined ratio 6 % 15 % 7 % 1 % 12 % 3 % Impact on year to date combined ratio 2 % 5 % 2 % - % 4 % 1 % COVID-19 Losses Underwriting results for the quarter and nine months endedSeptember 30, 2020 included$48.9 million and$373.9 million , respectively, of underwriting losses arising from the COVID-19 pandemic. The following table summarizes, by segment, the components of the underwriting losses attributed to the COVID-19 pandemic for the quarter and nine months endedSeptember 30, 2020 . As ofSeptember 30, 2020 , losses and loss adjustment expenses were net of ceded losses of$92.6 million . COVID-19 Pandemic Nine Months Ended September 30, Quarter Ended September 30, 2020 2020 (dollars in thousands) Insurance Reinsurance Consolidated Insurance Reinsurance Consolidated Losses and loss adjustment expenses$ 12,395 $ 34,450 $ 46,845 $ 305,395 $ 66,450 $ 371,845 Ceded (assumed) reinstatement premiums 2,145 (93) 2,052 2,145 (93) 2,052 Underwriting loss$ 14,540 $ 34,357 $ 48,897 $ 307,540 $ 66,357 $ 373,897 Impact on combined ratio 1 % 15 % 3 % 9 % 10 % 9 % 41
-------------------------------------------------------------------------------- Table of Contents Beginning in late February, as the COVID-19 outbreak was becoming more widespread, it was identified as a potential exposure within our underwriting operations. We began to regularly review all of our product lines to identify lines of business we believed could be directly impacted by COVID-19 and to evaluate the extent to which the virus may impact our coverages. In those instances where we identified COVID-19 as the proximate, or direct, cause of loss, we established net reserves for losses and loss adjustment expenses totaling$325.0 million during the first quarter of 2020. Our direct losses from COVID-19 are primarily attributed to business written within our international insurance operations and are primarily associated with coverages for event cancellation and business interruption losses in policies where no specific pandemic exclusions exist. During the quarter endedSeptember 30, 2020 , we increased our estimate of direct net losses and loss adjustment expenses attributable to COVID-19 by$31.8 million following changes in certain assumptions on which our estimates are based, as further discussed below, and resulting in total direct net losses and loss adjustment expenses of$356.8 million for the nine months endedSeptember 30, 2020 . In addition to loss exposures that are directly attributable to COVID-19, we are also exposed to losses indirectly related to the COVID-19 pandemic and associated with a broader range of coverages, including coverages within our trade credit, professional liability and workers' compensation product lines, among others, as well as our reinsurance product lines. During the quarter and nine months endedSeptember 30, 2020 , we recognized$15.0 million of net losses and loss adjustment expenses in our trade credit product line within our Insurance segment related to losses that were indirectly attributable to the pandemic. No other significant indirect losses attributable to COVID-19 have been reported at this time. See "Developments Related to COVID-19" for further discussion of other potential indirect exposures arising from the pandemic.
The following table summarizes, by coverage and underwriting platform, the
components of our direct net losses and loss adjustment expenses from COVID-19
for the quarter and nine months ended
Quarter EndedSeptember 30 ,
2020
(dollars in millions) Insurance Reinsurance Consolidated Event cancellation International$ 13.2 $ -$ 13.2 United States (1.0) - (1.0) Business interruption International (12.4) 20.0 7.6 United States (7.5) - (7.5) All other coverages 5.1 14.4 19.5 Total$ (2.6) $ 34.4 $ 31.8 Nine Months Ended September 30, 2020 (dollars in millions) Insurance Reinsurance Consolidated Event cancellation International$ 185.7 $ -$ 185.7 United States 7.5 - 7.5 Business interruption International 79.6 22.0 101.6 United States 8.5 15.0 23.5 All other coverages 9.1 29.4 38.5 Total$ 290.4 $ 66.4 $ 356.8 Both the gross and net loss estimates for direct losses attributed to COVID-19 represent our best estimates as ofSeptember 30, 2020 based upon information currently available. Our estimates for these direct losses and loss adjustment expenses are based on reported claims, as well as detailed policy level reviews and reviews of in-force assumed reinsurance contracts for potential exposures. We also considered analysis provided by our brokers and claims counsel. There are no recent historical events with similar characteristics to COVID-19, and therefore we have no past loss experience on which to base our estimates. Additionally, the economic and social impacts of the pandemic continue to evolve. 42 -------------------------------------------------------------------------------- Table of Contents Significant assumptions on which our estimates of reserves for direct COVID-19 losses and loss adjustment expenses are based include: •the scope of coverage provided under our policies, particularly those that provide for business interruption coverage, which generally falls under the following three categories: •coverage has not been triggered because the policy's insuring agreement has not been satisfied and/or a covered cause of loss has not been established; •the policy would not respond because the policy includes a communicable disease, virus or pandemic exclusion; or •the policy may provide coverage for communicable diseases and pandemics, but also includes conditions and limitations to coverage; •coverage provided under our ceded reinsurance contracts; •the expected duration of the disruption caused by the COVID-19 pandemic, which we have assumed will extend, in varying degrees, beyond the government directives currently in place and may impact certain covered events through the end of the year and beyond; and •the ability of insureds to mitigate some or all of their losses. For example, in the case of our event cancellation coverages, by deferring the event or moving to a virtual format, and for our business interruption exposures, the ability to continue providing certain services or to provide services remotely. Due to the inherent uncertainty associated with the assumptions surrounding the COVID-19 pandemic, these estimates are subject to a wide range of variability. Our initial estimates atMarch 31, 2020 reflected limited claims reporting and were based on broad assumptions about coverage, liability and reinsurance. A test case of a sample of business interruption coverages for policies written in theUnited Kingdom , which do not have the same exclusions as policies commonly written in theU.S. , concluded in the third quarter of 2020 with the court's judgment finding mostly in favor of policyholders. This ruling was most impactful to certain estimates in our Reinsurance segment, where we increased our estimate of losses and loss adjustment expenses on certain treaties following an increase in estimated losses by the respective cedents on the treaties. The ruling did not meaningfully impact the reserves previously established for business interruption coverage within our Insurance segment given the assumptions made in our initial estimates and our policy terms and conditions. Our estimates atSeptember 30, 2020 also reflect additional data gathered through increased claims reporting and a change in our expectation of the duration of the pandemic, which was most impactful to our event cancellation coverages. As ofSeptember 30 , assumptions about coverage, liability and reinsurance continue to be subject to judicial review and may be subject to other government action. Additionally, it is highly likely that there will be significant litigation involved in the handling of claims associated with COVID-19, and in certain instances, assessing the validity of policy exclusions for pandemics and interpreting policy terms to determine coverage for pandemics, which are in the process of being tested in various judicial systems. While we believe our net reserves for losses and loss adjustment expenses for COVID-19 as ofSeptember 30, 2020 are adequate based on information available at this time, we continue to closely monitor reported claims, government actions, judicial decisions and changes in the levels of worldwide social disruption and economic activity arising from the pandemic and will adjust our estimates of gross and net losses as new information becomes available. Such adjustments to our reserves for COVID-19 losses and loss adjustment expenses may be material to our results of operations, financial condition and cash flows. 