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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
 FORM 10-Q
______________________________________________________________________________________

    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2020
or
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _______ to _______
Commission File Number: 001-15811
_________________________________________
MARKEL CORPORATION
(Exact name of registrant as specified in its charter)
___________________________________________________________________________________
Virginia 54-1959284
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
4521 Highwoods Parkway, Glen Allen, Virginia 23060-6148
(Address of principal executive offices) (Zip Code)
(804) 747-0136
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of exchange on which registered
Common Stock, no par value MKL New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x   No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes x No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer   Non-accelerated filer  
Smaller reporting company Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ☐    No  x
Number of shares of the registrant's common stock outstanding at October 20, 2020: 13,778,084


Markel Corporation
Form 10-Q
Index
 
    Page Number
3
4
5
7
8
2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets
(dollars in thousands)
September 30,
2020
December 31,
2019
(unaudited)
ASSETS
Investments, at estimated fair value:
Fixed maturity securities, available-for-sale (amortized cost of $9,290,362 in 2020 and $9,448,840 in 2019)
$ 10,244,242  $ 9,970,909 
Equity securities (cost of $2,811,397 in 2020 and $3,266,735 in 2019)
6,183,944  7,590,755 
Short-term investments, available-for-sale (estimated fair value approximates cost) 1,897,459  1,196,248 
Total Investments 18,325,645  18,757,912 
Cash and cash equivalents 4,593,025  3,072,807 
Restricted cash and cash equivalents 669,528  427,546 
Receivables 2,004,080  1,847,802 
Reinsurance recoverables 5,665,838  5,432,712 
Deferred policy acquisition costs 638,134  566,042 
Prepaid reinsurance premiums 1,457,580  1,415,857 
Goodwill 2,604,575  2,308,548 
Intangible assets 1,820,453  1,738,474 
Other assets 2,391,161  1,906,115 
Total Assets $ 40,170,019  $ 37,473,815 
LIABILITIES AND EQUITY
Unpaid losses and loss adjustment expenses $ 15,723,231  $ 14,728,676 
Life and annuity benefits 1,034,093  985,729 
Unearned premiums 4,509,811  4,057,727 
Payables to insurance and reinsurance companies 416,988  406,720 
Senior long-term debt and other debt (estimated fair value of $4,270,000 in 2020 and $3,907,000 in 2019)
3,498,311  3,534,183 
Other liabilities 2,838,807  2,504,802 
Total Liabilities 28,021,241  26,217,837 
Redeemable noncontrolling interests 241,020  177,562 
Commitments and contingencies
Shareholders' equity:
Preferred stock 591,891  — 
Common stock 3,425,247  3,404,919 
Retained earnings 7,377,095  7,457,176 
Accumulated other comprehensive income 499,714  208,772 
Total Shareholders' Equity 11,893,947  11,070,867 
Noncontrolling interests 13,811  7,549 
Total Equity 11,907,758  11,078,416 
Total Liabilities and Equity $ 40,170,019  $ 37,473,815 
See accompanying notes to consolidated financial statements.
3

MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Loss) and Comprehensive Income
(Unaudited)
Quarter Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(dollars in thousands, except per share data)
OPERATING REVENUES
Earned premiums $ 1,394,428  $ 1,300,032  $ 4,085,311  $ 3,703,470 
Net investment income 90,384  113,382  274,242  339,395 
Net investment gains (losses):
Net realized investment gains 4,935  150  11,861  764 
Change in fair value of equity securities 534,367  31,994  (242,757) 1,069,224 
Net investment gains (losses) 539,302  32,144  (230,896) 1,069,988 
Products revenues 342,039  386,708  1,117,781  1,237,178 
Services and other revenues 545,582  200,792  1,132,978  594,631 
Total Operating Revenues 2,911,735  2,033,058  6,379,416  6,944,662 
OPERATING EXPENSES
Losses and loss adjustment expenses 863,247  752,134  2,652,811  2,118,000 
Underwriting, acquisition and insurance expenses 492,824  475,219  1,477,349  1,392,747 
Products expenses 296,371  354,404  974,925  1,098,968 
Services and other expenses 522,237  153,358  1,024,733  498,760 
Amortization of intangible assets 44,664  35,695  120,276  112,663 
Total Operating Expenses 2,219,343  1,770,810  6,250,094  5,221,138 
Operating Income 692,392  262,248  129,322  1,723,524 
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 (Loss) Before Income Taxes 584,071  261,928  (12,615) 1,644,798 
Income tax expense (130,028) (57,975) (3,047) (356,849)
Net Income (Loss) 454,043  203,953  (15,662) 1,287,949 
Net (income) loss 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 
Preferred stock dividends   —    — 
Net Income (Loss) to Common 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:
Net holding gains arising during the period $ 64,449  $ 48,315  $ 301,487  $ 329,113 
Reclassification adjustments for net gains (losses) included in net income (loss) (3,362) 203  (3,560) 760 
Change in net unrealized gains on available-for-sale investments, net of taxes 61,087  48,518  297,927  329,873 
Change in foreign currency translation adjustments, net of taxes 5,756  (4,606) (8,383) (5,978)
Change in net actuarial pension loss, net of taxes 538  462  1,422  2,338 
Total Other Comprehensive Income 67,381  44,374  290,966  326,233 
Comprehensive Income 521,424  248,327  275,304  1,614,182 
Comprehensive (income) loss attributable to noncontrolling interests (1,335) 1,742  (15,631) (8,538)
Comprehensive Income to Shareholders $ 520,089  $ 250,069  $ 259,673  $ 1,605,644 
NET INCOME (LOSS) PER COMMON SHARE
Basic $ 31.07  $ 13.97  $ (3.76) $ 92.92 
Diluted $ 31.03  $ 13.95  $ (3.76) $ 92.84 
See accompanying notes to consolidated financial statements.
4

MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Equity
(Unaudited)
Quarter Ended September 30, 2020 Preferred Shares Common Shares Preferred Stock Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Shareholders'
Equity
Noncontrolling
Interests
Total Equity Redeemable
Noncontrolling
Interests
(in thousands)
June 30, 2020 600  13,776  $ 591,891  $ 3,421,845  $ 6,948,466  $ 432,351  $ 11,394,553  $ 15,695  $ 11,410,248  $ 214,653 
Net income (loss) 452,726  —  452,726  (2,393) 450,333  3,710 
Other comprehensive income —  67,363  67,363  —  67,363  18 
Comprehensive Income (Loss) 520,089  (2,393) 517,696  3,728 
Issuance of common stock —  —  —  —  —  —  —  —  — 
Restricted stock units expensed —  —  —  3,402  —  —  3,402  —  3,402  — 
Adjustment of redeemable noncontrolling interests —  —  —  —  (23,621) —  (23,621) —  (23,621) 23,621 
Other —  —  —  —  (476) —  (476) 509  33  (982)
September 30, 2020 600  13,778  $ 591,891  $ 3,425,247  $ 7,377,095  $ 499,714  $ 11,893,947  $ 13,811  $ 11,907,758  $ 241,020 

Nine Months Ended September 30, 2020 Preferred Shares Common Shares Preferred Stock Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Shareholders'
Equity
Noncontrolling
Interests
Total Equity Redeemable
Noncontrolling
Interests
(in thousands)
December 31, 2019 —  13,794  $ —  $ 3,404,919  $ 7,457,176  $ 208,772  $ 11,070,867  $ 7,549  $ 11,078,416  $ 177,562 
Cumulative effect of adoption of ASU No. 2016-13, net of taxes (3,827) —  (3,827) —  (3,827) — 
January 1, 2020 —  13,794  —  3,404,919  7,453,349  208,772  11,067,040  7,549  11,074,589  177,562 
Net income (loss) (31,269) —  (31,269) 4,201  (27,068) 11,406 
Other comprehensive income —  290,942  290,942  —  290,942  24 
Comprehensive Income 259,673  4,201  263,874  11,430 
Issuance of preferred stock 600  —  591,891  —  —  —  591,891  —  591,891  — 
Issuance of common stock —  —  57  —  —  57  —  57  — 
Repurchase of common stock —  (21) —  —  (23,943) —  (23,943) —  (23,943) — 
Restricted stock units expensed —  —  —  26,386  —  —  26,386  —  26,386  — 
Acquisition of Lansing —  —  —  —  —  —  —  —  —  43,566 
Adjustment of redeemable noncontrolling interests —  —  —  —  (20,681) —  (20,681) —  (20,681) 20,681 
Purchase of noncontrolling interest —  —  —  (6,131) —  —  (6,131) —  (6,131) (7,029)
Other —  —  —  16  (361) —  (345) 2,061  1,716  (5,190)
September 30, 2020 600  13,778  $ 591,891  $ 3,425,247  $ 7,377,095  $ 499,714  $ 11,893,947  $ 13,811  $ 11,907,758  $ 241,020 
See accompanying notes to consolidated financial statements.
5

MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Equity (continued)
(Unaudited)
Quarter Ended September 30, 2019 Common Shares Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Shareholders'
Equity
Noncontrolling
Interests
Total Equity Redeemable
Noncontrolling
Interests
(in thousands)
June 30, 2019 13,826  $ 3,400,964  $ 6,808,201  $ 187,200  $ 10,396,365  $ 16,716  $ 10,413,081  $ 151,297 
Net income (loss) 205,637  —  205,637  (5,590) 200,047  3,906 
Other comprehensive income (loss) —  44,432  44,432  —  44,432  (58)
Comprehensive Income (Loss) 250,069  (5,590) 244,479  3,848 
Issuance of common stock 43  —  —  43  —  43  — 
Repurchase of common stock (12) —  (12,732) —  (12,732) —  (12,732) — 
Restricted stock units expensed —  2,410  —  —  2,410  —  2,410  — 
Adjustment of redeemable noncontrolling interests —  —  (12,221) —  (12,221) —  (12,221) 12,221 
Purchase of noncontrolling interest —  (483) —  —  (483) —  (483) 483 
Other —  —  —  290  293  (2,247)
September 30, 2019 13,815  $ 3,402,934  $ 6,988,888  $ 231,632  $ 10,623,454  $ 11,416  $ 10,634,870  $ 165,602 

Nine Months Ended September 30, 2019 Common Shares Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders'
Equity
Noncontrolling
Interests
Total Equity Redeemable
Noncontrolling
Interests
(in thousands)
December 31, 2018 13,888  $ 3,392,993  $ 5,782,310  $ (94,650) $ 9,080,653  $ 19,649  $ 9,100,302  $ 174,062 
Net income (loss) 1,279,362  —  1,279,362  (4,185) 1,275,177  12,772 
Other comprehensive income (loss) —  326,282  326,282  —  326,282  (49)
Comprehensive Income (Loss) 1,605,644  (4,185) 1,601,459  12,723 
Issuance of common stock 43  —  —  43  —  43  — 
Repurchase of common stock (80) —  (81,998) —  (81,998) —  (81,998) — 
Restricted stock units expensed —  14,282  —  —  14,282  —  14,282  — 
Adjustment to Nephila purchase price allocation —  —  —  —  —  (8,250) (8,250) 51 
Adjustment of redeemable noncontrolling interests —  —  9,464  —  9,464  —  9,464  (9,464)
Purchase of noncontrolling interest —  (4,219) —  —  (4,219) —  (4,219) (4,542)
Other —  (165) (250) —  (415) 4,202  3,787  (7,228)
September 30, 2019 13,815  $ 3,402,934  $ 6,988,888  $ 231,632  $ 10,623,454  $ 11,416  $ 10,634,870  $ 165,602 
See accompanying notes to consolidated financial statements.
6

MARKEL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
2020 2019
(dollars in thousands)
OPERATING ACTIVITIES
Net income (loss) $ (15,662) $ 1,287,949 
Adjustments to reconcile net income (loss) to net cash provided by operating activities 1,277,250  (575,991)
Net Cash Provided By Operating Activities 1,261,588  711,958 
INVESTING ACTIVITIES
Proceeds from sales of fixed maturity securities and equity securities 1,544,501  326,304 
Proceeds from maturities, calls and prepayments of fixed maturity securities 507,480  446,625 
Cost of fixed maturity securities and equity securities purchased (764,823) (657,563)
Net change in short-term investments (697,580) (451,408)
Cost of equity method investments (5,066) (216,806)
Proceeds from sales of equity and cost method investments 15,167  4,634 
Additions to property and equipment (72,771) (95,457)
Proceeds from disposals of fixed assets 20,527  15,949 
Acquisitions, net of cash acquired (547,847) (25,627)
Other 22,903  (3,809)
Net Cash Provided (Used) By Investing Activities 22,491  (657,158)
FINANCING ACTIVITIES
Additions to senior long-term debt and other debt 189,846  1,578,823 
Repayment of senior long-term debt and other debt (227,692) (680,516)
Premiums and fees related to early extinguishment of debt   (10,086)
Repurchases of common stock (23,943) (81,998)
Issuance of preferred stock, net 591,891  — 
Payment of contingent consideration (31,426) (14,113)
Purchase of noncontrolling interests (14,558) (9,754)
Distributions to noncontrolling interests (5,325) (7,147)
Other (3,172) (4,565)
Net Cash Provided By Financing Activities 475,621  770,644 
Effect of foreign currency rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents 2,500  (22,107)
Increase in cash, cash equivalents, restricted cash and restricted cash equivalents 1,762,200  803,337 
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period 3,500,353  2,396,432 
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS AT END OF PERIOD $ 5,262,553  $ 3,199,769 
See accompanying notes to consolidated financial statements.
7

MARKEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Markel Corporation is a diverse financial holding company serving a variety of niche markets. Markel Corporation's principal business markets and underwrites specialty insurance products. Through its wholly owned subsidiary, Markel Ventures, Inc. (Markel Ventures), Markel Corporation also owns interests in various businesses that operate outside of the specialty insurance marketplace.

a)Basis of Presentation. The consolidated balance sheet as of September 30, 2020 and the related consolidated statements of income (loss) and comprehensive income and changes in equity for the quarters and nine months ended September 30, 2020 and 2019, and the consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019 are unaudited. In the opinion of management, all adjustments necessary for fair presentation of such consolidated financial statements have been included. Such adjustments consist only of normal, recurring items. Interim results are not necessarily indicative of results of operations for the entire year. The consolidated balance sheet as of December 31, 2019 was derived from Markel Corporation's audited annual consolidated financial statements.

The accompanying consolidated financial statements have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) and include the accounts of Markel Corporation and its consolidated subsidiaries, as well as any variable interest entities (VIEs) that meet the requirements for consolidation (the Company). All significant intercompany balances and transactions have been eliminated in consolidation. The Company consolidates the results of its Markel Ventures subsidiaries on a one-month lag, with the exception of significant transactions or events that occur during the intervening period. Certain prior year amounts have been reclassified to conform to the current presentation.