43 -------------------------------------------------------------------------------- Table of Contents Insurance Segment The combined ratio for the Insurance segment was 94% (including six points for underwriting losses on the 2020 Catastrophes and one point for underwriting losses attributed to COVID-19) for the quarter endedSeptember 30, 2020 compared to 92% (including one point for underwriting losses on the 2019 Catastrophes) for the same period of 2019. For the quarter endedSeptember 30, 2020 , the increase in the combined ratio was driven by higher catastrophe losses in 2020 compared to 2019 and the impact of losses attributed to COVID-19 in 2020, partially offset by a lower attritional loss ratio and a lower expense ratio in 2020 compared to 2019. Higher earned premiums in 2020 compared to 2019 had a favorable impact on our expense ratio and an unfavorable impact on the prior accident years' loss ratio. •Excluding the impact of the 2020 and 2019 Catastrophes and losses attributed to COVID-19 in 2020, the current accident year loss ratio for the quarter endedSeptember 30, 2020 decreased compared to the same period of 2019 primarily driven by lower attritional loss ratios on our property and general liability product lines, which benefited from higher premium rates. •The Insurance segment's combined ratio for the quarter endedSeptember 30, 2020 included$137.3 million of favorable development on prior years' loss reserves compared to$135.0 million for the same period of 2019. For the quarter endedSeptember 30, 2020 , favorable development was most significant on our general liability and professional liability products lines, across several accident years, and workers' compensation product lines, primarily on the 2016 to 2019 accident years. The favorable development on prior years' loss reserves in the third quarter of 2019 was also most significant on our general liability, workers' compensation and professional liability product lines. •The expense ratio for the quarter endedSeptember 30, 2020 decreased compared to the same period of 2019, primarily due to the favorable impact of higher earned premiums. The combined ratio for the Insurance segment was 100% (including nine points for underwriting losses attributed to COVID-19 and two points for underwriting losses on the 2020 Catastrophes) for the nine months endedSeptember 30, 2020 compared to 94% for the same period of 2019. For the nine months endedSeptember 30, 2020 , the increase in the combined ratio was driven by the impact of losses attributed to COVID-19 in 2020 and higher catastrophe losses in 2020 compared to 2019, partially offset by more favorable development on prior accident years' loss reserves and a lower attritional loss ratio and a lower expense ratio in 2020 compared to 2019. Higher earned premiums in 2020 compared to 2019 had a favorable impact on our expense ratio and an unfavorable impact on the prior years' loss ratio. •Excluding the impact of losses attributed to COVID-19 in 2020 and the 2020 and 2019 Catastrophes, the current accident year loss ratio for the nine months endedSeptember 30, 2020 decreased compared to the same period of 2019, primarily due to lower net attritional losses on our marine and energy and professional liability product lines, partially offset by higher net attritional losses on our programs product line. We also had lower attritional loss ratios on our property and general liability product lines, which benefited from higher premium rates in 2020. •The Insurance segment's combined ratio for the nine months endedSeptember 30, 2020 included$404.6 million of favorable development on prior years' loss reserves compared to$309.3 million for the same period of 2019. The impact on the combined ratio of more favorable development on prior years' loss reserves was partially offset by the unfavorable impact of higher earned premiums in 2020 compared to 2019. The increase in favorable development was primarily due to more favorable development on our professional liability product lines in 2020 compared to 2019 and favorable development on our property product lines in 2020 compared to adverse development in 2019. For the nine months endedSeptember 30, 2020 , favorable development was most significant on our general liability, professional liability and workers' compensation product lines across several accident years. The favorable development on prior years' loss reserves in 2019 was also most significant on our general liability, workers' compensation and professional liability product lines. •The expense ratio for the nine months endedSeptember 30, 2020 decreased compared to the same period of 2019, primarily due to the favorable impact of higher earned premiums. 44 -------------------------------------------------------------------------------- Table of Contents Reinsurance Segment The combined ratio for the Reinsurance segment was 116% (including 15 points for underwriting losses attributed to COVID-19 and 15 points for underwriting losses on the 2020 Catastrophes) for the quarter endedSeptember 30, 2020 compared to 103% (including 12 points for underwriting losses on the 2019 Catastrophes) for the same period of 2019. For the quarter endedSeptember 30, 2020 , the increase in the combined ratio was driven by the impact of underwriting losses attributed to COVID-19 in 2020 and higher catastrophe losses in 2020 compared to 2019, partially offset by more favorable development on prior accident years' loss reserves in 2020 compared to 2019. •Excluding the impact of losses attributed to COVID-19 in 2020 and the 2020 and 2019 Catastrophes, the current accident year loss ratio for the quarter endedSeptember 30, 2020 increased compared to the same period of 2019, primarily due to less favorable premium adjustments in 2020 compared to 2019, most notably within our property and workers' compensation product lines, partially offset by lower net attritional losses, primarily on our general liability and property product lines. •The Reinsurance segment's combined ratio for the quarter endedSeptember 30, 2020 included$30.7 million of favorable development on prior years' loss reserves compared to$13.8 million for the same period of 2019. The increase in favorable development was primarily due to favorable development on our professional liability and workers' compensation product lines in 2020 compared to adverse development on these product lines in 2019. For the quarter endedSeptember 30, 2020 , favorable development was most significant on our property and professional liability product lines across several accident years. The favorable development on prior years' loss reserves in the third quarter of 2019 was most significant on our property product lines. The combined ratio for the Reinsurance segment was 106% (including 10 points for underwriting losses attributed to COVID-19 and five points for underwriting losses on the 2020 Catastrophes) for the nine months endedSeptember 30, 2020 