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements. For further details regarding certain estimates, see note 16.

The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the Company's annual consolidated financial statements and notes. Certain accounting policies were updated to reflect accounting pronouncements that became effective in 2020. See note 2. Readers are urged to review the Company's 2019 Annual Report on Form 10-K for a more complete description of the Company's business and accounting policies.

b)Investments. Available-for-sale investments and equity securities are recorded at estimated fair value. Unrealized gains and losses on available-for-sale investments, net of income taxes, are included in other comprehensive income. Unrealized gains and losses on equity securities, net of income taxes, are included in net income.

The Company completes a detailed analysis each quarter to assess declines in the fair value of available-for-sale investments. Effective January 1, 2020, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and related amendments, which created a new comprehensive credit losses standard, FASB Accounting Standards Codification (ASC) 326, Financial Instruments—Credit Losses. Upon adoption of ASC 326, any impairment losses on the Company's available-for-sale investments are recorded as an allowance, subject to reversal, rather than as a reduction in amortized cost, as was required under the previous other-than-temporary impairment (OTTI) model. In accordance with the provisions of ASU No. 2016-13, prior periods have not been restated.

Premiums and discounts are amortized or accreted over the lives of the related fixed maturity securities as an adjustment to the yield using the effective interest method. Dividend and interest income are recognized when earned. Accrued interest receivable is excluded from both the estimated fair value and the amortized cost basis of available-for-sale securities and included within other assets on the Company's consolidated balance sheets. Any uncollectible accrued interest receivable is written off in the period it is deemed uncollectible. Realized investment gains or losses on available-for-sale investments are included in net income. Realized gains or losses from sales of available-for-sale investments are derived using the first-in, first-out method on the trade date.


8

c)Receivables. Receivables include amounts receivable from agents, brokers and insureds, which represent premiums that are both currently due and amounts not yet due on insurance and reinsurance policies. Premiums for insurance policies are generally due at inception. Premiums for reinsurance policies generally become due over the period of coverage based on the policy terms. Changes in the estimate of reinsurance premiums written will result in an adjustment to premiums receivable in the period they are determined. Receivables also include amounts receivable from contracts with customers, which represent the Company's unconditional right to consideration for satisfying the performance obligations outlined in the contract.

The Company monitors credit risk associated with receivables, taking into consideration the fact that in certain instances in the Company's insurance operations, credit risk may be reduced by the Company's right to offset loss obligations or unearned premiums against premiums receivable. An allowance is established for amounts deemed uncollectible and receivables are recorded net of this allowance. Following the adoption of ASC 326, as described in note 2, beginning January 1, 2020 the allowance is established for expected credit losses to be recognized over the life of the receivable. The Company considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions when estimating the allowance for credit losses. The Company uses information obtained from external sources to forecast short-term changes in macroeconomic conditions that are expected to impact the Company's exposure to credit losses. Any allowance for credit losses is charged to net income in the period the receivable is recorded and revised in subsequent periods to reflect changes in the Company's estimate of expected credit losses.

d)Reinsurance Recoverables. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk to minimize its exposure to significant losses from individual reinsurers. To further reduce credit exposure on reinsurance recoverables, the Company has received collateral, including letters of credit and trust accounts, from certain reinsurers. Collateral related to these reinsurance agreements is available, without restriction, when the Company pays losses covered by the reinsurance agreements. An allowance is established for amounts deemed uncollectible and reinsurance recoverables are recorded net of this allowance. Following the adoption of ASC 326, as described in note 2, beginning January 1, 2020 the allowance is established for expected credit losses to be recognized over the life of the reinsurance recoverable. The Company considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions when estimating the allowance for credit losses. The Company uses information obtained from external sources to forecast short-term changes in macroeconomic conditions that are expected to impact the Company's exposure to credit losses. Any allowance for credit losses is charged to net income in the period the recoverable is recorded and revised in subsequent periods to reflect changes in the Company's estimate of expected credit losses.

9

2. Recent Accounting Pronouncements

Accounting Standards Adopted in 2020

Effective January 1, 2020, the Company adopted ASC 326, Financial Instruments—Credit Losses. This new standard replaced the incurred loss model used to measure impairment losses for financial assets measured at amortized cost with a current expected credit loss (CECL) model and also made changes to the impairment model for available-for-sale investments. Under the CECL model, allowances are established for expected credit losses to be recognized over the life of financial assets. Application of the CECL model does not impact the Company's investment portfolio, which is not measured at amortized cost, but it impacts certain of the Company's other financial assets, including its reinsurance recoverables and receivables. ASC 326 also replaced the OTTI model with an impairment allowance model, subject to reversal, for available-for-sale investments, which are measured at fair value. As a result of adopting ASC 326, the Company increased its allowances for credit losses related to its reinsurance recoverables and receivables by $3.8 million and $1.0 million, respectively, which was recorded through a cumulative-effect adjustment to retained earnings as of January 1, 2020 ($3.8 million, net of taxes). The Company continues to apply the previous guidance to 2019 and prior periods.

The following ASUs are relevant to the Company's operations and were adopted effective January 1, 2020. These ASUs did not have a material impact on the Company's financial position, results of operations or cash flows:
ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities

Accounting Standards Not Yet Adopted

In August 2018, the FASB issued ASU No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. The ASU requires insurance entities with long duration contracts to: (1) review and, if there is a change, update the assumptions used to measure cash flows at least annually, as well as update the discount rate assumption at each reporting date; (2) measure all market risk benefits associated with deposit (or account balance) contracts at fair value; and (3) disclose liability rollforwards and information about significant inputs, judgments, assumptions and methods used in measurement, including changes thereto and the effect of those changes on measurement. In July 2020, the FASB proposed an update to ASU No. 2018-12 to defer its effective date. The proposed update would make the ASU effective for the Company during the first quarter of 2023. ASU No. 2018-12 will, among other things, impact the discount rate used in estimating reserves for the Company's life and annuity reinsurance portfolio, which is in runoff. Currently, the discount rate assumption is locked-in for the life of the contracts, unless there is a loss recognition event. The Company is currently evaluating ASU No. 2018-12 to determine the impact that adopting this standard will have on its consolidated financial statements.

The following ASUs are relevant to the Company's operations and are not yet effective. These ASUs are not expected to have a material impact on the Company's financial position, results of operations or cash flows:
ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

10

3. Acquisitions

Lansing Building Products, LLC

In April 2020, the Company acquired a controlling interest in Lansing Building Products, LLC, a supplier of exterior building products and materials to professional contractors throughout the U.S., which simultaneously acquired the distribution business of Harvey Building Products to enhance geographic reach and scale (together, Lansing), bringing the Company's ownership in Lansing to 91%. Under the terms of the acquisition agreement, the Company has the option to acquire the remaining equity interests and the remaining equity holders have the option to sell their interests to the Company in the future. The redemption value of the remaining equity interests is generally based on Lansing's earnings in specified periods preceding the redemption dates. Total consideration for both transactions was $556.2 million, all of which was cash. The purchase price was preliminarily allocated to the acquired assets and liabilities of Lansing based on estimated fair value at the acquisition date. The Company preliminarily recognized goodwill of $290.8 million, which is primarily attributable to expected future earnings and cash flow potential of Lansing. The majority of the goodwill recognized is not expected to be deductible for income tax purposes. The Company also preliminarily recognized other intangible assets of $210.0 million, which includes $188.0 million of customer relationships and $22.0 million of trade names, which are expected to be amortized over a weighted average period of 16 years and 14 years, respectively. The Company also recognized redeemable noncontrolling interests of $43.6 million. Results attributable to Lansing are included in the Company's Markel Ventures segment.

The Company has not completed the process of determining the fair value of the assets acquired and liabilities assumed. These valuations are required to be completed within 12 months from the acquisition date. As a result, the fair value recorded for these items is a provisional estimate and may be subject to adjustment. Once completed, any adjustments resulting from the valuations may impact the individual amounts recorded for assets acquired and liabilities assumed, as well as the residual goodwill.

VSC Fire & Security, Inc.

In November 2019, the Company acquired VSC Fire & Security, Inc. (VSC), a provider of comprehensive fire protection, life safety, and low voltage solutions to retailers, commercial campuses, healthcare facilities, and government properties throughout the southeastern United States. Total consideration for the acquisition was $225.0 million, which included cash of $204.0 million. Total consideration also included the estimated fair value of contingent consideration the Company expects to pay in 2021 based on VSC's earnings, as defined in the purchase agreement.

As of December 31, 2019, the purchase price was preliminarily allocated to the acquired assets and liabilities of VSC based on estimated fair value at the acquisition date. During the first quarter of 2020, the Company completed the process of determining the fair value of the assets and liabilities acquired with VSC. The Company recognized goodwill of $124.9 million, which is primarily attributable to expected future earnings and cash flow potential of VSC. All of the goodwill recognized is deductible for income tax purposes. The Company also recognized other intangible assets of $64.5 million, which includes $48.0 million of customer relationships, $14.0 million of trade names and $2.5 million of other intangible assets, which are being amortized over a weighted average period of 12 years, 12 years and 8 years, respectively. Results attributable to VSC are included in the Company's Markel Ventures segment.