compared to 99% (including four points for underwriting losses on the 2019 Catastrophes) for the same period of 2019. For the nine months endedSeptember 30, 2020 , the increase in the combined ratio was primarily driven by the impact of underwriting losses attributed to COVID-19 in 2020 and higher catastrophe losses in 2020 compared to 2019, partially offset by a lower expense ratio and more favorable development on prior accident years' loss reserves in 2020 compared to 2019. •The Reinsurance segment's combined ratio for the nine months endedSeptember 30, 2020 included$29.0 million of favorable development on prior years' loss reserves compared to$20.7 million for the same period of 2019. The increase in favorable development was primarily due to more favorable development on our property product lines in 2020 compared to 2019, partially offset by more adverse development on our public entity product lines in 2020 compared to 2019. Additionally, in 2020, we recognized additional exposure related to net favorable premium adjustments along with adverse development on certain of our professional liability product lines. For the nine months endedSeptember 30, 2020 , favorable development was most significant on our property product lines, primarily on the 2017 to 2019 accident years. The favorable development on prior years' loss reserves in 2019 was most significant on our aviation, auto and whole account product lines. •The expense ratio for the nine months endedSeptember 30, 2020 decreased compared to the same period of 2019, primarily due to lower general expenses. 45 -------------------------------------------------------------------------------- Table of Contents Premiums The following tables summarize gross premium volume, net written premiums and earned premiums. Gross Premium Volume Nine Months Ended Quarter Ended September 30, September 30, (dollars in thousands) 2020 2019 2020 2019 Insurance$ 1,514,002 $ 1,418,363 $ 4,482,149 $ 3,979,559 Reinsurance 222,066 226,387 958,529 963,145 Other underwriting (227) 516 55 12 Total Underwriting 1,735,841 1,645,266 5,440,733 4,942,716 Program services and other 536,893 619,226 1,528,017 1,823,965 Total$ 2,272,734 $ 2,264,492 $ 6,968,750 $ 6,766,681 Gross premium volume in our underwriting operations for the quarter and nine months endedSeptember 30, 2020 increased 6% and 10%, respectively, compared to the same periods of 2019 due to an increase in gross premium volume in our Insurance segment. Also impacting consolidated gross premium volume were gross premiums written through our program services business and other fronting arrangements, which decreased 13% and 16% for the quarter and nine months endedSeptember 30, 2020 , respectively. The decrease in gross premium volume in our program services business for both periods was driven by the run-off of one large program and the cancellation of an in-force book of policies related to another large program. Substantially all gross premiums from our program services business and other fronting arrangements were ceded to third parties for the quarter and nine months endedSeptember 30, 2020 and 2019. See "Other Operations" for further discussion on gross premiums from our program services operations. Gross premium volume in our Insurance segment increased 7% and 13% for the quarter and nine months endedSeptember 30, 2020 , respectively, compared to the same periods of 2019. The increase for both periods was primarily driven by growth and more favorable rates within our professional liability and general liability product lines, as well as growth in our personal lines product lines. For the quarter endedSeptember 30, 2020 , these increases were partially offset by lower gross premiums written within our programs product line, due in part to reduced social and economic activity related to COVID-19, as well as active portfolio management where we have discontinued writing certain underperforming programs. Gross premium volume in our Reinsurance segment decreased slightly for both the quarter and nine months endedSeptember 30, 2020 compared to the same period of 2019. For the quarter endedSeptember 30, 2020 , significant offsetting variances compared to 2019 include: •lower gross premiums within our workers' compensation product lines, primarily due to lower gross premiums on renewals and less favorable premium adjustments, •lower gross premiums within our property product lines, primarily due to an unfavorable impact from the timing of multi-year contracts, and •higher gross premiums within our general liability product lines, primarily due to new business. Significant variability in gross premium volume can be expected in our Reinsurance segment due to individually significant contracts and multi-year contracts, as well as the timing of renewals. During the first nine months of 2020, we continued to see improved pricing across most of our product lines, most notably within our general liability, professional liability and property product lines. The primary exception was workers' compensation, where we continued to see low single digit rate decreases given generally favorable underlying trends in recent years. 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.
See "Developments Related to COVID-19" for further discussion on potential impacts to our premiums.
46 --------------------------------------------------------------------------------
Table of Contents Net Written Premiums Nine Months Ended Quarter Ended September 30, September 30, (dollars in thousands) 2020 2019 2020 2019 Insurance$ 1,220,054 $ 1,181,919 $ 3,683,767 $ 3,306,447 Reinsurance 178,994 187,180 820,573 844,949 Other underwriting (388) 556 51 99 Total Underwriting 1,398,660 1,369,655 4,504,391 4,151,495 Program services and other (1,384) 729 (4,242) 1,620 Total$ 1,397,276 $ 1,370,384 $ 4,500,149 $ 4,153,115 Net retention of gross premium volume for our underwriting operations for the quarter and nine months endedSeptember 30, 2020 was 81% and 83%, respectively, compared to 83% and 84% for the same periods of 2019. The decrease in net retention for both the quarter and nine months endedSeptember 30, 2020 compared to the same periods of 2019 was driven by a decrease in net retention within our Insurance segment, due in part to a new quota share agreement to fully cede premiums on a program that was put into run-off. Within our underwriting operations, we purchase reinsurance and retrocessional reinsurance to manage our net retention on individual risks and overall exposure to losses and to enable us to write policies with sufficient limits to meet policyholder needs. Earned Premiums Nine Months Ended Quarter Ended September 30, September 30, (dollars in thousands) 2020 2019 2020 2019 Insurance$ 1,173,758 $ 1,058,869 $ 3,400,760 $ 3,023,865 Reinsurance 222,369 240,144 688,884 678,382 Other underwriting (195) 556 51 99 Total Underwriting 1,395,932 1,299,569 4,089,695 3,702,346 Program services and other (1,504) 463 (4,384) 1,124 Total$ 1,394,428 $ 1,300,032 $ 4,085,311 $ 3,703,470 Earned premiums increased 7% and 10% for the quarter and nine months endedSeptember 30, 2020 , respectively, compared to the same periods of 2019. The increase in earned premiums for both the quarter and nine months endedSeptember 30, 2020 was primarily attributable to an increase in gross premium volume within our Insurance segment on our professional and general liability product lines, as described above. 47 -------------------------------------------------------------------------------- Table of Contents Investing Results 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. We measure investing results by our net investment income and net investment gains as well as our taxable equivalent total investment return.
The following table summarizes our investment performance.
Nine Months Ended Quarter Ended September 30, September 30, (dollars in thousands) 2020 2019 2020 2019 Net investment income$ 90,384 $
113,382
$ 539,302 $ 32,144 $ (230,896) $ 1,069,988 Change in net unrealized investment gains on available-for-sale securities (1)$ 98,148 $ 92,904 $ 429,658 $ 511,307 Investment yield (2) 0.6 % 0.7 % 1.8 % 2.3 % Taxable equivalent total investment return, before foreign currency effect 3.8 % 11.3 % Taxable equivalent total investment return 3.8 % 10.9 % (1)The change in net unrealized gains on available-for-sale securities excludes the reserve deficiency adjustment for life and annuity benefit reserves of$20.6 million and$31.3 million , respectively, for the quarters endedSeptember 30, 2020 and 2019, and$56.2 million and$93.1 million , respectively, for the nine months endedSeptember 30, 2020 and 2019. (2)Investment yield reflects net investment income as a percentage of monthly average invested assets at cost. The decrease in net investment income for the quarter and nine months endedSeptember 30, 2020 compared to the same periods of 2019 was driven primarily by lower short-term investment income due to lower short-term interest rates, and lower interest income on our fixed maturity investment portfolio, primarily due to decreased holdings of fixed maturity securities in 2020. The decrease in net investment income for the nine months endedSeptember 30, 2020 was also driven by losses on our equity method investments. See note 4(d) of the notes to consolidated financial statements for details regarding the components of net investment income. Net investment gains for the quarter endedSeptember 30, 2020 were primarily attributable to an increase in the fair value of our equity portfolio driven by favorable market value movements. This follows significant declines in the fair value of our equity portfolio in the first quarter of 2020 driven by unfavorable market value movements resulting from the onset of the COVID-19 pandemic, the impacts of which are further discussed in "Developments Related to COVID-19." The decline in fair value of the equity portfolio in the first quarter of 2020 resulted in net investment losses for the nine months endedSeptember 30, 2020 . See note 4(e) of the notes to consolidated financial statements for further details on the components of net investment gains (losses). We also evaluate our investment performance by analyzing 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 maturity securities, changes in fair value of equity securities, dividends on equity securities and realized investment gains or losses on available-for-sale securities, 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 inU.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 focus on our long-term investment return, understanding that the level of investment gains or losses may vary from one period to the next. 48
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Table of Contents The following table reconciles investment yield to taxable equivalent total investment return.
Nine Months Ended
2020 2019 Investment yield (1) 1.8 % 2.3 % Adjustment of investment yield from amortized cost to fair value (0.4) % (0.5) % Net amortization of net premium on fixed maturity securities 0.3 % 0.3 %
Net investment gains (losses) and change in net unrealized investment gains on available-for-sale securities
1.0 % 8.4 % Taxable equivalent effect for interest and dividends (2) 0.1 % 0.1 % Other (3) 1.0 % 0.3 % Taxable equivalent total investment return 3.8 % 10.9 % (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 time-weighting the inputs to the calculation of taxable equivalent total investment return.
We report the results of ourMarkel Ventures operations in ourMarkel 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, predominantly inthe United States . We measureMarkel Ventures' results by its operating income and net income, as well as earnings before interest, income taxes, depreciation and amortization (EBITDA). We consolidate the results of ourMarkel Ventures subsidiaries on a one-month lag, with the exception of any significant transactions or events that occur in the intervening period. The following table summarizes the operating revenues, operating income, EBITDA and net income to shareholders from ourMarkel Ventures segment. See note 7 of the notes to consolidated financial statements for further details regarding the components of ourMarkel Ventures segment operating revenues and expenses. Nine Months Ended Quarter Ended September 30, September 30, (dollars in thousands) 2020 2019 2020 2019 Operating revenues$ 824,132
$ 496,243 $ 2,013,492 $ 1,568,443 Operating income$ 79,605 $ 35,467 $ 200,766 $ 147,056 EBITDA$ 110,804
$ 48,731
Operating revenues from ourMarkel Ventures segment increased for the quarter and nine months endedSeptember 30, 2020 compared to the same periods of 2019 due to the contribution of revenues from Lansing, which was acquired inApril 2020 , and VSC, which was acquired inNovember 2019 . The quarter and nine months endedSeptember 30, 2020 included$373.4 million and$563.6 million , respectively, of operating revenues attributable to Lansing and VSC. Excluding the contributions of Lansing and VSC in 2020, operating revenues from our otherMarkel Ventures businesses decreased for the quarter and nine months endedSeptember 30, 2020 compared to the same periods of 2019, primarily due to decreased demand across many of our products businesses attributable to the economic and social disruption caused by the COVID-19 pandemic. For both periods, the decrease in demand, which led to lower sales volumes, had the most significant impact at our transportation-related businesses. These decreases were partially offset by the impact of higher sales volumes at one of our consumer and building products businesses. 49 -------------------------------------------------------------------------------- Table of Contents Operating income and EBITDA from ourMarkel Ventures segment increased for the quarter and nine months endedSeptember 30, 2020 compared to the same periods of 2019. The increase in operating income and EBITDA for both periods was due in part to the acquisitions of Lansing and VSC. The increase in operating income and EBITDA for both periods was also attributable to a gain on the sale of assets at one of our leasing businesses and higher revenues at one of our consumer and building products businesses, as described above. For the nine months endedSeptember 30, 2020 , the increase in operating income and EBITDA was also attributable to growth and improved operating results at one of our consulting services businesses. Operating income and EBITDA for both periods were unfavorably impacted by lower operating revenues at our transportation-related businesses, as a result of decreased demand attributed to the COVID-19 pandemic, as described above. Markel Ventures EBITDA is a non-GAAP financial measure. We useMarkel Ventures EBITDA as an operating performance measure in conjunction withU.S. GAAP measures, including operating revenues, operating income and net income to shareholders, to monitor and evaluate the performance of ourMarkel Ventures segment. Because EBITDA excludes interest, income taxes, depreciation and amortization, it provides an indicator of economic performance that is useful to both management and investors in evaluating ourMarkel Ventures businesses as it is not affected by levels of debt, interest rates, effective tax rates or levels of depreciation or amortization resulting from purchase accounting. The following table reconcilesMarkel Ventures operating income toMarkel Ventures EBITDA. Nine Months Ended Quarter Ended September 30, September 30, (dollars in thousands) 2020 2019 2020 2019
15,337 12,892 43,471 40,401 Amortization of intangible assets 15,862 10,357 39,299 31,674 Markel Ventures EBITDA$ 110,804 $ 58,716 $ 283,536 $ 219,131 Net income to shareholders from ourMarkel Ventures segment increased for the quarter and nine months endedSeptember 30, 2020 compared to the same periods of 2019, primarily due to higher operating income, partially offset by higher income tax expense and interest expense.