11

4. Investments

a)The following tables summarize the Company's available-for-sale investments. Commercial and residential mortgage-backed securities include securities issued by U.S. government-sponsored enterprises and U.S. government agencies. The net unrealized holding gains in the tables below are presented before taxes and any reserve deficiency adjustments for life and annuity benefit reserves. See note 11.
  September 30, 2020
(dollars in thousands) Amortized
Cost
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Estimated
Fair
Value
Fixed maturity securities:
U.S. Treasury securities $ 352,049  $ 10,726  $ (37) $ 362,738 
U.S. government-sponsored enterprises 471,629  53,212  (24) 524,817 
Obligations of states, municipalities and political subdivisions 3,898,016  388,563  (280) 4,286,299 
Foreign governments 1,333,875  210,688  (2,372) 1,542,191 
Commercial mortgage-backed securities 1,682,784  150,932  (22) 1,833,694 
Residential mortgage-backed securities 825,711  67,671  (28) 893,354 
Asset-backed securities 6,165  168    6,333 
Corporate bonds 720,133  75,354  (671) 794,816 
Total fixed maturity securities 9,290,362  957,314  (3,434) 10,244,242 
Short-term investments 1,898,317  682  (1,540) 1,897,459 
Investments, available-for-sale $ 11,188,679  $ 957,996  $ (4,974) $ 12,141,701 

  December 31, 2019
(dollars in thousands) Amortized
Cost
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Estimated
Fair
Value
Fixed maturity securities:
U.S. Treasury securities $ 282,305  $ 2,883  $ (402) $ 284,786 
U.S. government-sponsored enterprises 318,831  23,949  (200) 342,580 
Obligations of states, municipalities and political subdivisions 3,954,779  235,915  (812) 4,189,882 
Foreign governments 1,415,639  135,763  (9,398) 1,542,004 
Commercial mortgage-backed securities 1,761,777  57,450  (1,382) 1,817,845 
Residential mortgage-backed securities 855,641  32,949  (517) 888,073 
Asset-backed securities 11,042  28  (22) 11,048 
Corporate bonds 848,826  47,551  (1,686) 894,691 
Total fixed maturity securities 9,448,840  536,488  (14,419) 9,970,909 
Short-term investments 1,194,953  1,355  (60) 1,196,248 
Investments, available-for-sale $ 10,643,793  $ 537,843  $ (14,479) $ 11,167,157 

12

b)The following tables summarize gross unrealized investment losses on available-for-sale investments by the length of time that securities have continuously been in an unrealized loss position.
September 30, 2020
Less than 12 months 12 months or longer Total
(dollars in thousands) Estimated
Fair
Value
Gross
Unrealized
Holding Losses
Estimated
Fair
Value
Gross
Unrealized
Holding Losses
Estimated
Fair
Value
Gross
Unrealized
Holding Losses
Fixed maturity securities:
U.S. Treasury securities $ 51,672  $ (37) $   $   $ 51,672  $ (37)
U.S. government-sponsored enterprises 14,986  (24)     14,986  (24)
Obligations of states, municipalities and political subdivisions 57,282  (265) 2,994  (15) 60,276  (280)
Foreign governments 6,105  (85) 131,231  (2,287) 137,336  (2,372)
Commercial mortgage-backed securities 7,372  (9) 5,389  (13) 12,761  (22)
Residential mortgage-backed securities 3,303  (28)     3,303  (28)
Corporate bonds 11,391  (370) 10,573  (301) 21,964  (671)
Total fixed maturity securities 152,111  (818) 150,187  (2,616) 302,298  (3,434)
Short-term investments 1,706,815  (1,540)     1,706,815  (1,540)
Total $ 1,858,926  $ (2,358) $ 150,187  $ (2,616) $ 2,009,113  $ (4,974)

At September 30, 2020, the Company held 78 available-for-sale securities with a total estimated fair value of $2.0 billion and gross unrealized losses of $5.0 million. Of these 78 securities, 25 securities had been in a continuous unrealized loss position for one year or longer and had a total estimated fair value of $150.2 million and gross unrealized losses of $2.6 million. The Company does not intend to sell or believe it will be required to sell these available-for-sale securities before recovery of their amortized cost.

December 31, 2019
Less than 12 months 12 months or longer Total
(dollars in thousands) Estimated
Fair
Value
Gross
Unrealized
Holding  Losses
Estimated
Fair
Value
Gross
Unrealized
Holding  Losses
Estimated
Fair
Value
Gross
Unrealized
Holding  Losses
Fixed maturity securities:
U.S. Treasury securities $ 36,862  $ (361) $ 46,518  $ (41) $ 83,380  $ (402)
U.S. government-sponsored enterprises 24,148  (197) 2,868  (3) 27,016  (200)
Obligations of states, municipalities and political subdivisions 127,836  (702) 6,830  (110) 134,666  (812)
Foreign governments 162,907  (3,393) 159,888  (6,005) 322,795  (9,398)
Commercial mortgage-backed securities 202,530  (1,126) 33,853  (256) 236,383  (1,382)
Residential mortgage-backed securities 11,706  (66) 58,162  (451) 69,868  (517)
Asset-backed securities —  —  3,632  (22) 3,632  (22)
Corporate bonds 41,847  (1,287) 40,274  (399) 82,121  (1,686)
Total fixed maturity securities 607,836  (7,132) 352,025  (7,287) 959,861  (14,419)
Short-term investments 3,316  (60) —  —  3,316  (60)
Total $ 611,152  $ (7,192) $ 352,025  $ (7,287) $ 963,177  $ (14,479)

At December 31, 2019, the Company held 201 securities with a total estimated fair value of $963.2 million and gross unrealized losses of $14.5 million. Of these 201 securities, 122 securities had been in a continuous unrealized loss position for one year or longer and had a total estimated fair value of $352.0 million and gross unrealized losses of $7.3 million.