See "Developments Related to COVID-19" for further discussion of impacts of the
pandemic on our
50 -------------------------------------------------------------------------------- Table of Contents Other Operations
The following table presents the components of operating revenues and operating expenses that are not included in a reportable segment.
Quarter Ended September 30, 2020 2019 Services and Services and Amortization of Services and Services and Amortization of (dollars in thousands) other revenues other expenses intangible assets other revenues other expenses intangible assets Other operations: Insurance-linked securities$ 38,547 $ 83,495 $ 9,612$ 54,947 $ 46,123 $ 9,611 Program services 23,519 4,746 5,235 28,844 3,422 5,236 Life and annuity 541 1,063 - 378 1,789 - Other 886 639 3,579 7,250 6,009 650 63,493 89,943 18,426 91,419 57,343 15,497 Underwriting operations 10,376 9,841 Total$ 63,493 $ 89,943 $ 28,802$ 91,419 $ 57,343 $ 25,338 Nine Months Ended September 30, 2020 2019 Services and Services and Amortization of Services and Services and Amortization of (dollars in thousands) other revenues other expenses intangible assets other revenues other expenses intangible assets Other operations: Insurance-linked securities$ 146,265 $ 183,814 $ 28,836$ 158,570 $ 159,006 $ 33,748 Program services 74,561 16,073 15,703 79,395 14,300 15,704 Life and annuity 1,071 12,613 - 1,145 14,284 - Other 15,612 13,731 4,918 24,868 20,425 2,019 237,509 226,231 49,457 263,978 208,015 51,471 Underwriting operations 31,520 29,518 Total$ 237,509 $ 226,231 $ 80,977$ 263,978 $ 208,015 $ 80,989
For the quarter endedSeptember 30, 2020 , the decrease in operating revenues in our insurance-linked securities operations was driven by lower revenues from our Nephila operations, primarily due to lower investment management fees as a result of increases in development class assets, or capital held in a side-pocket for which management fees are not earned, and redemptions in 2020. The decrease in operating revenues for the quarter endedSeptember 30, 2020 was also attributable to lower revenues from our Markel CATCo operations, primarily due to lower assets under management during 2020 compared to 2019 and, effectiveJanuary 1, 2020 , a further reduction in the management fee rate. For the nine months endedSeptember 30, 2020 , the decrease in operating revenues in our insurance-linked securities operations was driven by lower revenues from our Markel CATCo operations, as described above, partially offset by higher revenues from our Nephila operations. Higher revenues from our Nephila operations for the nine months endedSeptember 30, 2020 were primarily due to growth in our managing general agent operations, partially offset by lower investment management fees, as described above. Nephila's net assets under management were$9.4 billion and$10.4 billion as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. MCIM's net assets under management were$1.2 billion and$2.8 billion as ofSeptember 30, 2020 andDecember 31, 2019 , respectively, a portion of which is attributable to our investments in the Markel CATCo Funds. 51 -------------------------------------------------------------------------------- Table of Contents The increase in services and other expenses in our insurance-linked securities operations for both the quarter and nine months endedSeptember 30, 2020 compared to the same periods of 2019 was primarily due to a legal settlement at our Markel CATCo operations. See note 15 of the notes to consolidated financial statements for further details around developments in our Markel CATCo operations. Services and other expenses at our Nephila operations increased for both the quarter and nine months endedSeptember 30, 2020 compared to the same periods of 2019 due to growth in our managing general agent operations in 2020. For the nine months endedSeptember 30, 2020 , higher managing general agent expenses were partially offset by a favorable impact from transaction-related costs in 2019 that did not recur in 2020. Services and other expenses in 2020 also reflect start-up costs associated with our new retrocessional insurance-linked securities fund manager, Lodgepine.
Program Services
The decrease in operating revenues in our program services operations for both the quarter and nine months endedSeptember 30, 2020 compared to the same periods of 2019 was primarily due to lower gross premium volume. Gross written premiums in our program services operations were$536.6 million and$1.5 billion for the quarter and nine months endedSeptember 30, 2020 , respectively, and$619.2 million and$1.8 billion for the quarter and nine months endedSeptember 30, 2019 , respectively. The decrease in gross premium volume for both periods was driven by the run-off of one large program and the cancellation of an in-force book of policies related to another large program resulting in a one-time unfavorable premium adjustment of$55.0 million associated with the return of unearned premium, which was recognized in the first quarter of 2020. For the nine months endedSeptember 30, 2020 , these decreases were partially offset by gross written premiums from new program business in 2020.
Interest Expense, Loss on Early Extinguishment of Debt and Income Taxes
Interest Expense and Loss on Early Extinguishment of Debt
Interest expense was$42.7 million and$133.2 million for the quarter and nine months endedSeptember 30, 2020 , respectively, compared to$47.5 million and$129.0 million for the same periods of 2019. The change in interest expense for the quarter and nine months endedSeptember 30, 2020 was primarily a result of the following transactions: •the purchase and redemption of our 6.25% and 5.35% unsecured senior notes in the third and fourth quarters of 2019 •the repayment of our 7.125% unsecured senior notes in the third quarter of 2019 •the issuance of our 3.35% and 4.15% unsecured senior notes in the third quarter of 2019 The change in interest expense for the nine months endedSeptember 30, 2020 was also impacted by the issuance of our 5.0% unsecured senior notes issued in the second quarter of 2019. InSeptember 2019 , we purchased$125.2 million of principal on our 6.25% unsecured senior notes dueSeptember 30, 2020 and$97.8 million of principal on our 5.35% unsecured senior notes dueJune 1, 2021 through a tender offer at a total purchase price of$130.1 million and$103.0 million , respectively. In connection with the tender offer and purchase, we recognized a loss on early extinguishment of debt of$6.7 million during the quarter and nine months endedSeptember 30, 2019 . See "Financial Condition" for further discussion of our other 2019 senior long-term debt transactions.
Income Taxes
The effective tax rate for the nine months endedSeptember 30, 2020 was not meaningful due to the small pre-tax loss in the period. The effective tax rate was 22% for the nine months endedSeptember 30, 2019 . We use the estimated annual effective tax rate method for calculating our tax provision in interim periods. This method applies our best estimate of the effective tax rate expected for the full year to year-to-date earnings before income taxes. Certain items, including those deemed to be unusual, infrequent or that cannot be reliably estimated (discrete items), are excluded from the estimated annual effective tax rate, and the related tax expense or benefit is reported in the same period as the related item. The estimated annual effective tax rate was 21% for both the nine months endedSeptember 30, 2020 and 2019. The difference between the estimated annual effective tax rate and the effective tax rate for both periods was attributed to discrete items during the respective periods, however, the impact of the discrete items for the nine months endedSeptember 30, 2020 was magnified due to the small pre-tax loss during the period. 52 -------------------------------------------------------------------------------- Table of Contents Comprehensive Income to Shareholders The following table summarizes the components of comprehensive income to shareholders. Nine Months Ended Quarter Ended September 30, September 30, (dollars in thousands) 2020 2019 2020 2019 Net income (loss) to shareholders$ 452,726 $ 205,637 $ (31,269) $ 1,279,362 Other comprehensive income Change in net unrealized gains on available-for-sale investments, net of taxes 61,087 48,518 297,927 329,873 Other, net of taxes 6,294 (4,144) (6,961) (3,640) Other comprehensive (income) loss attributable to noncontrolling interest (18) 58 (24) 49 Other comprehensive income to shareholders 67,363 44,432 290,942 326,282
Comprehensive income to shareholders
Book Value per Common Share and Total Shareholder Return
Book value per common share was$819.71 as ofSeptember 30, 2020 , which reflects an increase of 2% from$802.59 atDecember 31, 2019 . Our stock price per share, or total shareholder return, decreased 15% for the nine months endedSeptember 30, 2020 . 53 -------------------------------------------------------------------------------- Table of Contents Financial Condition Investments, cash and cash equivalents and restricted cash and cash equivalents (invested assets) were$23.6 billion atSeptember 30, 2020 compared to$22.3 billion atDecember 31, 2019 . Equity securities were$6.2 billion , or 26% of invested assets, atSeptember 30, 2020 , compared to$7.6 billion , or 34% of invested assets, atDecember 31, 2019 . The decrease in equity securities fromDecember 31, 2019 toSeptember 30, 2020 was attributable to sales of equity securities as well as a decrease in fair value, which was driven by net unfavorable market value movements during the nine months endedSeptember 30, 2020 . Fixed maturity securities were 43% of invested assets atSeptember 30, 2020 compared to 45% atDecember 31, 2019 . Net cash provided by operating activities was$1.3 billion for the nine months endedSeptember 30, 2020 compared to$712.0 million for the same period of 2019. Net cash flows from operating activities for the nine months endedSeptember 30, 2020 reflected higher net premium collections in our Insurance segment. Net cash provided by investing activities was$22.5 million for the nine months endedSeptember 30, 2020 compared to net cash used by investing activities of$657.2 million for the same period of 2019. During the nine months endedSeptember 30, 2020 , net cash provided by investing activities included$1.2 billion from sales of equity securities, net of cash used for purchases of equity securities. This was partially offset by cash used to increase our holdings of short-term investments in the period. See "Developments Related to COVID-19" for further discussion of actions we have taken in our investment portfolio in response to the pandemic. Net cash provided by investing activities in 2020 also was net of$547.9 million of net cash used for the acquisition of Lansing. During the nine months endedSeptember 30, 2019 , net cash used by investing activities included$212.5 million of cash to acquire a minority ownership interest inThe Hagerty Group, LLC . Cash flow from investing activities is also affected by various factors such as anticipated payment of claims, financing activity, acquisition opportunities and individual buy and sell decisions made in the normal course of our investment portfolio management. Net cash provided by financing activities was$475.6 million for the nine months endedSeptember 30, 2020 compared to$770.6 million for the same period of 2019. InMay 2020 , we issued preferred shares with net proceeds of$591.9 million , as further discussed below. During the nine months endedSeptember 30, 2019 , we issued unsecured senior notes with net proceeds of$1.4 billion , before expenses. We used a portion of these proceeds to repay the remaining outstanding balance of our 7.125% unsecured senior notes dueSeptember 30, 2019 ($234.8 million aggregate principal outstanding atDecember 31, 2018 ). We used an additional portion of these proceeds to purchase$223.0 million of principal on two additional series of our other unsecured senior notes through a tender offer at a total purchase price of$233.1 million . Cash of$23.9 million and$82.0 million was used to repurchase shares of our common stock during the first nine months of 2020 and 2019, respectively. We suspended repurchases of our shares inMarch 2020 . We seek to maintain prudent levels of liquidity and financial leverage for the protection of our policyholders, creditors and shareholders. Our debt to capital ratio was 23% atSeptember 30, 2020 and 24% atDecember 31, 2019 . We have access to various capital sources, including dividends from certain of our insurance andMarkel Ventures subsidiaries, holding company invested assets, undrawn capacity under our revolving credit facility and access to the debt and equity capital markets. We believe that we have sufficient liquidity to meet our capital needs. However, the availability of these sources of capital and the availability and terms of future financings will depend on a variety of factors, and could be adversely affected by, among other things, risks and uncertainties related to COVID-19. See "Developments Related to COVID-19" for further discussion of the potential impacts of COVID-19 on our liquidity and capital resources. InMay 2020 , we issued 600,000 6.00% Fixed-Rate Reset Non-Cumulative Series A preferred shares, with no par value and a liquidation preference of$1,000 per share, for aggregate net proceeds after expenses of$591.9 million . Dividends, if declared by our Board of Directors, are payable semi-annually in arrears beginning inDecember 2020 . If we do not declare and pay the full dividends for the latest completed dividend period on all outstanding Series A preferred shares, we may not (i) declare or pay a dividend on our common shares or (ii) purchase, redeem or otherwise acquire for consideration any common shares, subject to certain exceptions. See note 14 of the notes to consolidated financial statements. Our holding company had$3.8 billion and$4.0 billion of invested assets atSeptember 30, 2020 andDecember 31, 2019 , respectively. The decrease in invested assets was primarily due to a capital contribution toMarkel Ventures for the acquisition of Lansing as well as interest payments associated with our unsecured senior notes and a decrease in the fair value of equity securities, partially offset by the proceeds from our preferred shares offering, as described above. 54 -------------------------------------------------------------------------------- Table of Contents Developments Related to COVID-19 OnMarch 11, 2020 , COVID-19, a novel coronavirus outbreak, was declared a pandemic by theWorld Health Organization . This pandemic has caused unprecedented social and economic disruption, increased volatility of capital markets and intervention by various governments and central banks around the world. In addition to the losses incurred in both our investing and underwriting operations during the first nine months of 2020, and the decreased demand for certain products and services within ourMarkel Ventures operations, we are experiencing significant impacts across our business operations. Most of the workforce in our insurance operations is working remotely from their homes, however, some of our offices have re-opened to the workforce at a reduced capacity. We have taken significant measures and developed new policies and procedures to protect the health and safety of our employeeswho are returning the office. While remote working continues to be the predominate approach, and is currently operating effectively, an extended period of remote work arrangements could strain our business continuity plans, introduce or increase operational and control risks, including but not limited to increased cybersecurity risks, and impact our ability to effectively manage our businesses. Within ourMarkel Ventures operations, most of our businesses are operating on their premises, however, their ability to continue to do so may be impacted as the pandemic evolves. For those employees in our insurance andMarkel Ventures operationswho are returning to work, or have continued work, on our premises, there is a risk that they will contract COVID-19, which could expose us to increased risk of employment related claims and litigation. Illnesses suffered by key employees, or a significant percentage of our workforce, also could prevent or delay the performance of critical business functions.