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Following the adoption of ASC 326, as described in note 1, beginning January 1, 2020 the Company completes a detailed analysis each quarter to assess whether the decline in the fair value of any investment below its cost basis is the result of a credit loss. All available-for-sale securities with unrealized losses are reviewed. The Company considers many factors in completing its quarterly review of securities with unrealized losses for credit-related impairment to determine whether a credit loss exists, including the extent to which fair value is below cost, the implied yield to maturity, rating downgrades of the security and whether or not the issuer has failed to make scheduled principal or interest payments. The Company also takes into consideration information about the financial condition of the issuer and industry factors that could negatively impact the capital markets.

If the decline in fair value of an available-for-sale security below its amortized cost is considered to be the result of a credit loss, the Company compares the estimated present value of the cash flows expected to be collected to the amortized cost of the security. The extent to which the estimated present value of the cash flows expected to be collected is less than the amortized cost of the security represents the credit loss, which is recorded as an allowance and recognized in net income. The allowance is limited to the difference between the fair value and the amortized cost of the security. Any remaining decline in fair value represents the non-credit portion of the impairment, which is recognized in other comprehensive income.

The Company also considers whether it intends to sell an available-for-sale security or if it is more likely than not that it will be required to sell the security before recovery of its amortized cost. In these instances, a decline in fair value is recognized in net income based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security.

c)The amortized cost and estimated fair value of fixed maturity securities at September 30, 2020 are shown below by contractual maturity.
(dollars in thousands) Amortized
Cost
Estimated
Fair Value
Due in one year or less $ 346,355  $ 348,093 
Due after one year through five years 1,512,824  1,608,497 
Due after five years through ten years 2,169,620  2,385,810 
Due after ten years 2,746,903  3,168,461 
6,775,702  7,510,861 
Commercial mortgage-backed securities 1,682,784  1,833,694 
Residential mortgage-backed securities 825,711  893,354 
Asset-backed securities 6,165  6,333 
Total fixed maturity securities $ 9,290,362  $ 10,244,242 

d)The following table presents the components of net investment income.
Quarter Ended September 30, Nine Months Ended September 30,
(dollars in thousands) 2020 2019 2020 2019
Interest:
Municipal bonds (tax-exempt) $ 15,693  $ 17,456  $ 48,451  $ 54,167 
Municipal bonds (taxable) 16,456  18,442  50,185  55,634 
Other taxable bonds 38,788  40,560  118,376  122,583 
Short-term investments, including overnight deposits 894  14,294  13,516  38,259 
Dividends on equity securities 20,282  25,493  66,916  73,486 
Income (loss) from equity method investments 2,483  366  (11,849) 3,436 
Other (365) 797  438  3,971 
94,231  117,408  286,033  351,536 
Investment expenses (3,847) (4,026) (11,791) (12,141)
Net investment income $ 90,384  $ 113,382  $ 274,242  $ 339,395 

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e)The following table presents the components of net investment gains (losses) and the change in net unrealized gains included in other comprehensive income.

  Quarter Ended September 30, Nine Months Ended September 30,
(dollars in thousands) 2020 2019 2020 2019
Fixed maturity securities:
Realized gains $ 5,292  $ 856  $ 12,025  $ 2,660 
Realized losses (1,209) (198) (7,480) (1,109)
Change in allowance for expected credit losses 202  —    — 
Short-term investments:
Realized gains 655  1,540  1,756  1,288 
Realized losses (43) (2,172) (399) (2,659)
Cost-method investments:
Realized gains   —  11,167  — 
Other investment gains (losses): 38  124  (5,208) 584 
Net realized investment gains 4,935  150  11,861  764 
Equity securities:
Change in fair value of securities sold during the period 16,090  (345) (453,258) 35,786 
Change in fair value of securities held at the end of the period 518,277  32,339  210,501  1,033,438 
Total change in fair value 534,367  31,994  (242,757) 1,069,224 
Net investment gains (losses) $ 539,302  $ 32,144  $ (230,896) $ 1,069,988 
Change in net unrealized gains on available-for-sale investments included in other comprehensive income:
Fixed maturity securities $ 96,723  $ 95,170  $ 431,811  $ 509,712 
Short-term investments 1,425  (2,266) (2,153) 1,595 
Reserve deficiency adjustment for life and annuity benefit reserves (see note 11)
(20,625) (31,314) (56,237) (93,065)
Net increase $ 77,523  $ 61,590  $ 373,421  $ 418,242 

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5. Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability.

Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded and the reliability and transparency of the assumptions used to determine fair value. The hierarchy requires the use of observable market data when available. The levels of the hierarchy are defined as follows:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active markets.

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.

Level 3 – Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement.