We are committed to serving the needs of our employees, customers, business partners and shareholders and continue to focus our efforts on safeguarding our people, supporting our front office and business operations and keeping our employees, customers, business partners and shareholders informed.
Other impacts we have experienced in our operations during the quarter and nine months endedSeptember 30, 2020 , including our consideration of these impacts on the valuation of our goodwill and intangible assets, as well as steps we are taking to respond to the economic disruption and dislocation caused by the pandemic, are discussed below, along with potential future impacts to our results of operations and financial condition.
Liquidity and Capital Resources
We seek to maintain prudent levels of liquidity and financial leverage for the protection of our policyholders, creditors and shareholders. We began the year in a strong liquidity position, holding$4.0 billion of invested assets at our holding company, the highest level in our history, and atSeptember 30, 2020 , our holding company held$3.8 billion of invested assets. Invested assets at the holding company as ofSeptember 30, 2020 include net proceeds from ourMay 2020 issuance of preferred stock totaling$591.9 million , and following two debt issuances in 2019 and the purchase and redemption of our unsecured senior notes due to mature in 2020 and 2021, we have no unsecured senior notes maturing untilJuly 2022 . We also have access to our$300 million revolving credit facility. We continue to maintain a fixed maturity portfolio comprised of high credit quality, investment grade securities with an average rating of "AA." Despite a$242.8 million decrease in the fair value of our equity portfolio in the first nine months of 2020, unrealized gains on our equity portfolio were$3.4 billion as ofSeptember 30, 2020 . Given the dislocation in the financial markets and related uncertainty around the global credit markets, we have taken several steps within our investment portfolio to increase our allocation to cash. Initially, we were retaining cash proceeds from maturities of short-term investments and fixed maturity securities. However, we subsequently have been reallocating cash to purchase short-term investments and fixed maturity securities. We also paused our purchases of equity securities and sold certain equity securities based on our views of the underlying fundamentals of these positions and where pricing was deemed appropriate. We also suspended repurchases of our shares inMarch 2020 and are focusing on expense reductions across our company. Declines in the fair value of our equity securities and underwriting losses arising from COVID-19, as well as the 2020 Catastrophes, have reduced the capital held by our insurance subsidiaries. Our insurance operations may require additional capital to support premium writings, and we remain committed to maintaining adequate capital and surplus at each of our insurance subsidiaries. As ofSeptember 30, 2020 , the statutory capital of all of our insurance subsidiaries exceeded required capital, and we believe we are well positioned to continue to pay claims, including those arising from the pandemic, promptly in accordance with the terms of our policies.
We continue to believe we have adequate liquidity to meet our capital and operating needs, including that which may be required to support the operating needs of our subsidiaries.
55 -------------------------------------------------------------------------------- Table of Contents Underwriting Operations As previously discussed, our underwriting results for the nine months endedSeptember 30, 2020 included$356.8 million of net losses and loss adjustment expenses directly attributed to COVID-19 (where COVID-19 was deemed the proximate cause of loss), including$31.8 million recognized during the third quarter. Due to the inherent uncertainty associated with the assumptions surrounding this pandemic, these estimates are subject to a wide range of variability. While we believe our net reserves for direct losses and loss adjustment expenses for COVID-19 as ofSeptember 30, 2020 are adequate based on information available at this time, we continue to closely monitor reported claims, government actions, judicial decisions and changes in local and worldwide social disruption arising from the pandemic and will adjust our estimates of gross and net losses as new information becomes available. See "Results of Operations - Underwriting Results" for further discussion on our estimate of direct losses and loss adjustment expenses attributed to COVID-19. We also have underwriting exposure to loss impacts that are indirectly related to the COVID-19 pandemic and associated with a broader range of coverages, including coverages within our trade credit, professional liability and workers' compensation product lines, among others, as well as our reinsurance product lines. During the quarter and nine months endedSeptember 30, 2020 , we recognized$15.0 million of net losses and loss adjustment expenses in our trade credit product line within our Insurance segment related to losses that were indirectly attributable to the pandemic. As the impacts of the pandemic continue to evolve, we expect that further losses indirectly related to the COVID-19 pandemic are likely to emerge. As an example, we provide liability coverage for health and medical institutions and professions, as well as other professions, which have been strained or otherwise impacted by the pandemic. No other significant indirect losses have been reported at this time. The widespread economic and social disruption caused by COVID-19 has created significant financial hardships for individuals and businesses worldwide. However, at this time, we do not believe there has been any material change in our exposure to credit losses. Our allowances for credit losses in both our insurance receivables and reinsurance recoverables were adjusted during the first quarter of 2020 to reflect the increased credit risk associated with the negative economic outlook, the impact of which was not material to our underwriting results. The significant decline in economic activity occurring during the pandemic may have an unfavorable impact on our premium volume, due to business closures, reduced recreational activity and lower gross receipts, revenues and payrolls of our insureds, among other things. While premium volume for the quarter and nine months endedSeptember 30, 2020 was impacted by these effects of the pandemic, the impact was not material to our underwriting results. For those policies where the underlying loss exposures have been reduced as a result of decreased economic activity or stay-at-home orders resulting from COVID-19, we also may be required to refund premiums to policyholders, however, there have been no material adjustments to date. These adverse impacts on our premium volume could be material. Within our underwriting operations, we also are reviewing and analyzing the underwriting guidelines and procedures we use to underwrite and reinsure policies that provide coverages related to communicable diseases, viruses, pathogens and other similar risks. Where appropriate, we are taking steps to mitigate our exposure to additional or further losses related to these types of risks, including increasing pricing and adding policy terms and conditions, including exclusions. These actions may reduce premium volume in certain classes of business. Markel Ventures Operations Beginning in the second quarter of 2020, the economic and social disruption created by the pandemic impacted the results of operations, financial position and cash flows of ourMarkel Ventures operations. Revenues across many of our businesses decreased due to changes in consumer behavior and the overall impact of current economic conditions on commercial and consumer spending, all of which impacted demand for certain products and services within our businesses. We have also seen orders and contracts canceled or postponed, and as a result of reduced demand, we have temporarily reduced capacity at certain of our operations for which the duration is currently uncertain. As the social and economic disruption caused by the pandemic is ongoing, we expect that revenues from ourMarkel Ventures operations will continue to be impacted, and these impacts may continue to be material. In order to partially mitigate the impact of decreased revenues, certain of our businesses have taken actions to reduce expenses, including, but not limited to, elimination of non-essential expenses, cancellation or deferral of open positions, salary reductions and workforce furloughs and reductions. Our businesses may increase borrowings, if needed, to maintain the cash flow required to operate. 56 -------------------------------------------------------------------------------- Table of Contents Continued loss of revenues in certain of our products and services businesses, the extent of which we are currently unable to reasonably estimate, could also impact the carrying value of inventory, goodwill and intangible assets and other long-lived assets, which may become impaired. See further discussion below for considerations regarding the valuation of our goodwill and intangible assets as ofSeptember 30, 2020 . In certain cases, revenue declines also could result in ongoing cash and working capital constraints and could impact the companies' liquidity and their ability to comply with debt covenants, and, in response, we may take steps necessary to support these operations. As a result of the economic hardship experienced by our customers, we may modify our payment terms or offer discounts to our customers, and we also are exposed to increased credit risk. Our allowances for credit losses on our receivables were adjusted during the first quarter of 2020 to reflect the increased credit risk associated with the negative economic outlook, the impact of which was not material to our results of operations.
Through our insurance-linked securities operations, we receive management fees for investment and insurance management services based on the net asset value of the accounts we manage, and, for certain funds, incentive fees based on the annual performance of the funds managed. For the nine months endedSeptember 30, 2020 , investment losses attributed to COVID-19 within the investment funds we manage have not been significant; however, uncertainty around potential COVID-19 loss exposures, has reduced, and may further reduce, the net asset value on which our management fees are based. Deferred or reduced investment management fees and the associated decline in cash flows, the extent of which we are currently unable to reasonably estimate, also could impact the carrying value of our goodwill and intangible assets, which may become impaired. See further discussion below for considerations regarding the valuation of our goodwill and intangible assets as ofSeptember 30, 2020 . Volatility in the capital markets and investor uncertainty regarding insurance industry exposure to COVID-19 also has impacted, and may continue to impact, our ability to raise additional third party capital for the funds we manage. We also have experienced, and may continue to experience, higher than anticipated investor redemptions from our funds. These impacts could have a material impact on our results of operations and financial condition. Our program services business generates fee income, in the form of ceding (program service) fees. This fee income is calculated based on the gross premium volume of the insurance programs we support. Similar to our underwriting operations, the significant decline in economic activity may have an unfavorable impact on premium volume, which may result in a reduction in fee income.
Our consolidated balance sheet as of
September 30, 2020 (dollars in millions) Underwriting Markel Ventures Other (1) Total Goodwill$ 892.9 $ 904.7$ 807.0 $ 2,604.6 Intangible assets 460.0 637.0 723.5 1,820.5 Total$ 1,352.9 $ 1,541.7 $ 1,530.5 $ 4,425.1 (1)Amounts included in Other reflect our operations that are not included in a reportable segment, including our insurance-linked securities operations and our program services operations. 57 -------------------------------------------------------------------------------- Table of Contents ThroughSeptember 30, 2020 , we considered whether a quantitative assessment of goodwill and intangible assets for impairment was required as a result of the significant economic disruption caused by the COVID-19 pandemic. After considering qualitative factors regarding the actual and expected impacts of the pandemic on our operations, as well as the amount by which the fair value of our reporting units exceeded their respective carrying values at the date of the last quantitative assessment, we determined these conditions did not indicate that it is more likely than not that the carrying value of any of our reporting units exceeded their fair value as ofSeptember 30, 2020 based on information available to us at this time. Similar factors were considered to determine if these circumstances were an indicator requiring an assessment of the recoverability of our intangible assets, and we concluded they were not based on information available to us at this time. However, delayed recovery or further deterioration in market conditions related to the general economy and the specific industries in which we operate, a sustained trend of weaker than anticipated financial performance within a reporting unit, or an increase in the market-based weighted average cost of capital, among other factors, could significantly impact the impairment analysis and may result in future goodwill or intangible asset impairment charges that, if incurred, could have a material adverse effect on our financial condition and results of operations.
For additional risks to our businesses related to COVID-19, see the risk factor titled "The COVID-19 pandemic has had, and may continue to have, material adverse effects on us."
58 -------------------------------------------------------------------------------- Table of Contents Brexit Developments OnJune 23, 2016 , theUnited Kingdom (U.K. ) voted to exit theEuropean Union (E.U.) (Brexit). A Withdrawal Agreement was agreed between theU.K. government and the E.U. inOctober 2019 and was approved by the U.K. Parliament onJanuary 23, 2020 . Under the Withdrawal Agreement, theU.K. left the E.U. onJanuary 31, 2020 . The effect of the Withdrawal Agreement is that E.U. laws continue to have effect in theU.K. during a transition period untilDecember 31, 2020 . The final terms of the future relationship between theU.K. and the E.U. remain to be negotiated. The effects of Brexit will depend in part on agreements, if any, theU.K. makes to retain access to E.U. markets. Ultimately, all Brexit terms also must be ratified by the legislative bodies of the 27 E.U. member states. Without a Brexit agreement on future terms of trade,U.K. based insurers may be prohibited from administering policies for, or paying claims to, European Economic Area (EEA) policyholders post Brexit. In order to provide certainty for its EEA policyholders, ourU.K. insurance company,Markel International Insurance Company Limited , transferred its legacy EEA exposures, claims and policies to our German insurance company, Markel Insurance SE. Lloyd's also has commenced its transfer of legacy EEA exposures. That transfer is expected to be completed prior toDecember 31, 2020 , however it may take longer, and 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 andOccupational 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 byU.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, our Lloyd's syndicate, may be impaired in running-off business, including paying claims, in the E.U. member states.
For additional risks related to Brexit, see "The exit of the
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