In accordance with ASC 820, the Company determines fair value based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods, including the market, income and cost approaches. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The following section describes the valuation methodologies used by the Company to measure assets and liabilities at fair value, including an indication of the level within the fair value hierarchy in which each asset or liability is generally classified.

Available-for-sale investments and equity securities. Available-for-sale investments and equity securities are recorded at fair value on a recurring basis. Available-for-sale investments include fixed maturity securities and short-term investments. Short-term investments include certificates of deposit, commercial paper, discount notes and treasury bills with original maturities of one year or less. Fair value for available-for-sale investments and equity securities are determined by the Company after considering various sources of information, including information provided by a third party pricing service. The pricing service provides prices for substantially all of the Company's fixed maturity securities and equity securities. In determining fair value, the Company generally does not adjust the prices obtained from the pricing service. The Company obtains an understanding of the pricing service's valuation methodologies and related inputs, which include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, duration, credit ratings, estimated cash flows and prepayment speeds. The Company validates prices provided by the pricing service by reviewing prices from other pricing sources and analyzing pricing data in certain instances.

The Company has evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Level 1 investments include those traded on an active exchange, such as the New York Stock Exchange. Level 2 investments include U.S. Treasury securities, U.S. government-sponsored enterprises, municipal bonds, foreign government bonds, commercial mortgage-backed securities, residential mortgage-backed securities, asset-backed securities and corporate debt securities. Level 3 investments include the Company's investments in certain insurance-linked securities funds managed by Markel CATCo Investment Management Ltd. (MCIM), a consolidated subsidiary, that are not traded on an active exchange, as further described and defined in note 12 (the Markel CATCo Funds), and are valued using unobservable inputs.
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Fair value for available-for-sale investments and equity securities is measured based upon quoted prices in active markets, if available. Due to variations in trading volumes and the lack of quoted market prices, fixed maturity securities are classified as Level 2 investments. The fair value of fixed maturity securities is normally derived through recent reported trades for identical or similar securities, making adjustments through the reporting date based upon available market observable data described above. If there are no recent reported trades, the fair value of fixed maturity securities may be derived through the use of matrix pricing or model processes, where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Significant inputs used to determine the fair value of obligations of states, municipalities and political subdivisions, corporate bonds and obligations of foreign governments include reported trades, benchmark yields, issuer spreads, bids, offers, credit information and estimated cash flows. Significant inputs used to determine the fair value of commercial mortgage-backed securities, residential mortgage-backed securities and asset-backed securities include the type of underlying assets, benchmark yields, prepayment speeds, collateral information, tranche type and volatility, estimated cash flows, credit information, default rates, recovery rates, issuer spreads and the year of issue.

Due to the significance of unobservable inputs required in measuring the fair value of the Company's investments in the Markel CATCo Funds, these investments are classified as Level 3 within the fair value hierarchy. The fair value of the securities are derived using their reported net asset value (NAV) as the primary input, as well as other observable and unobservable inputs as deemed necessary by management. Management has obtained an understanding of the inputs, assumptions, process and controls used to determine NAV, which is calculated by an independent third party. Unobservable inputs to the NAV calculations include assumptions around premium earnings patterns and loss reserve estimates for the underlying securitized reinsurance contracts in which the Markel CATCo Funds invest. Significant unobservable inputs used in the valuation of these investments include an adjustment to include the fair value of the equity that was issued by one of the Markel CATCo Funds in exchange for notes receivable, rather than cash, which is excluded from NAV. The determination of fair value of the securities also considers external market data, including the trading price relative to its NAV of CATCo Reinsurance Opportunities Fund Ltd. (CROF), a comparable security traded on a market operated by the London Stock Exchange and on the Bermuda Stock Exchange. In July 2019, the Markel CATCo Funds were placed into run-off and capital is being returned to investors as it becomes available. However, due to the significant loss events on the underlying securitized reinsurance contracts in 2017 and 2018, portions of the Company's investments may be restricted up to three years.

The Company's valuation policies and procedures for Level 3 investments are determined by management. Fair value measurements are analyzed quarterly to ensure the change in fair value from prior periods is reasonable relative to management's understanding of the underlying investments, recent market trends and external market data.

Senior long-term debt and other debt. Senior long-term debt and other debt is carried at amortized cost with the estimated fair value disclosed on the consolidated balance sheets. Senior long-term debt and other debt is classified as Level 2 within the fair value hierarchy due to variations in trading volumes and the lack of quoted market prices. Fair value for senior long-term debt and other debt is generally derived through recent reported trades for identical securities, making adjustments through the reporting date, if necessary, based upon available market observable data including U.S. Treasury securities and implied credit spreads. Significant inputs used to determine the fair value of senior long-term debt and other debt include reported trades, benchmark yields, issuer spreads, bids and offers.

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The following tables present the balances of assets measured at fair value on a recurring basis by level within the fair value hierarchy.
September 30, 2020
(dollars in thousands) Level 1 Level 2 Level 3 Total
Assets:
Investments: