UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual report pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934 for the fiscal year ended December 31, 20102011

Commission File Number 001-15811

MARKEL CORPORATION

(Exact name of registrant as specified in its charter)

A Virginia Corporation

IRS Employer Identification No. 54-1959284

4521 Highwoods Parkway, Glen Allen, Virginia 23060-6148

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code: (804) 747-0136

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, no par value

7.50% Senior Debentures due 2046

New York Stock Exchange, Inc.

(title of each class and name of the exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x        Accelerated filer  ¨        Non-accelerated filer  ¨        Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the shares of the registrant’s Common Stock held by non-affiliates as of June 30, 20102011 was approximately $3,020,713,353.$3,601,190,030.

The number of shares of the registrant’s Common Stock outstanding at February 16, 2011: 9,718,932.10, 2012: 9,621,842.

Documents Incorporated By Reference

The portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 9, 2011,14, 2012, referred to in Part III.

 

 

 


Index and Cross References-Form 10-K Annual Report

 

Item No.

   Page    Page 

Part I

      

1.

 Business   12-33, 129-131   Business   12-33, 131-133  

1A.

 Risk Factors   30-33   Risk Factors   30-33  

1B.

 Unresolved Staff Comments   NONE   Unresolved Staff Comments   NONE  

2.

 Properties (note 5)   53   Properties (note 5)   52  

3.

 Legal Proceedings (note 14)   69   Legal Proceedings (note 14)   70  

4.

 [Reserved]   [Reserved]  

4A.

 Executive Officers of the Registrant   132   Executive Officers of the Registrant   134  

Part II

      

5.

 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   83, 129-130   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   85, 131-132  

6.

 Selected Financial Data   34-35   Selected Financial Data   34-35  

7.

 Management’s Discussion and Analysis of Financial Condition and Results of Operations   88-128   Management’s Discussion and Analysis of Financial Condition and Results of Operations   90-130  

7A.

 Quantitative and Qualitative Disclosures About Market Risk   120-125   Quantitative and Qualitative Disclosures About Market Risk   122-127  

8.

 

Financial Statements and Supplementary Data

The response to this item is submitted in Item 15 and on page 83.

   

Financial Statements and Supplementary Data

The response to this item is submitted in Item 15 and on page 85.

  

9.

 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   NONE   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   NONE  

9A.

 Controls and Procedures   85-87, 126   Controls and Procedures   87-89, 128  

9B.

 Other Information   NONE   Other Information   NONE  

Part III

      

10.

 Directors, Executive Officers and Corporate Governance*   132   Directors, Executive Officers and Corporate Governance*   134  
 Code of Conduct   131   Code of Conduct   133  

11.

 Executive Compensation*   Executive Compensation*  

12.

 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*  

13.

 Certain Relationships and Related Transactions, and Director Independence*   Certain Relationships and Related Transactions, and Director Independence*  

14.

 Principal Accounting Fees and Services*   Principal Accounting Fees and Services*  

*Portions of Item 10 and Items 11, 12, 13 and 14 will be incorporated by reference from the Registrant’s 2011 Proxy Statement pursuant to instructions G(1) and G(3) of the General Instructions to Form 10-K.

   

*Portions of Item 10 and Items 11, 12, 13 and 14 will be incorporated by reference from the Registrant’s 2012 Proxy Statement pursuant to instructions G(1) and G(3) of the General Instructions to Form 10-K.

*Portions of Item 10 and Items 11, 12, 13 and 14 will be incorporated by reference from the Registrant’s 2012 Proxy Statement pursuant to instructions G(1) and G(3) of the General Instructions to Form 10-K.

   

Part IV

      

15.

 

Exhibits, Financial Statement Schedules

 

a.      Documents filed as part of this Form 10-K

 

(1)    Financial Statements

   

Exhibits, Financial Statement Schedules

 

a.      Documents filed as part of this Form 10-K

 

(1)    Financial Statements

  
 

Consolidated Balance Sheets at December 31, 2010 and 2009

   36   

Consolidated Balance Sheets at December 31, 2011 and 2010

   36  
 

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December  31, 2010, 2009 and 2008

   37   

Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2011, 2010 and 2009

   37  
 

Consolidated Statements of Changes in Equity for the Years Ended December 31, 2010, 2009 and 2008

   38   

Consolidated Statements of Changes in Equity for the Years Ended December 31, 2011, 2010 and 2009

   38  
 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008

   39   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009

   39  
 

Notes to Consolidated Financial Statements for the Years Ended December 31, 2010, 2009 and 2008

   40-83   

Notes to Consolidated Financial Statements for the Years Ended December 31, 2011, 2010 and 2009

   40-85  
 

Reports of Independent Registered Public Accounting Firm

   84-86   

Reports of Independent Registered Public Accounting Firm

   86-88  
 

(2)    Schedules have been omitted since they either are not required or are not applicable, or the information called for is shown in the Consolidated Financial Statements and Notes thereto.

   

(2)    Schedules have been omitted since they either are not required or are not applicable, or the information called for is shown in the Consolidated Financial Statements and Notes thereto.

  
 

(3)    See Index to Exhibits for a list of Exhibits filed as part of this report

 

b.      See Index to Exhibits and Item 15a(3)

 

c.      See Index to Financial Statements and Item 15a(2)

   

(3)    See Index to Exhibits for a list of Exhibits filed as part of this report

 

b.      See Index to Exhibits and Item 15a(3)

 

c.      See Index to Financial Statements and Item 15a(2)

  


Markel Corporation & Subsidiaries

 

BUSINESS OVERVIEW

We are a diverse financial holding company serving a variety of niche markets. Our principal business markets and underwrites specialty insurance products and programs.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 compete in three segments of the specialty insurance marketplace: the Excess and Surplus Lines, the Specialty Admitted and the London markets. We also own interests in various industrial and service 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.

Specialty Insurance

 

The specialty insurance market differs significantly from the standard market. In the standard market, insurance rates and forms are highly regulated, products and coverages are largely uniform with relatively predictable exposures and companies tend to compete for customers on the basis of price. In contrast, the specialty market provides coverage for hard-to-place risks that generally do not fit the underwriting criteria of standard carriers. For example, United States insurance regulations generally require an Excess and Surplus Lines (E&S) account to be declined by admitted carriers before an E&S company may write the business. Hard-to-place risks written in the Specialty Admitted market cover insureds engaged in similar, but highly specialized activities who require a total insurance program not otherwise available from standard insurers or insurance products that are overlooked by large admitted carriers. Hard-to-place risks in the London market are generally distinguishable from standard risks due to the complexity or significant size of the risk.

Competition in the specialty insurance market tends to focus less on price than in the standard insurance market and more on other value-based considerations, such as availability, service and expertise. While specialty market exposures may have higher perceived insurance risks than their standard market counterparts, we seek to manage these risks to achieve higher financial returns. To reach our financial and operational goals, we must have extensive knowledge and expertise in our chosen markets. Many of our accounts are considered on an individual basis where customized forms and tailored solutions are employed.

By focusing on the distinctive risk characteristics of our insureds, we have been able to identify a variety of niche markets where we can add value with our specialty product offerings. Examples of niche markets that we have targeted include wind and earthquake exposedearthquake-exposed commercial properties, liability coverage for highly specialized professionals, equine-related risks, workers’ compensation insurance for small businesses, yachts and other watercraft, motorcycles and marine, energy and environmental-related activities. Our market strategy in each of these areas of specialization is tailored to the unique nature of the loss exposure, coverage and services required by insureds. In each of our niche markets, we assign teams of experienced underwriters and claims specialists who provide a full range of insurance services.

Markets

 

The E&S market focuses on hard-to-place risks and loss exposures that generally cannot be written in the standard market. E&S eligibility allows our insurance subsidiaries to underwrite unique loss exposures with more flexible policy forms and unregulated premium rates. This typically results in coverages that are more restrictive and more expensive than coverages in the standard market.

 

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In 2009,2010, the E&S market represented approximately $33$32 billion, or 7%, of the approximately $475$481 billion United States property and casualty (P&C) industry.(1) We are the sixthseventh largest E&S writer in the United States as measured by direct premium writings.(1) In 2010,2011, we wrote $898$893 million of business in our Excess and Surplus Lines segment.

We also write business in the Specialty Admitted market. Most of these risks, although unique and hard-to-place in the standard market, must remain with an admitted insurance company for marketing and regulatory reasons. The Specialty Admitted market is subject to more state regulation than the E&S market, particularly with regard to rate and form filing requirements, restrictions on the ability to exit lines of business, premium tax payments and membership in various state associations, such as state guaranty funds and assigned risk plans. In late 2010, we acquired Aspen Holdings, Inc. and began writing workers’ compensation insurance within the Specialty Admitted market. In 2010,2011, we wrote $375$572 million of business in our Specialty Admitted segment.

The London market, which produced approximately $50$57 billion of gross written premium in 2009,2010, is the largest insurance market in Europe and third largest in the world.(2) The London market is known for its ability to provide innovative, tailored coverage and capacity for unique and hard-to-place risks. It is primarily a broker market, which means that insurance brokers bring most of the business to the market. The London market is also largely a subscription market, which means that loss exposures brought into the market are typically insured by more than one insurance company or Lloyd’s syndicate, often due to the high limits of insurance coverage required. We write business on both a direct and subscription basis in the London market. 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.

In 2009,2010, gross premium written through Lloyd’s syndicates generated approximately two-thirdshalf of the London market’s international insurance business,(2), making Lloyd’s the world’s second largest commercial surplus lines insurer(1) and fifth largest reinsurer.(3)(2) Corporate capital providers often provide a majority of a syndicate’s capacity and also oftengenerally own or control the syndicate’s managing agent. This structure permits the capital provider to exert greater influence on, and demand greater accountability for, underwriting results. In 2009,2010, corporate capital providers accounted for approximately 95%87% of total underwriting capacity in Lloyd’s.(4)(3)

We participate in the London market through Markel International, which includes Markel Capital Limited (Markel Capital) and Markel International Insurance Company Limited (MIICL). Markel Capital is the corporate capital provider for our syndicate at Lloyd’s, Markel Syndicate 3000, which is managed by Markel Syndicate Management Limited. In 2010,2011, we wrote $709$825 million of business in our London Insurance Market segment.

In 2010, 28%2011, 31% of consolidated premium writings related to foreign risks (i.e., coverage for risks located outside of the United States), of which 20% were from the United Kingdom and 18% were from Canada. In 2010, 28% of our premium writings related to foreign risks, of which 25% were from the United Kingdom and 17% were from Canada. In 2009, 26% of our premium writings related to foreign risks, of which 28% were from the United Kingdom. In 2008, 23% of our premium writings related to foreign risks, of which 32% were from the United Kingdom. In each of these years, there were no other individual foreign countries from which premium writings were material. Premium writings are attributed to individual countries based upon location of risk.

 

(1)

U.S. Surplus Lines – 2010 Market Review Special Report,A.M. Best Research(September 2010)26, 2011).

 

(2)

Insurance 2010,2011,TheCityUK(December 2010)2011).

 

(3)

Lloyd’s Quick Guide,Top Ten Global Reinsurers by Net Reinsurance Premiums Written 2009, Business InsuranceLloyd’s(September 2010)May 2011).

(4)

Lloyd’s Highlights, Lloyd’s(April 2010).

 

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Markel Corporation & Subsidiaries

 

BUSINESS OVERVIEW (continued)

 

Competition

 

We compete with numerous domestic and international insurance companies and reinsurers, Lloyd’s syndicates, risk retention groups, insurance buying groups, risk securitization programs and alternative self-insurance mechanisms. Competition may take the form of lower prices, broader coverages, greater product flexibility, higher quality services or higher ratings by independent rating agencies. In all of our markets, we compete by developing specialty products to satisfy well-defined market needs and by maintaining relationships with agents, brokers and insureds who rely on our expertise. This expertise is our principal means of competing. We offer over 100 product lines. Each of these products has its own distinct competitive environment. With each of our products, we seek to compete with innovative ideas, appropriate pricing, expense control and quality service to policyholders, agents and brokers.

Few barriers exist to prevent insurers from entering our segments of the P&C industry. Market conditions and capital capacity influence the degree of competition at any point in time. Periods of intense competition, which typically include broader coverage terms, lower prices and excess underwriting capacity, are referred to as a “soft market.” A favorable insurance market is commonly referred to as a “hard market” and is characterized by stricter coverage terms, higher prices and lower underwriting capacity. During soft markets, unfavorable conditions exist due, in part, to what many perceive to beas excessive amounts of capital in the industry. In an attempt to use their capital, many insurance companies seek to write additional premiums without appropriate regard for ultimate profitability, and standard insurance companies are more willing to write specialty coverages. The opposite is typically true during hard markets.

The Insurance Market Cycle

 

After a decade of soft market conditions, the insurance industry experienced favorable conditions beginning in late 2000, which continued through 2003 for most product lines. During 2004, the market began to soften and the industry began to show signs of increased competition. Since 2005, we have been in a soft insurance market and have experienced intense competition. During the current soft market cycle, we have experienced price deterioration in virtually all of our product areas due in part to an increased presence of standard insurance companies in our markets. During 2008, given the rapid deterioration in underwriting capacity as a result of the disruptions in the financial markets and losses from catastrophes, the rate of decline in prices began to slow. However, the effects of the economic environment contributed to further declines in gross premium volume in 2009 and 2010. Premiums for many of our product lines are based upon our insureds’ revenues, gross receipts or payroll, which have been negatively impacted by the depressed levels of business activity in recent years. In 2010, we continued to experience pricing pressure due in part to intense competition, which resulted in further price deterioration across many of our product lines, most notably our professional and products liability programs within the Excess and Surplus Lines segment. However, we experienced moderate price increases in several product lines during 2010, most notably those offered by Markel International.within the London Insurance Market segment. During 2011, the unfavorable pricing trends noted in 2010 continued for some of our product lines, most notably our professional and products liability programs within the Excess and Surplus Lines segment. However, price declines stabilized for most of our product lines during 2011, and we achieved moderate price increases in several lines, most notably the marine and energy products within the London Insurance Market segment.

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We routinely review the pricing of our major product lines and have pursuedwill continue to pursue price increases for most product lines in many product areas;2012; however, as a result of continued soft insurance market conditions, our targeted price increases have been met with resistance in the marketplace, particularly within the Excess and Surplus Lines segment. In general, we believe prevailing rates within the property and casualty insurance marketplace are lower than our targeted pricing levels. Whenwhen 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 for many ofmay vary when we alter our product lines, most notably within the Excess and Surplus Lines segment, has declined and, if the competitive environment does notofferings to maintain or improve could decline further in the future.

14  |


underwriting profitability.

Underwriting Philosophy

 

By focusing on market niches where we have underwriting expertise, we seek to earn consistent underwriting profits. Underwriting profits are a key component of our strategy. 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. We use underwriting profit or loss 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. A combined ratio less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. In 2010,2011, our combined ratio was 97%102%. See Management’s Discussion & Analysis of Financial Condition and Results of Operations for further discussion of our underwriting results.

The following graph compares our combined ratio to the P&C industry’s combined ratio for the past five years.

Underwriting Segments

 

We define our underwriting segments based on the areas of the specialty insurance market in which we compete, the Excess and Surplus Lines, Specialty Admitted and London markets. See note 17 of the notes to consolidated financial statements for additional segment reporting disclosures.

For purposes of segment reporting, our Other Insurance (Discontinued Lines) segment includes lines of business that have been discontinued in conjunction with the acquisitions of insurance operations.acquisitions. The lines were discontinued because we believed some aspect of the product, such as risk profile or competitive environment, would not allow us to earn consistent underwriting profits.

 

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Markel Corporation & Subsidiaries

 

BUSINESS OVERVIEW (continued)

 

MARKEL CORPORATION

20102011 CONSOLIDATED GROSS PREMIUM VOLUME ($2.0($2.3 billion)

Excess and Surplus Lines Segment

Our Excess and Surplus Lines segment reported gross premium volume of $898.4$893.4 million, earned premiums of $809.7$756.3 million and an underwriting profit of $35.6$109.0 million in 2010.2011.

Business in the Excess and Surplus Lines segment is written through two distribution channels, professional surplus lines general agents who have limited quoting and binding authority and wholesale brokers. The majority of the business produced by this segment is written on a surplus lines basis through either Essex Insurance Company, which is domiciled in Delaware, or Evanston Insurance Company, which is domiciled in Illinois.

The Excess and Surplus Lines segment is comprised of five regions, and each regional underwriting office is responsible for serving the needs of the wholesale producers located in its region. Our regional teams focus on customer service and marketing, underwriting and distributing our insurance solutions and provide customers easy access to the majority of our products.

In the Excess and Surplus Lines segment, we wrote business through the following regional underwriting offices during 2010:2011:

 

Markel Northeast (Red Bank, NJ)

 

Markel Southeast (Glen Allen, VA)

 

Markel Midwest (Deerfield, IL)

 

Markel Mid South (Plano, TX)

 

Markel West (Woodland Hills, CA and Scottsdale, AZ)

We also have a product line leadership group that has primary responsibility for both for developing and maintaining underwriting and pricing guidelines on our existing products and for new product development. The product line leadership group also delegates underwriting authority to the regional underwriters to ensure that the products needed by our customers are available through the regional offices and provides underwriting training and development so that our regional underwriting teams have the expertise to underwrite the risk or to refer risks to our product line experts as needed. The product line leadership group is under the direction of our Chief Underwriting Officer, who also is ultimately responsible for the underwriting activities of our Specialty Admitted and London Insurance Market segments.

 

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Product offerings within the Excess and Surplus Lines segment include:

Property and Casualty

Professional Liability

Excess and Umbrella

Environmental

Transportation

Inland Marine

Ocean Marine

Miscellaneous Coverages

These product offerings are generally available in all of the regional offices included in the Excess and Surplus Lines segment.

EXCESSAND SURPLUS LINES SEGMENT

20102011 GROSS PREMIUM VOLUME ($898893MILLION)

Our property

Product offerings within the Excess and casualtySurplus Lines segment fall within the following major product offerings include a variety of liability coverages focusing on light-to-medium casualty exposures such as restaurantsgroupings:

Property and bars, child and adult care facilities, vacant properties, builder’s risk, general or artisan contractors and office buildings. In addition, we offer third party protection on either an occurrence or claims-made basis to manufacturers, distributors, importers and re-packagers of manufactured products. We also provide property coverages for similar classes of business ranging from small, single-location accounts to large, multi-state, multi-location accounts. Casualty

Professional Liability

Other Product Lines

Property coverages consist principally of fire, allied lines (including windstorm, hail and water damage) and other specialized property coverages, including catastrophe-exposed property risks such as earthquake and wind on both a primary and excess basis. Catastrophe-exposed property risks are typically larger and are lower frequency and higher severity in nature than more standard property risks.

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Our professional liabilityproperty risks range from small, single-location accounts to large, multi-state, multi-location accounts. Casualty product offerings include a variety of liability coverages targeting apartments and office buildings, retail stores, contractors and recreational and hospitality businesses. We also offer products liability coverages on either an occurrence or claims-made basis to manufacturers, distributors, importers and re-packagers of manufactured products.

Professional liability coverages include unique solutions for highly specialized professions, including architects and engineers, lawyers, agents and brokers, service technicians and computer consultants. We also offer claims-made medical malpractice coverage for doctors, dentists podiatrists and other medical professionals;podiatrists; claims-made professional liability coverage to individual healthcare providers such as therapists, pharmacists, physician assistants and nurse anesthetists; and coverages for medical facilities and other allied healthcare risks such as clinics, laboratories, medical spas, home health agencies, small hospitals, pharmacies and nursing homes. This product line also includes for-profit and not-for profit management liability coverage forwhich can be bundled or written mono-line and include employment practices liability, not-for-profit and for-profit directors’ and officers’ liability and fiduciary liability and tenant discrimination coverages. Additionally, we offer a data privacy and security product, which provides coverage for data breach and privacy liability, data breach loss to insureds and electronic media coverage.

We offer

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Other product lines within the Excess and Surplus Lines segment include:

excess and umbrella solutions, primarily to commercial businesses,products, which provide coverage over approved underlying insurance carriers. Coverage can be writtencarriers on either an occurrence or claims-made basis. Targeted classes of businessbasis;

environmental products, which include commercial and residential construction contractors and subcontractors, manufacturers, wholesalers, retailers, service providers, municipalities and school districts.

Our environmental product offerings target small to mid-sized environmental contractors and provide a complete array of environmental coverages, including environmental consultants’ professional liability, contractors’ pollution liability and site specific environmental impairment liability. The professional liability cover is offered on a claims-made basis and targets risks inherent in the businesses of environmental consultants and engineers. The contractors’ pollution liability cover is offered on either a claims-made or occurrence basis and protects environmental contractors, trade contractors and general contractors. Thesite-specific environmental impairment liability cover is offered on a claims-made basis and protects commercial, industrial, environmental, habitational and institutional facilities against pollution to their premises.coverages;

Our transportation product offerings include

transportation-related products, which provide auto physical damage coveragescoverage for high-value automobiles such as race cars and antique vehicles, as well as all types of specialty commercial vehicles, including dump trucks, coal haulers, logging trucks, bloodmobiles, mobile stores, public autos, couriers and house moving vehicles. We offer dealer’sdealers’ open lot and garagekeeper’sgaragekeeper legal liability coverages, targeting used car and truck, motorcycle and mobile home and recreational vehicle dealers, as well as repair shops. We also offer vehicular liability and physical damage coverages for local and intermediate haul commercial trucks. Additionally, we providetrucks and liability coverage to operators of small to medium-sized owned and operated taxicab fleets, non-emergency ambulances and multi-line specialty products designed for the unique characteristics of the garage industry.industry;

Our

inland marine product offerings includeproducts, which provide a number of specialty coverages for risks such as motor truck cargo warehouseman’s legal liability and contractors’ equipment. In addition, this product line group includes builder’s risk coverage. Motor truck cargo coverage is offered to haulers of commercial goods for damage to third party cargo while in transit. Warehouseman’stransit, warehouseman’s legal liability provides coverage to warehouse operators for damage to third party goods in storage. Contractors’storage, contractors’ equipment cover provides protectioncoverage for first party property damage to contractors’ equipment including tools and machinery. Also included in this product line group is first party property coverage for miscellaneous property including slot machines, ATMs, medical equipment, musical instruments and amusement equipment.builder’s risk coverage;

 

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Our ocean marine product offerings includeproducts, which provide general liability, professional liability, property and cargo coverages for many marine-related classes. Targeted marine classes include marine artisan contractors, boat dealers and marina owners. Coverages offered include general liability and property coverages, as well asowners including hull physical damage, protection and indemnity and third party property coveragecoverages for ocean cargo.cargo;

Miscellaneous coverages offered include

casualty facultative reinsurance railroad first and third party insurance, public entity insurance and reinsurance and specialized insurance programs for specific classes of business. Casualty facultative reinsurance is written for individual casualty risks focusing on general liability, products liability, automobile liability and certain classes of miscellaneous professional liability. Targetedliability and targeting classes which include low frequency, high severity, short-tail general liability risks. Casualty facultative placements offer coverages that possess favorable underwriting characteristics, such as control of individual risk selection and pricing. Our railroad product offersrisks;

railroad-related products, which provide first and third party coverages for short-line and regional railroads, scenic and tourist railroads, commuter and light rail trains and railroad equipment. Publicequipment; and

public entity insurance and reinsurance programs, which provide coverage for government entities including counties, municipalities, schools and community colleges.

Specialty Admitted Segment

Our Specialty Admitted segment reported gross premium volume of $375.0$572.4 million, earned premiums of $343.6$527.3 million and an underwriting profitloss of $1.3$45.1 million in 2010.2011.

The majority of the business in the Specialty Admitted segment is written by retail insurance agents who have very limited underwriting authority. Agents are carefully selected and agency business is controlled through regular audits and pre-approvals. Certain products and programs are marketed directly to consumers or distributed through wholesale producers. Personal lines coverages included in this segment are marketed directly to the consumer using direct mail, internet and telephone promotions, as well as relationships with various motorcycle and boat manufacturers, dealers and associations.

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The majority of the business produced by this segment is written on an admitted basis either through Markel Insurance Company (MIC), which is domiciled in Illinois, Markel American Insurance Company (MAIC), which is domiciled in Virginia, or FirstComp Insurance Company (FCIC), which is domiciled in Nebraska. MIC and MAIC are licensed to write P&C insurance in all 50 states and the District of Columbia, while FCIC is currently licensed in 28 states and specializes in workers’ compensation coverage.

In the Specialty Admitted market, we wrote business through the following underwriting units during 2010:2011:

 

Markel Specialty (Glen Allen, VA)

 

Markel American Specialty Personal and Commercial Lines (Pewaukee, WI)

 

FirstComp (Omaha, NE)

SPECIALTY ADMITTED SEGMENT

2010 GROSS PREMIUM VOLUME ($375MILLION)

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Markel Specialty.The Markel Specialty unit focuses on providing total insurance programs for businesses engaged in highly specialized activities. These activities typically do not fit the risk profiles of standard insurers and make complete coverage difficult to obtain from a single insurer.

The Markel Specialty unit is organized into product areas that concentrate on particular markets and customer groups. The property and casualty division writes commercial coverages forgroups including youth and recreation oriented organizations, such as children’s camps, conference centers, YMCAs, YWCAs, Boys and Girls Clubs, child care centers, nursery schools, private and Montessori schools and gymnastics, martial arts and dance schools. This division also writes commercial coverages for social service organizations, museumsamateur sports organizations and historic homes, performing arts organizations, bed and breakfast inns, outfitters and guides, hunting and fishing lodges, dude ranches and rod and gun clubs. The horse and farm operations specialize in insurance coverages for equine-related risks, such as horse mortality, theft, infertility, transit and specified perils. We also provide property and liability coverages for farms and boarding, breeding and training facilities. The accident and health division writes liability and accident insurance for amateur sports organizations, accident and medical insurance for colleges, universities, public schools and private schools, monoline accident and medical coverage for various niche markets, short-term medical insurance, pet health insurance, stop-loss insurance for self-insured medical plans and medical excess reinsurance coverage. The garage division provides commercial coverages for auto repair garages, gas stations and convenience stores and used car dealers. The general agent programs division develops partnerships with managing general agents to offer single source admitted and non-admitted programs for a specific class or line of business. We seek general agents who utilize retailers as their primary source of distribution. Underwriting, policy issuance and business development authority are delegated to the managing general agent. The Markel Risk Solutions facility works with select retail producers on a national basis to provide admitted market solutions to accounts having difficulty finding coverage in the standard marketplace. Accounts of various classes and sizes are written with emphasis placed on individual risk underwriting and pricing.operations.

The majority of Markel Specialty business is produced by retail insurance agents. Management grants very limited underwriting authority to a few carefully selected agents and controls agency business through regular audits and pre-approvals. Certain products and programs are also marketed directly to consumers or through wholesale producers. Markel Specialty business is primarily written on Markel Insurance Company (MIC). MIC is domiciled in Illinois and is licensed to write P&C insurance in all 50 states and the District of Columbia.

MARKEL SPECIALTY

2010 GROSS PREMIUM VOLUME ($230MILLION)

20  |


Markel American Specialty Personal and Commercial Lines.The Markel American Specialty Personal and Commercial Lines unit offers its insurance products in niche markets and focuses its underwriting on marine, recreational vehicle, property and other personal and commercial line coverages. The marine divisionproducts offered by this unit are characterized by high numbers of transactions, low average premiums and creative solutions for under-served and emerging markets.

The FirstComp unit provides workers’ compensation insurance and related services, principally to small businesses. The FirstComp unit distributes its products through independent insurance agencies, generally located in small towns, which have been underserved by other market participants because of their size. Utilizing its proprietary technology platform, FirstComp is able to service these small agencies in a cost-efficient manner. Through June 30, 2011, FirstComp also acted as a managing general agent producing business for unaffiliated insurance companies.

SPECIALTY ADMITTED SEGMENT

2011 GROSS PREMIUM VOLUME ($572MILLION)

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Product offerings within the Specialty Admitted segment fall within the following major product groupings:

Workers’ Compensation

Property and Casualty

Personal Lines

Accident and Health

Other Product Lines

Workers’ compensation products provide wage replacement and medical benefits to employees injured in the course of employment and target main-street, service and artisan contractor businesses, retail stores and restaurants.

Property and casualty products included in this segment are offered on a monoline or package basis and generally target specialized commercial markets and customer groups. Targeted groups include youth and recreation oriented organizations, social service organizations, museums and historic homes, performing arts organizations, bed and breakfast inns, outfitters and guides, hunting and fishing lodges, dude ranches and rod and gun clubs.

Personal lines products provide first and third party coverages for a variety of personal lines insurance coverage for watercraft,watercrafts including older boats, high performance boats and yachts. The marine division also provides coverageyachts, as well as for small fishing ventures, charters, utility boats and boat rentals. The recreational vehicle division provides coverage forvehicles including motorcycles, snowmobiles and ATVs. TheAdditionally, property division provides coveragecoverages are offered for mobile homes, dwellings and homeowners that do not qualify for standard homeownershomeowner’s coverage. Other products offered include special event protection, supplemental natural disaster coverage, renters’ protection coverage, excess flood coverage and collector vehicle coverage.

Accident and health products offer liability and accident insurance for amateur sports organizations, accident and medical insurance for academic institutions, monoline accident and medical coverage for various niche markets, short-term medical insurance, pet health insurance, stop-loss insurance for self-insured medical plans and medical excess reinsurance coverage.

Other product lines within the Specialty Admitted segment include:

coverages for equine-related risks, such as horse mortality, theft, infertility, transit and specified perils, as well as contents coverageproperty and liability coverages for renters. Mobile homefarms and boarding, breeding and training facilities;

first and third party coverages include primary, seasonalfor auto repair garages, gas stations and rental mobile homes. Coverage is offeredconvenience stores and used car dealers;

general agent programs that use managing general agents to offer single source admitted and non-admitted programs for motor homes, as well as motor home rental operations. Commerciala specific class or line of business;

first and third party coverages include specialty insurance products, most notably for small fishing ventures, charters, utility boats and boat rentals; and

professional liability coverages that we design and administer on behalf of other insurance carriers and ultimately assume on a reinsurance basis. Other products offered by this unit include special event protection, which provides for cancellation and/or liability coverage for weddings, anniversary celebrations and other personal events; supplemental natural disaster coverage, which offers additional living expense protection for loss due to specific named perils including flood; renters’ protection coverage, which provides tenant homeowner’s coverage on a broader form than the standard renter’s policy; excess flood coverage, which provides coverage above the National Flood Insurance Program limits; and collector vehicle coverage, which provides comprehensive coverage for a variety of collector vehicles including antique autos and motorcycles.

Markel American Specialty Personal and Commercial Lines products are characterized by high numbers of transactions, low average premiums and creative solutions for under-served and emerging markets. The unit distributes its marine, property and other products through wholesale or specialty retail producers. The recreational vehicle program and some marine products are marketed directly to the consumer using direct mail, internet and telephone promotions, as well as relationships with various motorcycle and boat manufacturers, dealers and associations. The Markel American Specialty Personal and Commercial Lines unit writes the majority of its business in Markel American Insurance Company (MAIC). MAIC is domiciled in Virginia and is licensed to write P&C business in all 50 states and the District of Columbia.20  |

MARKEL AMERICAN SPECIALTY PERSONALAND COMMERCIAL LINES


2010 GROSS PREMIUM VOLUME ($104MILLION)

 

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

 

FirstComp.On October 15, 2010, we completed our acquisition of Aspen Holdings, Inc., a Nebraska-based privately held corporation whose FirstComp insurance group provides workers’ compensation insurance and related services, principally to small businesses, in 31 states. The majority of FirstComp business is produced by retail insurance agents. FirstComp business produced for our benefit is written on FirstComp Insurance Company, which is domiciled in Nebraska, or MIC. FirstComp also produces business for unaffiliated insurance companies through FirstComp Underwriters Group, Inc. and FirstComp Insurance Agency, Inc., which act as managing general agents. FirstComp has distribution relationships with more than 8,000 independent insurance agencies. These agencies are generally located in small towns and have been underserved by other market participants because of their size. For expense efficiency reasons, carriers often will not do business with agencies that do not have large books of business. Utilizing its proprietary technology platform, FirstComp is able to service these small agencies in a cost-efficient manner.

The FirstComp operations collectively produced approximately $290 million of gross written premiums in 2010. During 2010, the Specialty Admitted segment included $40.7 million of gross premium volume produced by FirstComp.

London Insurance Market Segment

Our London Insurance Market segment reported gross premium volume of $709.0$825.3 million, earned premiums of $577.5$695.8 million and an underwriting profitloss of $26.1$109.5 million in 2010.

LONDON INSURANCE MARKET SEGMENT

2010 GROSS PREMIUM VOLUME ($709MILLION)

2011.

This segment is comprised of Markel International, which is headquartered in London, England. In addition to seven branch offices in the United Kingdom, Markel International has offices in Canada, Spain, Singapore, Sweden, Hong Kong, China and Sweden.the Netherlands. Markel International writes specialty property, casualty, professional liability, equine, marine, energy and trade credit insurance on a direct and reinsurance basis. Business is written worldwide through either MIICL or Markel Syndicate 3000 with approximately 23%15% of writings coming from the United States.

LONDON INSURANCE MARKET SEGMENT

22  |


2011 GROSS PREMIUM VOLUME ($825 MILLION)

 

Markel International.Markel International is comprised of

Product offerings within the London Insurance Market segment fall within the following underwriting divisions which, to better serve the needs of our customers, have the ability to write business through either MIICL or Markel Syndicate 3000:major product groupings:

 

Marine and Energy

 

Non-Marine Professional and General Liability

Reinsurance

Property

 

Professional and Financial RisksOther Product Lines

Retail

Specialty

Equine

Trade Credit

Elliott Special Risks (ESR)

The Marine and Energy division underwritesenergy products include a portfolio of coverages for cargo, energy, hull, liability, war, terrorism and specie risks. The cargo account is an international transit-based book covering many types of cargo. The energy accountEnergy coverage includes all aspects of oil and gas activities. The hull account covers physical damage to ocean-going tonnage, yachts and mortgagee’s interest. The liability accountLiability coverage provides coverage for a broad range of energy liabilities, as well as traditional marine exposures including charterers, terminal operators and ship repairers. The war account covers the hulls of ships and aircraft, and other related interests, against war and associated perils. Terrorism coverage provides for property damage and business interruption related to political violence including war and civil war. The specie account includes coverage for fine art on exhibitexhibition and in private collections, securities, bullion, precious metals, cash in transit and jewelry.

The Non-Marine Property division writesProfessional and general liability products include professional indemnity, directors’ and officers’ liability, intellectual property, some miscellaneous defense costs, incidental commercial crime, general and products liability coverages targeting consultants, construction professionals, financial

|  21


Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

service professionals, professional practices, social welfare organizations and medical products. Professional and general liability products are written on a worldwide basis, limiting exposure in the United States.

Reinsurance products include property and casualty treaty reinsurance. Property treaty products are offered on an excess of loss and proportional basis for per risk and catastrophe exposures. A significant portion of the excess of loss catastrophe and per risk property treaty business comes from the United States with the remainder coming from international property treaties. Casualty treaty reinsurance is offered on an excess of loss basis and primarily targets specialist writers of motor products in the United Kingdom and Europe. Excess of loss casualty treaty reinsurance also is offered for select writers of employers’ and products liability business forcoverages.

Property products target a wide range of insureds, providing coverage ranging from fire to catastrophe perils such as earthquake and windstorm. Business is written either in either the open market or on a delegated authority accounts. The open market account writesbasis for direct and facultative risks, typically for Fortune 1000 companies.risks. Open market business is written mainly on a worldwide basis by our underwriters to London brokers, with each risk being considered on its own merits. The open market property book targets Fortune 1000 companies. Property accounts written on a delegated authority account focusesbasis focus mainly on small commercial insureds and isare written through a network of coverholders. The delegated authority account iscoverholders, primarily written in the United States. Coverholders underwriting this business are closely monitored, subject to audit and must adhere to strict underwriting guidelines.

The Professional and Financial Risks division underwrites professional indemnity, directors’ and officers’ liability, intellectual We also provide property some miscellaneous defense costs, incidental commercial crime and general liability coverages. The professional indemnity account offers unique solutions in four main professional classes including miscellaneous professionals and consultants, construction professionals, financial service professionals and professional practices. The miscellaneous professionals and consultants class includes coverages for a wide range of professionals including management consultants, publishers, broadcasters, pension trustees and public officials. The construction class includes coverages for surveyors, engineers, architects and estate agents. The financial services class includes coverages for insurance brokers, insurance agents, financial consultants, stockbrokers, fund managers, venture capitalists and bankers. The professional practices class includes coverages for accountants and solicitors. The directors’ and officers’ liability account offers coverage to public, private and non-profit companies of all sizes on either an individual or blanket basis. The Professional and Financial Risks division writes business on a worldwide basis, limiting exposure in the United States.

The Retail division offers a full range of professional liability products, including professional indemnity, directors’ and officers’ liability and employment practices liability, through six branch offices in England and one branch office in Scotland. In addition, coverage is provided for small to

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

medium-sized commercial property risks on both a stand-alone and package basis. Thebasis through our branch offices provide insureds and brokers with direct access to decision-making underwriters who possess specialized knowledge of their local markets. The division also underwrites certain niche liability products such as coverages for social welfare organizations.offices.

The Specialty division provides property treaty reinsurance on an excess of loss and proportional basis for per risk and catastrophe exposures. A significant portion ofOther product lines within the division’s excess of loss catastrophe and per risk treaty business comes from the United States with the remainder coming from international property treaties. The Specialty division also offers directLondon Insurance Market segment include:

crime coverage for a number of specialist classes includingprimarily targeting financial institutions contingency and other special risks. Coverage includes bankersproviding protection for bankers’ blanket bond, computer crime and commercial fidelity, professional sports liability,fidelity;

contingency coverage including event cancellation, non-appearance and prize indemnity.indemnity;

The Equine division writes bloodstock, livestock

accident and aquaculture-related products on a worldwide basis. The bloodstock account provides health coverage targeting affinity groups and schemes, high value and high risks accounts and sports groups;

coverage for equine-related risks ofsuch as horse mortality, theft, infertility, transit and specified perils for insureds ranging in size from large stud farms to private horse owners. The livestock account provides coverageperils;

specialty coverages include mortality risks for farms, zoos, animal theme parks and safari parks. The aquaculture account provides comprehensive coverage for fish at onshore farms, offshore farms and in-transit risks.parks;

The Trade Credit division writes

short-term trade credit coverage for commercial risks, including insolvency and protracted default. Politicaldefault as well as political risks are coveredcoverage in conjunction with commercial risks for currency inconvertibility, government action, import/export license cancellation, public buyer default and war. Products include coverages for captive reinsurance, trade receivables securitization, vendor financing, pre-credit/work in progress, anticipatory credit, factoringwar; and contract replacement. Policy structures are on an excess of loss basis or ground up for specific or named buyer risks.

ESR underwrites a diverse portfolio of property and casualty coverages for Canadian domiciled insureds. ESR provides primary general liability,

products liability, excess and umbrella and environmental liability and property coverages. ESR also writes professional indemnity, directors and officers and equine products.coverages targeted at Canadian domiciled insureds.

22  |


Reinsurance

 

We purchase reinsurance in order to reduce our retention on individual risks and to have the ability to underwrite policies with sufficient limits to meet policyholder needs. As part of our underwriting philosophy, we seek to offer products with limits that do not require significant amounts of reinsurance. We purchase catastrophe reinsurance coverage for our catastrophe-exposed policies, and we seek to manage our exposures under this coverage so that no exposure to any one reinsurer is material to our ongoing business. Net retention of gross premium volume was 89% in 2010both 2011 and 90% in 2009.2010. We do not purchase or sell finite reinsurance products or use other structures that would have the effect of discounting loss reserves.

The ceding of insurance does not legally discharge us from our primary liability for the full amount of the policies, and we will be required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. We attempt to minimize credit exposure to reinsurers through adherence to internal reinsurance guidelines. To become our reinsurance partner, prospective companies generally must: (i) maintain an A.M. Best Company (Best) or

24  |


Standard & Poor’s (S&P) rating of “A” (excellent) or better; (ii) maintain minimum capital and surplus of $500 million and (iii) provide collateral for recoverables in excess of an individually established amount. In addition, certain foreign reinsurers for our United States insurance operations must provide collateral equal to 100% of recoverables, with the exception of reinsurers who have been granted authorized status by an insurance company’s state of domicile. Lloyd’s syndicates generally must have a minimum of a “B” rating from Moody’s Investors Service (Moody’s) to be our reinsurers.

When appropriate, we pursue reinsurance commutations that involve the termination of ceded reinsurance contracts. Our commutation strategy related to ceded reinsurance contracts is to reduce credit exposure and eliminate administrative expenses associated with the run-off of reinsurance placed with certain reinsurers.

The following table displays balances recoverable from our ten largest reinsurers by group at December 31, 2010.2011. The contractual obligations under reinsurance agreements are typically with individual subsidiaries of the group or syndicates at Lloyd’s and are not typically guaranteed by other group members or syndicates at Lloyd’s. These ten reinsurance groups represent approximately 68%72% of our $1.0 billion$898.4 million reinsurance recoverable balance before considering allowances for bad debts.

 

Reinsurers

  A.M. Best
Rating
  Reinsurance
Recoverable
   A.M. Best
Rating
  Reinsurance
Recoverable
 
     (dollars in
thousands)
      (dollars in
thousands)
 

Munich Re Group

  A+  $167,148    A+  $162,335  

Lloyd’s of London

  A     131,960    A     98,975  

Fairfax Financial Group

  A     89,166    A     74,480  

XL Capital Group

  A     60,484    A     60,278  

Swiss Re Group

  A     55,292    A+   51,776  

HDI Group

  A     46,207  

Ace Group

  A+   51,577    A+   44,432  

W.R. Berkley Group

  A+   36,669  

HDI Group

  A     35,299  

Aspen (Bermuda) Group

  A     33,301    A     38,127  

W. R. Berkley Group

  A+   36,903  

White Mountains Insurance Group

  A-    31,607    A     29,313  
          

 

 

Reinsurance recoverable on paid and unpaid losses for ten largest reinsurers

Reinsurance recoverable on paid and unpaid losses for ten largest reinsurers

   692,503  

Reinsurance recoverable on paid and unpaid losses for ten largest reinsurers

   642,826  
          

 

 

Total reinsurance recoverable on paid and unpaid losses

Total reinsurance recoverable on paid and unpaid losses

  $1,023,848  

Total reinsurance recoverable on paid and unpaid losses

  $898,377  
          

 

 

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Reinsurance recoverable balances in the preceding table above are shown before consideration of balances owed to reinsurers and any potential rights of offset, any collateral held by us and allowances for bad debts.

Reinsurance treaties are generally purchased on an annual basis and are subject to yearly renegotiations. In most circumstances, the reinsurer remains responsible for all business produced before termination. Treaties typically contain provisions concerning ceding commissions, required reports to reinsurers, responsibility for taxes, arbitration in the event of a dispute and provisions that allow us to demand that a reinsurer post letters of credit or assets as security if a reinsurer becomes an unauthorized reinsurer under applicable regulations or if its rating falls below an acceptable level.

See note 13 of the notes to consolidated financial statements and Management’s Discussion & Analysis of Financial Condition and Results of Operations for additional information about our reinsurance programs and exposures.

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Investments

 

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. Approximately two-thirdsThe majority of our investable assets come from premiums paid by policyholders. Policyholder funds are invested predominantly in high-quality corporate, government and municipal bonds with relatively short durations. The balance, comprised of shareholder funds, is available to be invested in equity securities, which over the long run, have produced higher returns relative to fixed maturity investments. When purchasing equity securities, we seek to invest in profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline, at reasonable prices. We intend to hold these investments over the long term. The investment portfolio is managed by company employees.

Total investment return includes items that impact net income, such as net investment income and net realized investment gains or losses, as well as changes in net unrealized gains on investments, which do not impact net income. In 2010,2011, net investment income was $272.5$263.7 million and net realized investment gains were $36.4$35.9 million. During the year ended December 31, 2010,2011, net unrealized gains on investments increased by $243.7$182.7 million. We do not lower the quality of our investment portfolio in order to enhance or maintain yields. We focus on long-term total investment return, understanding that the level of realized and unrealized investment gains or losses may vary from one period to the next.

We believe our investment performance is best analyzed from the review of total investment return over several years. The following table presents taxable equivalent total investment return before and after the effects of foreign currency movements.

24  |


ANNUAL TAXABLE EQUIVALENT TOTAL INVESTMENT RETURNS

 

  Years Ended December 31,  Weighted
Average
Five-Year
Annual
Return
  Weighted
Average
Ten-Year
Annual
Return
             Weighted
Average
Five-Year
Annual
Return
  Weighted
Average
Ten-Year
Annual
Return
 
             
             
   Years Ended December 31, 
2006 2007 2008 2009 2010   2007 2008 2009 2010 2011 

Equities

   25.9  (0.4%)   (34.0%)   25.7  20.8  6.2  7.6   (0.4%)   (34.0%)   25.7  20.8  3.8  1.9  6.7

Fixed maturities(1)

   5.2  5.6  0.2  9.8  5.4  5.3  5.5   5.6  0.2  9.8  5.4  7.6  5.8  5.6

Total portfolio, before foreign currency effect

   9.6  4.1  (6.9%)   11.7  8.1  5.3  5.7   4.1  (6.9%)   11.7  8.1  6.7  4.8  5.7

Total portfolio

   11.2  4.8  (9.6%)   13.2  7.9  5.4  6.0   4.8  (9.6%)   13.2  7.9  6.5  4.6  5.9
                        

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Invested assets, end of year (in millions)

  $7,524   $7,775   $6,893   $7,849   $8,224      $7,775   $6,893   $7,849   $8,224   $8,728    
                    

 

  

 

  

 

  

 

  

 

   

 

(1)

Includes short-term investments and cash and cash equivalents.

Taxable equivalent total investment return provides a measure of investment performance that considers the yield of both taxable and tax-exempt investments on an equivalent basis.

We monitor our portfolio to ensure that credit risk does not exceed prudent levels. S&P and Moody’s provide corporate and municipal debt ratings based on their assessments of the credit quality of an obligor with respect to a specific obligation. S&P’s ratings range from “AAA” (capacity to pay interest and repay principal is extremely strong) to “D” (debt is in payment default). Securities with ratings of “BBB” or higher are referred to as investment grade securities. Debt rated “BB” and below

26  |


is regarded by S&P as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. Moody’s ratings range from “Aaa” to “C” with ratings of “Baa” or higher considered investment grade.

Our fixed maturity portfolio has an average rating of “AA,” with approximately 93%95% rated “A” or better by at least one nationally recognized rating organization. Our policy is to invest in investment grade securities and to minimize investments in fixed maturities that are unrated or rated below investment grade. At December 31, 2010, approximately 2%2011, less than 1% of our fixed maturity portfolio was unrated or rated below investment grade. Our fixed maturity portfolio includes securities issued with financial guaranty insurance. We purchase fixed maturities based on our assessment of the credit quality of the underlying assets without regard to insurance.

At December 31, 2011, we held fixed maturities of $53.9 million, or less than 1% of invested assets, from sovereign and non-sovereign issuers domiciled in Portugal, Ireland, Italy, Greece or Spain and $730.4 million, or 8% of invested assets, from sovereign and non-sovereign issuers domiciled in other European countries including supranationals. At December 31, 2010, we held fixed maturities of $84.7 million, or 1% of invested assets, from sovereign and non-sovereign issuers domiciled in Portugal, Ireland, Italy, Greece or Spain and $680.4 million, or 8% of invested assets, from sovereign and non-sovereign issuers domiciled in other European countries including supranationals.

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

The following chart presents our fixed maturity portfolio, at estimated fair value, by rating category at December 31, 2010.2011.

20102011 CREDIT QUALITY OF FIXED MATURITY PORTFOLIO ($5.45.5BILLION)

See “Market Risk Disclosures” in Management’s Discussion & Analysis of Financial Condition and Results of Operations for additional information about investments.

Non-Insurance Operations (Markel Ventures)

 

Through our wholly-owned subsidiary Markel Ventures, Inc., we own interests in various industrial and service businesses that operate outside of the specialty insurance marketplace. These businesses are viewed by management as separate and distinct from our insurance operations. Local management teams oversee the day-to-day operations of these companies, while strategic decisions are made in conjunction with members of our executive management team, principally our President and Chief Investment Officer. The financial results of those companies in which we own controlling interests have been consolidated in our financial statements. The financial results of those companies in which we hold a noncontrolling interest are accounted for under the equity method of accounting.

Our strategy in making these private equity investments is similar to our strategy for purchasing equity securities. We seek to invest in profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline, at reasonable prices. We intend to own the businesses acquired for a long period of time.

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Our non-insurance operations, which are referredwe refer to collectively as Markel Ventures, are comprised of a diverse portfolio of industrial and service companies from various industries, including manufacturers of dredging equipment, high-speed bakery equipment, laminated furniture products and food processing equipment, an owner and operator of manufactured housing communities, a real estate investment fund manager, a retail intelligence services company, and a manager of behavioral health programs. Ourprograms, a provider of concierge medical and executive health services and a manufacturer and lessor of trailer tubes used by industrial, chemical and distribution companies to transport gas and liquids. In 2011, our non-insurance operations reported revenues of $166.5$317.5 million and net income to shareholders of $4.2 million in 2010.$7.7 million.

In December 2010, we acquired controlling interests in RD Holdings, LLC (RetailData), a company that provides retail intelligence services, and Diamond Healthcare Corporation, a company that manages behavioral health programs throughout the United States. Both of these companies are headquartered in Richmond, Virginia. Since we consolidate our non-insurance operations on a one-month lag, the results for these two acquisitions will be included in our consolidated results beginning in the first quarter of 2011.

26  |


Shareholder Value

 

Our financial goals are to earn consistent underwriting and operating profits and superior investment returns to build shareholder value. More specifically, we measure financial success by our ability to compound growth in book value per share at a high rate of return over a long period of time. To mitigate the effects of short-term volatility, we generally use five-year time periods to measure ourselves over a five-year period.ourselves. We believe that growth in book value per share is the most comprehensive measure of our success because it includes all underwriting, operating and investing results. For the year ended December 31, 2011, book value per share increased 8% primarily due to net income to shareholders of $142.0 million and a $123.4 million increase in net unrealized gains on investments, net of taxes. For the year ended December 31, 2010, book value per share increased 16% primarily due to net income to shareholders of $266.8 million and a $163.5 million increase in net unrealized gains on investments, net of taxes. For the year ended December 31, 2009, book value per share increased 27% primarily due to a $374.4 million increase in net unrealized gains on investments, net of taxes, and net income to shareholders of $201.6 million. Over the past five years, we have grown book value per share at a compound annual rate of 13%9% to $326.36$352.10 per share.

The following graph presents book value per share for the past five years.

BOOK VALUE PER SHARE

 

28  

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Markel Corporation & Subsidiaries

 

BUSINESS OVERVIEW (continued)

 

Regulatory Environment

 

Our insurance subsidiaries are subject to regulation and supervision by the insurance regulatory authorities of the various jurisdictions in which they conduct business. This regulation is intended for the benefit of policyholders rather than shareholders or holders of debt securities.

United States Insurance Regulation.In the United States, state regulatory authorities have broad regulatory, supervisory and administrative powers relating to solvency standards, the licensing of insurers and their agents, the approval of forms and policies used, the nature of, and limitations on, insurers’ investments, the form and content of annual statements and other reports on the financial condition of such insurers and the establishment of loss reserves. Additionally, the business written in the Specialty Admitted segment typically is subject to regulatory rate and form review.

As an insurance holding company, we are also subject to certain state laws. Under these laws, insurance departments may, at any time, examine us, require disclosure of material transactions, require approval of certain extraordinary transactions, such as extraordinary dividends from our insurance subsidiaries to us, or require approval of changes in control of an insurer or an insurance holding company. Generally, control for these purposes is defined as ownership or voting power of 10% or more of a company’s shares.

The laws of the domicile states of our insurance subsidiaries govern the amount of dividends that may be paid to our holding company, Markel Corporation. Generally, statutes in the domicile states of our insurance subsidiaries require prior approval for payment of extraordinary as opposed to ordinary dividends. At December 31, 2010,2011, our United States insurance subsidiaries could pay up to $197.0$222.2 million during the following 12 months under the ordinary dividend regulations.

Our United States insurance subsidiaries are also subject to risk-based capital requirements that provide a method to measure the capital of each subsidiary taking into account that subsidiary’s investments and products. These requirements provide a formula which, for P&C insurance companies, establishes capital thresholds for four categories of risk: asset risk, insurance risk, interest rate risk and business risk. At December 31, 2011, the capital and surplus of each of our United States insurance subsidiaries was above the minimum regulatory thresholds.

United Kingdom Insurance Regulation.With the enactment of the Financial Services and Markets Act, the United Kingdom government authorized the Financial Services Authority (FSA) to supervise all securities, banking and insurance businesses, including Lloyd’s. The FSA oversees compliance with established periodic auditing and reporting requirements, risk assessment reviews, minimum solvency margins and individual capital assessment requirements, dividend restrictions, restrictions governing the appointment of key officers, restrictions governing controlling ownership interests and various other requirements. Both MIICL and Markel Syndicate Management Limited are authorized and regulated by the FSA. We are required to provide 14 days advance notice to the FSA for any dividends from MIICL. In addition, our United Kingdom insurance subsidiaries must comply with the United Kingdom Companies Act of 2006, which provides that dividends may only be paid out of profits available for that purpose.

 

28  |  29


Markel Corporation & Subsidiaries

 

BUSINESS OVERVIEW (continued)

 

Ratings

 

Financial stability and strength are important purchase considerations of policyholders and insurance agents and brokers. Because an insurance premium paid today purchases coverage for losses that might not be paid for many years, the financial viability of the insurer is of critical concern. Various independent rating agencies provide information and assign ratings to assist buyers in their search for financially sound insurers. Rating agencies periodically re-evaluate assigned ratings based upon changes in the insurer’s operating results, financial condition or other significant factors influencing the insurer’s business. Changes in assigned ratings could have an adverse impact on an insurer’s ability to write new business.

Best assigns financial strength ratings (FSRs) to P&C insurance companies based on quantitative criteria such as profitability, leverage and liquidity, as well as qualitative assessments such as the spread of risk, the adequacy and soundness of reinsurance, the quality and estimated market value of assets, the adequacy of loss reserves and surplus and the competence, experience and integrity of management. Best’s FSRs range from “A++” (superior) to “F” (in liquidation).

Six of our insurance subsidiaries rated by Best have been assigned an FSR of “A” (excellent), one is rated “A-” (excellent) and one is rated “B++” (good). Markel Syndicate 3000 has been assigned an FSR of “A” (excellent) by Best.

In addition to Best, seven of our insurance subsidiaries are rated by Fitch Ratings (Fitch), an independent rating agency. All seven of our insurance subsidiaries rated by Fitch have been assigned an FSR of “A” (strong).

The various rating agencies typically charge companies fees for the rating and other services they provide. During 2010,2011, we paid rating agencies, including Best and Fitch, $0.4$0.7 million for their services.

|  29


Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Risk Factors

 

A wide range of factors could materially affect our future prospects and performance. The matters addressed under “Safe Harbor and Cautionary Statements,” “Critical Accounting Estimates” and “Market Risk Disclosures” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and other information included or incorporated in this report describe most of the significant risks that could affect our operations and financial results. We are also subject to the following risks.

We may experience losses from catastrophes.As a property and casualty insurance company, we may experience losses from man-made or natural catastrophes. Catastrophes may have a material adverse effect on operations. Catastrophes include, but are not limited to, windstorms, hurricanes, earthquakes, tornadoes, hail, severe winter weather and fires and may include terrorist events. We cannot predict how severe a particular catastrophe will be before it occurs. The extent of losses from catastrophes is a function of the total amount of losses incurred, the number of insureds affected, the frequency and severity of the events, the effectiveness of our catastrophe risk management program and the adequacy of our reinsurance coverage. Most catastrophes occur over a small geographic area; however, some catastrophes may produce significant damage in large, heavily populated areas. If, as many forecast, climate change results in an increase in the frequency and severity of weather-related catastrophes, we may experience additional catastrophe-related losses.

30  |


Our results may be affected because actual insured losses differ from our loss reserves. Significant periods of time often elapse between the occurrence of an insured loss, the reporting of the loss to us and our payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the related loss adjustment expenses. The process of estimating loss reserves is a difficult and complex exercise involving many variables and subjective judgments. This process may become more difficult if we experience a period of rising inflation. As part of the reserving process, we review historical data and consider the impact of such factors as:

 

trends in claim frequency and severity,

 

changes in operations,

 

emerging economic and social trends,

 

uncertainties relating to asbestos and environmental exposures,

 

inflation or deflation, and

 

changes in the regulatory and litigation environments.

This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves, and actual results will differ from original estimates. As part of the reserving process, we regularly review our loss reserves and make adjustments as necessary. Future increases in loss reserves will result in additional charges to earnings.

30  |


We are subject to regulation by insurance regulatory authorities that may affect our ability to implement our business objectives.Our insurance subsidiaries are subject to supervision and regulation by the insurance regulatory authorities in the various jurisdictions in which they conduct business. This regulation is intended for the benefit of policyholders rather than shareholders or holders of debt securities. Insurance regulatory authorities have broad regulatory, supervisory and administrative powers relating to solvency standards, licensing, coverage requirements, policy rates and forms and the form and content of financial reports. In light of recent economic conditions, regulatory and legislative authorities are implementing enhanced or new regulatory requirements intended to prevent future crises or otherwise assure the stability of financial institutions. Regulatory authorities also may seek to exercise their supervisory or enforcement authority in new or more aggressive ways, such as imposing increased capital requirements. Any such actions, if they occurred, could affect the competitive market and the way we conduct our business and manage our capital. As a result, such actions could materially affect our results of operations, financial condition and liquidity.

Our ability to make payments on debt or other obligations depends on the receipt of funds from our subsidiaries.We are a holding company, and substantially all of our operations are conducted through our regulated subsidiaries. As a result, our cash flow and our ability to service our debt are dependent upon the earnings of our subsidiaries and on the distribution of earnings, loans or other payments by our subsidiaries to us. In addition, payment of dividends by our insurance subsidiaries may require prior regulatory notice or approval.

|  31


Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Our investment results may be impacted by changes in interest rates, U.S. and international monetary and fiscal policies as well as broader economic conditions.We receive premiums from customers for insuring their risks. We invest these funds until they are needed to pay policyholder claims or until they are recognized as profits. Fluctuations in the value of our investment portfolio can occur as a result of changes in interest rates, U.S. and international monetary and fiscal policies as well as broader economic conditions (including, for example, equity market conditions and significant inflation or deflation). Our investment results may be impacted by one or more of these factors.

Competition in the property and casualty insurance industry could adversely affect our ability to grow or maintain premium volume.Among our competitive strengths have been our specialty product focus and our niche market strategy. These strengths also make us vulnerable in periods of intense competition to actions by other insurance companies who seek to write additional premiums without appropriate regard for ultimate profitability. During soft markets, it is very difficult for us to grow or maintain premium volume levels without sacrificing underwriting profits. If we are not successful in maintaining rates or achieving rate increases, it may be difficult for us to improve underwriting margins and grow or maintain premium volume levels.

We invest a significant portion of our invested assets in equity securities, which may result in significant variability in our investment results and may adversely impact shareholders’ equity. Additionally, our equity investment portfolio is concentrated and declines in the value of these significant investments could adversely affect our financial results.Equity securities were 54%55% and 49%54% of our shareholders’ equity at December 31, 20102011 and 2009,2010, respectively. Equity securities have historically produced higher returns than fixed

|  31


Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

maturities; however, investing in equity securities may result in significant variability in investment returns from one period to the next. If recent levels of market volatility persist, we could experience significant declines in the fair value of our equity investment portfolio, which would result in a material decrease in shareholders’ equity. Our equity portfolio is concentrated in particular issuers and industries and, as a result, a decline in the fair value of these significant investments also could result in a material decrease in shareholders’ equity. A material decrease in shareholders’ equity may adversely impact our ability to carry out our business plans.

Deterioration in financial markets could lead to investment losses and adverse effects on our business.The severe downturn in the public debt and equity markets beginning in 2008, reflecting uncertainties associated with the mortgage and credit crises, worsening economic conditions, widening of credit spreads, bankruptcies and government intervention in large financial institutions, resulted in significant realized and unrealized losses in our investment portfolio. In the event of another major financial crisis (for example, a significant and widespread increase in municipal bond defaults)default of foreign sovereign debt or collapse of the Eurozone), we could incur substantial realized and unrealized investment losses in future periods, which would have an adverse impact on our results of operations, financial condition, debt and financial strength ratings, insurance subsidiaries’ capital and ability to access capital markets.

We rely on reinsurance and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement.We purchase reinsurance in order to reduce our retention on individual risks and to have the ability to underwrite policies with sufficient limits to meet policyholder needs. The ceding of insurance does not legally discharge us from our primary liability for the full amount of the policies. Such reliance on reinsurance may create credit risk as a result of the reinsurer’s inability or unwillingness to pay reinsurance claims when due. Deterioration in the credit quality of existing reinsurers or disputes over the terms of reinsurance could result in additional charges to earnings, which may adversely impact our results of operations and financial condition.

32  |


Our information technology systems maycould fail or suffer a security breach, which could adversely affect our business or reputation.Our business is dependent upon the successful functioning and security of our computer systems. Among other things, we rely on these systems to interact with producers and insureds, to perform actuarial and other modeling functions, to underwrite business, to prepare policies and process premiums, to process claims and make claims payments, and to prepare internal and external financial statements and information. A significant failure of these systems, whether because of a breakdown, natural disaster or an attack on our systems, could have a material adverse affect on our business. In addition, a security breach of our computer systems could damage our reputation or result in material liabilities.

32  |


The integration of acquired companies may not be as successful as we anticipate.We have recently engaged in a number of acquisitions in an effort to achieve profitable growth in our insurance operations and to create additional value on a diversified basis in our non-insurance operations. Acquisitions present operational, strategic and financial risks, as well as risks associated with liabilities arising from the previous operations of the acquired companies. Assimilation of the operations and personnel of acquired companies (especially those that are outside of our core insurance operations) may prove more difficult than anticipated, which may result in failure to achieve financial objectives associated with the acquisition or diversion of management attention. In addition, integration of formerly privately-held companies into the management and internal control and financial reporting systems of a publicly-held company presents additional risks.

Associates

 

At December 31, 2010,2011, we had approximately 4,8005,400 employees, of whichwhom approximately 2,6002,700 were employed within our insurance operations and approximately 2,2002,700 were employed within our non-insurance operations.

 

|  33


Markel Corporation & Subsidiaries

 

 

SELECTED FINANCIAL DATA(dollars in millions, except per share data)

 

  2010 2009 2008   2011 2010 2009 

RESULTSOF OPERATIONS

        

Earned premiums

  $1,731   $1,816   $2,022    $1,979   $1,731   $1,816  

Net investment income

   273    260    282     264    273    260  

Total operating revenues

   2,225    2,069    1,977     2,630    2,225    2,069  

Net income (loss) to shareholders

   267    202    (59   142    267    202  

Comprehensive income (loss) to shareholders

   431    591    (403   252    431    591  

Diluted net income (loss) per share

  $27.27   $20.52   $(5.95  $14.60   $27.27   $20.52  
            

 

  

 

  

 

 

FINANCIAL POSITION

        

Total investments and cash and cash equivalents

  $8,224   $7,849   $6,893    $8,728   $8,224   $7,849  

Total assets

   10,826    10,242    9,512     11,532    10,826    10,242  

Unpaid losses and loss adjustment expenses

   5,398    5,427    5,492     5,399    5,398    5,427  

Convertible notes payable

   —      —      —    

Senior long-term debt and other debt

   1,016    964    694     1,294    1,016    964  

8.71% Junior Subordinated Debentures

   —      —      —    

Shareholders’ equity

   3,172    2,774    2,181     3,388    3,172    2,774  

Common shares outstanding (at year end, in thousands)

   9,718    9,819    9,814     9,621    9,718    9,819  
            

 

  

 

  

 

 
OPERATING PERFORMANCE MEASURES(1)    

OPERATING PERFORMANCE MEASURES(1)

    

OPERATING DATA

        

Book value per common share outstanding

  $326.36   $282.55   $222.20    $352.10   $326.36   $282.55  

Growth (decline) in book value per share

   16  27  (16%)    8  16  27

5-Year CAGR in book value per share(2)

   13  11  10   9  13  11

Closing stock price

  $378.13   $340.00   $299.00    $414.67   $378.13   $340.00  
            

 

  

 

  

 

 

RATIO ANALYSIS

        

U.S. GAAP combined ratio(3)

   97  95  99   102  97  95

Investment yield(4)

   4  4  4   4  4  4

Taxable equivalent total investment return(5)

   8  13  (10%)    7  8  13

Investment leverage(6)

   2.6    2.8    3.2     2.6    2.6    2.8  

Debt to total capital

   24  26  24   27  24  26
            

 

  

 

  

 

 

 

(1)

Operating Performance Measures provide a basis for management to evaluate our performance. The method we use to compute these measures may differ from the methods used by other companies. See further discussion of management’s evaluation of these measures in Management’s Discussion & Analysis of Financial Condition and Results of Operations.

 

(2)

CAGR—compound annual growth rate.

 

(3)

The U.S. GAAP combined ratio measures the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.

 

34  |


2007  2006  2005  2004  2003  2002  2001  10-Year
CAGR (2)
 
$2,117   $2,184   $1,938   $2,054   $1,864   $1,549   $1,207    6
 305    269    242    204    183    170    171    6
 2,551    2,576    2,200    2,262    2,092    1,770    1,397    7
 406    393    148    165    123    75    (126  —    
 337    551    64    273    222    73    (77  —    
$40.64   $39.40   $14.80   $16.41   $12.31   $7.53   $(14.73  —    
                               
       
$7,775   $7,524   $6,588   $6,317   $5,350   $4,314   $3,591    10
 10,164    10,117    9,814    9,398    8,532    7,409    6,441    7
 5,526    5,584    5,864    5,482    4,930    4,367    3,700    6
 —      —      99    95    91    86    116    —    
 691    760    609    610    522    404    265    —    
 —      106    141    150    150    150    150    —    
 2,641    2,296    1,705    1,657    1,382    1,159    1,085    15
 9,957    9,994    9,799    9,847    9,847    9,832    9,820    —    
                               
       
$265.26   $229.78   $174.04   $168.22   $140.38   $117.89   $110.50    12
 15  32  3  20  19  7  8  —    
 18  16  11  20  13  13  18  —    
$491.10   $480.10   $317.05   $364.00   $253.51   $205.50   $179.65    —    
                               
 88  87  101  96  99  103  124  —    
 4  4  4  4  4  4  5  —    
 5  11  2  8  11  8  8  —    
 2.9    3.3    3.9    3.8    3.9    3.7    3.3    —    
 21  27  33  34  36  36  33  —    
                               

2008  2007  2006  2005  2004  2003  2002  10-Year
CAGR (2)
 
$2,022   $2,117   $2,184   $1,938   $2,054   $1,864   $1,549    5
 282    305    269    242    204    183    170    4
 1,977    2,551    2,576    2,200    2,262    2,092    1,770    7
 (59  406    393    148    165    123    75    —    
 (403  337    551    64    273    222    73    —    
$(5.95 $40.64   $39.40   $14.80   $16.41   $12.31   $7.53    —    

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
       
$6,893   $7,775   $7,524   $6,588   $6,317   $5,350   $4,314    9
 9,512    10,164    10,117    9,814    9,398    8,532    7,409    6
 5,492    5,526    5,584    5,864    5,482    4,930    4,367    4
 694    691    866    849    855    763    640    —    
 2,181    2,641    2,296    1,705    1,657    1,382    1,159    12
 9,814    9,957    9,994    9,799    9,847    9,847    9,832    
—  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
       
$222.20   $265.26   $229.78   $174.04   $168.22   $140.38   $117.89    12
 (16%)   15  32  3  20  19  7  
—  
  
 10  18  16  11  20  13  13  
—  
  
$299.00   $491.10   $480.10   $317.05   $364.00   $253.51   $205.50    
—  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 99  88  87  101  96  99  103  
—  
  
 4  4  4  4  4  4  4  
—  
  
 (10%)   5  11  2  8  11  8  
—  
  
 3.2    2.9    3.3    3.9    3.8    3.9    3.7    —    
 24  21  27  33  34  36  36  
—  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(4)

Investment yield reflects net investment income as a percentage of average invested assets.

 

(5)

Taxable equivalent total investment return includes net investment income, realized investment gains or losses, the change in fair value of the investment portfolio and the effect of foreign currency exchange rate movements during the period as a percentage of average invested assets. Tax-exempt interest and dividend payments are grossed up using the U.S. corporate tax rate to reflect an equivalent taxable yield.

 

(6)

Investment leverage represents total invested assets divided by shareholders’ equity.

 

|  35


Markel Corporation & Subsidiaries

 

 

CONSOLIDATED BALANCE SHEETS

 

  December 31,   December 31, 
  2010   2009   2011   2010 
  (dollars in thousands)   (dollars in thousands) 

ASSETS

        

Investments, available-for-sale, at estimated fair value:

        

Fixed maturities (amortized cost of $5,256,980 in 2010 and $4,961,745 in 2009)

  $5,431,226    $5,112,136  

Equity securities (cost of $996,088 in 2010 and $843,841 in 2009)

   1,721,971     1,349,829  

Fixed maturities (amortized cost of $5,172,952 in 2011 and $5,256,980 in 2010)

  $5,538,174    $5,431,226  

Equity securities (cost of $1,156,294 in 2011 and $996,088 in 2010)

   1,873,927     1,721,971  

Short-term investments (estimated fair value approximates cost)

   325,340     492,581     541,014     325,340  

Investments in affiliates

   —       43,633  
          

 

   

 

 

TOTAL INVESTMENTS

   7,478,537     6,998,179     7,953,115     7,478,537  
          

 

   

 

 

Cash and cash equivalents

   745,259     850,494     775,032     745,259  

Receivables

   312,096     279,879     350,237     318,507  

Reinsurance recoverable on unpaid losses

   798,090     886,442     791,102     798,090  

Reinsurance recoverable on paid losses

   70,568     65,703     38,208     70,568  

Deferred policy acquisition costs

   188,783     156,797     194,674     188,783  

Prepaid reinsurance premiums

   80,293     68,307     97,074     80,293  

Goodwill and intangible assets

   645,900     502,833     867,558     641,733  

Other assets

   506,063     433,262     465,103     503,819  
          

 

   

 

 

TOTAL ASSETS

  $10,825,589    $10,241,896    $11,532,103    $10,825,589  
          

 

   

 

 

LIABILITIESAND EQUITY

        

Unpaid losses and loss adjustment expenses

  $5,398,406    $5,427,096    $5,398,869    $5,398,406  

Unearned premiums

   839,537     717,728     915,930     839,537  

Payables to insurance companies

   50,715     46,853     64,327     50,715  

Senior long-term debt and other debt (estimated fair value of $1,086,000 in 2010 and $1,011,000 in 2009)

   1,015,947     963,648  

Senior long-term debt and other debt (estimated fair value of $1,391,000 in 2011 and $1,086,000 in 2010)

   1,293,520     1,015,947  

Other liabilities

   333,292     294,857     397,111     333,292  
          

 

   

 

 

TOTAL LIABILITIES

   7,637,897     7,450,182     8,069,757     7,637,897  
          

 

   

 

 

Commitments and contingencies

        

Shareholders’ equity:

        

Common stock

   884,457     872,876     891,507     884,457  

Retained earnings

   1,735,973     1,514,398     1,835,086     1,735,973  

Accumulated other comprehensive income

   551,093     387,086     660,920     551,093  
          

 

   

 

 

TOTAL SHAREHOLDERS’ EQUITY

   3,171,523     2,774,360     3,387,513     3,171,523  

Noncontrolling interests

   16,169     17,354     74,833     16,169  
          

 

   

 

 

TOTAL EQUITY

   3,187,692     2,791,714     3,462,346     3,187,692  
          

 

   

 

 

TOTAL LIABILITIES AND EQUITY

  $10,825,589    $10,241,896    $11,532,103    $10,825,589  
          

 

   

 

 

See accompanying notes to consolidated financial statements.

 

36  |


      

 

 

CONSOLIDATED STATEMENTS OF OPERATIONSINCOME AND COMPREHENSIVE INCOME (LOSS)

 

  Years Ended December 31,   Years Ended December 31, 
  2010 2009 2008   2011 2010 2009 
  (dollars in thousands, except per share data)   (dollars in thousands, except per share data) 
OPERATING REVENUES        

Earned premiums

  $1,730,921   $1,815,835   $2,022,184    $1,979,340   $1,730,921   $1,815,835  

Net investment income

   272,530    259,809    282,148     263,676    272,530    259,809  

Net realized investment gains (losses):

        

Other-than-temporary impairment losses

   (11,644  (95,570  (339,164   (14,250  (11,644  (95,570

Other-than-temporary impairment losses recognized in other comprehensive income (loss)

   (563  5,620    —    

Other-than-temporary impairment losses recognized in other comprehensive income

   (5,946  (563  5,620  
            

 

  

 

  

 

 

Other-than-temporary impairment losses recognized in net income (loss)

   (12,207  (89,950  (339,164

Other-than-temporary impairment losses recognized in net income

   (20,196  (12,207  (89,950

Net realized investment gains (losses), excluding other-than-temporary impairment losses

   48,569    (6,150  (68,430   56,053    48,569    (6,150
            

 

  

 

  

 

 

Net realized investment gains (losses)

   36,362    (96,100  (407,594   35,857    36,362    (96,100

Other revenues

   185,580    89,782    79,845     351,077    185,580    89,782  
            

 

  

 

  

 

 

TOTAL OPERATING REVENUES

   2,225,393    2,069,326    1,976,583     2,629,950    2,225,393    2,069,326  
            

 

  

 

  

 

 

OPERATING EXPENSES

        

Losses and loss adjustment expenses

   946,229    992,863    1,269,025     1,209,986    946,229    992,863  

Underwriting, acquisition and insurance expenses

   724,876    736,660    738,546     810,179    724,876    736,660  

Amortization of intangible assets

   16,824    6,698    5,742     24,291    16,824    6,698  

Other expenses

   168,290    80,499    74,889     309,046    168,290    80,499  
            

 

  

 

  

 

 

TOTAL OPERATING EXPENSES

   1,856,219    1,816,720    2,088,202     2,353,502    1,856,219    1,816,720  
            

 

  

 

  

 

 

OPERATING INCOME (LOSS)

   369,174    252,606    (111,619

OPERATING INCOME

   276,448    369,174    252,606  
            

 

  

 

  

 

 

Interest expense

   73,663    53,969    48,210     86,252    73,663    53,969  
            

 

  

 

  

 

 

INCOME (LOSS) BEFORE INCOME TAXES

   295,511    198,637    (159,829

INCOME BEFORE INCOME TAXES

   190,196    295,511    198,637  

Income tax expense (benefit)

   27,782    (3,782  (101,395   41,710    27,782    (3,782
            

 

  

 

  

 

 

NET INCOME (LOSS)

  $267,729   $202,419   $(58,434

NET INCOME

  $148,486   $267,729   $202,419  

Net income attributable to noncontrolling interests

   936    781    333     6,460    936    781  
            

 

  

 

  

 

 

NET INCOME (LOSS)TO SHAREHOLDERS

  $266,793   $201,638   $(58,767

NET INCOMETO SHAREHOLDERS

  $142,026   $266,793   $201,638  
            

 

  

 

  

 

 

OTHER COMPREHENSIVE INCOME (LOSS)

    

OTHER COMPREHENSIVE INCOME

    

Change in net unrealized gains on investments, net of taxes:

        

Net holding gains (losses) arising during the period

  $195,648   $326,959   $(594,767

Net holding gains arising during the period

  $141,839   $195,648   $326,959  

Unrealized other-than-temporary impairment losses on fixed maturities arising during the period

   672    (5,405  —       3,943    672    (5,405

Reclassification adjustments for net gains (losses) included in net income (loss)

   (32,831  52,883    264,898  

Reclassification adjustments for net gains (losses) included in net income

   (22,341  (32,831  52,883  
            

 

  

 

  

 

 

Change in net unrealized gains on investments, net of taxes

   163,489    374,437    (329,869   123,441    163,489    374,437  

Change in foreign currency translation adjustments, net of taxes

   (2,282  19,239    (7,893   (4,191  (2,282  19,239  

Change in net actuarial pension loss, net of taxes

   2,749    (4,268  (6,740   (9,459  2,749    (4,268
            

 

  

 

  

 

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)

   163,956    389,408    (344,502

TOTAL OTHER COMPREHENSIVE INCOME

   109,791    163,956    389,408  
            

 

  

 

  

 

 

COMPREHENSIVE INCOME (LOSS)

  $431,685   $591,827   $(402,936

COMPREHENSIVE INCOME

  $258,277   $431,685   $591,827  

Comprehensive income attributable to noncontrolling interests

   1,122    832    333     6,424    1,122    832  
            

 

  

 

  

 

 

COMPREHENSIVE INCOME (LOSS)TO SHAREHOLDERS

  $430,563   $590,995   $(403,269

COMPREHENSIVE INCOMETO SHAREHOLDERS

  $251,853   $430,563   $590,995  
            

 

  

 

  

 

 

NET INCOME (LOSS) PER SHARE

    

NET INCOME PER SHARE

    

Basic

  $27.31   $20.54   $(5.95  $14.66   $27.31   $20.54  

Diluted

  $27.27   $20.52   $(5.95  $14.60   $27.27   $20.52  
            

 

  

 

  

 

 

See accompanying notes to consolidated financial statements.

 

|  37


Markel Corporation & Subsidiaries

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 

 Common
Shares
 Common
Stock
 Retained
Earnings
 Accumulated
Other

Comprehensive
Income
 Total
Shareholders’
Equity
 Noncontrolling
Interests
 Total Equity   Common
Shares
 Common
Stock
 Retained
Earnings
 Accumulated
Other
Comprehensive
Income
 Total
Shareholders’
Equity
 Noncontrolling
Interests
 Total Equity 
 (in thousands) 

January 1, 2008

  9,957   $866,362   $1,417,269   $357,531   $2,641,162   $(136 $2,641,026  

Net loss

  —      —      (58,767  —      (58,767  333    (58,434

Change in net unrealized gains on investments, net of taxes

  —      —      —      (329,869  (329,869  —      (329,869

Change in foreign currency translation adjustments, net of taxes

  —      —      —      (7,893  (7,893  —      (7,893

Change in net actuarial pension loss, net of taxes

  —      —      —      (6,740  (6,740  —      (6,740
                     

Comprehensive loss

      (403,269  333    (402,936

Issuance of common stock

  10    —      —      —      —      —      —    

Repurchase of common stock

  (153  —      (60,601  —      (60,601  —      (60,601

Restricted stock units expensed

  —      2,187    —      —      2,187    —      2,187  

Other

  —      1,195    —      —      1,195    64    1,259  
                       (in thousands) 

December 31, 2008

  9,814    869,744    1,297,901    13,029    2,180,674    261    2,180,935     9,814   $869,744   $1,297,901   $13,029   $2,180,674   $261   $2,180,935  

Net income

  —      —      201,638    —      201,638    781    202,419       201,638    0    201,638    781    202,419  

Change in net unrealized gains on investments, net of taxes

  —      —      —      374,437    374,437    —      374,437       0    374,437    374,437    0    374,437  

Cumulative effect of adoption of FASB ASC 320-10, net of taxes

  —      —      15,300    (15,300  —      —      —         15,300    (15,300  0    0    0  

Change in foreign currency translation adjustments, net of taxes

  —      —      —      19,188    19,188    51    19,239       0    19,188    19,188    51    19,239  

Change in net actuarial pension loss, net of taxes

  —      —      —      (4,268  (4,268  —      (4,268     0    (4,268  (4,268  0    (4,268
                       

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Comprehensive income

      590,995    832    591,827         590,995    832    591,827  

Issuance of common stock

  6    —      —      —      —      —      —       6    0    0    0    0    0    0  

Restricted stock units expensed

  —      2,638    —      —      2,638    —      2,638     0    2,638    0    0    2,638    0    2,638  

Acquisitions

  —      —      —      —      —      16,204    16,204     0    0    0    0    0    16,204    16,204  

Other

  (1  494    (441  —      53    57    110     (1  494    (441  0    53    57    110  
                       

 

  

 

  

 

  

 

  

 

  

 

  

 

 

December 31, 2009

  9,819    872,876    1,514,398    387,086    2,774,360    17,354    2,791,714     9,819    872,876    1,514,398    387,086    2,774,360    17,354    2,791,714  

Net income

  —      —      266,793    —      266,793    936    267,729       266,793    0    266,793    936    267,729  

Change in net unrealized gains on investments, net of taxes

  —      —      —      163,489    163,489    —      163,489       0    163,489    163,489    0    163,489  

Change in foreign currency translation adjustments, net of taxes

  —      —      —      (2,468  (2,468  186    (2,282     0    (2,468  (2,468  186    (2,282

Change in net actuarial pension loss, net of taxes

  —      —      —      2,749    2,749    —      2,749       0    2,749    2,749    0    2,749  
                       

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Comprehensive income

      430,563    1,122    431,685         430,563    1,122    431,685  

Issuance of common stock

  32    8,185    —      —      8,185    —      8,185     32    8,185    0    0    8,185    0    8,185  

Repurchase of common stock

  (133  —      (45,218  —      (45,218  —      (45,218   (133  0    (45,218  0    (45,218  0    (45,218

Restricted stock units expensed

  —      2,543    —      —      2,543    —      2,543     0    2,543    0    0    2,543    0    2,543  

Stock options issued

  —      9,133    —      —      9,133    —      9,133     0    9,133    0    0    9,133    0    9,133  

Purchase of noncontrolling interest

  —      (8,345  —      237    (8,108  (1,557  (9,665   0    (8,345  0    237    (8,108  (1,557  (9,665

Other

  —      65    —      —      65    (750  (685   0    65    0    0    65    (750  (685
                       

 

  

 

  

 

  

 

  

 

  

 

  

 

 

DECEMBER 31, 2010

  9,718   $884,457   $1,735,973   $551,093   $3,171,523   $16,169   $3,187,692  

December 31, 2010

   9,718    884,457    1,735,973    551,093    3,171,523    16,169    3,187,692  

Net income

     142,026    0    142,026    6,460    148,486  

Change in net unrealized gains on investments, net of taxes

     0    123,441    123,441    0    123,441  

Change in foreign currency translation adjustments, net of taxes

     0    (4,155  (4,155  (36  (4,191

Change in net actuarial pension loss, net of taxes

     0    (9,459  (9,459  0    (9,459
                       

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Comprehensive income

       251,853    6,424    258,277  

Issuance of common stock

   16    1,182    0    0    1,182    0    1,182  

Repurchase of common stock

   (113  0    (42,913  0    (42,913  0    (42,913

Restricted stock units expensed

   0    5,818    0    0    5,818    0    5,818  

Acquisitions

   0    0    0    0    0    62,189    62,189  

Other

   0    50    0    0    50    (9,949  (9,899
  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

DECEMBER 31, 2011

   9,621   $891,507   $1,835,086   $660,920   $3,387,513   $74,833   $3,462,346  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

See accompanying notes to consolidated financial statements.

 

38  |


 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

  Years Ended December 31,   Years Ended December 31, 
  2010 2009 2008   2011 2010 2009 
  (dollars in thousands)   (dollars in thousands) 

OPERATING ACTIVITIES

        

Net income (loss)

  $267,729   $202,419   $(58,434

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Net income

  $148,486   $267,729   $202,419  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Deferred income tax expense (benefit)

   7,185    (9,144  (100,417   5,649    7,185    (9,144

Depreciation and amortization

   53,587    31,172    31,191     70,572    53,587    31,172  

Net realized investment losses (gains)

   (36,362  96,100    407,594     (35,857  (36,362  96,100  

Decrease in receivables

   7,647    21,035    24,829  

Decrease (increase) in receivables

   (10,745  7,647    21,035  

Decrease (increase) in deferred policy acquisition costs

   (13,910  26,958    18,536     (5,891  (13,910  26,958  

Increase (decrease) in unpaid losses and loss adjustment expenses, net

   (109,371  6,213    235,045     57,000    (109,371  6,213  

Increase (decrease) in unearned premiums, net

   37,799    (91,933  (84,244   59,612    37,799    (91,933

Increase (decrease) in payables to insurance companies

   1,115    (8,260  2,609     (3,665  1,115    (8,260

Other

   7,872    7,903    (79,709   26,157    7,872    7,903  
            

 

  

 

  

 

 

NET CASH PROVIDEDBY OPERATING ACTIVITIES

   223,291    282,463    397,000     311,318    223,291    282,463  
            

 

  

 

  

 

 

INVESTING ACTIVITIES

        

Proceeds from sales of fixed maturities and equity securities

   340,546    205,561    683,316     288,046    340,546    205,561  

Proceeds from maturities, calls and prepayments of fixed maturities

   383,618    312,951    404,444     343,502    383,618    312,951  

Cost of fixed maturities and equity securities purchased

   (957,193  (726,954  (702,292   (713,102  (957,193  (726,954

Net change in short-term investments

   202,882    23,616    (467,026   (216,972  202,882    23,616  

Cost of investments in affiliates

   —      —      (8,481

Acquisitions, net of cash acquired

   (214,156  (154,920  (10,070   (120,102  (214,156  (154,920

Additions to property and equipment

   (42,103  (21,906  (17,673   (60,132  (42,103  (21,906

Other

   3,063    27,943    (34,190   4,449    3,063    27,943  
            

 

  

 

  

 

 

NET CASH USEDBY INVESTING ACTIVITIES

   (283,343  (333,709  (151,972   (474,311  (283,343  (333,709
            

 

  

 

  

 

 

FINANCING ACTIVITIES

        

Additions to senior long-term debt and other debt

   42,897    507,346    102,425     336,181    42,897    507,346  

Repayment and retirement of senior long-term debt and other debt

   (30,021  (255,293  (100,190   (90,557  (30,021  (255,293

Repurchases of common stock

   (45,218  —      (60,601   (42,913  (45,218  0  

Purchase of noncontrolling interest

   (3,001  —      —       0    (3,001  0  

Other

   (10,267  (441  64     (8,122  (10,267  (441
            

 

  

 

  

 

 

NET CASH PROVIDED (USED)BY FINANCING ACTIVITIES

   (45,610  251,612    (58,302   194,589    (45,610  251,612  
            

 

  

 

  

 

 

Effect of foreign currency rate changes on cash and cash equivalents

   427    9,749    (24,387   (1,823  427    9,749  
            

 

  

 

  

 

 

Increase (decrease) in cash and cash equivalents

   (105,235  210,115    162,339     29,773    (105,235  210,115  

Cash and cash equivalents at beginning of year

   850,494    640,379    478,040     745,259    850,494    640,379  
            

 

  

 

  

 

 

CASHAND CASH EQUIVALENTSAT ENDOF YEAR

  $745,259   $850,494   $640,379    $775,032   $745,259   $850,494  
            

 

  

 

  

 

 

See accompanying notes to consolidated financial statements.

 

|  39


Markel Corporation & 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 and programs and operates in three segments of the specialty insurance marketplace: the Excess and Surplus Lines, the Specialty Admitted and the London markets.products. Markel Corporation also owns interests in various industrial and service businesses that operate outside of the specialty insurance marketplace.

a) Basis of Presentation.The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include the accounts of Markel Corporation and all subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated in consolidation. The Company consolidates the results of its non-insurance subsidiaries on a one-month lag. Certain prior year amounts have been reclassified to conform to the current presentation.

b) Use of Estimates.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. Management periodically reviews its estimates and assumptions. These reviews include evaluating the adequacy of reserves for unpaid losses and loss adjustment expenses, litigation contingencies, the reinsurance allowance for doubtful accounts and income tax liabilities, as well as analyzing the recoverability of deferred tax assets, assessing goodwill and intangible assets for impairment and evaluating the investment portfolio for other-than-temporary declines in estimated fair value. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements.

c) Investments.Available-for-sale investments are recorded at estimated fair value. Unrealized gains and losses on investments, net of deferred income taxes, are included in accumulated other comprehensive income in shareholders’ equity. 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 deemed other-than-temporary.

Premiums and discounts are amortized or accreted over the lives of the related fixed maturities as an adjustment to the yield using the effective interest method. Dividend and interest income are recognized when earned. Realized investment gains or losses are included in earnings. Realized gains or losses from sales of investments are derived using the first-in, first-out method.

d) Cash and Cash Equivalents.The Company considers all investments with original maturities of 90 days or less to be cash equivalents. The carrying value of the Company’s cash and cash equivalents approximates fair value.

e) Reinsurance Recoverables.Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business. Allowances are established for amounts deemed uncollectible and reinsurance recoverables are recorded net of these allowances. The Company evaluates the financial condition of its reinsurers and monitors concentration risk to minimize its exposure to significant losses from individual reinsurers.

40  |


1. Summary of Significant Accounting Policies (continued)

f) Deferred Policy Acquisition Costs.Costs directly related to the acquisition of insurance premiums, such as commissions to agents and brokers, are deferred and amortized over the related policy period, generally one year. Commissions received related to reinsurance premiums ceded are netted against broker commissions and other acquisition costs in determining acquisition costs eligible for deferral. To the extent that future policy revenues on existing policies are not adequate to cover related costs and expenses, deferred policy acquisition costs are charged to earnings. The Company does not consider anticipated investment income in determining whether a premium deficiency exists.

40  |


1. Summary of Significant Accounting Policies (continued)

g) Goodwill and Intangible Assets.Goodwill and indefinite-lived intangible assets are tested for impairment at least annually. The Company completes itsan annual test during the fourth quarter of each year based upon the results of operations through September 30. Intangible assets with finite lives are amortized using the straight-line method over their estimated useful lives, generally threefour to 25 years, and are reviewed for impairment when events or circumstances indicate that their carrying value may not be recoverable.

h) Property and Equipment.Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment are calculated using the straight-line method over the estimated useful lives (generally, the life of the lease for leasehold improvements, 20 to 40 years for buildings, eight to 20 years for land improvements, three to 15 years for furniture and equipment and three to 25 years for other property and equipment).

i) Income Taxes.The Company records deferred income taxes to reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets are reduced by a valuation allowance when management believes it is more likely than not that some, or all, of the deferred tax assets will not be realized. The Company recognizes the tax benefit from an uncertain tax position taken or expected to be taken in income tax returns only if it is more likely than not that the tax position will be sustained upon examination by tax authorities, based on the technical merits of the position. Tax positions that meet the more likely than not threshold are then measured using a probability weighted approach, whereby the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement is recognized. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense (benefit).

j) Unpaid Losses and Loss Adjustment Expenses.Unpaid losses and loss adjustment expenses are based on evaluations of reported claims and estimates for losses and loss adjustment expenses incurred but not reported. Estimates for losses and loss adjustment expenses incurred but not reported are based on reserve development studies, among other things. The Company does not discount reserves for losses and loss adjustment expenses to reflect estimated present value. The reserves recorded are estimates, and the ultimate liability may be greater than or less than the estimates.

|  41


Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Summary of Significant Accounting Policies (continued)

k) Revenue Recognition.Insurance premiums are earned on a pro rata basis over the policy period, generally one year. The cost of reinsurance is initially recorded as prepaid reinsurance premiums and is amortized over the reinsurance contract period in proportion to the amount of insurance protection provided. Premiums ceded are netted against premiums written. The Company uses the periodic method to account for assumed reinsurance from foreign reinsurers. The Company’s foreign reinsurers provide sufficient information to record foreign assumed business in the same manner as the Company records assumed business from United States reinsurers. Other revenues primarily consist of sales of products manufactured byrelate to the Company’s non-insurance operations. Revenueoperations and consist of revenues from the sale of manufactured products and service revenues. Revenues from manufactured products isare generally recognized at the time title transfers to the customer, which occurs at the point of shipment or delivery to the customer, depending on the terms of the sales arrangement. Revenues from services are generally recognized as the services are performed. Services provided pursuant to a contract are recognized either over the contract period or upon completion of the elements specified in the contract, depending on the terms of the contract.

l) Stock-based Compensation.Stock-based compensation expense is recognized as part of underwriting, acquisition and insurance expenses over the requisite service period. Stock-based compensation expense, net of taxes, was $4.0 million in 2011, $2.1 million in 2010 and $1.8 million in 2009 and $1.3 million in 2008.2009.

|  41


Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Summary of Significant Accounting Policies (continued)

m) Foreign Currency Translation.The functional currencies of the Company’s foreign operations are the currencies in which the majority of their business is transacted. Assets and liabilities of foreign operations are translated into the United States Dollar using the exchange rates in effect at the balance sheet date. Revenues and expenses of foreign operations are translated using the average exchange rate for the period. Gains or losses from translating the financial statements of foreign operations are included, net of taxes, in shareholders’ equity as a component of accumulated other comprehensive income. Gains and losses arising from transactions denominated in a foreign currency, other than a functional currency, are included in net income (loss).income.

The Company manages its exposure to foreign currency risk primarily by matching assets and liabilities denominated in the same currency. To the extent that assets and liabilities in foreign currencies are not matched, the Company is exposed to foreign currency risk. For functional currencies, the related exchange rate fluctuations are reflected in other comprehensive income (loss).income. The cumulative foreign currency translation adjustment, net of taxes, was a loss of $2.6 million at December 31, 2011 and a gain of $1.5 million at December 31, 2010.

n) Derivative Financial Instruments.Derivative instruments, including derivative instruments resulting from hedging activities, are measured at fair value and recognized as either assets or liabilities on the consolidated balance sheets. The changes in fair value of derivatives are recognized in earnings unless the derivative is designated as a hedge and qualifies for hedge accounting.

The Company’s foreign currency forward contracts are generally designated and qualified as hedges of a net investment in a foreign operation. The effective portion of the change in fair value resulting from these hedges is reported in currency translation adjustments as part of other comprehensive income (loss).income. The ineffective portion of the change in fair value is recognized in earnings.

o) Comprehensive Income (Loss).Income.Comprehensive income (loss) represents all changes in equity that result from recognized transactions and other economic events during the period. Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under U.S. GAAP are included in comprehensive income (loss) but excluded from net income, (loss), such as unrealized gains or losses on investments, foreign currency translation adjustments and changes in net actuarial pension loss.

42  |


1. Summary of Significant Accounting Policies (continued)

p) Net Income (Loss) Per Share.Basic net income (loss) per share is computed by dividing net income (loss) to shareholders by the weighted average number of common shares outstanding during the year. Diluted net income (loss) per share is computed by dividing net income (loss) to shareholders by the weighted average number of common shares and dilutive potential common shares outstanding during the year.

q) Recent Accounting Pronouncements.Effective in the first quarter ofIn October 2010, the Company adopted Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-06,Improving Disclosures about Fair Value Measurements,which expands disclosure requirements related to fair value measurements. ASU No. 2010-06 requires disclosure of the amounts of and reasons for significant transfers into and out of Level 1 and Level 2 fair value measurements. This guidance also requires gross rather than net disclosures about purchases, sales, issuances and settlements relating to Level 3 fair value measurements. Disclosures about the valuation techniques and inputs used to measure fair value for Level 2 and Level 3 fair value measurements are required as well. Since ASU No. 2010-06 addresses financial statement disclosures only, the adoption of this guidance did not have an impact on the Company’s financial position, results of operations or cash flows. The Company has included the disclosures required by ASU No. 2010-06 in note 12.

42  |


1. Summary of Significant Accounting Policies (continued)

In June 2009, the FASB issued Statement of Financial Accounting Standards (Statement) No. 167,Amendments to FASB Interpretation No. 46(R). In December 2009, the FASB issued ASU No. 2009-17,Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,to amend their codification for Statement No. 167. This guidance removes the scope exception for qualifying special-purpose entities, includes new criteria for determining the primary beneficiary of a variable interest entity and increases the frequency of required assessments to determine whether an entity is the primary beneficiary of a variable interest entity. In January 2010, the FASB decided to indefinitely defer the consolidation requirements of ASU No. 2009-17 for interests in certain investment entities. The FASB also decided to revise the provisions of ASU No. 2009-17 for determining whether service-provider or decision-maker fee arrangements represent a variable interest. Both the provisions of ASU No. 2009-17 as issued and the subsequent revisions to this guidance became effective for the Company on January 1, 2010. The adoption of this guidance did not have an impact on the Company’s financial position, results of operations or cash flows.

Effective July 1, 2010, the Company adopted ASU No. 2010-11,Scope Exception Related to Embedded Credit Derivatives,which clarifies that the only type of embedded credit derivatives that are exempt from bifurcation requirements are those that relate to the subordination of one financial instrument to another. This guidance requires analysis of embedded credit derivative features other than subordination to determine if they require bifurcation and separate accounting treatment. The adoption of ASU No. 2010-11 did not have an impact on the Company’s financial position, results of operations or cash flows.

In October 2010, the FASB issued ASU No. 2010-26,Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts,to address diversity in practice within the insurance industry regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. This guidance modifies the definition of the types of costs incurred by insurance companies that can be capitalized in the acquisition of new and renewal contracts. This guidance specifies that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be capitalized. ASU No. 2010-26 becomes effective for the Company beginning January 1, 2012, and would allow, but not require, retrospective application.2012. The Company is currently evaluatingintends to adopt ASU No. 2010-26 prospectively and expects to defer fewer costs under this new guidance. The Company expects the adoption of this guidance to increase its underwriting, acquisition and insurance expenses for 2012 by approximately $40 million to $45 million, which will increase the expense ratio by approximately two points.

In September 2011, the FASB issued ASU No. 2011-08,Testing Goodwill for Impairment.ASU No. 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the potentialfair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Accounting Standards Codification (ASC) 350,Intangibles – Goodwill and Other.The Company adopted ASU No. 2011-08 for its 2011 annual goodwill impairment test. The adoption of ASU No. 2011-08 did not have an impact that adopting this standard will have on its consolidatedthe Company’s financial statements.position, results of operations or cash flows.

 

|  43


Markel Corporation & Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

2. Investments

a)The following tables summarize the Company’s available-for-sale investments.

 

   December 31, 2010 

(dollars in thousands)

  Amortized
Cost
   Gross
Unrealized
Holding
Gains
   Gross
Unrealized
Holding
Losses
  Unrealized Other-
Than-Temporary
Impairment Losses
  Estimated
Fair

Value
 

Fixed maturities:

        

U.S. Treasury securities and obligations of U.S. government agencies

  $300,555    $20,832    $(49 $—     $321,338  

Obligations of states, municipalities and political subdivisions

   2,767,169     61,620     (29,450  —      2,799,339  

Foreign governments

   550,755     24,662     (2,599  —      572,818  

Residential mortgage-backed securities

   409,415     29,664     (1,738  (11,778  425,563  

Asset-backed securities

   21,704     1,052     —      —      22,756  

Public utilities

   95,770     6,674     —      —      102,444  

Convertible bonds

   16,725     —       —      —      16,725  

All other corporate bonds

   1,094,887     83,752     (603  (7,793  1,170,243  
                       

Total fixed maturities

   5,256,980     228,256     (34,439  (19,571  5,431,226  

Equity securities:

        

Insurance companies, banks and trusts

   388,848     323,634     (1,496  —      710,986  

Industrial, consumer and all other

   607,240     404,444     (699  —      1,010,985  
                       

Total equity securities

   996,088     728,078     (2,195  —      1,721,971  

Short-term investments

   325,336     4     —      —      325,340  
                       

INVESTMENTS, AVAILABLE-FOR-SALE

  $6,578,404    $956,338    $(36,634 $(19,571 $7,478,537  
                       

  December 31, 2009   December 31, 2011 

(dollars in thousands)

  Amortized
Cost
   Gross
Unrealized
Holding
Gains
   Gross
Unrealized
Holding
Losses
 Unrealized Other-
Than-Temporary
Impairment Losses
 Estimated
Fair

Value
   Amortized
Cost
   Gross
Unrealized
Holding
Gains
   Gross
Unrealized
Holding
Losses
 Unrealized Other-
Than-Temporary
Impairment Losses
 Estimated
Fair

Value
 

Fixed maturities:

                

U.S. Treasury securities and obligations of U.S. government agencies

  $358,360    $18,053    $(91 $—     $376,322  

U.S. Treasury securities and obligations of U.S.government agencies

  $299,413    $22,789    $(9 $0   $322,193  

Obligations of states, municipalities and political subdivisions

   2,729,838     201,477     (794  0    2,930,521  

Foreign governments

   572,253     45,629     (1,068  0    616,814  

Residential mortgage-backed securities

   366,859     24,601     (18  (2,258  389,184  

Asset-backed securities

   16,096     731     (9  0    16,818  

Public utilities

   63,965     5,462     0    0    69,427  

All other corporate bonds

   1,124,528     78,053     (2,750  (6,614  1,193,217  
  

 

   

 

   

 

  

 

  

 

 

Total fixed maturities

   5,172,952     378,742     (4,648  (8,872  5,538,174  

Equity securities:

        

Insurance companies, banks and trusts

   389,421     296,648     (1,366  0    684,703  

Industrial, consumer and all other

   766,873     425,131     (2,780  0    1,189,224  
  

 

   

 

   

 

  

 

  

 

 

Total equity securities

   1,156,294     721,779     (4,146  0    1,873,927  

Short-term investments

   541,014     4     (4  0    541,014  
  

 

   

 

   

 

  

 

  

 

 

INVESTMENTS, AVAILABLE-FOR-SALE

  $6,870,260    $1,100,525    $(8,798 $(8,872 $7,953,115  
  

 

   

 

   

 

  

 

  

 

 
  December 31, 2010 

(dollars in thousands)

  Amortized
Cost
   Gross
Unrealized
Holding
Gains
   Gross
Unrealized
Holding
Losses
 Unrealized Other-
Than-Temporary
Impairment Losses
 Estimated
Fair

Value
 

Fixed maturities:

        

U.S. Treasury securities and obligations of U.S.government agencies

  $300,555    $20,832    $(49 $0   $321,338  

Obligations of states, municipalities and political subdivisions

   2,241,457     65,840     (16,763  —      2,290,534     2,767,169     61,620     (29,450  0    2,799,339  

Foreign governments

   410,435     14,912     (2,335  —      423,012     454,615     22,512     (1,397  0    475,730  

Residential mortgage-backed securities

   419,707     24,223     (1,534  (12,342  430,054     409,415     29,664     (1,738  (11,778  425,563  

Asset-backed securities

   27,052     244     (1,001  —      26,295     21,704     1,052     0    0    22,756  

Public utilities

   136,302     7,317     —      —      143,619     95,770     6,674     0    0    102,444  

Convertible bonds

   30,750     —       —      —      30,750     16,725     0     0    0    16,725  

All other corporate bonds

   1,337,682     70,269     (5,977  (10,424  1,391,550     1,191,027     85,902     (1,805  (7,793  1,267,331  
                    

 

   

 

   

 

  

 

  

 

 

Total fixed maturities

   4,961,745     200,858     (27,701  (22,766  5,112,136     5,256,980     228,256     (34,439  (19,571  5,431,226  

Equity securities:

                

Insurance companies, banks and trusts

   338,369     243,669     (3,521  —      578,517     388,848     323,634     (1,496  0    710,986  

Industrial, consumer and all other

   505,472     266,165     (325  —      771,312     607,240     404,444     (699  0    1,010,985  
                    

 

   

 

   

 

  

 

  

 

 

Total equity securities

   843,841     509,834     (3,846  —      1,349,829     996,088     728,078     (2,195  0    1,721,971  

Short-term investments

   492,563     20     (2  —      492,581     325,336     4     0    0    325,340  
                    

 

   

 

   

 

  

 

  

 

 

INVESTMENTS, AVAILABLE-FOR-SALE

  $6,298,149    $710,712    $(31,549 $(22,766 $6,954,546    $6,578,404    $956,338    $(36,634 $(19,571 $7,478,537  
                    

 

   

 

   

 

  

 

  

 

 

 

44  |


 

 

 

2. Investments (continued)

 

b)The following tables summarize gross unrealized investment losses by the length of time that securities have continuously been in an unrealized loss position.

 

 December 31, 2010   December 31, 2011 
 Less than 12 months 12 months or longer Total   Less than 12 months 12 months or longer Total 

(dollars in thousands)

 Estimated
Fair

Value
 Gross Unrealized
Holding and Other-
Than-Temporary
Impairment

Losses
 Estimated
Fair
Value
 Gross Unrealized
Holding and Other-
Than-Temporary
Impairment

Losses
 Estimated
Fair

Value
 Gross Unrealized
Holding and Other-
Than-Temporary
Impairment

Losses
   Estimated
Fair

Value
   Gross Unrealized
Holding and Other-
Than-Temporary
Impairment

Losses
 Estimated
Fair
Value
   Gross Unrealized
Holding and Other-
Than-Temporary
Impairment

Losses
 Estimated
Fair

Value
   Gross Unrealized
Holding and Other-
Than-Temporary
Impairment

Losses
 

Fixed maturities:

                

U.S. Treasury securities and obligations of U.S. government agencies

 $23,574   $(49 $—     $—     $23,574   $(49  $32,384    $(9) $   0    $0   $32,384    $(9

Obligations of states, municipalities and political subdivisions

  942,935    (27,463  22,468    (1,987  965,403    (29,450   1,016     (2  17,261     (792  18,277     (794

Foreign governments

  119,211    (2,440  4,955    (159  124,166    (2,599   40,340     (1,068  0     0    40,340     (1,068

Residential mortgage-backed securities

  20,972    (10,822  10,534    (2,694  31,506    (13,516   489     (2,263  2,045     (13  2,534     (2,276

Asset-backed securities

   0     0    32     (9  32     (9

All other corporate bonds

  15,294    (7,921  15,966    (475  31,260    (8,396   74,812     (7,829  7,923     (1,535  82,735     (9,364
                    

 

   

 

  

 

   

 

  

 

   

 

 

Total fixed maturities

  1,121,986    (48,695  53,923    (5,315  1,175,909    (54,010   149,041     (11,171  27,261     (2,349  176,302     (13,520

Equity securities:

                

Insurance companies, banks and trusts

  22,750    (1,496  —      —      22,750    (1,496   26,514     (1,366  0     0    26,514     (1,366

Industrial, consumer and all other

  16,712    (699  —      —      16,712    (699   70,555     (2,774  18,525     (6  89,080     (2,780
                    

 

   

 

  

 

   

 

  

 

   

 

 

Total equity securities

  39,462    (2,195  —      —      39,462    (2,195   97,069     (4,140  18,525     (6  115,594     (4,146

Short-term investments

   295,991     (4  0     0    295,991     (4
                    

 

   

 

  

 

   

 

  

 

   

 

 

TOTAL

 $1,161,448   $(50,890 $53,923   $(5,315 $1,215,371   $(56,205  $542,101    $(15,315 $45,786    $(2,355 $587,887    $(17,670
                    

 

   

 

  

 

   

 

  

 

   

 

 

At December 31, 2010,2011, the Company held 36376 securities with a total estimated fair value of $1.2 billion$587.9 million and gross unrealized losses of $56.2$17.7 million. Of these 36376 securities, 1917 securities havehad been in a continuous unrealized loss position for greater than one year and had a total estimated fair value of $53.9$45.8 million and gross unrealized losses of $5.3$2.4 million. All 19Of these securities, 16 securities were fixed maturities.maturities and one was an equity security. The Company does not intend to sell or believe it will be required to sell these fixed maturities before recovery of their amortized cost.

 

|  45


Markel Corporation & Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

2. Investments (continued)

 

 December 31, 2009   December 31, 2010 
 Less than 12 months 12 months or longer Total   Less than 12 months 12 months or longer Total 

(dollars in thousands)

 Estimated
Fair

Value
 Gross Unrealized
Holding and Other-
Than-Temporary
Impairment

Losses
 Estimated
Fair

Value
 Gross Unrealized
Holding and Other-
Than-Temporary

Impairment
Losses
 Estimated
Fair

Value
 Gross Unrealized
Holding and Other-
Than-Temporary

Impairment
Losses
   Estimated
Fair

Value
   Gross Unrealized
Holding and Other-
Than-Temporary
Impairment

Losses
 Estimated
Fair
Value
   Gross Unrealized
Holding and Other-
Than-Temporary
Impairment

Losses
 Estimated
Fair

Value
   Gross Unrealized
Holding and Other-
Than-Temporary
Impairment

Losses
 

Fixed maturities:

                

U.S. Treasury securities and obligations of U.S. government agencies

 $23,798   $(91 $—     $—     $23,798   $(91  $23,574    $(49) $   0    $0   $23,574    $(49

Obligations of states, municipalities and political subdivisions

  373,382    (9,946  153,500    (6,817  526,882    (16,763   942,935     (27,463  22,468     (1,987  965,403     (29,450

Foreign governments

  92,166    (2,335  —      —      92,166    (2,335   91,252     (1,238  4,955     (159  96,207     (1,397

Residential mortgage-backed securities

  33,223    (12,748  11,162    (1,128  44,385    (13,876   20,972     (10,822  10,534     (2,694  31,506     (13,516

Asset-backed securities

  —      —      10,607    (1,001  10,607   ��(1,001

All other corporate bonds

  58,482    (11,332  138,127    (5,069  196,609    (16,401   43,253     (9,123  15,966     (475  59,219     (9,598
                    

 

   

 

  

 

   

 

  

 

   

 

 

Total fixed maturities

  581,051    (36,452  313,396    (14,015  894,447    (50,467   1,121,986     (48,695  53,923     (5,315  1,175,909     (54,010

Equity securities:

                

Insurance companies, banks and trusts

  45,917    (3,521  —      —      45,917    (3,521   22,750     (1,496  0     0    22,750     (1,496

Industrial, consumer and all other

  10,943    (325  —      —      10,943    (325   16,712     (699  0     0    16,712     (699
                    

 

   

 

  

 

   

 

  

 

   

 

 

Total equity securities

  56,860    (3,846  —      —      56,860    (3,846   39,462     (2,195  0     0    39,462     (2,195

Short-term investments

  4,298    (2  —      —      4,298    (2
                    

 

   

 

  

 

   

 

  

 

   

 

 

TOTAL

 $642,209   $(40,300 $313,396   $(14,015 $955,605   $(54,315  $1,161,448    $(50,890 $53,923    $(5,315 $1,215,371    $(56,205
                    

 

   

 

  

 

   

 

  

 

   

 

 

At December 31, 2009,2010, the Company held 190363 securities with a total estimated fair value of $955.6 million$1.2 billion and gross unrealized losses of $54.3$56.2 million. Of these 190363 securities, 7819 securities had been in a continuous unrealized loss position for greater than one year and had a total estimated fair value of $313.4$53.9 million and gross unrealized losses of $14.0$5.3 million. All 7819 securities were fixed maturities.

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 deemed other-than-temporary. All securities with unrealized losses are reviewed. The Company considers many factors in completing its quarterly review of securities with unrealized losses for other-than-temporary impairment, including the length of time and the extent to which fair value has been below cost and the financial condition and near-term prospects of the issuer. For equity securities, the ability and intent to hold the security for a period of time sufficient to allow for anticipated recovery is considered. For fixed maturities, the Company considers whether it intends to sell the security or if it is more likely than not that it will be required to sell the security before recovery, the implied yield-to-maturity, the credit quality of the issuer and the ability to recover all amounts outstanding when contractually due.

46  |


2. Investments (continued)

For equity securities, a decline in fair value that is considered to be other-than-temporary is recognized in net income (loss) based on the fair value of the security at the time of assessment, resulting in a new cost basis

46  |


2. Investments (continued)

for the security. For fixed maturities where the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost, a decline in fair value is considered to be other-than-temporary and is recognized in net income (loss) based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security. If the decline in fair value of a fixed maturity below its amortized cost is considered to be other-than-temporary based upon other considerations, 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-related portion of the other-than-temporary impairment, which is recognized in net income, (loss), resulting in a new cost basis for the security. Any remaining decline in fair value represents the non-credit portion of the other-than-temporary impairment, which is recognized in other comprehensive income (loss).income. The discount rate used to calculate the estimated present value of the cash flows expected to be collected is the effective interest rate implicit for the security at the date of purchase.

When assessing whether it intends to sell a fixed maturity or if it is likely to be required to sell a fixed maturity before recovery of its amortized cost, the Company evaluates facts and circumstances including, but not limited to, decisions to reposition the investment portfolio, potential sales of investments to meet cash flow needs and potential sales of investments to capitalize on favorable pricing. Additional information on the methodology and significant inputs, by security type, that the Company used to determine the amount of credit loss recognized on fixed maturities with declines in fair value below amortized cost that were considered to be other-than-temporary is provided below.

Residential mortgage-backed securities.For mortgage-backed securities, credit impairment is assessed by estimating future cash flows from the underlying mortgage loans and interest payments. The cash flow estimate incorporates actual cash flows from the mortgage-backed securities through the current period and then projects the remaining cash flows using a number of assumptions, including prepayment rates, default rates, recovery rates on foreclosed properties and loss severity assumptions. Management develops specific assumptions using market data and internal estimates, as well as estimates from rating agencies and other third party sources. Default rates are estimated by considering current underlying mortgage loan performance and expectations of future performance. Estimates of future cash flows are discounted to present value. If the present value of expected cash flows is less than the amortized cost, the Company recognizes the estimated credit loss in net income (loss).income.

Corporate bonds.For corporate bonds, credit impairment is assessed by evaluating the underlying issuer. As part of this assessment, the Company analyzes various factors, including the following:

 

fundamentals of the issuer, including current and projected earnings, current liquidity position and ability to raise capital;

 

fundamentals of the industry in which the issuer operates;

 

expectations of defaults and recovery rates;

 

changes in ratings by rating agencies;

 

other relevant market considerations; and

 

receipt of interest payments

Default probabilities and recovery rates from rating agencies are key factors used in calculating the credit loss. Additional research of the industry and issuer is completed to determine if there is any current information that may affect the fixed maturity or its issuer in a negative manner and require an adjustment to the cash flow assumptions.

 

|  47


Markel Corporation & Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

2. Investments (continued)

 

c)The amortized cost and estimated fair value of fixed maturities at December 31, 20102011 are shown below by contractual maturity and investment type.maturity.

 

(dollars in thousands)

  Amortized
Cost
   Estimated
Fair Value
 

U.S. Treasury securities and obligations of U.S. government agencies:

    

Due in one year or less

  $39,857    $40,540  

Due after one year through five years

   167,837     181,006  

Due after five years through ten years

   89,465     96,319  

Due after ten years

   3,396     3,473  
          

TOTAL

   300,555     321,338  
          

Obligations of states, municipalities and political subdivisions:

    

Due in one year or less

   6,943     7,011  

Due after one year through five years

   104,991     106,993  

Due after five years through ten years

   1,005,067     1,034,138  

Due after ten years

   1,650,168     1,651,197  
          

TOTAL

   2,767,169     2,799,339  
          

Foreign governments:

    

Due in one year or less

   9,070     9,103  

Due after one year through five years

   203,929     212,333  

Due after five years through ten years

   301,776     316,951  

Due after ten years

   35,980     34,431  
          

TOTAL

   550,755     572,818  
          

Residential mortgage-backed securities:

    

Due in one year or less

   4,811     4,890  

Due after one year through five years

   7,236     7,571  

Due after five years through ten years

   30,641     31,488  

Due after ten years

   366,727     381,614  
          

TOTAL

   409,415     425,563  
          

Asset-backed securities:

    

Due in one year or less

   —       —    

Due after one year through five years

   10,950     11,536  

Due after five years through ten years

   1,000     1,117  

Due after ten years

   9,754     10,103  
          

TOTAL

   21,704     22,756  
          

Public utilities:

    

Due in one year or less

   25,244     25,783  

Due after one year through five years

   53,649     58,023  

Due after five years through ten years

   16,877     18,638  

Due after ten years

   —       —    
          

TOTAL

   95,770     102,444  
          

Convertible bonds and all other corporate bonds:

    

Due in one year or less

   101,538     106,388  

Due after one year through five years

   695,381     739,661  

Due after five years through ten years

   310,329     336,521  

Due after ten years

   4,364     4,398  
          

TOTAL

   1,111,612     1,186,968  
          

Total fixed maturities:

    

Due in one year or less

   187,463     193,715  

Due after one year through five years

   1,243,973     1,317,123  

Due after five years through ten years

   1,755,155     1,835,172  

Due after ten years

   2,070,389     2,085,216  
          

TOTAL FIXED MATURITIES

  $5,256,980    $5,431,226  
          

48  |


2. Investments (continued)

(dollars in thousands)

  Amortized
Cost
   Estimated
Fair Value
 

Due in one year or less

  $286,486    $290,942  

Due after one year through five years

   1,184,272     1,259,314  

Due after five years through ten years

   1,763,033     1,906,823  

Due after ten years

   1,556,206     1,675,093  
  

 

 

   

 

 

 
   4,789,997     5,132,172  
  

 

 

   

 

 

 

Residential mortgage-backed securities

   366,859     389,184  

Asset-backed securities

   16,096     16,818  
  

 

 

   

 

 

 

TOTAL FIXED MATURITIES

  $5,172,952    $5,538,174  
  

 

 

   

 

 

 

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties, and the lenders may have the right to put the securities back to the borrower. Based on expected maturities, the estimated average duration of the fixed maturities was 4.34.1 years.

d)The following table presents the components of net investment income.

 

  Years Ended December 31,   Years Ended December 31, 

(dollars in thousands)

  2010 2009 2008   2011 2010 2009 

Interest:

        

Municipal bonds (tax-exempt)

  $92,168   $83,695   $80,975    $94,457   $92,168   $83,695  

Municipal bonds (taxable)

   23,277    18,679    1,816  

Taxable bonds

   150,843    150,169    170,400     117,242    132,164    148,353  

Short-term investments, including overnight deposits

   2,850    5,597    18,979     2,484    2,850    5,597  

Dividends on equity securities

   33,128    24,883    35,048     35,996    33,128    24,883  

Income (loss) from investments in affiliates

   —      (379  1,136  

Change in fair value of credit default swap

   1,740    2,996    (13,698   (4,103  1,740    2,996  

Other

   1,337    (151  (1,903   2,135    1,337    (530
            

 

  

 

  

 

 
   282,066    266,810    290,937     271,488    282,066    266,810  

Investment expenses

   (9,536  (7,001  (8,789   (7,812  (9,536  (7,001
            

 

  

 

  

 

 

NET INVESTMENT INCOME

  $272,530   $259,809   $282,148    $263,676   $272,530   $259,809  
            

 

  

 

  

 

 

48  |


2. Investments (continued)

e)The following table summarizes the activity for credit losses recognized in net income on fixed maturities where other-than-temporary impairment was identified and a portion of the other-than-temporary impairment was included in other comprehensive income.

 

  Years Ended
December 31,
   Years Ended December 31, 

(dollars in thousands)

  2010 2009   2011 2010 2009 

Cumulative credit loss, beginning of year

  $9,141   $—      $10,307   $9,141   $0  

Adoption of FASB ASC 320-10

   —      237     0    0    237  

Additions:

       

Other-than-temporary impairment losses not previously recognized

   —      7,019     875    0    7,019  

Increases related to other-than-temporary impairment losses previously recognized

   1,185    2,062     10,203    1,185    2,062  
         

 

  

 

  

 

 

Total additions

   1,185    9,318     11,078    1,185    9,318  

Reductions:

       

Sales of fixed maturities on which credit losses were recognized

   (19  (177   (15  (19  (177
         

 

  

 

  

 

 

Cumulative credit loss, end of year

  $10,307   $9,141    $21,370   $10,307   $9,141  
         

 

  

 

  

 

 

f)The following table presents net realized investment gains (losses) and the change in net unrealized gains on investments.

   Years Ended December 31, 

(dollars in thousands)

  2011  2010  2009 

Realized gains:

    

Sales of fixed maturities

  $17,035   $20,848   $5,752  

Sales of equity securities

   36,863    35,150    7,605  

Other

   2,626    1,966    5,781  
  

 

 

  

 

 

  

 

 

 

Total realized gains

   56,524    57,964    19,138  
  

 

 

  

 

 

  

 

 

 

Realized losses:

    

Sales of fixed maturities

   (410  (1,470  (25,230

Sales of equity securities

   (61  0    (58

Other-than-temporary impairments

   (20,196  (12,207  (89,950

Other

   0    (7,925  0  
  

 

 

  

 

 

  

 

 

 

Total realized losses

   (20,667  (21,602  (115,238
  

 

 

  

 

 

  

 

 

 

NET REALIZED INVESTMENT GAINS (LOSSES)

  $35,857   $36,362   $(96,100
  

 

 

  

 

 

  

 

 

 

Change in net unrealized gains on investments:

    

Fixed maturities

  $190,976   $23,855   $280,210  

Equity securities

   (8,250  219,895    287,407  

Short-term investments

   (4  (14  (4
  

 

 

  

 

 

  

 

 

 

NET INCREASE

  $182,722   $243,736   $567,613  
  

 

 

  

 

 

  

 

 

 

 

|  49


Markel Corporation & Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

2. Investments (continued)

 

f)The following table presents net realized investment gains (losses) and the change in net unrealized gains on investments.

   Years Ended December 31, 

(dollars in thousands)

  2010  2009  2008 

Realized gains:

    

Sales of fixed maturities

  $20,848   $5,752   $9,647  

Sales of equity securities

   35,150    7,605    64,709  

Other

   1,966    5,781    1,267  
             

Total realized gains

   57,964    19,138    75,623  
             

Realized losses:

    

Sales of fixed maturities

   (1,470  (25,230  (102,925

Sales of equity securities

   —      (58  (39,827

Other-than-temporary impairments

   (12,207  (89,950  (339,164

Other

   (7,925  —      (1,301
             

Total realized losses

   (21,602  (115,238  (483,217
             

NET REALIZED INVESTMENT GAINS (LOSSES)

  $36,362   $(96,100 $(407,594
             

Change in net unrealized gains on investments:

    

Fixed maturities

  $23,855   $280,210   $(135,455

Equity securities

   219,895    287,407    (372,215

Short-term investments

   (14  (4  22  
             

NET INCREASE (DECREASE)

  $243,736   $567,613   $(507,648
             

Net realized investment losses for the year ended December 31, 2010 included $12.2 million of write downs for other-than-temporary declines in the estimated fair value of investments. The write downs for other-than-temporary declines in the estimated fair value of investments for 2010 related to eight equity securities, four fixed maturities and four real estate investments. Net realized investment losses for the year ended December 31, 2009 included $90.0 million of write downs for other-than-temporary declines in the estimated fair value of investments. Net realized investment gains for the year ended December 31, 2008 included $339.2 million of write downs for other-than-temporary declines in the estimated fair value of investments.

50  |


2. Investments (continued)

g)The following table presents other-than-temporary impairment losses recognized in net income (loss) and included in net realized investment gains (losses) by investment type.

 

  Years Ended December 31,   Years Ended December 31, 

(dollars in thousands)

  2010 2009 2008   2011 2010 2009 

Fixed maturities:

        

Corporate bonds

  $—     $(7,310 $(46,452  $0   $0   $(7,310

Residential mortgage-backed securities

   (1,185  (3,541  (7,691   (11,078  (1,185  (3,541

Other

   —      (1,487  —       0    0    (1,487
            

 

  

 

  

 

 

Total fixed maturities

   (1,185  (12,338  (54,143   (11,078  (1,185  (12,338
            

 

  

 

  

 

 

Equity securities:

        

Insurance companies, banks and trusts

   (2,872  (15,978  (99,226   (4,251  (2,872  (15,978

Industrial, consumer and all other

   (965  (38,548  (176,795   (4,867  (965  (38,548
            

 

  

 

  

 

 

Total equity securities

   (3,837  (54,526  (276,021   (9,118  (3,837  (54,526
            

 

  

 

  

 

 

Nonredeemable preferred stocks

   —      —      (9,000

Investments in affiliates

   —      (23,086  —       0    0    (23,086

Other

   (7,185  —      —       0    (7,185  0  
            

 

  

 

  

 

 

TOTAL

  $(12,207 $(89,950 $(339,164  $(20,196 $(12,207 $(89,950
            

 

  

 

  

 

 

h)The merger of First Market Bank with Union Bankshares Corporation was completed in the first quarter of 2010 and formed Union First Market Bankshares Corporation (Union). As a result of this merger, the Company received 3.5 million shares of common stock in Union for the Company’s investment in First Market Bank. Prior to the merger, the Company’s investment in First Market Bank was included in investments in affiliates on the consolidated balance sheet. The Company’s investment in Union is included in equity securities on the consolidated balance sheet.

i)The Company had $1.6$1.8 billion and $1.5$1.6 billion of investments and cash and cash equivalents (invested assets) held in trust or on deposit for the benefit of policyholders, reinsurers or banks in the event of default by the Company on its obligations at December 31, 20102011 and 2009,2010, respectively. These invested assets and the related liabilities are included on the Company’s consolidated balance sheets. The following discussion provides additional detail regarding irrevocable undrawn letters of credit and investments held in trust or on deposit.

The Company’s United States insurance companies had invested assets with a carrying value of $43.3$43.0 million and $39.1$43.3 million on deposit with state regulatory authorities at December 31, 20102011 and 2009,2010, respectively.

Invested assets with a carrying value of $67.3$65.4 million and $3.0$67.3 million at December 31, 20102011 and 2009,2010, respectively, were held in trust for the benefit of cedents of the Company’s United States insurance companies.

Invested assets with a carrying value of $60.3$56.8 million and $58.4$60.3 million at December 31, 20102011 and 2009,2010, respectively, were held in trust for the benefit of United States cedents of Markel International Insurance Company Limited (MIICL), a wholly-owned subsidiary, and to facilitate MIICL’s accreditation as an alien reinsurer by certain states.

Invested assets with a carrying value of $33.7$25.0 million and $32.2$33.7 million at December 31, 20102011 and 2009,2010, respectively, were held in trust for the benefit of MIICL’s United States surplus lines policyholders.

|  51


Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. Investments (continued)

Banks have issued irrevocable undrawn letters of credit supporting the Company’s contingent liabilities related to certain reinsurance business written in the United States by MIICL. The Company had deposited invested assets with a carrying value of $25.3$24.3 million and $27.5$25.3 million at December 31, 20102011 and 2009,2010, respectively, as collateral against these letters of credit.

50  |


2. Investments (continued)

The Company had deposited $351.6$459.5 million and $333.8$352.2 million of invested assets with Lloyd’s to support its underwriting activities at December 31, 20102011 and 2009,2010, respectively. In addition, the Company had invested assets with a carrying value of $1.1 billion and $1.0 billion at December 31, 2011 and 2010, and 2009respectively, held in trust for the benefit of syndicate policyholders.

In accordance with the terms of its credit default swap agreement, the Company had $33.3$35.2 million and $33.1$34.3 million of invested assets on deposit at December 31, 20102011 and 2009,2010, respectively.

j)i)At December 31, 20102011 and December 31, 2009,2010, investments in U.S. Treasury securities and obligations of U.S. government agencies were the only investments in any one issuer that exceeded 10% of shareholders’ equity.

At December 31, 2010,2011, the Company’s ten largest equity holdings represented $941.9$955.5 million, or 55%51%, of the equity portfolio. Investments in the property and casualty insurance industry represented $413.4$397.3 million, or 24%21%, of the equity portfolio at December 31, 2010.2011. Investments in the property and casualty insurance industry included a $230.1$221.2 million investment in the common stock of Berkshire Hathaway Inc.

 

 

3. Receivables

The following table presents the components of receivables.

 

  December 31,   December 31, 

(dollars in thousands)

  2010 2009   2011 2010 

Amounts receivable from agents, brokers and insureds

  $257,028   $206,514    $283,248   $263,439  

Trade accounts receivable

   51,796    16,327  

Employee stock loans receivable (see note 10)

   13,694    15,821     13,142    13,694  

Loan participations

   14,410    27,326  

Other

   39,860    36,578     17,068    38,379  
         

 

  

 

 
   324,992    286,239     365,254    331,839  

Allowance for doubtful receivables

   (12,896  (6,360   (15,017  (13,332
         

 

  

 

 

RECEIVABLES

  $312,096   $279,879    $350,237   $318,507  
         

 

  

 

 

|  51


Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Deferred Policy Acquisition Costs

The following table presents the amounts of policy acquisition costs acquired, deferred and amortized.

 

   Years Ended December 31, 

(dollars in thousands)

  2010  2009  2008 

Balance, beginning of year

  $156,797   $183,755   $202,291  

Policy acquisition costs of acquired insurance companies

   18,076    —      —    

Policy acquisition costs deferred

   439,803    413,858    487,990  

Amortization of policy acquisition costs

   (425,893  (440,816  (506,526
             

DEFERRED POLICY ACQUISITION COSTS

  $188,783   $156,797   $183,755  
             

52  |


4. Deferred Policy Acquisition Costs (continued)

   Years Ended December 31, 

(dollars in thousands)

  2011  2010  2009 

Balance, beginning of year

  $188,783   $156,797   $183,755  

Policy acquisition costs of acquired insurance companies

   0    18,076    0  

Policy acquisition costs deferred

   485,345    439,803    413,858  

Amortization of policy acquisition costs

   (479,454  (425,893  (440,816
  

 

 

  

 

 

  

 

 

 

DEFERRED POLICY ACQUISITION COSTS

  $194,674   $188,783   $156,797  
  

 

 

  

 

 

  

 

 

 

The following table presents the components of underwriting, acquisition and insurance expenses.

 

  Years Ended December 31,   Years Ended December 31, 

(dollars in thousands)

  2010   2009   2008   2011   2010   2009 

Amortization of policy acquisition costs

  $425,893    $440,816    $506,526    $479,454    $425,893    $440,816  

Other operating expenses

   298,983     295,844     232,020     330,725     298,983     295,844  
              

 

   

 

   

 

 

UNDERWRITING, ACQUISITIONAND INSURANCE EXPENSES

  $724,876    $736,660    $738,546    $810,179    $724,876    $736,660  
              

 

   

 

   

 

 

5. Property and Equipment

The following table presents the components of property and equipment, which are included in other assets on the consolidated balance sheets.

 

  December 31,   December 31, 

(dollars in thousands)

  2010 2009   2011 2010 

Land

  $35,105   $28,453    $38,066   $35,105  

Buildings

   22,758    14,173     27,897    22,758  

Leasehold improvements

   45,512    38,607     50,195    45,512  

Land improvements

   29,477    24,711  

Furniture and equipment

   137,512    110,641     170,869    137,512  

Other

   41,288    13,510     65,790    16,577  
         

 

  

 

 
   282,175    205,384     382,294    282,175  

Accumulated depreciation and amortization

   (122,608  (105,145   (137,445  (122,608
         

 

  

 

 

PROPERTYAND EQUIPMENT

  $159,567   $100,239    $244,849   $159,567  
         

 

  

 

 

Depreciation and amortization expense of property and equipment was $24.2 million, $19.5 million $14.8 million and $12.3$14.8 million for the years ended December 31, 2011, 2010 2009 and 2008,2009, respectively.

The Company does not own any material properties. The Company leases substantially all of the facilities utilized by its insurance operations and certain furniture and equipment under operating leases. The Company’s non-insurance operations own certain of their facilities and lease others.

 

52  |


 

6. Goodwill and Intangible Assets

The following table presents the components of goodwill.

 

(dollars in thousands)

  Excess and
Surplus Lines
Segment
   Specialty
Admitted
Segment
   London
Insurance
Market
Segment
   Other(1)   Total   Excess and
Surplus Lines
Segment
   Specialty
Admitted
Segment
   London
Insurance
Market
Segment
 Other(1)   Total 

January 1, 2009

  $81,770    $1,888    $248,558    $6,163    $338,379  

Acquisitions

   —       —       42,860     20,235     63,095  

Foreign currency movements

   —       —       1,045     —       1,045  
                    

December 31, 2009

  $81,770    $1,888    $292,463    $26,398    $402,519  

January 1, 2010

  $81,770    $1,888    $292,463   $26,398    $402,519  

Acquisitions (see note 21)

   —       67,193     —       2,569     69,762     0     63,026     0    2,569     65,595  

Foreign currency movements

   —       —       2,466     —       2,466     0     0     2,466    0     2,466  
                      

 

   

 

   

 

  

 

   

 

 

DECEMBER 31, 2010

  $81,770    $69,081    $294,929    $28,967    $474,747  

December 31, 2010

  $81,770    $64,914    $294,929   $28,967    $470,580  

Acquisitions (see note 21)

   0     0     15,310    122,846     138,156  

Foreign currency movements

   0     0     (1,175  0     (1,175
                      

 

   

 

   

 

  

 

   

 

 

DECEMBER 31, 2011

  $81,770    $64,914    $309,064   $151,813    $607,561  
  

 

   

 

   

 

  

 

   

 

 

 

(1)

See note 17 for a discussion ofAmounts included in Other above are related to the Company’s non-insurance operations included in Other above.operations.

Goodwill isand indefinite-lived intangible assets are tested for impairment at least annually. The Company completes an annual test during the fourth quarter of each year based upon the results of operations through September 30. There were no indications of goodwill impairment during 2011 or 2010.

The following table presents the components of intangible assets.

   December 31, 

(dollars in thousands)

  2011  2010 
   Gross
Carrying
Amount
   Accumulated
Amortization
  Gross
Carrying

Amount
   Accumulated
Amortization
 

Customer relationships

  $200,926    $(26,159 $132,110    $(23,949

Trade names

   47,649     (4,094  34,127     (1,431

Technology

   33,753     (5,723  25,753     (2,324

Other

   15,506     (1,861  7,646     (779
  

 

 

   

 

 

  

 

 

   

 

 

 

TOTAL

  $297,834    $(37,837 $199,636    $(28,483
  

 

 

   

 

 

  

 

 

   

 

 

 

Amortization of intangible assets was $24.3 million, $16.8 million and $6.7 million for the years ended December 31, 2011, 2010 or 2009.and 2009, respectively. Amortization of intangible assets is estimated to be $25.8 million for 2012, $23.7 million for 2013, $21.7 million for 2014, $21.6 million for 2015 and $19.1 million for 2016. Indefinite-lived intangible assets were $4.1 million at December 31, 2011 and 2010.

In 2011, the Company acquired $113.7 million of intangible assets. The definite-lived intangible assets acquired are expected to be amortized over a weighted average period of 14.4 years. The definite-lived intangible assets acquired during 2011 include customer relationships, technology and trade names, which are expected to be amortized over a weighted average period of 15.9, 5.0 and 15.6 years, respectively.

 

|  53


Markel Corporation & Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

6. Goodwill and Intangible Assets (continued)

The following table presents the components of intangible assets.

   December 31, 

(dollars in thousands)

  2010  2009 
   Gross
Carrying
Amount
   Accumulated
Amortization
  Gross
Carrying
Amount
   Accumulated
Amortization
 

Customer relationships

  $132,110    $(23,949 $83,791    $(12,391

Trade names

   34,127     (1,431  18,988     (215

Technology

   25,753     (2,324  7,900     (1,095

Other

   7,646     (779  5,450     (2,114
                   

TOTAL

  $199,636    $(28,483 $116,129    $(15,815
                   

Amortization of intangible assets was $16.8 million, $6.7 million and $5.7 million for the years ended December 31, 2010, 2009 and 2008, respectively. Amortization of intangible assets is estimated to be $18.2 million for 2011, $15.4 million for 2012, $14.3 million for 2013, $12.4 million for 2014 and $12.3 million for 2015.

In 2010, the Company acquired $86.2 million of intangible assets, including $4.1 million of insurance licenses with indefinite lives. The definite-lived intangible assets acquired are expected to be amortized over a weighted average period of 16.6 years. The definite-lived intangible assets acquired during 2010 include customer relationships, technology and trade names, which are expected to be amortized over a weighted average period of 21.9, 9.0 and 11.3 years, respectively.

7. Income Taxes

Income (loss) before income taxes includes the following components.

 

  Years Ended December 31,   Years Ended December 31, 

(dollars in thousands)

  2010   2009   2008   2011 2010   2009 

Domestic

  $174,543    $86,592    $(100,512  $200,446   $174,543    $86,592  

Foreign

   120,968     112,045     (59,317   (10,250  120,968     112,045  
              

 

  

 

   

 

 

INCOME (LOSS) BEFORE INCOME TAXES

  $295,511    $198,637    $(159,829

INCOME BEFORE INCOME TAXES

  $190,196   $295,511    $198,637  
              

 

  

 

   

 

 

Income tax expense (benefit) includes the following components.

 

   Years Ended December 31, 

(dollars in thousands)

  2010  2009  2008 

Current:

    

Domestic

  $22,875   $8,076   $(1,041

Foreign

   (2,278  (2,714  63  
             

Total current tax expense (benefit)

   20,597    5,362    (978
             

Deferred:

    

Domestic

   1,050    (6,763  (63,702

Foreign

   6,135    (2,381  (36,715
             

Total deferred tax expense (benefit)

   7,185    (9,144  (100,417
             

INCOME TAX EXPENSE (BENEFIT)

  $27,782   $(3,782 $(101,395
             

54  |


7. Income Taxes (continued)

   Years Ended December 31, 

(dollars in thousands)

  2011   2010  2009 

Current:

     

Domestic

  $35,721    $22,875   $8,076  

Foreign

   340     (2,278  (2,714
  

 

 

   

 

 

  

 

 

 

Total current tax expense

   36,061     20,597    5,362  
  

 

 

   

 

 

  

 

 

 

Deferred:

     

Domestic

   436     1,050    (6,763

Foreign

   5,213     6,135    (2,381
  

 

 

   

 

 

  

 

 

 

Total deferred tax expense (benefit)

   5,649     7,185    (9,144
  

 

 

   

 

 

  

 

 

 

INCOME TAX EXPENSE (BENEFIT)

  $41,710    $27,782   $(3,782
  

 

 

   

 

 

  

 

 

 

Foreign income tax expense (benefit) includes United States tax expense (benefit) on foreign operations.

In 2011, income tax expense included a decrease in the provision for interest and penalties of $0.6 million. In 2010, income tax expense included a benefit from a reduction in the provision for interest and penalties of $3.9 million. In 2009, income tax benefit included an increase in the provision for interest and penalties of $2.7 million. In 2008, income tax benefit included a benefit from a reduction in the provision for interest and penalties of $3.5 million. At December 31, 20102011 and 2009,2010, other liabilities on the consolidated balance sheets included $2.4$1.8 million and $6.3$2.4 million, respectively, for potential payment of interest and penalties.

State income tax expense is not material to the consolidated financial statements.

The Company made income tax payments of $35.0 million, $24.0 million and $21.2 million in 2011, 2010 and $29.0 million in 2010, 2009, and 2008, respectively. Income taxes payable was $12.1 million at December 31, 2011 and was included in other liabilities on the consolidated balance sheet. Income taxes receivable werewas $15.9 million and $13.2 million at December 31, 2010 and 2009, respectively, and werewas included in other assets on the consolidated balance sheets.sheet. The income tax receivablesreceivable at December 31, 2010 and 2009 werewas due in part to the carryback of $27.5 million and $38.7 million, respectively, of capital losses generated as a result of sales of equity securities and fixed maturities that had tax bases in excess of fair value on the dates of sale.

54  |


7. Income Taxes (continued)

Reconciliations of the United States corporate income tax rate to the effective tax rate on income (loss) before income taxes are presented in the following table.

 

  Years Ended December 31,   Years Ended December 31, 
  2010 2009 2008   2011 2010 2009 

United States corporate tax rate

   35  35  35   35  35  35

Tax-exempt investment income

   (11  (14  18     (18  (11  (14

Uncertain tax positions

   (1  2    (6   (2  (1  2  

Tax credits

   1    (3  19     0    1    (3

Foreign operations

   (13  (21  (2   6    (13  (21

Other

   (2  (1  (1   1    (2  (1
            

 

  

 

  

 

 

EFFECTIVE TAX RATE

   9  (2%)   63   22  9  (2%) 
            

 

  

 

  

 

 

The 2011 effective tax rate included a 6% income tax expense related to foreign operations, which was primarily the result of a change in the U.K. tax rate that reduced the deferred tax assets to be realized in the future and the impact of applying a lower foreign tax rate to 2011 losses from foreign operations. The 2010 effective tax rate included a 13% income tax benefit related to foreign operations, of which 11% iswas a result of a change in the Company’s plans regarding the amount of earnings considered permanently reinvested indefinitely in foreign subsidiaries. The 2009 effective tax rate included a 21% income tax benefit related to foreign operations, of which 17% iswas the result of a one-time tax benefit related to a change in the United Kingdom tax law that became effective in the third quarter of 2009.

The following table presents the components of domestic and foreign deferred tax assets and liabilities.

   December 31, 

(dollars in thousands)

  2011  2010 

Assets:

   

Differences between financial reporting and tax bases

  $101,152   $101,822  

Unpaid losses and loss adjustment expenses not yet deductible for income tax purposes

   98,571    105,183  

Unearned premiums recognized for income tax purposes

   39,110    36,416  

Other-than-temporary impairments not yet deductible for income tax purposes

   43,387    42,377  

Net operating loss carryforwards

   85,700    93,864  

Tax credit carryforwards

   31,718    25,582  
  

 

 

  

 

 

 

Total gross deferred tax assets

   399,638    405,244  
  

 

 

  

 

 

 

Liabilities:

   

Differences between financial reporting and tax bases

   21,114    17,370  

Deferred policy acquisition costs

   44,730    44,813  

Net unrealized gains on investments

   315,692    260,791  

Amortization of goodwill and other intangible assets

   29,205    21,251  
  

 

 

  

 

 

 

Total gross deferred tax liabilities

   410,741    344,225  
  

 

 

  

 

 

 

NET DEFERRED TAX ASSET (LIABILITY)

  $(11,103 $61,019  
  

 

 

  

 

 

 

 

|  55


Markel Corporation & Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

7. Income Taxes (continued)

 

The following table presents the components of domestic and foreignnet deferred tax assets and liabilities.

   December 31, 

(dollars in thousands)

  2010   2009 

Assets:

    

Differences between financial reporting and tax bases

  $101,419    $62,620  

Unpaid losses and loss adjustment expenses not yet deductible for income tax purposes

   105,183     102,999  

Unearned premiums recognized for income tax purposes

   36,416     32,080  

Other-than-temporary impairments not yet deductible for income tax purposes

   42,377     68,084  

Net operating loss carryforwards

   93,864     154,406  

Tax credit carryforwards

   25,582     22,185  
          

Total gross deferred tax assets

   404,841     442,374  
          

Liabilities:

    

Differences between financial reporting and tax bases

   36,004     18,708  

Deferred policy acquisition costs

   44,813     37,597  

Net unrealized gains on investments

   260,761     193,495  

Undistributed investment in foreign subsidiaries

   —       31,418  
          

Total gross deferred tax liabilities

   341,578     281,218  
          

NET DEFERRED TAX ASSET

  $63,263    $161,156  
          

The decreaseliability at December 31, 2011 was included in other liabilities on the consolidated balance sheet. The net deferred tax asset in 2010 was primarily due to an increase in net unrealized gains on investments and a decrease in net operating loss carryforwards during 2010. The net deferred tax assets at December 31, 2010 and 2009 werewas included in other assets on the consolidated balance sheets.sheet.

In December 2008, Markel Corporation received $110.0 million in distributions made by Markel International. In January 2009, Markel Corporation received an additional $101.7 million in distributions made by Markel International. Pursuant to guidance included in FASB ASC 740,Income Taxes, approximately $46 million in foreign paid taxes became available for use by the Company as foreign tax credits as a result of these distributions. At December 31, 2010,2011, the Company had tax credit carryforwards of $25.6$31.7 million. The earliest any of these credits will expire is 2019.

At December 31, 2010,2011, the Company had net operating losses of $317.6$317.2 million. These losses can be carried forward indefinitely to offset future taxable income in the United Kingdom. Of the $317.6$317.2 million of net operating losses, $98.9$63.3 million also can be utilized to offset future Markel Capital Limited, a wholly-owned subsidiary, income that is taxable in the United States.States from Markel Capital Limited, a wholly-owned subsidiary. The Company’s ability to utilize these losses in the United States expires between the years 20192020 and 2026.

At December 31, 2010, the Company had unused capital losses of $7.8 million. The Company’s ability to utilize these losses expires in 2015.

The Company estimates that it will realize $341.6$399.6 million of the gross deferred tax assets, including net operating losses, recorded at December 31, 20102011 through the reversal of existing temporary differences attributable to the gross deferred tax liabilities. The Company believes that it is more likely than not that it will realize $63.3 million of gross deferred tax assets by generating future taxable income and by using

56  |


7. Income Taxes (continued)

prudent and feasible tax planning strategies if future taxable income is not sufficient. While management believes that a valuation allowance at December 31, 2010 and 2009 was not necessary, changes in management’s estimate of future taxable income to be generated by its foreign subsidiaries, changes in the Company’s ability to use tax planning strategies or significant declines in the estimated fair value of investments could result in a need to record a valuation allowance through a charge to earnings.

At December 31, 2010,2011, the Company had unrecognized tax benefits of $24.6$19.6 million. If recognized, $19.3$16.0 million of these tax benefits would decrease the annual effective tax rate. The Company does not currently anticipate any significant changes in unrecognized tax benefits during 2011.2012.

The following table presents a reconciliation of beginning and ending unrecognized tax benefits.

 

   Years Ended December 31, 

(dollars in thousands)

  2010  2009 

Unrecognized Tax Benefits, Beginning of Year

  $24,940   $59,237  

Increases based upon tax positions taken during the current year

   863    1,140  

Increases for tax positions taken in prior years

   342    9,022  

Decreases for tax positions taken in prior years

   (744  (42,601

Settlement with taxing authorities

   —      (1,858

Lapse of statute of limitations

   (816  —    
         

UNRECOGNIZED TAX BENEFITS, ENDOF YEAR

  $24,585   $24,940  
         

The $42.6 million decrease in 2009 for tax positions taken in prior years represented future tax return benefits that the Company no longer anticipated recognizing in its consolidated financial statements.

   Years Ended December 31, 

(dollars in thousands)

  2011  2010 

Unrecognized tax benefits, beginning of year

  $24,585   $24,940  

Increases based upon tax positions taken during the current year

   864    863  

Increases for tax positions taken in prior years

   156    342  

Decreases for tax positions taken in prior years

   (3,309  (744

Settlement with taxing authorities

   (1,526  0  

Lapse of statute of limitations

   (1,184  (816
  

 

 

  

 

 

 

UNRECOGNIZED TAX BENEFITS, ENDOF YEAR

  $19,586   $24,585  
  

 

 

  

 

 

 

Provisions for United States income taxes on undistributed earnings of foreign subsidiaries are made only on those amounts in excess of the amounts that are considered to be permanently reinvested. As ofreinvested indefinitely. At December 31, 2010,2011, earnings of the Company’s foreign subsidiaries through 2010 are considered permanently reinvested indefinitely and no provision for United States income taxes has been recorded. It is not practicable to determine the amount of unrecognized deferred tax liabilities associated with such earnings due to the complexity of this calculation.

The Company is subject to income tax in the United States and in foreign jurisdictions. With few exceptions, the Company is no longer subject to income tax examination by tax authorities for years ended before January 1, 2007.2008.

 

56  |  57


Markel Corporation & Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

8. Unpaid Losses and Loss Adjustment Expenses

a)The following table presents a reconciliation of consolidated beginning and ending reserves for losses and loss adjustment expenses.

 

  Years Ended December 31,   Years Ended December 31, 

(dollars in thousands)

  2010 2009 2008   2011 2010 2009 

NET RESERVESFOR LOSSESAND LOSS ADJUSTMENT EXPENSES, BEGINNINGOF YEAR

  $4,540,654   $4,465,481   $4,452,655    $4,600,316   $4,540,654   $4,465,481  

Foreign currency movements, commutations and other

   (5,070  86,362    (192,838   (7,496  (5,070  86,362  
            

 

  

 

  

 

 

ADJUSTED NET RESERVESFOR LOSSESAND LOSS ADJUSTMENT EXPENSES, BEGINNINGOF YEAR

   4,535,584    4,551,843    4,259,817     4,592,820    4,535,584    4,551,843  

Incurred losses and loss adjustment expenses:

        

Current year

   1,224,270    1,228,152    1,432,808     1,563,993    1,224,270    1,228,152  

Prior years

   (278,041  (235,289  (163,783   (354,007  (278,041  (235,289
            

 

  

 

  

 

 

TOTAL INCURRED LOSSESAND LOSS ADJUSTMENT EXPENSES

   946,229    992,863    1,269,025     1,209,986    946,229    992,863  
            

 

  

 

  

 

 

Payments:

        

Current year

   269,469    247,814    310,953     291,837    269,469    247,814  

Prior years

   796,138    759,522    727,609     898,318    796,138    759,522  
            

 

  

 

  

 

 

TOTAL PAYMENTS

   1,065,607    1,007,336    1,038,562     1,190,155    1,065,607    1,007,336  
            

 

  

 

  

 

 

Effect of foreign currency rate changes

   1,773    3,284    (20,080   (4,884  1,773    3,284  

Net reserves for losses and loss adjustment expenses of acquired insurance companies

   182,337    —      —       0    182,337    0  

Other

   —      —      (4,719
            

 

  

 

  

 

 

NET RESERVESFOR LOSSESAND LOSS ADJUSTMENT EXPENSES, ENDOF YEAR

   4,600,316    4,540,654    4,465,481     4,607,767    4,600,316    4,540,654  
            

 

  

 

  

 

 

Reinsurance recoverable on unpaid losses

   798,090    886,442    1,026,858     791,102    798,090    886,442  
            

 

  

 

  

 

 

GROSS RESERVESFOR LOSSESAND LOSS ADJUSTMENT EXPENSES, ENDOF YEAR

  $5,398,406   $5,427,096   $5,492,339    $5,398,869   $5,398,406   $5,427,096  
            

 

  

 

  

 

 

Beginning of year net reserves for losses and loss adjustment expenses are adjusted, when applicable, for the impact of changes in foreign currency rates, commutations and other items. In 2011, beginning of year net reserves for losses and loss adjustment expenses were decreased by a movement of $14.1 million in foreign currency rates of exchange, which was offset in part by increases for other items including commutations. In 2010, beginning of year net reserves for losses and loss adjustment expenses were decreased by a movement of $19.1 million in foreign currency rates of exchange, which was offset in part by increases for other items including commutations. In 2009, beginning of year net reserves for losses and loss adjustment expenses were increased by a movement of $74.8 million in foreign currency rates of exchange, most notably between the United States Dollar and the United Kingdom Sterling. In 2008, beginning of

|  57


Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8. Unpaid Losses and Loss Adjustment Expenses (continued)

Current year net reserves forincurred losses and loss adjustment expenses for 2011 included $150.9 million of estimated net losses related to the Thai floods, Hurricane Irene, U.S. tornadoes, Japanese earthquake and tsunami, Australian floods and New Zealand earthquakes. The estimated net losses on these natural catastrophes were decreased by a movementnet of $195.7estimated reinsurance recoverables of $36.3 million.

In 2011, incurred losses and loss adjustment expenses included $354.0 million in foreign currency rates of exchange, most notably betweenfavorable development on prior years’ loss reserves, which was primarily due to $265.8 million of loss reserve redundancies experienced at Markel International and on the United States Dollarprofessional and products liability and casualty programs within the United Kingdom Sterling.Excess and Surplus Lines segment as actual claims reporting patterns on prior accident years have been more favorable than the Company’s actuarial analyses initially anticipated.

As a result of its acquisition of Aspen Holdings, Inc. (Aspen) in 2010, the Company recorded net reserves for losses and loss adjustment expenses of $182.3 million. These reserves were recorded at fair value as part of the Company’s purchase accounting. See note 21 for a discussion of the Company’s acquisition of Aspen.

In 2010, incurred losses and loss adjustment expenses included $278.0 million of favorable development on prior years’ loss reserves, which was primarily due to $214.4 million of loss reserve redundancies experienced at Markel International and on the professional and products liability programs within the

58  |


8. Unpaid Losses and Loss Adjustment Expenses (continued)

Excess and Surplus Lines segment as actual claims reporting patterns on prior accident years have been more favorable than initially anticipated within the Company’s actuarial analyses.

In 2009, incurred losses and loss adjustment expenses included $235.3 million of favorable development on prior years’ loss reserves, which was primarily due to $205.6 million of loss reserve redundancies experienced at Markel International and on the professional and products liability programs within the Excess and Surplus Lines segment as actual claims reporting patterns on prior accident years were more favorable than initially anticipated within the Company’s actuarial analyses. The favorable development on prior years’ loss reserves in 2009 was partially offset by $10.0 million of adverse development on asbestos and environmental loss reserves following the Company’s annualactuarial review of these exposures.

Current year incurred losses and loss adjustment expenses for 2008 included $91.1 million of estimated net losses on Hurricanes Gustav and Ike (2008 Hurricanes). The estimated net losses on the 2008 Hurricanes were net of estimated reinsurance recoverables of $58.6 million.

In 2008, incurred losses and loss adjustment expenses included $163.8 million of favorable development on prior years’ loss reserves, which was primarily due to $149.6 million of loss reserve redundancies experienced at Markel International and on the professional and products liability programs within the Excess and Surplus Lines segment as actual claims reporting patterns on prior accident years were more favorable than initially anticipated within the Company’s actuarial analyses. The favorable development on prior years’ loss reserves in 2008 was partially offset by $24.9 million of adverse development on prior years’ loss reserves on asbestos and environmental exposures and related reinsurance bad debt.

During the third quarter of each of the past three years, the Company completed an in-depth, actuarial review of its asbestos and environmental exposures. During the 2011 and 2010 review,reviews, the Company determined that no adjustment to loss reserves was necessary. During the 2009 review, the Company increased its estimate of the number of claims that willwould ultimately be closed with an indemnity payment. During the 2008 review, the Company noted that claims had been closed with total indemnity payments that were higher than had been anticipated, and as a result of this higher than expected average severity on closed claims, the Company’s actuaries updated their average severity assumptions for both open claims and claims incurred but not yet reported. In 2009, and 2008, the Company’s actuarial estimatesestimate of the ultimate liability for asbestos and environmental loss reserves werewas increased, and management increased prior years’ loss reserves for asbestos and environmental exposures accordingly.

Inherent in the Company’s reserving practices is the desire to establish loss reserves that are more likely redundant than deficient. As such, the Company seeks to establish loss reserves that will ultimately prove to be adequate. Furthermore, the Company’s philosophy is to price its insurance products to make an underwriting profit. Management continually attempts to improve its loss estimation process by refining its ability to analyze loss development patterns, claim payments and other information, but uncertainty remains regarding the potential for adverse development of estimated ultimate liabilities.

58  |


8. Unpaid Losses and Loss Adjustment Expenses (continued)

The Company uses a variety of techniques to establish the liabilities for unpaid losses and loss adjustment expenses, all of which involve significant judgments and assumptions. These techniques include detailed statistical analysis of past claim reporting, settlement activity, claim frequency and severity, policyholder loss experience, industry loss experience and changes in market conditions, policy forms and exposures. Greater judgment may be required when new product lines are introduced or when there have been changes in claims handling practices, as the statistical data available may be insufficient. The Company’s estimates reflect implicit and explicit assumptions regarding the potential effects of external factors, including economic and social inflation, judicial decisions, law changes, general economic conditions and recent trends in these factors. In some of the Company’s markets, and where the Company acts as a reinsurer, the timing and amount of information reported about underlying claims are in the control of third parties. This can also affect estimates and require re-estimation as new information becomes available.

|  59


Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8. Unpaid Losses and Loss Adjustment Expenses (continued)

The Company believes the process of evaluating past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. Management currently believes the Company’s gross and net reserves, including the reserves for environmental and asbestos exposures, are adequate. However, there is no precise method for evaluating the impact of any significant factor on the adequacy of reserves, and actual results will differ from original estimates.

b)The Company’s exposure to asbestos and environmental (A&E) claims results from policies written by acquired insurance operations before their acquisitions by the Company. The Company’s exposure to A&E claims originated from umbrella, excess and commercial general liability (CGL) insurance policies and assumed reinsurance contracts that were written on an occurrence basis from the 1970s to mid-1980s. Exposure also originated from claims-made policies that were designed to cover environmental risks provided that all other terms and conditions of the policy were met.

A&E claims include property damage and clean-up costs related to pollution, as well as personal injury allegedly arising from exposure to hazardous materials. After 1986, the Company began underwriting CGL coverage with pollution exclusions, and in some lines of business the Company began using a claims-made form. These changes significantly reduced the Company’s exposure to future A&E claims on post-1986 business.

|  59


Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8. Unpaid Losses and Loss Adjustment Expenses (continued)

The following table provides a reconciliation of beginning and ending A&E reserves for losses and loss adjustment expenses, which are a component of consolidated unpaid losses and loss adjustment expenses. Amounts included in the following table are presented before consideration of reinsurance allowances.

 

  Years Ended December 31,   Years Ended December 31, 

(dollars in thousands)

  2010 2009 2008   2011 2010 2009 

NET RESERVESFOR A&E LOSSESAND LOSS ADJUSTMENT EXPENSES, BEGINNINGOF YEAR

  $229,030   $238,272   $221,654    $216,034   $229,030   $238,272  

Commutations and other

   111    (500  (191   36,271    111    (500
            

 

  

 

  

 

 

ADJUSTED NET RESERVESFOR A&E LOSSESAND LOSS ADJUSTMENT EXPENSES, BEGINNINGOF YEAR

   229,141    237,772    221,463     252,305    229,141    237,772  

Incurred losses and loss adjustment expenses

   (428  2,657    22,106     (134  (428  2,657  

Payments

   (12,679  (11,399  (5,297   (7,399  (12,679  (11,399
            

 

  

 

  

 

 

NET RESERVESFOR A&E LOSSESAND LOSS ADJUSTMENT EXPENSES, ENDOF YEAR

   216,034    229,030    238,272     244,772    216,034    229,030  
            

 

  

 

  

 

 

Reinsurance recoverable on unpaid losses

   132,021    153,078    154,901     89,391    132,021    153,078  
            

 

  

 

  

 

 

GROSS RESERVESFOR A&E LOSSESAND LOSS ADJUSTMENT EXPENSES, ENDOF YEAR

  $348,055   $382,108   $393,173    $334,163   $348,055   $382,108  
            

 

  

 

  

 

 

IncurredCommutations and other for the year ended December 31, 2011 included a $40.0 million adjustment related to commutations completed by Markel International, which involved the termination of ceded reinsurance contracts. The adjustment was made with respect to commuted recoverables where the amount of the balance due from reinsurers was offset in full by a provision within the reinsurance allowance. The adjustment reduced the reinsurance recoverable on unpaid losses with a corresponding reduction to the reinsurance allowance for doubtful accounts. Accordingly, there was no impact on the reinsurance recoverable on unpaid losses or on net reserves for A&E losses and loss adjustment expenses, net of the reinsurance allowance, for 2009 and 2008 were primarily dueany period presented. See note 13 for further discussion of the corresponding reduction to adverse development of asbestos-related reserves. the reinsurance allowance.

At December 31, 2010,2011, asbestos-related reserves were $270.3$257.8 million and $154.4$184.8 million on a gross and net basis, respectively.

Net reserves for reported claims and net incurred but not reported reserves for A&E exposures were $131.6$143.8 million and $84.4$101.0 million, respectively, at December 31, 2010.2011. Inception-to-date net paid losses and loss adjustment expenses for A&E related exposures totaled $355.7$363.1 million at December 31, 2010,2011, which includes $67.2$71.1 million of litigation-related expense.

60  |


8. Unpaid Losses and Loss Adjustment Expenses (continued)

The Company’s reserves for losses and loss adjustment expenses related to A&E exposures represent management’s best estimate of ultimate settlement values. A&E reserves are monitored by management, and the Company’s statistical analysis of these reserves is reviewed by the Company’s independent actuaries. A&E exposures are subject to significant uncertainty due to potential loss severity and frequency resulting from the uncertain and unfavorable legal climate. A&E reserves could be subject to increases in the future; however, management believes the Company’s gross and net A&E reserves at December 31, 20102011 are adequate.

 

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9. Senior Long-Term Debt and Other Debt

The following table summarizes the Company’s senior long-term debt and other debt.

 

   December 31, 

(dollars in thousands)

  2010   2009 

6.80% unsecured senior notes, due February 15, 2013, interest payable semi-annually, net of unamortized discount of $582 in 2010 and $851 in 2009

  $246,083    $245,814  

7.125% unsecured senior notes, due September 30, 2019, interest payable semi-annually, net of unamortized discount of $2,474 in 2010 and $2,757 in 2009

   347,526     347,243  

7.35% unsecured senior notes, due August 15, 2034, interest payable semi-annually, net of unamortized discount of $2,503 in 2010 and $2,609 in 2009

   197,497     197,391  

7.50% unsecured senior debentures, due August 22, 2046, interest payable quarterly, net of unamortized discount of $4,091 in 2010 and $4,206 in 2009

   145,909     145,794  

Subsidiary debt, at various interest rates ranging from 2.7% to 8.8%

   78,932     27,406  
          

SENIOR LONG-TERM DEBTAND OTHER DEBT

  $1,015,947    $963,648  
          
   December 31, 

(dollars in thousands)

  2011   2010 

6.80% unsecured senior notes, due February 15, 2013, interest payable semi-annually, net of unamortized discount of $314 in 2011 and $582 in 2010

  $246,351    $246,083  

7.125% unsecured senior notes, due September 30, 2019, interest payable semi-annually, net of unamortized discount of $2,192 in 2011 and $2,474 in 2010

   347,808     347,526  

5.35% unsecured senior notes, due June 1, 2021, interest payable semi-annually, net of unamortized discount of $1,944 in 2011

   248,056     0  

7.35% unsecured senior notes, due August 15, 2034, interest payable semi-annually, net of unamortized discount of $2,397 in 2011 and $2,503 in 2010

   197,603     197,497  

7.50% unsecured senior debentures, due August 22, 2046, interest payable quarterly, net of unamortized discount of $3,976 in 2011 and $4,091 in 2010

   146,024     145,909  

Subsidiary debt, at various interest rates ranging from 2.8% to 6.5%

   107,678     78,932  
  

 

 

   

 

 

 

SENIOR LONG-TERM DEBTAND OTHER DEBT

  $1,293,520    $1,015,947  
  

 

 

   

 

 

 

On June 9, 2010,1, 2011, the Company issued $250 million of 5.35% unsecured senior notes due June 1, 2021. Net proceeds to the Company were $247.9 million, which will be used for general corporate purposes, including acquisitions. In addition, proceeds may be used to repay other of the Company’s outstanding debt.

On September 23, 2011, the Company entered into aan amended and restated revolving credit facility, which provides $270$150 million of capacity for working capital and other general corporate purposes. The Company may increase the capacity of the revolving credit facility may be increased to $350$300 million subject to certain terms and conditions. The Company may select from two interest rate options for balances outstanding under the facility and pays a commitment fee (0.38%(0.25% at December 31, 2010)2011) on the unused portion of the facility based on the Company’s debt to equity leverage ratio as calculated under the agreement. At December 31, 2010,2011, the Company had no borrowings outstanding related tounder the facility. This facility replaced the Company’s previous $375$270 million revolving credit facility and expires in June 2013.September 2015.

At December 31, 2010,2011, the Company was in compliance with all covenants contained in its revolving credit facility. To the extent that the Company is not in compliance with its covenants, the Company’s access to the credit facility could be restricted. While the Company believes this to be unlikely, the inability to access the credit facility could adversely affect the Company’s liquidity.

On September 22, 2009, the Company issued $350 million of 7.125% unsecured senior notes due September 30, 2019. Net proceeds to the Company were $347.2 million, which were used for general corporate purposes, including acquisitions.

 

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Markel Corporation & Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

9. Senior Long-Term Debt and Other Debt (continued)

 

The Company’s 7.125% unsecured senior notes, are redeemable by the Company at any time. The Company’s5.35% unsecured senior notes and 7.50% unsecured senior debentures are redeemable by the Company at any time after August 22, 2011.time. None of the Company’s other senior long-term debt is redeemable. None of the Company’s senior long-term debt is subject to any sinking fund requirements.

The Company’s subsidiary debt is primarily associated with its non-insurance operations and is non-recourse to the holding company. The debt of the Company’s non-insurance subsidiaries generally is secured by the assets of those subsidiaries. ParkLand Ventures, Inc., a subsidiary of the Company, has formed subsidiaries for the purpose of acquiring and financing real estate (the real estate subsidiaries). The assets of the real estate subsidiaries, which are not material to the Company, are consolidated in accordance with U.S. GAAP but are not available to satisfy the debt and other obligations of the Company or any affiliates other than the real estate subsidiaries.

The estimated fair value based on quoted market prices of the Company’s senior long-term debt and other debt was $1.1$1.4 billion and $1.0$1.1 billion at December 31, 20102011 and 2009,2010, respectively.

The following table summarizes the future principal payments due at maturity on senior long-term debt and other debt as of December 31, 2010.2011.

 

Years Ending December 31,

  (dollars in
thousands)
   (dollars in
thousands)
 

2011

  $7,264  

2012

   2,919    $5,876  

2013

   255,694     272,365  

2014

   7,976     6,229  

2015

   15,492     4,619  

2016 and thereafter

   736,252  

2016

   14,209  

2017 and thereafter

   1,001,045  
      

 

 

TOTAL PRINCIPAL PAYMENTS

  $1,025,597    $1,304,343  

Unamortized discount

   (9,650   (10,823
      

 

 

SENIOR LONG-TERM DEBTAND OTHER DEBT

  $1,015,947    $1,293,520  
      

 

 

The Company paid $84.1 million, $72.9 million $47.1 million and $47.5$47.1 million in interest on its senior long-term debt and other debt during the years ended December 31, 2011, 2010 2009 and 2008,2009, respectively.

 

62  |


 

10. Shareholders’ Equity

a)The Company had 50,000,000 shares of no par value common stock authorized of which 9,717,9289,620,985 shares and 9,819,1519,717,928 shares were issued and outstanding at December 31, 20102011 and 2009,2010, respectively. The Company also has 10,000,000 shares of no par value preferred stock authorized, none of which were issued or outstanding at December 31, 20102011 or 2009.2010.

In November 2010, theThe Company’s Board of Directors has approved the repurchase of up to $200 million of common stock under a share repurchase program (the Program). Under the Program, the Company may repurchase outstanding shares of common stock from time to time, primarily through open-market transactions. The Program has no expiration date but may be terminated by the Board of Directors at any time. This repurchase program replaced a previous repurchase program that had been approved by the Board of Directors in August 2005. As of December 31, 2010,2011, the Company had repurchased 7,956118,056 shares of common stock at a cost of $2.8$44.6 million under the Program. As of December 31, 2010, the Company had repurchased 484,750 shares of common stock at a cost of $178.7 million under the previous program, which was terminated upon approval of the Program.

62  |


10. Shareholders’ Equity (continued)

b)Net income (loss) per share iswas determined by dividing net income (loss) to shareholders by the applicable weighted average shares outstanding.

 

  Years Ended December 31,   Years Ended December 31, 

(in thousands, except per share amounts)

  2010   2009   2008   2011   2010   2009 

Net income (loss) to shareholders

  $266,793    $201,638    $(58,767

Net income to shareholders

  $142,026    $266,793    $201,638  
              

 

   

 

   

 

 

Basic common shares outstanding

   9,768     9,815     9,876     9,686     9,768     9,815  

Dilutive potential common shares

   17     11     —       40     17     11  
              

 

   

 

   

 

 

Diluted shares outstanding

   9,785     9,826     9,876     9,726     9,785     9,826  
              

 

   

 

   

 

 

Basic net income (loss) per share

  $27.31    $20.54    $(5.95

Basic net income per share

  $14.66    $27.31    $20.54  
              

 

   

 

   

 

 

Diluted net income (loss) per share

  $27.27    $20.52    $(5.95

Diluted net income per share

  $14.60    $27.27    $20.52  
              

 

   

 

   

 

 

Average closing common stock market prices are used to calculate the dilutive effect attributable to restricted stock.

Diluted shares outstanding for 2008 excluded 15,376 dilutive potential shares. These shares were excluded due to their antidilutive effect as a result of the Company’s net loss to shareholders for the year ended December 31, 2008.

c)The Company’s Employee Stock Purchase and Bonus Plan provides a method for employees and directors to purchase shares of the Company’s common stock on the open market. The plan encourages share ownership by providing for the award of bonus shares to participants equal to 10% of the net increase in the number of shares owned under the plan in a given year, excluding shares acquired through the plan’s loan program component. Under the loan program, the Company offers subsidized unsecured loans so participants may purchase shares and awards bonus shares equal to 5% of the shares purchased with a loan. The Company has authorized 100,000 shares for purchase under this plan, of which 60,93152,703 and 70,87460,931 shares were available for purchase at December 31, 20102011 and 2009,2010, respectively. At December 31, 20102011 and 2009,2010, loans outstanding under the plan, which are included in receivables on the consolidated balance sheets, totaled $13.7$13.1 million and $15.8$13.7 million, respectively.

d)The Markel Corporation Omnibus Incentive Plan (Omnibus Incentive Plan) provides for grants or awards of cash, restricted stock, restricted stock units, performance grants and other stock-based awards to employees and directors. The Omnibus Incentive Plan is administered by the Compensation Committee of the Company’s Board of Directors (Compensation Committee) and will terminate on March 5, 2013.. At December 31, 2010,2011, there were 128,834118,177 shares reserved for issuance under the Omnibus Incentive Plan.

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Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

10. Shareholder’s Equity (continued)

Restricted stock units are awarded to certain associates and executive officers based upon meeting performance conditions determined by the Compensation Committee. These awards generally vest at the end of the fifth year following the year for which the Compensation Committee determines performance conditions have been met. At the end of the vesting period, recipients are entitled to receive one share of the Company’s common stock for each vested restricted stock unit. During 2010,2011, the Company awarded 3,18612,770 restricted stock units to certain associates and executive officers based either on performance conditions being met or as an incentivemet.

Restricted stock units also are awarded to certain newly hired associates.

associates and executive officers to assist the Company in retaining the services of key employees. During 2010,2011, the Company awarded 1,5614,902 restricted stock units to associates and executive officers as a retention incentive. These awards generally vest over a five-year period and entitle the recipient to receive one share of the Company’s common stock for each vested restricted stock unit.

During 2011, the Company awarded 1,379 shares of restricted stock to its non-employee directors. The shares awarded to non-employee directors will vest in 2011.

|  63


Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

10. Shareholders’ Equity (continued)

In May 2010, the Compensation Committee awarded 26,410 restricted stock units to certain associates and executive officers to assist the Company in retaining the services of key employees. These restricted stock units had a grant-date fair value of $9.5 million. Each restricted stock unit will ultimately allow the recipient to receive one share of the Company’s common stock. Twenty percent of the restricted stock units vest after one year, and the balance after five years, with pro rata vesting in case of death, disability or retirement. Shares will be issued in respect of the initial twenty percent of the restricted stock units promptly after vesting. The remaining shares will be issued only following termination of employment, except that issuance of a portion of the shares may occur earlier if designated share price targets are attained. Violation of non-competition agreements contained in the award agreement may result in cancellation of the award, even after vesting.2012.

The following table summarizes nonvested share-based awards.

 

  Number
of Awards
 Weighted Average
Grant-Date

Fair Value
   Number
of Awards
 Weighted Average
Grant-Date
Fair Value
 

Nonvested awards at January 1, 2010

   23,855   $415.39  

Nonvested awards at January 1, 2011

   44,924   $384.54  

Granted

   31,157    358.48     19,051    408.60  

Vested

   (4,579  309.44     (12,813  410.22  

Forfeited

   (5,509  433.00     (896  405.23  
         

 

  

 

 

Nonvested awards at December 31, 2010

   44,924   $384.54  

Nonvested awards at December 31, 2011

   50,266   $386.74  
         

 

  

 

 

The fair value of the Company’s share-based awards is determined based on the average price of the Company’s common shares on the grant date. The weighted average grant-date fair value of the Company’s share-based awards granted in 2011, 2010 and 2009 was $408.60, $358.48 and 2008 was $358.48, $275.93, and $461.65, respectively. As of December 31, 2010,2011, unrecognized compensation cost related to nonvested share-based awards was $10.6$12.0 million, which is expected to be recognized over a weighted average period of 3.73.4 years. The fair value of the Company’s share-based awards that vested during 2011, 2010 and 2009 and 2008 was $5.3 million, $1.4 million $2.6 million and $2.1$2.6 million, respectively.

e)In connection with the acquisition of Aspen, the Company provided for the conversion of options issued under the Aspen Holdings, Inc. 2008 Stock Option Plan and the Aspen Holdings, Inc. 2008 Stock Option Plan for Non-Employee Directors (the Aspen Option Plans) into options to purchase 58,116 of the Company’s common shares. No further options are available for issuance under the Aspen Option Plans. The options issued were fully vested and exercisable upon conversion and expire ten years from the original date of issue or sooner upon the recipient’s termination of employment or death. The options issued had a weighted average exercise price of $225.94 and a grant-date fair value of $157.15.

64  |


10. Shareholder’s Equity (continued)

The fair value of the options was estimated on the grant date using the Black-Scholes option pricing model. Assumptions used in the pricing model included an expected annual volatility of 35%, a risk-free rate of approximately 1% and an expected term of four years. The expected annual volatility was based on the historical volatility of the Company’s stock and other factors. The risk-free rate was based on the U.S. Treasury yield curve, with a remaining term equal to the expected life assumption at the grant date. The expected term of the options granted represents the period of time that the options were expected to be outstanding at the grant date. Historical data was used to estimate option exercises and employee termination within the pricing model.

The following table summarizes additional information with respect to these options.

   Number
of
Shares
   Weighted
Average
Exercise Price
   Weighted Average
Remaining
Contractual Term
(years)
   Intrinsic Value
(in millions)
 

Outstanding and Exercisable, January 1, 2011

   50,521    $229.80      

Exercised

   5,660    $208.88      
  

 

 

   

 

 

   

 

 

   

 

 

 

Outstanding and Exercisable, December 31, 2011

   44,861    $232.44     6.4    $8.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

During 2011, 5,660 options were exercised under the Aspen Option Plans, resulting in cash proceeds of $1.2 million and a current tax benefit of $0.4 million. The intrinsic value of options exercised in 2011 was $1.1 million. During 2010, 7,595 options were exercised under the Aspen Option Plans, resulting in cash proceeds of $1.5 million and a current tax benefit of $0.4 million. The intrinsic value of options exercised in 2010 was $1.3 million.

At December 31, 2010, there were 50,521 options outstanding and exercisable under the Aspen Option Plans with a weighted average exercise price of $229.80 and a weighted average remaining contractual life of seven years. The outstanding options had an intrinsic value of $7.4 million at December 31, 2010.

64  |


 

11. Other Comprehensive Income (Loss)

Other comprehensive income (loss) includes net holding gains (losses) arising during the period, unrealized other-than-temporary impairment losses on fixed maturities arising during the period and reclassification adjustments for net gains (losses) included in net income (loss).income. Other comprehensive income (loss) also includes changes in foreign currency translation adjustments and changes in net actuarial pension loss.

The following table summarizes the deferred tax expense (benefit) associated with each component of other comprehensive income (loss).income.

 

  Years Ended December 31,   Years Ended December 31, 

(dollars in thousands)

  2010 2009 2008   2011 2010 2009 

Change in net unrealized gains on investments:

        

Net holding gains (losses) arising during the period

  $96,555   $190,978   $(320,314

Net holding gains arising during the period

  $68,064   $96,555   $190,978  

Unrealized other-than-temporary impairment losses on fixed maturities arising during the period

   316    (1,118  —       2,107    316    (1,118

Reclassification adjustments for net gains (losses) included in net income (loss)

   (16,624  25,912    142,638  
          

Reclassification adjustments for net gains (losses) included in net income

   (10,890  (16,624  25,912  

Change in net unrealized gains on investments

   80,247    215,772    (177,676   59,281    80,247    215,772  

Change in foreign currency translation adjustments

   6,579    6,825    (4,250   250    6,579    6,825  

Change in net actuarial pension loss

   1,069    2,859    (3,630   (3,153  1,069    2,859  
            

 

  

 

  

 

 

TOTAL

  $87,895   $225,456   $(185,556  $56,378   $87,895   $225,456  
            

 

  

 

  

 

 

|  65


Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

12. Fair Value Measurements

FASB ASC 820-10,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 FASB 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.

|  65


Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

12. Fair Value Measurements (continued)

Investments available-for-sale.Investments available-for-sale are recorded at fair value on a recurring basis and include fixed maturities, equity 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 investments available-for-sale is 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 maturities 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.

Fair value for investments available-for-sale is measured based upon quoted prices in active markets, if available. Due to variations in trading volumes and the lack of quoted market prices for fixed maturities, the fair value of fixed maturities 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 maturities 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.

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 and obligations of U.S. government agencies, municipal bonds, foreign government bonds, residential mortgage-backed securities and corporate debt securities.

Fair value for investments available-for-sale 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 maturities are classified as Level 2 investments. The fair value of fixed maturities is normally derived through recent reported trades for identical or similar securities, making adjustments through the reporting date based

66  |


12. Fair Value Measurements (continued)

upon available market observable data described above. If there are no recent reported trades, the fair value of fixed maturities 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 residential mortgage-backed securities include the type of underlying mortgage loans, 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.

Derivatives.Derivatives are recorded at fair value on a recurring basis and include a credit default swap. The fair value of the credit default swap is measured by the Company using a third party pricing model. See note 20 for a discussion of the valuation model for the credit default swap, including the key inputs and assumptions to the model. Due to the significance of unobservable inputs required in measuring the fair value of the credit default swap, the credit default swap has been classified as Level 3 within the fair value hierarchy.

66  |


12. Fair Value Measurements (continued)

The following table presentstables present the balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2010, by level within the fair value hierarchy.

 

(dollars in thousands)

  Level 1   Level 2   Level 3   Total 

Assets:

        

Investments available-for-sale:

        

Fixed maturities:

        

U.S. Treasury securities and obligations of U.S. government agencies

  $—      $321,338    $—      $321,338  

Obligations of states, municipalities and political subdivisions

   —       2,799,339     —       2,799,339  

Foreign governments

   —       572,818     —       572,818  

Residential mortgage-backed securities

   —       425,563     —       425,563  

Asset-backed securities

   —       22,756     —       22,756  

Public utilities

   —       102,444     —       102,444  

Convertible bonds

   —       16,725     —       16,725  

All other corporate bonds

   —       1,170,243     —       1,170,243  
                    

Total fixed maturities

   —       5,431,226     —       5,431,226  
                    

Equity securities:

        

Insurance companies, banks and trusts

   710,986     —       —       710,986  

Industrial, consumer and all other

   1,010,985     —       —       1,010,985  
                    

Total equity securities

   1,721,971     —       —       1,721,971  
                    

Short-term investments

   269,466     55,874     —       325,340  
                    

Total investments available-for-sale

   1,991,437     5,487,100     —       7,478,537  
                    

Liabilities:

        

Derivative contracts

  $—      $—      $25,228    $25,228  
                    

The following table summarizes changes in Level 3 liabilities measured at fair value on a recurring basis.

(dollars in thousands)

  2010  2009 

Derivatives, Beginning of Period

  $26,968   $29,964  

Total gains included in:

   

Net income

   (1,740  (2,996

Other comprehensive income

   —      —    

Transfers into Level 3

   —      —    

Transfers out of Level 3

   —      —    
         

Derivatives, End of Period

  $25,228   $26,968  
         

Net unrealized gains included in net income relating to liabilities held at December 31, 2010 and 2009

  $1,740(1)  $2,996(1) 
         

(1)

Included in net investment income in the consolidated statements of operations and comprehensive income (loss).

   December 31, 2011 

(dollars in thousands)

  Level 1   Level 2   Level 3   Total 

Assets:

        

Investments available-for-sale:

        

Fixed maturities:

        

U.S. Treasury securities and obligations of U.S. government agencies

  $0    $322,193    $0    $322,193  

Obligations of states, municipalities and political subdivisions

   0     2,930,521     0     2,930,521  

Foreign governments

   0     616,814     0     616,814  

Residential mortgage-backed securities

   0     389,184     0     389,184  

Asset-backed securities

   0     16,818     0     16,818  

Public utilities

   0     69,427     0     69,427  

All other corporate bonds

   0     1,193,217     0     1,193,217  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturities

   0     5,538,174     0     5,538,174  
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities:

        

Insurance companies, banks and trusts

   684,703     0     0     684,703  

Industrial, consumer and all other

   1,189,224     0     0     1,189,224  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

   1,873,927     0     0     1,873,927  
  

 

 

   

 

 

   

 

 

   

 

 

 

Short-term investments

   477,348     63,666     0     541,014  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investments available-for-sale

   2,351,275     5,601,840     0     7,953,115  
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

        

Derivative contracts

  $0    $0    $29,331    $29,331  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

|  67


Markel Corporation & Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

12. Fair Value Measurements (continued)

 

   December 31, 2010 

(dollars in thousands)

  Level 1   Level 2   Level 3   Total 

Assets:

        

Investments available-for-sale:

        

Fixed maturities:

        

U.S. Treasury securities and obligations of U.S. government agencies

  $0    $321,338    $0    $321,338  

Obligations of states, municipalities and political subdivisions

   0     2,799,339     0     2,799,339  

Foreign governments

   0     475,730     0     475,730  

Residential mortgage-backed securities

   0     425,563     0     425,563  

Asset-backed securities

   0     22,756     0     22,756  

Public utilities

   0     102,444     0     102,444  

Convertible bonds

   0     16,725     0     16,725  

All other corporate bonds

   0     1,267,331     0     1,267,331  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturities

   0     5,431,226     0     5,431,226  
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities:

        

Insurance companies, banks and trusts

   710,986     0     0     710,986  

Industrial, consumer and all other

   1,010,985     0     0     1,010,985  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

   1,721,971     0     0     1,721,971  
  

 

 

   

 

 

   

 

 

   

 

 

 

Short-term investments

   269,466     55,874     0     325,340  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investments available-for-sale

   1,991,437     5,487,100     0     7,478,537  
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

        

Derivative contracts

  $0    $0    $25,228    $25,228  
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table summarizes changes in Level 3 liabilities measured at fair value on a recurring basis.

(dollars in thousands)

  2011  2010 

Derivatives, Beginning of Period

  $25,228   $26,968  

Total losses (gains) included in:

   

Net income

   4,103    (1,740

Other comprehensive income

   0    0  

Transfers into Level 3

   0    0  

Transfers out of Level 3

   0    0  
  

 

 

  

 

 

 

Derivatives, End of Period

  $29,331   $25,228  
  

 

 

  

 

 

 

Net unrealized losses (gains) included in net income relating to liabilities held at December 31, 2011 and 2010

  $4,103(1)  $(1,740)(1) 
  

 

 

  

 

 

 

(1)

Included in net investment income in the consolidated statements of income and comprehensive income.

There were no transfers into or out of Level 1 and Level 2 during 2010 and 2009.2011 or 2010. The Company did not have any assets or liabilities measured at fair value on a non-recurring basis during the yearyears ended December 31, 2011 and 2010. At December 31, 2010, the Company did not hold material investments in auction rate securities, loans held for sale or mortgage-backed securities backed by subprime or Alt-A collateral.

 

68  |


 

13. Reinsurance

The Company purchases reinsurance in order to reduce its retention on individual risks and enable it to underwrite policies with sufficient limits to meet policyholder needs. In a reinsurance transaction, an insurance company transfers, or cedes, all or part of its exposure in return for a portion of the premium. The ceding of insurance does not legally discharge the Company from its primary liability for the full amount of the policies, and the Company will be required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement.

A credit risk exists with reinsurance ceded to the extent that any reinsurer is unable to meet the obligations assumed under the reinsurance agreements. Allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers. At December 31, 20102011 and 2009,2010, balances recoverable from the Company’s ten largest reinsurers, by group, represented approximately 68%72% and 62%63%, respectively, of the reinsurance recoverable on paid and unpaid losses, before considering reinsurance allowances. At December 31, 2010,2011, the Company’s largest reinsurance balance was due from the Munich Re Group and represented 16%18% of the reinsurance recoverable on paid and unpaid losses, before considering reinsurance allowances.

To further reduce credit exposure to reinsurance recoverable balances, 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.

The following table summarizes the Company’s reinsurance allowance for doubtful accounts.

 

  Years Ended December 31,   Years Ended December 31, 

(dollars in thousands)

  2010 2009 2008   2011 2010 2009 

REINSURANCE ALLOWANCE, BEGINNINGOF YEAR

  $151,339   $155,882   $167,465    $155,190   $151,339   $155,882  

Additions:

    

Charged to expense

   —      —      2,634  

Charged to other accounts

   7,927    686    3,672  
          

TOTAL REINSURANCE ALLOWANCE ADDITIONS

   7,927    686    6,306  
          

Additions

   8,504    7,927    686  

Deductions

   (4,076  (5,229  (17,889   (94,627  (4,076  (5,229
            

 

  

 

  

 

 

REINSURANCE ALLOWANCE, ENDOF YEAR

  $155,190   $151,339   $155,882    $69,067   $155,190   $151,339  
            

 

  

 

  

 

 

Deductions for the year ended December 31, 2011 included a $78.5 million adjustment related to commutations completed by Markel International, which involved the termination of ceded reinsurance contracts. Of the total adjustment, $40.0 million related to reinsurance recoverables on losses and loss adjustment expenses for A&E related exposures. The adjustment had no impact on the reinsurance recoverable on unpaid losses, net of the reinsurance allowance, for any period presented.

Management believes the Company’s reinsurance allowance for doubtful accounts is adequate at December 31, 2010;2011; however, the deterioration in the credit quality of existing reinsurers or disputes over reinsurance agreements could result in additional charges.

68  |


13. Reinsurance (continued)

The following table summarizes the effect of reinsurance on premiums written and earned.

 

  Years Ended December 31,   Years Ended December 31, 

(dollars in thousands)

  2010 2009 2008   2011 2010 2009 
  Written Earned Written Earned Written Earned   Written Earned Written Earned Written Earned 

Direct

  $1,704,684   $1,681,027   $1,683,355   $1,808,471   $2,002,882   $2,088,824    $1,957,397   $1,873,512   $1,704,684   $1,681,027   $1,683,355   $1,808,471  

Assumed

   277,783    253,654    222,538    218,309    209,902    202,031     333,854    338,183    277,783    253,654    222,538    218,309  

Ceded

   (213,349  (203,760  (191,484  (210,945  (244,288  (268,671   (249,413  (232,355  (213,349  (203,760  (191,484  (210,945
                     

 

  

 

  

 

  

 

  

 

  

 

 

NET PREMIUMS

  $1,769,118   $1,730,921   $1,714,409   $1,815,835   $1,968,496   $2,022,184    $2,041,838   $1,979,340   $1,769,118   $1,730,921   $1,714,409   $1,815,835  
                     

 

  

 

  

 

  

 

  

 

  

 

 

|  69


Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

13. Reinsurance (continued)

Incurred losses and loss adjustment expenses were net of reinsurance recoverables (ceded incurred losses and loss adjustment expenses) of $159.8 million, $61.3 million $51.0 million and $226.7$51.0 million for the years ended December 31, 2011, 2010 and 2009, and 2008, respectively. The year ended December 31, 2010 included $43.2 million of estimated reinsurance recoverables related to the Deepwater Horizon drilling rig explosion. Ceded incurred losses and loss adjustment expenses in 2008 included ceded losses on the 2008 Hurricanes of $58.6 million.

The percentage of assumed earned premiums to net earned premiums was 15%17%, 12%15% and 10%12% for the years ended December 31, 2011, 2010 2009 and 2008,2009, respectively.

 

 

14. Commitments and Contingencies

a)The Company leases substantially all of its facilities and certain furniture and equipment under noncancelable operating leases with remaining terms up to ten years.

The following table summarizes the Company’s minimum annual rental commitments, excluding taxes, insurance and other operating costs payable directly by the Company, for noncancelable operating leases at December 31, 2010.2011.

 

Years Ending December 31,

  (dollars in
thousands)
   (dollars in
thousands)
 

2011

  $17,689  

2012

   16,820    $21,460  

2013

   16,761     21,724  

2014

   15,797     20,553  

2015

   14,414     18,870  

2016 and thereafter

   34,353  

2016

   13,633  

2017 and thereafter

   35,188  
      

 

 

TOTAL

  $115,834    $131,428  
      

 

 

Rental expense was $25.8 million, $22.9 million $19.8 million and $20.7$19.8 million for the years ended December 31, 2011, 2010 2009 and 2008,2009, respectively.

b)Contingencies arise in the normal conductcourse of the Company’s operations and are not expected to have a material impact on the Company’s financial condition or results of operations. However, adverse outcomes are possible and could negatively impact the Company’s financial condition and results of operations.

 

70  |


 

15. Related Party Transactions

The Company engages in certain related party transactions in the normal course of business. These transactions are at arm’s length and are immaterial to the Company’s consolidated financial statements.

 

|  69


Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

16. Statutory Financial Information

a)The following table includes unaudited selected information for the Company’s wholly-owned domestic insurance subsidiaries as filed with state insurance regulatory authorities.

 

  Years Ended December 31,   Years Ended December 31, 

(dollars in thousands)

  2010   2009   2008   2011   2010   2009 

Net income (loss)

  $165,605    $129,035    $(19,073

Net income

  $180,744    $165,605    $129,035  
              

 

   

 

   

 

 

Statutory capital and surplus

  $1,503,165    $1,308,437    $985,675    $1,460,813    $1,456,879    $1,265,621  
              

 

   

 

   

 

 

The laws of the domicile states of the Company’s domestic insurance subsidiaries govern the amount of dividends that may be paid to the Company. Generally, statutes in the domicile states of the Company’s domestic insurance subsidiaries require prior approval for payment of extraordinary as opposed to ordinary dividends. At December 31, 2010,2011, the Company’s domestic insurance subsidiaries could pay up to $197.0$222.2 million during the following 12 months under the ordinary dividend regulations.

In converting from statutory accounting principles to U.S. GAAP, typical adjustments include deferral of policy acquisition costs, differences in the calculation of deferred income taxes and the inclusion of net unrealized gains or losses relating to fixed maturities in shareholders’ equity. The Company does not use any permitted statutory accounting practices that are different from prescribed statutory accounting practices.

b)MIICL files an annual audited return with the Financial Services Authority (FSA) in the United Kingdom. Assets and liabilities reported within the annual FSA return are prepared subject to specified rules concerning valuation and admissibility.

The following table summarizes MIICL’s FSA Return net income (loss) and policyholders’ surplus.

 

  Years Ended December 31,   Years Ended December 31, 

(dollars in thousands)

  2010(1)   2009   2008   2011(1)   2010   2009 

Net income (loss)

  $82,984    $80,193    $(40,946

Net income

  $13,229    $80,688    $80,193  
              

 

   

 

   

 

 

Policyholders’ surplus

  $522,325    $382,741    $264,421    $426,655    $516,110    $382,741  
              

 

   

 

   

 

 

 

(1)

Estimated and unaudited.

MIICL’s ability to pay dividends is limited by applicable FSA requirements, which require MIICL to give 14 days advance notice to the FSA of its intention to declare and pay a dividend. In addition, MIICL must comply with the United Kingdom Companies Act of 2006, which provides that dividends may only be paid out of profits available for that purpose.

 

|  71


Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

17. Segment Reporting Disclosures

The Company operates in three segments of the specialty insurance marketplace: the Excess and Surplus Lines, the Specialty Admitted and the London markets. The Company considers many factors, including the nature of its insurance products, production sources, distribution strategies and regulatory environment in determining how to aggregate operating segments.

All investing activities related to our insurance operations are included in the Investing segment. For purposes of segment reporting, the Other Insurance (Discontinued Lines) segment includes lines of business that have been discontinued in conjunction with an acquisition.acquisitions. The Company’s non-insurance operations primarily consist of controlling interests in various industrial and service businesses. For purposes of segment reporting, the Company’s non-insurance operations are not considered to be a reportable operating segment.

70  |


17. Segment Reporting Disclosures (continued)

The following table summarizes the Company’s gross written premiums by country. Gross written premiums are attributed to individual countries based upon location of risk.

 

  Years Ended December 31,   Years Ended December 31, 

(dollars in thousands)

  2010   % of
Total
 2009   % of
Total
 2008   % of
Total
   2011   % of
Total
 2010   % of
Total
 2009   % of
Total
 

United States

  $1,433,185     72 $1,417,497     74 $1,701,677     77  $1,590,238     69 $1,433,185     72 $1,417,497     74

United Kingdom

   137,502     7    136,907     7    165,671     7     139,349     6    137,502     7    136,907     7  

Canada

   92,017     5    35,685     2    42,379     2     126,434     6    92,017     5    35,685     2  

Other countries

   319,763     16    315,804     17    303,057     14     435,230     19    319,763     16    315,804     17  
                        

 

   

 

  

 

   

 

  

 

   

 

 

Total

  $1,982,467     100 $1,905,893     100 $2,212,784     100

TOTAL

  $2,291,251     100 $1,982,467     100 $1,905,893     100
                        

 

   

 

  

 

   

 

  

 

   

 

 

Segment profit or loss for each of the Company’s operating segments is measured by underwriting profit or loss. 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. Underwriting profit or loss does not replace operating income (loss) or net income (loss) computed in accordance with U.S. GAAP as a measure of profitability. Underwriting profit or loss provides a basis for management to evaluate the Company’s underwriting performance. Segment profit for the Investing segment is measured by net investment income and net realized investment gains or losses.

For management reporting purposes, the Company allocates assets to its underwriting, investing and non-insurance operations. Underwriting assets are all assets not specifically allocated to the Investing segment or to the Company’s non-insurance operations. Underwriting assets are not allocated to the Excess and Surplus Lines, Specialty Admitted, London Insurance Market or Other Insurance (Discontinued Lines) segments since the Company does not manage its assets by operating segment. Invested assets related to our insurance operations are allocated to the Investing segment since these assets are available for payment of losses and expenses for all operating segments. The Company does not allocate capital expenditures for long-lived assets to any of its operating segments for management reporting purposes.

 

72  |  71


Markel Corporation & Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

17. Segment Reporting Disclosures (continued)

 

a)The following tables summarize the Company’s segment disclosures.

 

  Year Ended December 31, 2010   Year Ended December 31, 2011 

(dollars in thousands)

  Excess and
Surplus

Lines
 Specialty
Admitted
 London
Insurance
Market
 Other
Insurance
(Discontinued
Lines)
 Investing   Consolidated   Excess and
Surplus
Lines
 Specialty
Admitted
 London
Insurance
Market
 Other
Insurance
(Discontinued
Lines)
 Investing   Consolidated 

Gross premium volume

  $898,409   $375,036   $708,968   $54   $—      $1,982,467    $893,427   $572,392   $825,301   $131   $0    $2,291,251  

Net written premiums

   797,518    348,634    622,799    167    —       1,769,118     772,279    543,213    726,359    (13  0     2,041,838  

Earned premiums

   809,672    343,574    577,507    168    —       1,730,921     756,306    527,293    695,753    (12  0     1,979,340  

Losses and loss adjustment expenses

   (413,998  (208,519  (320,350  (3,362  —       (946,229   (318,583  (364,144  (531,625  4,366    0     (1,209,986

Amortization of policy acquisition costs

   (190,903  (85,521  (149,469  —      —       (425,893   (172,269  (129,731  (177,454  0    0     (479,454

Other operating expenses

   (169,221  (48,283  (81,553  74    —       (298,983   (156,419  (78,509  (96,149  352    0     (330,725
                      

 

  

 

  

 

  

 

  

 

   

 

 

Underwriting profit (loss)

   35,550    1,251    26,135    (3,120  —       59,816     109,035    (45,091  (109,475  4,706    0     (40,825
                      

 

  

 

  

 

  

 

  

 

   

 

 

Net investment income

   —      —      —      —      272,530     272,530     0    0    0    0    263,676     263,676  

Net realized investment gains

   —      —      —      —      36,362     36,362     0    0    0    0    35,857     35,857  

Other revenues (insurance)

   —      12,354    6,753    —      —       19,107     0    33,545    0    0    0     33,545  

Other expenses (insurance)

   —      (16,055  (5,854  —      —       (21,909   0    (33,722  0    0    0     (33,722
                      

 

  

 

  

 

  

 

  

 

   

 

 

Segment profit (loss)

  $35,550   $(2,450 $27,034   $(3,120 $308,892    $365,906    $109,035   $(45,268 $(109,475 $4,706   $299,533    $258,531  
                      

 

  

 

  

 

  

 

  

 

   

 

 

Other revenues (non-insurance)

         166,473           317,532  

Other expenses (non-insurance)

         (146,381         (275,324

Amortization of intangible assets

         (16,824         (24,291

Interest expense

         (73,663         (86,252
                  

 

 

INCOME BEFORE INCOME TAXES

        $295,511          $190,196  
                  

 

 

U.S. GAAP combined ratio(1)

   96  100  95  NM(2)     97   86  109  116  NM(2)     102
                      

 

  

 

  

 

  

 

  

 

   

 

 

 

  Year Ended December 31, 2009   Year Ended December 31, 2010 

(dollars in thousands)

  Excess and
Surplus

Lines
 Specialty
Admitted
 London
Insurance
Market
 Other
Insurance
(Discontinued
Lines)
 Investing Consolidated   Excess and
Surplus
Lines
 Specialty
Admitted
 London
Insurance
Market
 Other
Insurance
(Discontinued
Lines)
 Investing   Consolidated 

Gross premium volume

  $962,702   $301,827   $641,226   $138   $—     $1,905,893    $898,409   $375,036   $708,968   $54   $0    $1,982,467  

Net written premiums

   869,695    279,266    566,046    (598  —      1,714,409     797,518    348,634    622,799    167    0     1,769,118  

Earned premiums

   940,098    303,897    572,438    (598  —      1,815,835     809,672    343,574    577,507    168    0     1,730,921  

Losses and loss adjustment expenses

   (504,631  (186,215  (298,741  (3,276  —      (992,863   (413,998  (208,519  (320,350  (3,362  0     (946,229

Amortization of policy acquisition costs

   (221,518  (72,306  (146,992  —      —      (440,816   (190,903  (85,521  (149,469  0    0     (425,893

Other operating expenses

   (177,707  (43,052  (74,243  (842  —      (295,844   (169,221  (48,283  (81,553  74    0     (298,983
                     

 

  

 

  

 

  

 

  

 

   

 

 

Underwriting profit (loss)

   36,242    2,324    52,462    (4,716  —      86,312     35,550    1,251    26,135    (3,120  0     59,816  
                     

 

  

 

  

 

  

 

  

 

   

 

 

Net investment income

   —      —      —      —      259,809    259,809     0    0    0    0    272,530     272,530  

Net realized investment losses

   —      —      —      —      (96,100  (96,100

Net realized investment gains

   0    0    0    0    36,362     36,362  

Other revenues (insurance)

   —      —      4,116    —      —      4,116     0    12,354    6,753    0    0     19,107  

Other expenses (insurance)

   —      —      (3,248  —      —      (3,248   0    (16,055  (5,854  0    0     (21,909
                     

 

  

 

  

 

  

 

  

 

   

 

 

Segment profit (loss)

  $36,242   $2,324   $53,330   $(4,716 $163,709   $250,889    $35,550   $(2,450 $27,034   $(3,120 $308,892    $365,906  
                     

 

  

 

  

 

  

 

  

 

   

 

 

Other revenues (non-insurance)

        85,666           166,473  

Other expenses (non-insurance)

        (77,251         (146,381

Amortization of intangible assets

        (6,698         (16,824

Interest expense

        (53,969         (73,663
                 

 

 

INCOME BEFORE INCOME TAXES

       $198,637          $295,511  
                 

 

 

U.S. GAAP combined ratio(1)

   96  99  91  NM(2)   —      95   96  100  95  NM(2)     97
                     

 

  

 

  

 

  

 

  

 

   

 

 

 

(1)

The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.

 

(2)

NM — Ratio is not meaningful.

 

72  |  73


Markel Corporation & Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

17. Segment Reporting Disclosures (continued)

 

  Year Ended December 31, 2008   Year Ended December 31, 2009 

(dollars in thousands)

  Excess and
Surplus
Lines
 Specialty
Admitted
 London
Insurance
Market
 Other
Insurance
(Discontinued
Lines)
 Investing Consolidated   Excess and
Surplus
Lines
 Specialty
Admitted
 London
Insurance
Market
 Other
Insurance
(Discontinued
Lines)
 Investing Consolidated 

Gross premium volume

  $1,163,992   $355,061   $693,138   $593   $—     $2,212,784    $962,702   $301,827   $641,226   $138   $0   $1,905,893  

Net written premiums

   1,028,816    321,109    617,946    625    —      1,968,496     869,695    279,266    566,046    (598  0    1,714,409  

Earned premiums

   1,089,967    315,764    615,828    625    —      2,022,184     940,098    303,897    572,438    (598  0    1,815,835  

Losses and loss adjustment expenses

   (609,790  (209,022  (420,438  (29,775  —      (1,269,025   (504,631  (186,215  (298,741  (3,276  0    (992,863

Amortization of policy acquisition costs

   (263,348  (73,211  (169,967  —      —      (506,526   (221,518  (72,306  (146,992  0    0    (440,816

Other operating expenses

   (128,667  (51,766  (52,682  1,095    —      (232,020   (177,707  (43,052  (74,243  (842  0    (295,844
                     

 

  

 

  

 

  

 

  

 

  

 

 

Underwriting profit (loss)

   88,162    (18,235  (27,259  (28,055  —      14,613     36,242    2,324    52,462    (4,716  0    86,312  
                     

 

  

 

  

 

  

 

  

 

  

 

 

Net investment income

   —      —      —      —      282,148    282,148     0    0    0    0    259,809    259,809  

Net realized investment losses

   —      —      —      —      (407,594  (407,594   0    0    0    0    (96,100  (96,100

Other revenues (insurance)

   0    0    4,116    0    0    4,116  

Other expenses (insurance)

   0    0    (3,248  0    0    (3,248
                     

 

  

 

  

 

  

 

  

 

  

 

 

Segment profit (loss)

  $88,162   $(18,235 $(27,259 $(28,055 $(125,446 $(110,833  $36,242   $2,324   $53,330   $(4,716 $163,709   $250,889  
                     

 

  

 

  

 

  

 

  

 

  

 

 

Other revenues (non-insurance)

        79,845          85,666  

Other expenses (non-insurance)

        (74,889        (77,251

Amortization of intangible assets

        (5,742        (6,698

Interest expense

        (48,210        (53,969
                

 

 

LOSS BEFORE INCOME TAXES

       $(159,829

INCOME BEFORE INCOME TAXES

       $198,637  
                

 

 

U.S. GAAP combined ratio(1)

   92  106  104  NM(2)   —      99   96  99  91  NM(2)    95
                     

 

  

 

  

 

  

 

  

 

  

 

 

 

(1)

The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.

 

(2)

NM — Ratio is not meaningful.

b)The following table summarizes deferred policy acquisition costs, unearned premiums and unpaid losses and loss adjustment expenses by segment.

 

(dollars in thousands)

  Deferred Policy
Acquisition Costs
   Unearned
Premiums
   Unpaid Losses and
Loss Adjustment Expenses
   Deferred Policy
Acquisition Costs
   Unearned
Premiums
   Unpaid Losses and
Loss Adjustment Expenses
 

December 31, 2011

      

Excess and Surplus Lines

  $73,403    $382,632    $2,235,218  

Specialty Admitted

   54,399     238,581     717,642  

London Insurance Market

   66,872     294,717     1,981,895  

Other Insurance (Discontinued Lines)

   0     0     464,114  
  

 

   

 

   

 

 

TOTAL

  $194,674    $915,930    $5,398,869  
  

 

   

 

   

 

 

December 31, 2010

            

Excess and Surplus Lines

  $73,368    $356,277    $2,442,987    $73,368    $356,277    $2,442,987  

Specialty Admitted

   54,669     222,965     628,775     54,669     222,965     628,775  

London Insurance Market

   60,746     260,295     1,820,399     60,746     260,295     1,820,399  

Other Insurance (Discontinued Lines)

   —       —       506,245     0     0     506,245  
              

 

   

 

   

 

 

TOTAL

  $188,783    $839,537    $5,398,406    $188,783    $839,537    $5,398,406  
              

 

   

 

   

 

 

December 31, 2009

      

Excess and Surplus Lines

  $75,835    $369,262    $2,620,119  

Specialty Admitted

   31,585     134,979     383,820  

London Insurance Market

   49,377     213,487     1,855,014  

Other Insurance (Discontinued Lines)

   —       —       568,143  
            

TOTAL

  $156,797    $717,728    $5,427,096  
            

 

74  |  73


Markel Corporation & Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

17. Segment Reporting Disclosures (continued)

 

c)The following table summarizes segment earned premiums by major product grouping.

 

(dollars in thousands)

  Property   Casualty   Professional/
Products Liability
   Workers’
Compensation
   Other Consolidated   Property   Casualty   Professional/
Products Liability
   Workers’
Compensation
   Other Consolidated 

Year Ended December 31, 2011

           

Excess and Surplus Lines

  $124,798    $213,632    $318,546    $0    $99,330   $756,306  

Specialty Admitted

   135,077     122,180     18,625     200,797     50,614    527,293  

London Insurance Market

   231,798     117,022     173,141     0     173,792    695,753  

Other Insurance (Discontinued Lines)

   0     0     0     0     (12  (12
  

 

   

 

   

 

   

 

   

 

  

 

 

EARNED PREMIUMS

  $491,673    $452,834    $510,312    $200,797    $323,724   $1,979,340  
  

 

   

 

   

 

   

 

   

 

  

 

 

Year Ended December 31, 2010

                      

Excess and Surplus Lines

  $145,250    $191,770    $339,427    $—      $133,225   $809,672    $145,250    $191,770    $339,427    $0    $133,225   $809,672  

Specialty Admitted

   121,268     118,253     17,085     36,853     50,115    343,574     121,268     118,253     17,085     36,853     50,115    343,574  

London Insurance Market

   201,796     50,244     176,767     —       148,700    577,507     201,796     50,244     176,767     0     148,700    577,507  

Other Insurance (Discontinued Lines)

   —       —       —       —       168    168     0     0     0     0     168    168  
                         

 

   

 

   

 

   

 

   

 

  

 

 

EARNED PREMIUMS

  $468,314    $360,267    $533,279    $36,853    $332,208   $1,730,921    $468,314    $360,267    $533,279    $36,853    $332,208   $1,730,921  
                         

 

   

 

   

 

   

 

   

 

  

 

 

Year Ended December 31, 2009

                      

Excess and Surplus Lines

  $174,046    $233,955    $322,822    $—      $209,275   $940,098    $174,046    $233,955    $322,822    $0    $209,275   $940,098  

Specialty Admitted

   131,362     130,566     —       —       41,969    303,897     131,362     130,566     0     0     41,969    303,897  

London Insurance Market

   200,410     46,327     190,394     —       135,307    572,438     200,410     46,327     190,394     0     135,307    572,438  

Other Insurance (Discontinued Lines)

   —       —       —       —       (598  (598   0     0     0     0     (598  (598
                         

 

   

 

   

 

   

 

   

 

  

 

 

EARNED PREMIUMS

  $505,818    $410,848    $513,216    $—      $385,953   $1,815,835    $505,818    $410,848    $513,216    $0    $385,953   $1,815,835  
                         

 

   

 

   

 

   

 

   

 

  

 

 

Year Ended December 31, 2008

           

Excess and Surplus Lines

  $182,114    $326,260    $354,053    $—      $227,540   $1,089,967  

Specialty Admitted

   140,650     131,716     —       —       43,398    315,764  

London Insurance Market

   204,722     48,713     243,050     —       119,343    615,828  

Other Insurance (Discontinued Lines)

   —       —       —       —       625    625  
                       

EARNED PREMIUMS

  $527,486    $506,689    $597,103    $—      $390,906   $2,022,184  
                       

The Company does not manage products at this level of aggregation. The Company offers over 100 product lines and manages these products in logical groupings within each operating segment.

d)The following table reconciles segment assets to the Company’s consolidated balance sheets.

 

  December 31,   December 31, 

(dollars in thousands)

  2010   2009   2008   2011   2010   2009 

Segment Assets:

            

Investing

  $8,198,401    $7,844,052    $6,892,005    $8,692,391    $8,198,401    $7,844,052  

Underwriting

   2,371,406     2,214,991     2,569,234     2,209,431     2,273,621     2,214,991  
              

 

   

 

   

 

 

TOTAL SEGMENT ASSETS

  $10,569,807    $10,059,043    $9,461,239    $10,901,822    $10,472,022    $10,059,043  
              

 

   

 

   

 

 

Non-insurance operations

   255,782     182,853     50,815     630,281     353,567     182,853  
              

 

   

 

   

 

 

TOTAL ASSETS

  $10,825,589    $10,241,896    $9,512,054    $11,532,103    $10,825,589    $10,241,896  
              

 

   

 

   

 

 

|  75


Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

18. Employee Benefit Plans

a)The Company maintains defined contribution plans for employees of its United States insurance operations in accordance with Section 401(k) of the Internal Revenue Code. Employees of the Company’s non-insurance subsidiaries are provided post-retirement benefits under separate plans. The Company also provides another defined contribution plan for Markel International employees. This plan is in line with local market terms and conditions of employment. Expenses relating to the Company’s defined contribution plans were $14.4$17.8 million, $13.1$14.4 million and $13.1 million in 2011, 2010 and 2009, and 2008, respectively.

74  |


18. Employee Benefit Plans (continued)

b)The Terra Nova Pension Plan is a defined benefit plan which covers Markel International employees who meet the eligibility conditions set out in the plan. The plan has been closed to new participants since 2001. The cost of providing pensions for employees is charged to earnings over the average working life of employees according to actuarial recommendations. Final benefits are based on the employee’s years of credited service and the higher of pensionable compensation received in the calendar year preceding retirement or the best average pensionable compensation received in any three consecutive years in the ten years preceding retirement. Effective April 1, 2012, employees will no longer accrue benefits for future service in the Terra Nova Pension Plan. The Company uses December 31 as the measurement date for the Terra Nova Pension Plan.

The following table summarizes the funded status of the Terra Nova Pension Plan and the amounts recognized on the accompanying consolidated balance sheets of the Company.

 

  Years Ended December 31,   Years Ended December 31, 

(dollars in thousands)

  2010 2009   2011 2010 

Change in projected benefit obligation:

      

Projected benefit obligation at beginning of period

  $125,052   $93,442    $130,266   $125,052  

Service cost

   1,238    1,374     1,357    1,238  

Interest cost

   6,812    5,881     7,115    6,812  

Participant contributions

   271    148     319    271  

Benefits paid

   (4,004  (2,719   (3,045  (4,004

Actuarial loss

   5,499    17,210     6,440    5,499  

Effect of foreign currency rate changes

   (4,602  9,716     (1,289  (4,602
         

 

  

 

 

PROJECTED BENEFIT OBLIGATIONAT ENDOF YEAR

  $130,266   $125,052    $141,163   $130,266  
         

 

  

 

 

Change in plan assets:

      

Fair value of plan assets at beginning of period

  $120,092   $86,064    $134,589   $120,092  

Actual gain on plan assets

   16,099    20,823     1,755    16,099  

Employer contributions

   6,560    6,829     6,786    6,560  

Participant contributions

   271    148     319    271  

Benefits paid

   (4,004  (2,719   (3,045  (4,004

Effect of foreign currency rate changes

   (4,429  8,947     (1,079  (4,429
         

 

  

 

 

FAIR VALUEOF PLAN ASSETSAT ENDOF YEAR

  $134,589   $120,092    $139,325   $134,589  
         

 

  

 

 

Funded status of the plan

  $4,323   $(4,960  $(1,838 $4,323  
         

 

  

 

 

Net actuarial pension loss

   44,064    47,882     56,676    44,064  
         

 

  

 

 

TOTAL

  $48,387   $42,922    $54,838   $48,387  
   ��     

 

  

 

 

Net actuarial pension loss is recognized as a component of accumulated other comprehensive income, net of a tax benefit of $15.5 million and $12.3 million in 2011 and $13.4 million in 2010, and 2009, respectively. The assetliability for pension benefits, also referred to as the funded status of the plan, at December 31, 2011 was included in other liabilities on the consolidated balance sheet. The asset for pension benefits at December 31, 2010 iswas included in other assets on the consolidated balance sheet. The liability for pension benefits at December 31, 2009 is included in other liabilities on the consolidated balance sheet.

 

76  |  75


Markel Corporation & Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

18. Employee Benefit Plans (continued)

 

The following table summarizes the components of net periodic benefit cost and the weighted average assumptions for the Terra Nova Pension Plan.

 

  Years Ended December 31,   Years Ended December 31, 

(dollars in thousands)

  2010 2009 2008   2011 2010 2009 

Components of net periodic benefit cost:

        

Service cost

  $1,238   $1,374   $1,940    $1,357   $1,238   $1,374  

Interest cost

   6,812    5,881    5,850     7,115    6,812    5,881  

Expected return on plan assets

   (8,645  (6,877  (7,208   (9,834  (8,645  (6,877

Amortization of net actuarial pension loss

   1,931    1,990    1,602     1,908    1,931    1,990  
            

 

  

 

  

 

 

NET PERIODIC BENEFIT COST

  $1,336   $2,368   $2,184    $546   $1,336   $2,368  
            

 

  

 

  

 

 

Weighted average assumptions as of December 31:

        

Discount rate

   5.4  5.8  6.0   4.8  5.4  5.8

Expected return on plan assets

   6.8  7.2  7.2   6.6  6.8  7.2

Rate of compensation increase

   4.5  4.5  4.5   3.2  4.5  4.5
            

 

  

 

  

 

 

The projected benefit obligation and the net periodic benefit cost are determined by independent actuaries using assumptions provided by the Company. In determining the discount rate, the Company uses the current yield on high-quality, fixed-income investments that have maturities corresponding to the anticipated timing of estimated defined benefit payments. The Company’s discount rate approximates a bond yield from a published index that includes “AA” rated corporate bonds with maturities of 15 years or more. The expected return on plan assets is estimated based upon the anticipated average yield on plan assets and reflects expected changes in the allocation of plan assets. Asset returns reflect management’s belief that 4.5% is a reasonable rate of return to anticipate for fixed maturities given current market conditions and future expectations. In addition, the expected return on plan assets includes an assumption that equity securities will outperform fixed maturities by approximately 3.5% over the long term. The rate of compensation increase is based upon historical experience and management’s expectation of future compensation.

Management’s discount rate and rate of compensation increase assumptions at December 31, 20102011 were used to calculate the Company’s projected benefit obligation. Management’s discount rate, expected return on plan assets and rate of compensation increase assumptions at December 31, 20092010 were used to calculate the net periodic benefit cost for 2010.2011. The Company estimates that net periodic benefit cost in 20112012 will include an expense of $1.8$2.5 million resulting from the amortization of the net actuarial pension loss included as a component of accumulated other comprehensive income at December 31, 2010.2011.

The fair values of each of the plan’s assets are measured using quoted prices in active markets for identical assets, which represent Level 1 inputs within the fair value hierarchy established in FASB ASC 820-10. The following table summarizes the fair value of plan assets as of December 31, 20102011 and 2009.2010.

 

  December 31,   December 31, 

(dollars in thousands)

  2010   2009   2011   2010 

Plan assets:

        

Fixed maturity index funds

  $31,230    $24,535    $52,576    $31,230  

Equity security index funds

   103,273     95,538     86,733     103,273  

Cash and cash equivalents

   86     19     16     86  
          

 

   

 

 

TOTAL

  $134,589    $120,092    $139,325    $134,589  
          

 

   

 

 

 

76  |  77


Markel Corporation & Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

18. Employee Benefit Plans (continued)

 

The Company’s target asset allocation for the plan is 73%66% equity securities and 27%34% fixed maturities. At December 31, 2011, the actual allocation of assets in the plan was 62% equity securities and 38% fixed maturities. At December 31, 2010, the actual allocation of plan assets in the plan was 77% equity securities and 23% fixed maturities. At December 31, 2009, the actual allocation of plan assets was 80% equity securities and 20% fixed maturities.

Investments are managed by a third-party investment manager. Equity securities are invested in two index funds that are allocated 67% to shares of United Kingdom companies and 33% to companies in other markets. The primary objective of investing in these funds is to earn rates of return that are consistently in excess of inflation. Investing in equity securities, historically, has provided rates of return that are higher than investments in fixed maturities. As the Company’s obligations under this pension plan are expected to be paid out over a period in excess of thirty years, the Company primarily invests in equity securities. Fixed maturity investments are allocated between five index funds, two that include United Kingdom government securities, one that includes securities issued by other foreign governments and two that include United Kingdom corporate securities. The assets in these funds are invested to meet the Company’s obligations for current pensioners and those individuals nearing retirement. The plan does not invest in the Company’s common shares.

At December 31, 20102011 and 2009,2010, the fair value of plan assets exceeded the plan’s accumulated benefit obligation of $109.8$124.5 million and $105.8$109.8 million, respectively. The Company expects to make plan contributions of $6.5$5.6 million in 2011.2012.

The benefits expected to be paid in each year from 20112012 to 20152016 are $2.6 million, $2.7 million, $2.8 million, $2.9 million, $3.0 million, $3.1$2.8 million and $3.2$2.9 million, respectively. The aggregate benefits expected to be paid in the five years from 20162017 to 20202021 are $17.3$16.1 million. The expected benefits to be paid are based on the same assumptions used to measure the Company’s projected benefit obligation at December 31, 20102011 and include estimated future employee service.

c)AMF Bakery Systems (AMF), one of the Company’s non-insurance subsidiaries, participates in a multiemployer defined benefit pension plan, Regime de retraite patronal-syndical (Quebec) de l’A.I.M. (Quebec pension plan no. 26467). The multiemployer plan covers approximately 90 union employees within the Canadian operations of AMF. AMF’s contributions to the multiemployer plan were $0.5 million, $0.2 million and $0.2 million in 2011, 2010 and 2009, respectively. AMF’s contributions to the multiemployer plan represented 11% of the total contributions made to the multiemployer plan in both 2010 and 2009. As of November 30, 2011, the multiemployer plan was approximately 70% funded.

|  77


Markel Corporation & SubsidiariesIn December 2011, AMF gave notice to the trustees of the multiemployer plan of its intent to withdraw. As a result, AMF established a liability of $2.0 million for its obligations under the multiemployer plan, which is included in other liabilities on the consolidated balance sheet. AMF continues to negotiate the terms of withdrawal with the trustees of the multiemployer plan. In the unlikely event that AMF is unable to withdraw from the multiemployer plan and other employers fail to fund their obligations under the multiemployer plan, AMF may be required to make up a shortfall, if any, between the assets of the multiemployer plan and the projected benefit obligation.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)78  |


 

19. Markel Corporation (Parent Company Only) Financial Information

The following parent company only condensed financial information reflects the financial condition,position, results of operations and cash flows of Markel Corporation.

CONDENSED BALANCE SHEETS

 

   December 31, 
   2010   2009 
   (dollars in thousands) 

ASSETS

    

Investments, available-for-sale, at estimated fair value:

    

Fixed maturities (amortized cost of $194,441 in 2010 and $233,932 in 2009)

  $201,736    $249,640  

Equity securities (cost of $276,507 in 2010 and $218,103 in 2009)

   391,831     304,416  

Short-term investments (estimated fair value approximates cost)

   109,994     179,986  

Investments in affiliates

   —       43,633  
          

TOTAL INVESTMENTS

   703,561     777,675  
          

Cash and cash equivalents

   182,088     243,182  

Receivables

   27,467     18,093  

Investments in consolidated subsidiaries

   2,917,796     2,677,419  

Notes receivable from subsidiaries

   296,694     66,517  

Income taxes receivable

   6,087     21,899  

Net deferred tax asset

   22,214     —    

Other assets

   50,923     47,786  
          

TOTAL ASSETS

  $4,206,830    $3,852,571  
          

LIABILITIESAND SHAREHOLDERS’ EQUITY

    

Senior long-term debt

  $937,015    $936,242  

Net deferred tax liability

   —       27,644  

Other liabilities

   98,292     114,325  
          

TOTAL LIABILITIES

   1,035,307     1,078,211  
          

TOTAL SHAREHOLDERS’ EQUITY

   3,171,523     2,774,360  
          

TOTAL LIABILITIESAND SHAREHOLDERS’ EQUITY

  $4,206,830    $3,852,571  
          

78  |


19. Markel Corporation (Parent Company Only) Financial Information (continued)

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

   Years Ended December 31, 
   2010  2009  2008 
   (dollars in thousands) 

REVENUES

    

Net investment income

  $21,070   $21,899   $5,432  

Dividends on common stock of consolidated subsidiaries

   142,014    44,048    246,346  

Net realized investment gains (losses):

    

Other-than-temporary impairment losses

   (8,087  (28,185  (63,043

Net realized investment gains (losses), excluding other-than-temporary impairment losses

   21,496    4,201    (62,281
             

Net realized investment gains (losses)

   13,409    (23,984  (125,324

Other

   5    4    2  
             

TOTAL REVENUES

   176,498    41,967    126,456  
             

EXPENSES

    

Interest

   69,107    52,286    47,357  

Other

   1,226    4,764    2,336  
             

TOTAL EXPENSES

   70,333    57,050    49,693  
             

INCOME (LOSS) BEFORE EQUITYIN UNDISTRIBUTED EARNINGSOF CONSOLIDATED SUBSIDIARIESAND INCOME TAXES

   106,165    (15,083  76,763  

Equity in undistributed earnings of consolidated subsidiaries

   113,892    203,822    (218,823

Income tax benefit

   46,736    12,899    83,293  
             

NET INCOME (LOSS ) TO SHAREHOLDERS

  $266,793   $201,638   $(58,767
             

OTHER COMPREHENSIVE INCOME (LOSS)TO SHAREHOLDERS

    

Change in net unrealized gains on investments, net of taxes:

    

Net holding gains (losses) arising during the period

  $28,646   $27,516   $(92,656

Consolidated subsidiaries’ net holding gains (losses) arising during the period

   167,002    299,443    (502,111

Consolidated subsidiaries’ unrealized other-than-temporary impairment losses on fixed maturities arising during the period

   672    (5,405  —    

Reclassification adjustments for net gains (losses) included in net income (loss) to shareholders

   (15,257  6,043    81,403  

Consolidated subsidiaries’ reclassification adjustments for net gains (losses) included in net income (loss) to shareholders

   (17,574  46,840    183,495  
             

Change in net unrealized gains on investments, net of taxes

   163,489    374,437    (329,869
             

Change in foreign currency translation adjustments, net of taxes

   1,656    (22,532  19,558  

Consolidated subsidiaries’ change in foreign currency translation adjustments, net of taxes

   (4,124  41,720    (27,451

Change in net actuarial pension loss, net of taxes

   —      460    726  

Consolidated subsidiaries’ change in net actuarial pension loss, net of taxes

   2,749    (4,728  (7,466
             

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)TO SHAREHOLDERS

   163,770    389,357    (344,502
             

COMPREHENSIVE INCOME (LOSS )TO SHAREHOLDERS

  $430,563   $590,995   $(403,269
             
   December 31, 
   2011   2010 
   (dollars in thousands) 

ASSETS

    

Investments, available-for-sale, at estimated fair value:

    

Fixed maturities (amortized cost of $187,088 in 2011 and $194,441 in 2010)

  $196,513    $201,736  

Equity securities (cost of $275,731 in 2011 and $276,507 in 2010)

   391,094     391,831  

Short-term investments (estimated fair value approximates cost)

   289,995     109,994  
  

 

 

   

 

 

 

TOTAL INVESTMENTS

   877,602     703,561  
  

 

 

   

 

 

 

Cash and cash equivalents

   281,062     182,088  

Receivables

   16,125     27,467  

Investments in consolidated subsidiaries

   3,112,545     2,917,796  

Notes receivable from subsidiaries

   290,710     296,694  

Income taxes receivable

   7,394     6,087  

Net deferred tax asset

   22,221     22,214  

Other assets

   51,875     50,923  
  

 

 

   

 

 

 

TOTAL ASSETS

  $4,659,534    $4,206,830  
  

 

 

   

 

 

 

LIABILITIESAND SHAREHOLDERS’ EQUITY

    

Senior long-term debt

  $1,185,842    $937,015  

Other liabilities

   86,179     98,292  
  

 

 

   

 

 

 

TOTAL LIABILITIES

   1,272,021     1,035,307  
  

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

   3,387,513     3,171,523  
  

 

 

   

 

 

 

TOTAL LIABILITIESAND SHAREHOLDERS’ EQUITY

  $4,659,534    $4,206,830  
  

 

 

   

 

 

 

 

|  79


Markel Corporation & Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

19. Markel Corporation (Parent Company Only) Financial Information (continued)

 

CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

   Years Ended December 31, 
   2011  2010  2009 
   (dollars in thousands) 

REVENUES

    

Net investment income

  $12,629   $21,070   $21,899  

Dividends on common stock of consolidated subsidiaries

   330,462    142,014    44,048  

Net realized investment gains (losses):

    

Other-than-temporary impairment losses

   (7,676  (8,087  (28,185

Net realized investment gains, excluding other-than-temporary impairment losses

   7,417    21,496    4,201  
  

 

 

  

 

 

  

 

 

 

Net realized investment gains (losses)

   (259  13,409    (23,984

Other

   13    5    4  
  

 

 

  

 

 

  

 

 

 

TOTAL REVENUES

   342,845    176,498    41,967  
  

 

 

  

 

 

  

 

 

 

EXPENSES

    

Interest

   78,830    69,107    52,286  

Other

   4,572    1,226    4,764  
  

 

 

  

 

 

  

 

 

 

TOTAL EXPENSES

   83,402    70,333    57,050  
  

 

 

  

 

 

  

 

 

 

INCOME (LOSS) BEFORE EQUITYIN UNDISTRIBUTED EARNINGSOF CONSOLIDATED SUBSIDIARIESAND INCOME TAXES

   259,443    106,165    (15,083

Equity in undistributed earnings of consolidated subsidiaries

   (144,348  113,892    203,822  

Income tax benefit

   (26,931  (46,736  (12,899
  

 

 

  

 

 

  

 

 

 

NET INCOMETO SHAREHOLDERS

  $142,026   $266,793   $201,638  
  

 

 

  

 

 

  

 

 

 

OTHER COMPREHENSIVE INCOMETO SHAREHOLDERS

    

Change in net unrealized gains on investments, net of taxes:

    

Net holding gains arising during the period

  $675   $28,646   $27,516  

Consolidated subsidiaries’ net holding gains arising during the period

   141,164    167,002    299,443  

Consolidated subsidiaries’ unrealized other-than-temporary impairment losses on fixed maturities arising during the period

   3,943    672    (5,405

Reclassification adjustments for net gains (losses) included in net income to shareholders

   735    (15,257  6,043  

Consolidated subsidiaries’ reclassification adjustments for net gains (losses) included in net income to shareholders

   (23,076  (17,574  46,840  
  

 

 

  

 

 

  

 

 

 

Change in net unrealized gains on investments, net of taxes

   123,441    163,489    374,437  
  

 

 

  

 

 

  

 

 

 

Change in foreign currency translation adjustments, net of taxes

   314    1,656    (22,532

Consolidated subsidiaries’ change in foreign currency translation adjustments, net of taxes

   (4,469  (4,124  41,720  

Consolidated subsidiaries’ change in net actuarial pension loss, net of taxes

   (9,459  2,749    (4,268
  

 

 

  

 

 

  

 

 

 

TOTAL OTHER COMPREHENSIVE INCOMETO SHAREHOLDERS

   109,827    163,770    389,357  
  

 

 

  

 

 

  

 

 

 

COMPREHENSIVE INCOMETO SHAREHOLDERS

  $251,853   $430,563   $590,995  
  

 

 

  

 

 

  

 

 

 

80  |


19. Markel Corporation (Parent Company Only) Financial Information (continued)

CONDENSED STATEMENTS OF CASH FLOWS

 

  Years Ended December 31,   Years Ended December 31, 
  2010 2009 2008   2011 2010 2009 
  (dollars in thousands)   (dollars in thousands) 

OPERATING ACTIVITIES

        

Net income (loss) to shareholders

  $266,793   $201,638   $(58,767

Adjustments to reconcile net income (loss) to shareholders to net cash provided by operating activities

   (181,824  (124,388  239,739  

Net income to shareholders

  $142,026   $266,793   $201,638  

Adjustments to reconcile net income to shareholders to net cash provided by operating activities

   102,714    (181,824  (124,388
            

 

  

 

  

 

 

NET CASH PROVIDEDBY OPERATING ACTIVITIES

   84,969    77,250    180,972     244,740    84,969    77,250  
            

 

  

 

  

 

 

INVESTING ACTIVITIES

        

Proceeds from sales of fixed maturities and equity securities

   244,225    30,233    314,544     50,322    244,225    30,233  

Proceeds from maturities, calls and prepayments of fixed maturities

   43,530    10,597    19,253     46,522    43,530    10,597  

Cost of fixed maturities and equity securities purchased

   (252,934  (59,410  (286,766   (92,287  (252,934  (59,410

Net change in short-term investments

   69,861    (59,736  (119,698   (179,823  69,861    (59,736

Decrease (increase) in notes receivable due from subsidiaries

   2,142    (39,088  5,700     7,401    2,142    (39,088

Capital contributions to subsidiaries

   (53,409  (127,094  (138,406   (179,403  (53,409  (127,094

Return of capital from subsidiaries

   3,505    101,715    109,949     0    3,505    101,715  

Acquisitions

   (128,884  —      —       0    (128,884  0  

Additions to property and equipment

   (18,621  (12,360  (9,764   (16,927  (18,621  (12,360

Other

   (757  20,766    (22,350   12,175    (757  20,766  
            

 

  

 

  

 

 

NET CASH USEDBY INVESTING ACTIVITIES

   (91,342  (134,377  (127,538   (352,020  (91,342  (134,377
            

 

  

 

  

 

 

FINANCING ACTIVITIES

        

Additions to senior long-term debt

   —      497,172    100,000     247,935    0    497,172  

Repayments and retirement of senior long-term debt

   —      (250,000  (93,050

Repayments of senior long-term debt

   0    0    (250,000

Repurchases of common stock

   (45,218  —      (60,601   (42,913  (45,218  0  

Other

   (9,503  (441  —       1,232    (9,503  (441
            

 

  

 

  

 

 

NET CASH PROVIDED (USED)BY FINANCING ACTIVITIES

   (54,721  246,731    (53,651   206,254    (54,721  246,731  
            

 

  

 

  

 

 

Increase (decrease) in cash and cash equivalents

   (61,094)    189,604    (217   98,974    (61,094  189,604  

Cash and cash equivalents at beginning of year

   243,182    53,578    53,795     182,088    243,182    53,578  
            

 

  

 

  

 

 

CASHAND CASH EQUIVALENTSAT ENDOF YEAR

  $182,088   $243,182   $53,578    $281,062   $182,088   $243,182  
            

 

  

 

  

 

 

|  81


Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

20. Derivatives

The Company is a party to a credit default swap agreement, under which third party credit risk is transferred from a counterparty to the Company. The Company entered into the credit default swap agreement for investment purposes. At both December 31, 20102011 and 2009,2010, the notional amount of the credit default swap was $33.1 million, which represented the Company’s aggregate exposure to losses if specified credit events involving third party reference entities occur. These third party reference entities are specified under the terms of the agreement and represent a portfolio of names upon which the Company has assumed credit risk from the counterparty. The Company’s exposure to loss from any one reference entity is limited to $20.0 million. The credit default swap has a scheduled termination date of December 2014.

80  |


20. Derivatives (continued)

The credit default swap is accounted for as a derivative instrument and is recorded at fair value with any changes in fair value recorded in net investment income. At December 31, 20102011 and 2009,2010, the credit default swap had a fair value of $25.2$29.3 million and $27.0$25.2 million, respectively. The fair value of the credit default swap is determined by the Company using an external valuation model that is dependent upon several inputs, including changes in interest rates, credit spreads, expected default rates, changes in credit quality, future expected recovery rates and other market factors. The fair value of the credit default swap is included in other liabilities on the consolidated balance sheets. Net investment income in 2011 included an adverse change in the fair value of the credit default swap of $4.1 million. Net investment income in 2010 and 2009 included a favorable changechanges in the fair value of the credit default swap of $1.7 million and $3.0 million, respectively. Net investment income in 2008 included an adverse change in the fair value of the credit default swap of $13.7 million.

Since entering into the credit default swap agreement, the Company has paid $16.9 million to settle its obligations related to credit events. These payments reduced the Company’s liability related to its credit default swap.

See notes 2(i)2(h) and 12 for further discussion of the Company’s credit default swap.

The Company had no other material derivative instruments at December 31, 2010.2011.

 

 

21. Acquisitions

a) Insurance Acquisition.Acquisitions.On October 15, 2010, the Company completed its acquisition of 100% of the outstanding shares of Aspen, a Nebraska-based privately held corporation whose FirstComp insurance group provides workers’ compensation insurance and related services, principally to small businesses, in 31 states. This acquisition will provide the Company with the ability to expand its insurance operations to include workers’ compensation coverage.businesses. Results attributable to this acquisition are included in the Specialty Admitted segment.

FirstComp operations collectively produced approximately $290 million of gross written premiums in 2010. A portion of the business FirstComp produces is written on FirstComp Insurance Company, a wholly-owned subsidiary and a Nebraska-domiciled insurance company. FirstComp also produces business for unaffiliated insurance companies through FirstComp Underwriters Group, Inc. and FirstComp Insurance Agency, Inc., which act as managing general agents. During 2010, the Specialty Admitted segment included $40.7 million of gross written premiums produced by FirstComp. The Company expects to significantly increase its share of the premium writings produced by FirstComp in 2011.

Total consideration for this acquisition was $135.6 million, which included cash consideration of $128.9 million. As part of the consideration, outstandingmillion and options to purchase shares of Aspen’s common stock were converted into options to purchase 58,116 shares of the Company’s common stock at an average exercise price of $225.94 per share. These options had a fair value at acquisition of $6.7 million, net of taxes.stock. Aspen shareholders also received contingent value rights that may result in the payment of additional cash consideration depending, among other things, upon the development of FirstComp’s loss reserves and loss sensitive profit commissions over time. Based on current expectations, the Company believes that it is unlikely that any contingent consideration will be paid related to the contingent value rights.

The purchase price was allocated to the acquired assets and liabilities of Aspen based on estimated fair values at the acquisition date. The Company recognized goodwill of $67.2$63.0 million, which iswas primarily attributable to synergies that are expected to result upon integration of FirstComp into the Company’s insurance operations. None of the goodwill recognized is expected to be deductible for income tax purposes. The Company also recognized other intangible assets of $70.0 million.

 

82  |  81


Markel Corporation & Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

21. Acquisitions (continued)

 

The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquistion date.

(dollars in thousands)

    

Investments

  $208,198  

Cash and cash equivalents

   47,354  

Receivables

   57,077  

Reinsurance recoverable on paid and unpaid losses

   22,932  

Deferred policy acquisition costs

   18,076  

Unpaid losses and loss adjustment expenses

   (204,418

Unearned premiums

   (74,553

Other debt

   (28,964

Other, net

   (47,331
     

Net liabilities

   (1,629

Goodwill

   67,193  

Intangible assets

   70,000  
     

Acquisition date fair value

  $135,564  
     

The following table presents, on a pro forma basis, the Company’s unaudited consolidated operating revenues and net income to shareholders as if the acquisition of Aspen had occurred onOn January 1, 2009 and after certain adjustments, primarily related2012, the Company acquired Thompson Insurance Enterprises, LLC (THOMCO), a privately held program administrator headquartered in Kennesaw, Georgia that underwrites multi-line, industry-focused insurance programs. Total consideration for this acquisition was $108.7 million, which included cash consideration of $100.7 million. The purchase price allocation for THOMCO will be completed in the first quarter of 2012. Results attributable to amortization of intangible assets, interest expense on debt retired atthis acquisition andwill be included in the corresponding income tax effects. The pro forma financial information does not necessarily reflect the results that would have occurred had the acquisition taken place onSpecialty Admitted segment.

January 1, 2009.

   Years Ended December 31, 

(dollars in thousands)

  2010   2009 

Operating revenues

  $2,361,174    $2,263,321  

Net income to shareholders

  $243,795    $193,729  

b) Non-insurance Acquisitions.On May 11, 2010, the Company acquired Solbern, Inc., a privately held company headquartered in Fairfield, New Jersey that manufactures food processing equipment for both domestic and international markets. On December 15, 2010, the Company acquired a 60% controlling interest in RD Holdings, LLC (RetailData), a privately held company headquartered in Richmond, Virginia that provides retail intelligence services. On December 23, 2010, the Company acquired a 75% controlling interest in Diamond Healthcare Corporation (Diamond Healthcare), a privately held company headquartered in Richmond, Virginia that manages behavioral health programs throughout the United States. Under the terms of the acquisition agreements, the Company has the option to acquire the remaining equity interests in RetailData and Diamond Healthcare in the future. Any additional consideration for the remaining equity interests would be based on the future earnings of these companies. Also during 2010, ParkLand Ventures, Inc., a subsidiary that owns and operates manufactured housing communities throughout the United States, made several acquisitions.

Total consideration for the Company’s non-insurance acquisitions in 2010 was approximately $132 million. Since theThe Company consolidates its non-insurance operations on a one-month lag and, as a result, the purchase price allocationallocations for RetailData and Diamond Healthcare will bewere completed in the first quarter of 2011. At December 31, 2010, amounts related to the consideration paid to acquire RetailData and Diamond Healthcare were included in other assets on the consolidated balance sheet.

On July 13, 2011, the Company acquired PartnerMD, LLC, a privately held company headquartered in Richmond, Virginia that provides concierge medical and executive health services. On September 6, 2011, the Company acquired Baking Technology Systems, Inc. (BAKE-TECH), a privately held company based in Tucker, Georgia that supplies ovens and other related equipment to high-speed bread and bun bakeries. On October 19, 2011, the Company acquired an 83% controlling interest in WI Holdings Inc. (Weldship), a privately held company based in Bethlehem, Pennsylvania that manufactures and leases high-pressure trailer tubes used by industrial, chemical and distribution companies to transport gas and liquids.

Under the terms of the acquisition agreements for RetailData, Diamond Healthcare and Weldship, the Company has the option to acquire the remaining equity interests and the remaining equity interests have the option to sell their interests to the Company in the future. Any additional consideration for the remaining equity interests would be based on the future earnings of these companies. At December 31, 2011 and 2010, the value of these options was not material to the Company’s consolidated financial statements.

|  83


Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

21. Acquisitions (continued)

Total consideration for the acquisitions of RetailData, Diamond Healthcare, PartnerMD, LLC, BAKE-TECH and Weldship was $197.0 million, which included cash consideration of $187.9 million. The purchase prices were allocated to the acquired assets and liabilities based on the estimated fair values at the acquisition dates. In connection with these acquisitions, the Company recognized goodwill of $2.6$122.8 million, of which $94.1 million is deductible for income tax purposes. The following table summarizes the aggregate fair values of the assets acquired and liabilities assumed at the acquisition dates.

(dollars in thousands)

    

Cash and cash equivalents

  $3,574  

Receivables

   19,989  

Other assets

   63,306  

Other debt

   (30,234

Other liabilities

   (21,768
  

 

 

 

Net assets

   34,867  

Goodwill

   122,814  

Intangible assets

   101,460  

Noncontrolling interests

   (62,189
  

 

 

 

ACQUISITION DATE FAIR VALUE

  $196,952  
  

 

 

 

In 2011, other revenues and net income to shareholders in the consolidated statement of income and comprehensive income included $101.5 million and other$6.5 million, respectively, from RetailData, Diamond Healthcare, PartnerMD, LLC, BAKE-TECH and Weldship. The following table presents, on a pro forma basis, the Company’s unaudited consolidated operating revenues and net income to shareholders as if these acquisitions had occurred on January 1, 2010 and after certain adjustments, primarily related to amortization of intangible assets of $12.7 million in connection withand the Solbern, Inc. and ParkLand Ventures, Inc.corresponding income tax effect. The pro forma financial information does not necessarily reflect the results that would have occurred had these acquisitions completed intaken place on January 1, 2010.

   Years Ended December 31, 

(dollars in thousands)

  2011   2010 

Operating revenues

  $2,708,417    $2,385,097  

Net income to shareholders

  $146,806    $276,467  

The Company’s strategy in acquiring controlling interests in industrial and service businesses that operate outside of the specialty insurance marketplace is similar to the Company’s strategy for purchasing equity securities. The Company seeks to invest in profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline, at reasonable prices.

 

8284  |


 

 

 

22. Quarterly Financial Information (unaudited)

The following table presents the unaudited quarterly results of consolidated operations for 2011, 2010 2009 and 2008.2009.

 

  Quarters Ended   Quarters Ended 

(dollars in thousands, except per share amounts)

  Mar. 31 June 30 Sept. 30 Dec. 31   Mar. 31 June 30 Sept. 30 Dec. 31 

2011

     

Operating revenues

  $621,594   $647,168   $676,088   $685,100  

Net income

   9,861    31,649    54,669    52,307  

Net income to shareholders

   8,272    30,314    53,264    50,176  

Comprehensive income (loss) to shareholders

   24,738    96,045    (52,626  183,696  

Net income per share:

     

Basic

  $0.85   $3.12   $5.50   $5.21  

Diluted

   0.85    3.11    5.48    5.19  

Common stock price ranges:

     

High

  $422.83   $430.26   $403.21   $419.10  

Low

   379.44    386.81    346.15    337.50  

2010

          

Operating revenues

  $536,719   $515,414   $561,354   $611,906    $536,719   $515,414   $561,354   $611,906  

Net income

   43,206    20,917    63,157    140,449     43,206    20,917    63,157    140,449  

Net income to shareholders

   42,569    20,831    63,250    140,143     42,569    20,831    63,250    140,143  

Comprehensive income (loss) to shareholders

   134,539    (33,903  225,328    104,599     134,539    (33,903  225,328    104,599  

Net income per share:

          

Basic

  $4.34   $2.13   $6.49   $14.42    $4.34   $2.13   $6.49   $14.42  

Diluted

   4.33    2.12    6.48    14.37     4.33    2.12    6.48    14.37  

Common stock price ranges:

          

High

  $379.05   $392.55   $354.34   $386.87    $379.05   $392.55   $354.34   $386.87  

Low

   325.00    326.90    320.71    332.77     325.00    326.90    320.71    332.77  

2009

          

Operating revenues

  $495,177   $522,432   $500,349   $551,368    $495,177   $522,432   $500,349   $551,368  

Net income

   16,436    33,030    59,211    93,742     16,436    33,030    59,211    93,742  

Net income to shareholders

   16,358    32,798    59,126    93,356     16,358    32,798    59,126    93,356  

Comprehensive income (loss) to shareholders

   (1,996  171,869    339,859    81,263     (1,996  171,869    339,859    81,263  

Net income per share:

          

Basic

  $1.67   $3.34   $6.02   $9.51    $1.67   $3.34   $6.02   $9.51  

Diluted

   1.67    3.34    6.02    9.49     1.67    3.34    6.02    9.49  

Common stock price ranges:

          

High

  $317.75   $316.00   $363.00   $347.50    $317.75   $316.00   $363.00   $347.50  

Low

   208.77    255.37    266.91    316.85     208.77    255.37    266.91    316.85  

2008

     

Operating revenues

  $520,222   $645,003   $434,204   $377,154  

Net income (loss)

   33,976    82,315    (142,115  (32,610

Net income (loss) to shareholders

   33,988    82,242    (142,287  (32,710

Comprehensive loss to shareholders

   (19,889  (93,698  (158,822  (130,860

Net income (loss) per share:

     

Basic

  $3.42   $8.30   $(14.46 $(3.33

Diluted

   3.41    8.29    (14.46  (3.33

Common stock price ranges:

     

High

  $492.97   $458.31   $480.00   $392.38  

Low

   394.99    367.00    315.90    234.23  

 

|  8385


Markel Corporation & Subsidiaries

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Markel Corporation:

We have audited the accompanying consolidated balance sheets of Markel Corporation and subsidiaries (the Company) as of December 31, 20102011 and 2009,2010, and the related consolidated statements of operationsincome and comprehensive income, (loss), changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2010.2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Markel Corporation and subsidiaries as of December 31, 20102011 and 2009,2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010,2011, in conformity with U.S. generally accepted accounting principles.

The Company adopted Financial Accounting Standards Board Accounting Standards Codification 320-10-65 related to the recognition and presentation of other-than-temporary impairment of investments on April 1, 2009.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Markel Corporation’s internal control over financial reporting as of December 31, 2010,2011, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 20112012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Richmond, Virginia

February 28, 20112012

 

8486  |


 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Markel Corporation:

We have audited Markel Corporation’s (the Company) internal control over financial reporting as of December 31, 2010,2011, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanyingManagement’s Report on Internal Control over Financial ReportingReporting.. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

|  8587


Markel Corporation & Subsidiaries

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (continued)

 

In our opinion, Markel Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010,2011, based on criteria established inInternal Control—Integrated Frameworkissued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Markel Corporation and subsidiaries as of December 31, 20102011 and 2009,2010, and the related consolidated statements of operationsincome and comprehensive income, (loss), changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2010,2011, and our report dated February 28, 20112012 expressed an unqualified opinion on those consolidated financial statements.

Richmond, Virginia

February 28, 20112012

 

8688  |


 

 

 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Management does not expect that its internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. The design of any system of internal control over financial reporting also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, we evaluated the effectiveness of our internal control over financial reporting as of December 31, 2010,2011, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, we have concluded that we maintained effective internal control over financial reporting as of December 31, 2010.2011.

KPMG LLP, our independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting, which is included herein.

 

  

Alan I. Kirshner  Anne G. Waleski
Chief Executive Officer  Chief Financial Officer

February 28, 20112012

 

|  8789


Markel Corporation & Subsidiaries

 

 

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Estimates

 

The accompanying consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include the accounts of Markel Corporation and all subsidiaries. For a discussion of our significant accounting policies, see note 1 of the notes to consolidated financial statements.

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 with U.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.

We review our critical accounting estimates and assumptions quarterly. These reviews include evaluating the adequacy of reserves for unpaid losses and loss adjustment expenses, the reinsurance allowance for doubtful accounts and income tax liabilities, as well as analyzing the recoverability of deferred tax assets, assessing goodwill and intangible assets for impairment and evaluating the investment portfolio for other-than-temporary declines in estimated fair value. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements.

Unpaid Losses and Loss Adjustment Expenses

Our consolidated balance sheet included estimated unpaid losses and loss adjustment expenses of $5.4 billion and reinsurance recoverable on unpaid losses of $0.8 billion$791.1 million at December 31, 20102011 compared to $5.4 billion and $0.9 billion,$798.1 million, respectively, at December 31, 2009.2010. We do not discount our reserves for losses and loss adjustment expenses to reflect estimated present value.

We accrue liabilities for unpaid losses and loss adjustment expenses based upon estimates of the ultimate amounts payable. We maintain reserves for specific claims incurred and reported (case reserves) and reserves for claims incurred but not reported (IBNR reserves).

Reported claims are in various stages of the settlement process, and the corresponding reserves for reported claims are based primarily on case-by-case evaluations of the individual claims. Case reserves consider our estimate of the ultimate cost to settle the claims, including investigation and defense of lawsuits resulting from the claims, and may be subject to adjustment for differences between costs originally estimated and costs subsequently re-estimated or incurred. Each claim is settled individually based upon its merits, and some claims may take years to settle, especially if legal action is involved.

As of any balance sheet date, all claims have not yet been reported, and some claims may not be reported for many years. As a result, the liability for unpaid losses and loss adjustment expenses includes significant estimates for incurred but not reported claims.

U.S. GAAP requires that IBNR reserves be based on the estimated ultimate cost of settling claims, including the effects of inflation and other social and economic factors, using past experience adjusted for current trends and any other factors that would modify past experience. IBNR reserves are generally calculated by subtracting paid losses and case reserves from estimated ultimate losses. IBNR reserves were 61%60% of total unpaid losses and loss adjustment expenses at December 31, 20102011 compared to 60%61% at December 31, 2009.2010.

 

8890  |


    �� 

 

 

 

Our liabilities for unpaid losses and loss adjustment expenses can generally be categorized into two distinct groups, short-tail business and long-tail business. Short-tail business refers to lines of business, such as property, accident and health, motorcycle, watercraft and marine hull exposures for which losses are usually known and paid shortly after the loss actually occurs. Long-tail business describes lines of business for which specific losses may not be known and reported for some period and losses take much longer to emerge. Given the time frame over which long-tail exposures are ultimately settled, there is greater uncertainty and volatility in these lines than in short-tail lines of business. Our long-tail coverages consist of most casualty lines, including professional liability, directors’ and officers’ liability, products liability, general liability and excess and umbrella exposures, as well as workers’ compensation insurance. Some factors that contribute to the uncertainty and volatility of long-tail casualty programs, and thus require a significant degree of judgment in the reserving process, include the inherent uncertainty as to the length of reporting and payment development patterns, the possibility of judicial interpretations or legislative changes, including changes in workers’ compensation benefit laws, that might impact future loss experience relative to prior loss experience and the potential lack of comparability of the underlying data used in performing loss reserve analyses.

Our ultimate liability may be greater or less than current reserves. Changes in our estimated ultimate liability for loss reserves generally occur as the result of the emergence of unanticipated loss activity, the completion of specific actuarial or claims studies or changes in internal or external factors. We closely monitor new information on reported claims and use statistical analyses prepared by our actuaries to evaluate the adequacy of our recorded reserves. We are required to exercise considerable judgment when assessing the relative credibility of loss development trends. Our philosophy is to establish loss reserves that are more likely redundant than deficient. This means that we seek to establish loss reserves that will ultimately prove to be adequate. As a result, if new information or trends indicate an increase in frequency or severity of claims in excess of what we initially anticipated, we generally respond quickly and increase loss reserves. If, however, frequency or severity trends are more favorable than initially anticipated, we often wait to reduce our loss reserves until we can evaluate experience in additional periods to confirm the credibility of the trend. In addition, for long-tail lines of business, trends develop over longer periods of time, and as a result, we give credibility to these trends more slowly than for short-tail or less volatile lines of business.

Each quarter, our actuaries prepare estimates of the ultimate liability for unpaid losses and loss adjustment expenses based on established actuarial methods. Management reviews these estimates, supplements the actuarial analyses with information provided by claims, underwriting and other operational personnel and determines its best estimate of loss reserves, which is recorded in our financial statements. Our procedures for determining the adequacy of loss reserves at the end of the year are substantially similar to the procedures applied at the end of each interim period.

Additionally, once a year, generally during the third quarter, we conduct a detailed review of our liability for unpaid losses and loss adjustment expenses for asbestos and environmental (A&E) claims. If there is significant development on A&E claims in advance of the annual review, such development is considered by our actuaries and by management as part of our quarterly review process. We consider a detailed annual review appropriate because A&E claims develop slowly, are typically reported and paid many years after the loss event occurs and, historically, have exhibited a high degree of variability.

|  91


Markel Corporation & Subsidiaries

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Any adjustments resulting from our interim or year-end reviews, including changes in estimates, are recorded as a component of losses and loss adjustment expenses in the period of the change. Reserve changes that increase previous estimates of ultimate claims cost are referred to as unfavorable or adverse development, deficiencies or reserve strengthening. Reserve changes that decrease previous estimates of ultimate claims cost are referred to as favorable development or redundancies.

|  89


Markel Corporation & Subsidiaries

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

In establishing our liabilities for unpaid losses and loss adjustment expenses, our actuaries estimate an ultimate loss ratio, by accident year, for each of our over 100 product lines with input from our underwriting and claims associates. In estimating an ultimate loss ratio for a particular line of business, our actuaries may use one or more actuarial reserving methods and select from these a single point estimate. To varying degrees, these methods include detailed statistical analysis of past claim reporting, settlement activity, claim frequency and severity, policyholder loss experience, industry loss experience and changes in market conditions, policy forms and exposures. The actuarial methods we use include:

Paid Loss DevelopmentThis method uses historical loss payment patterns to estimate future loss payment patterns. Our actuaries use the historical loss patterns to develop factors that are applied to current paid loss amounts to calculate expected ultimate losses.

Incurred Loss DevelopmentThis method uses historical loss reporting patterns to estimate future loss reporting patterns. Our actuaries use the historical loss patterns to develop factors that are applied to current reported losses to calculate expected ultimate losses.

Bornhuetter-Ferguson Paid Loss DevelopmentThis method divides the projection of ultimate losses into the portion that has already been paid and the portion that has yet to be paid. The portion that has yet to be paid is estimated as the product of three amounts: the premium earned for the exposure period, the expected loss ratio and the percentage of ultimate losses that are still unpaid. The expected loss ratio is selected by considering historical loss ratios, adjusted for any known changes in pricing, loss trends, adequacy of case reserves, changes in administrative practices and other relevant factors.

Bornhuetter-Ferguson Incurred Loss DevelopmentThis method is identical to the

Bornhuetter-Ferguson paid loss development method, except that it uses the percentage of ultimate losses that are still unreported, instead of the percentage of ultimate losses that are still unpaid.

Frequency/SeverityUnder this method, expected ultimate losses are equal to the product of the expected ultimate number of claims and the expected ultimate average cost per claim. Our actuaries use historical reporting patterns and severity patterns to develop factors that are applied to the current reported amounts to calculate expected ultimate losses.

Each actuarial method has its own set of assumptions and its own strengths and limitations, with no one method being better than the others in all situations. Our actuaries select the reserving methods that they believe will produce the most reliable estimate for the class of business being evaluated. Greater judgment may be required when we introduce new product lines or when there have been changes in claims handling practices, as the statistical data available may be insufficient. In these instances, we may rely upon assumptions applied to similar lines of business, rely more heavily on industry experience, take into account changes in underwriting guidelines and risk selection or review the impact of changes in claims reserving practices with claims personnel.

92  |


For example, during the acquisition of our FirstComp workers’ compensation insurance unit in 2009, as partOctober 2010, we noted that FirstComp’s loss reserves reflected an expectation that their loss development period would be shorter than that indicated by industry data. FirstComp provides workers’ compensation insurance to small businesses in rural areas. Prior to our acquisition, FirstComp’s loss reserves were established with an expectation that loss development patterns for these small businesses may differ from the overall workers’ compensation industry data, which is drawn from a broader profile of risks. In establishing the formation ofpost-acquisition loss reserves for FirstComp, we determined that FirstComp had insufficient historical data to reach this conclusion with certainty. Workers’ compensation insurance is a shared service claims function, we reassigned certain claims handling responsibilities to different claims personnel based upon ourlong-tail product line, groupings and regional office model,FirstComp has only had significant premium volume since 2004. We decided to give more weight to the longer-tailed industry development factors and adopted a more conservative loss reserving position until we standardized certain claims handling practices. We believe these changes in claims handling practices impacted the comparabilitybecome more familiar with this book of casebusiness and how its loss reserves between periods. Our actuaries considered these changes and made adjustments to data where appropriate when establishing their actuarial point estimates.develop.

A key assumption in most actuarial analyses is that past development patterns will repeat themselves in the future, absent a significant change in internal or external factors that influence the ultimate cost of our unpaid losses and loss adjustment expenses. Our estimates reflect implicit

90  |


and explicit assumptions regarding the potential effects of external factors, including economic and social inflation, judicial decisions, law changes, general economic conditions and recent trends in these factors. Our actuarial analyses are based on statistical analysis but also consist of reviewing internal factors that are difficult to analyze statistically, including underwriting and claims handling changes. In some of our markets, and where we act as a reinsurer, the timing and amount of information reported about underlying claims are in the control of third parties. This can also affect estimates and require re-estimation as new information becomes available.

As indicated above, we may use one or more actuarial reserving methods, which incorporate numerous underlying judgments and assumptions, to establish our estimate of ultimate loss reserves. While we use our best judgment in establishing our estimate for loss reserves, applying different assumptions and variables could lead to significantly different loss reserve estimates.

Loss frequency and loss severity are two key measures of loss activity that often result in adjustments to actuarial assumptions relative to ultimate loss reserve estimates. Loss frequency measures the number of claims per unit of insured exposure. When the number of newly reported claims is higher than anticipated, generally speaking, loss reserves are increased. Conversely, loss reserves are generally decreased when fewer claims are reported than expected. Loss severity measures the average size of a claim. When the average severity of reported claims is higher than originally estimated, loss reserves are typically increased. When the average claim size is lower than anticipated, loss reserves are typically decreased. For example, in each of the past three years, we have experienced redundancies on prior years’ loss reserves in our professional and products liability lines as a result of decreases in loss severity, while over the past three-year periodtwo years, we have experienced deficiencies on prior years’ loss reserves related to our A&E exposuresmedical malpractice coverage for Italian hospitals as a result of increases in loss frequency and severity.

Changes in prior years’ loss reserves, including the trends and factors that impacted loss reserve development, as well as the likelihood that such trends and factors could result in future loss reserve development, are discussed in further detail under “Results of Operations.”

|  93


Markel Corporation & Subsidiaries

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Loss reserves are established for each of our product lines at management’s best estimate, which is generally higher than the corresponding actuarially calculated point estimate. The actuarial point estimate represents our actuaries’ estimate of the most likely amount that will ultimately be paid to settle the loss reserves we have recorded at a particular point in time; however, there is inherent uncertainty in the point estimate as it is the expected value in a range of possible reserve estimates. In some cases, actuarial analyses, which are based on statistical analysis, cannot fully incorporate all of the subjective factors that affect development of losses. In other cases, management’s perspective of these more subjective factors may differ from the actuarial perspective. Subjective factors where management’s perspective may differ from that of the actuaries include: the credibility and timeliness of claims information received from third parties, economic and social inflation, judicial decisions, law changes, changes in underwriting or claims handling practices, general economic conditions, the risk of moral hazard and other current and developing trends within the insurance market, including the effects of competition. As a result, the actuarially calculated point estimates for each of our lines of business represent starting points for management’s quarterly review of loss reserves.

Management’s best estimate of net reserves for unpaid losses and loss adjustment expenses exceeded the actuarially calculated point estimate by $365 million, or 8.6%, at December 31, 2011, compared to $361 million, or 8.5%, at December 31, 2010, compared to $371 million, or 8.9%, at December 31, 2009.2010. In management’s opinion, the actuarially calculated point estimate generally underestimates both the ultimate favorable impact of a hard insurance market and the ultimate adverse impact of a soft insurance market. Therefore, the percentage by which management’s best estimate exceeds the actuarial point estimate will generally be higher during a soft market than during a hard market.

|  91


Markel Corporation & Subsidiaries

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The difference between management’s best estimate and the actuarially calculated point estimate in both 20102011 and 20092010 is primarily associated with our long-tail business in the Excess and Surplus Lines and London Insurance Market segments. In both 20102011 and 2009,2010, management’s best estimate exceeded the actuarial point estimate asestimate. Actuarial estimates can underestimate the adverse effects of a resultsoft insurance market because the impact of attributingchanges in risk selection and terms and conditions can be difficult to quantify. In addition, the frequency of claims may increase in a recessionary environment. Similarly, the risk an insured will intentionally cause or be indifferent to loss may increase during an economic downturn, and the attention to loss prevention measures may decrease. Also, management has attributed less credibility than our actuaries to favorable trends experienced on our long-tail lines of business in recent years.from the earlier hard market period. In particular, given the long-tail and volatile nature of the business in the London Insurance Market segment, as well as past unfavorable development in this segment, management has not incorporated these favorable trends into its best estimate to the same extent as the actuaries. Management also believes that the actuaries’ point estimates for the 2008 to 2010 accident years do not fully reflect the impact of soft insurance market conditions or the recent economic environment. During a recessionary environment, the frequency of insurance claims may increase. Similarly, the risk that an insured will intentionally cause or be indifferent to a loss may increase during an economic downturn, and the attention to loss prevention measures may decrease. These subjective factors affect the development of losses and represent instances where management’s perspectives may differ from those of our actuaries.

Management also considers the range, or variability, of reasonably possible losses determined by our actuaries when establishing its best estimate for loss reserves. The actuarial ranges represent our actuaries’ estimate of a likely lowest amount and highest amount that will ultimately be paid to settle the loss reserves we have recorded at a particular point in time. The range determinations are based on estimates and actuarial judgments and are intended to encompass reasonably likely changes in one or more of the factors that were used to determine the point estimates. Using statistical models, our actuaries establish high and low ends of a range of reasonable reserve estimates for each of our operating segments.

94  |


The following table summarizes our reserves for net unpaid losses and loss adjustment expenses and the actuarially established high and low ends of a range of reasonable reserve estimates, by segment, at December 31, 2010.2011.

 

(dollars in millions)

  Net Loss
Reserves  Held
   Low End  of
Actuarial
Range(1)
   High End of
Actuarial
Range(1)
   Net Loss
Reserves Held
   Low End of
Actuarial
Range(1)
   High End of
Actuarial
Range(1)
 

Excess and Surplus Lines

  $2,113.2    $1,711.0    $2,373.3    $1,921.5    $1,568.1    $2,153.3  

Specialty Admitted

   550.0     451.0     603.3     646.8     545.3     688.9  

London Insurance Market

   1,513.0     1,136.7     1,552.6     1,641.6     1,220.0     1,741.5  

Other Insurance (Discontinued Lines)

   424.1     212.9     948.5     397.8     199.7     917.6  
            

 

(1)

Due to the actuarial methods used to determine the separate ranges for each segment of our business, it is not appropriate to aggregate the high or low ends of the separate ranges to determine the high and low ends of the actuarial range on a consolidated basis.

Undue reliance should not be placed on these ranges of estimates as they are only one of many points of reference used by management to determine its best estimate of ultimate losses. Further, actuarial ranges may not be a true reflection of the potential variability between loss reserves estimated at the balance sheet date and the ultimate cost of settling claims. Actuarial ranges are developed based on known events as of the valuation date, while ultimate losses are subject to events and circumstances that are unknown as of the valuation date. For example, the Claims and Reserves table on page 115,117, which provides a summary of historical development between originally estimated loss reserves and ultimate claims costs, illustrates this potential variability, reflecting a cumulative deficiency in net

92  |


reserves of 37%29% for the 20002001 and prior accident years. A significant portion of the cumulative deficiency that occurred during those periods included adverse loss reserve development at Markel International, which we acquired in 2000. Historically, we have experienced greater volatility on acquired books of business than on existing books of business. The increases in pre-acquisition loss reserves at Markel International were primarily associated with books of business that were not subject to our underwriting discipline and that subsequently experienced unfavorable loss development that exceeded our initial expectations. We believe that as a result of applying greater underwriting discipline, including improved risk selection and pricing, on the business written since acquisition, total recorded loss reserves at Markel International are unlikely to vary to the same degree as we have experienced on the 20002001 and prior accident years.

We place less reliance on the range established for our Other Insurance (Discontinued Lines) segment than on the ranges established for our remaining segments. The range established for our Other Insurance (Discontinued Lines) segment includes exposures related to acquired lines of business, many of which are no longer being written, that were not subject to our underwriting discipline and controls. Additionally, A&E exposures, which are subject to an uncertain and unfavorable legal environment, account for approximately 50%60% of the loss reserves considered in the range established for our Other Insurance (Discontinued Lines) segment.

Our exposure to A&E claims results from policies written by acquired insurance operations before their acquisitions. The exposure to A&E claims originated from umbrella, excess and commercial general liability (CGL) insurance policies and assumed reinsurance contracts that were written on an occurrence basis from the 1970s to mid-1980s. Exposure also originated from claims-made policies that were designed to cover environmental risks provided that all other terms and conditions of the policy were met. A&E claims include property damage and clean-up costs related to pollution, as well as personal injury allegedly arising from exposure to hazardous materials. After 1986, we began underwriting CGL coverage with pollution exclusions, and in some lines of business we began using a claims-made form. These changes significantly reduced our exposure to future A&E claims on post-1986 business.

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Markel Corporation & Subsidiaries

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

There is significant judgment required in estimating the amount of our potential exposure from A&E claims due to the limited and variable historical data on A&E losses as compared to other types of claims, the potential significant reporting delays of claims from insureds to insurance companies and the continuing evolution of laws and judicial interpretations of those laws relative to A&E exposures. Due to these unique aspects of A&E exposures, the ultimate value of loss reserves for A&E claims cannot be estimated using traditional methods and is subject to greater uncertainty than other types of claims. Other factors contributing to the significant uncertainty in estimating A&E reserves include: uncertainty as to the number and identity of insureds with potential exposure; uncertainty as to the number of claims filed by exposed, but not ill, individuals; uncertainty as to the settlement values to be paid; difficulty in properly allocating responsibility and liability for the loss, especially if the claim involves multiple insurance providers or multiple policy periods; growth in the number and significance of bankruptcies of asbestos defendants; uncertainty as to the financial status of companies that insured or reinsured all or part of A&E claims; and inconsistent court decisions and interpretations with respect to underlying policy intent and coverage.

Due to these uncertainties, it is not possible to estimate our ultimate liability for A&E exposures with the same degree of reliability as with other types of exposures. Future development will be affected by the factors mentioned above and could have a material effect on our results of operations, cash flows and financial position. As of December 31, 2010,2011, our consolidated balance sheet included estimated net reserves for A&E losses and loss adjustment expenses of $216.0$244.8 million. We seek to establish appropriate reserve levels for A&E exposures; however, these reserves could increase in the future. These reserves are not discounted to present value and are forecasted to pay out over the next 50 years.

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Markel Corporation & Subsidiaries

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Reinsurance Allowance for Doubtful Accounts

We evaluate and adjust reserves for uncollectible reinsurance based upon our collection experience, the financial condition of our reinsurers, collateral held and the development of our gross loss reserves. Our consolidated balance sheets at December 31, 20102011 and 20092010 included a reinsurance allowance for doubtful accounts of $155.2$69.1 million and $151.3$155.2 million, respectively.

Reinsurance recoverables recorded on insurance losses ceded under reinsurance contracts are subject to judgments and uncertainties similar to those involved in estimating gross loss reserves. In addition to these uncertainties, our reinsurance recoverables may prove uncollectible if the reinsurers are unable or unwilling to perform under the reinsurance contracts. In establishing our reinsurance allowance for amounts deemed uncollectible, we evaluate the financial condition of our reinsurers and monitor concentration of credit risk arising from our exposure to individual reinsurers. To determine if an allowance is necessary, we consider, among other factors, published financial information, reports from rating agencies, payment history, collateral held and our legal right to offset balances recoverable against balances we may owe. Our reinsurance allowance for doubtful accounts is subject to uncertainty and volatility due to the time lag involved in collecting amounts recoverable from reinsurers. Over the period of time that losses occur, reinsurers are billed and amounts are ultimately collected, economic conditions, as well as the operational and financial performance of particular reinsurers, may change and these changes may affect the reinsurers’ willingness and ability to meet their contractual obligation to us. It is also difficult to fully evaluate the impact of major catastrophic events on the financial stability of reinsurers, as well as the access to capital that reinsurers may have when such events occur. The ceding of insurance does not legally discharge us from our primary liability for the full amount of the policies, and we will be required to pay the loss and bear collection risk if the reinsurers fail to meet their obligations under the reinsurance contracts.

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Income Taxes and Uncertain Tax Positions

The preparation of our consolidated income tax provision, including the evaluation of tax positions we have taken or expect to take on our income tax returns, requires significant judgment. In evaluating our tax positions, we recognize the tax benefit from an uncertain tax position only if, based on the technical merits of the position, it is more likely than not that the tax position will be sustained upon examination by the taxing authorities. Tax positions that meet the more likely than not threshold are then measured using a probability weighted approach, whereby the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement is recognized. The tax positions that we have taken or expect to take are based upon the application of tax laws and regulations, which are subject to interpretation, judgment and uncertainty. As a result, our actual liability for income taxes may differ significantly from our estimates.

We record deferred income taxes as assets or liabilities on our consolidated balance sheets to reflect the net tax effect of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases. At December 31, 2011, our net deferred tax liability was $11.1 million. At December 31, 2010, our net deferred tax asset was $61.0 million. The change in our deferred tax amounts in 2011 was due in part to an increase in the deferred tax liability related to accumulated other comprehensive income resulting from an increase in net unrealized gains on investments during 2011.

Deferred tax assets are reduced by a valuation allowance when management believes it is more likely than not that some, or all, of the deferred tax assets will not be realized. At December 31, 2010 and 2009, our net deferred tax asset was $63.3 million and $161.2 million, respectively. We did not have a valuation allowance on our deferred tax assets at December 31, 20102011 or 2009. The decrease in the net deferred tax asset in 2010 was due in part to an increase in the deferred tax liability related to accumulated other comprehensive income items resulting from an increase in net unrealized gains on investments during 2010. In evaluating our ability to realize the netour deferred tax assetassets and assessing the need for a valuation allowance at December 31, 2011 and 2010, we have made estimates regarding the future taxable income of our foreign subsidiaries and judgments about our ability to pursue prudent and feasible tax planning strategies. A change in any of these estimates and

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judgments could result in the need to record a valuation allowance through a charge to earnings. See note 7 of the notes to consolidated financial statements for further discussion of our consolidated income tax provision, uncertain tax positions and net operating losses and valuation allowance.losses.

Goodwill and Intangible Assets

Our consolidated balance sheet as of December 31, 20102011 included goodwill from acquired businessesand intangible assets of $474.7$867.6 million. Goodwill isand indefinite-lived intangible assets are tested for impairment at least annually. Intangible assets with finite lives are reviewed for impairment when events or circumstances indicate that their carrying value may not be recoverable. We completed our annual test for impairment during the fourth quarter of 20102011 based upon results of operations through September 30, 2010.2011. There were no indications of goodwill impairment during 2010.2011.

A significant amount of judgment is required in performing goodwill impairment tests. Such tests include estimating the fair value of our reporting units. We compare the estimated fair value of our reporting units to their respective carrying amounts including goodwill. The methods we use for estimating reporting unit fair values may include market quotations, asset and liability fair values and other valuation techniques, such as discounted cash flows and multiples of earnings or revenues. With the exception of market quotations, all of these methods involve significant estimates and assumptions.

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OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Investments

We complete a detailed analysis each quarter to assess whether the decline in the fair value of any investment below its cost basis is deemed other-than-temporary. All securities with unrealized losses are reviewed. For equity securities, a decline in fair value that is considered to be other-than-temporary is recognized in net income (loss) based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security. For fixed maturities where we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost, a decline in fair value is considered to be other-than-temporary and is recognized in net income (loss) based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security. If the decline in fair value of a fixed maturity below its amortized cost is considered to be other-than-temporary based upon other considerations, we compare 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-related portion of the other-than-temporary impairment, which is recognized in net income, (loss), resulting in a new cost basis for the security. Any remaining decline in fair value represents the non-credit portion of the other-than-temporary impairment, which is recognized in other comprehensive income (loss).income. The discount rate used to calculate the estimated present value of the cash flows expected to be collected is the effective interest rate implicit for the security at the date of purchase.

We consider many factors in completing our quarterly review of securities with unrealized losses for other-than-temporary impairment, including the length of time and the extent to which fair value has been below cost and the financial condition and near-term prospects of the issuer. For equity securities, the ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery is considered. For fixed maturities, we consider whether we intend to sell the security or if it is more likely than not that we will be required to sell the security before recovery, the implied yield-to-maturity, the credit quality of the issuer and the ability to recover all amounts outstanding when contractually due. When assessing whether we intend to sell a fixed maturity or if it is likely that we will be required to sell a fixed maturity before recovery of its amortized cost, we evaluate facts and circumstances including, but not limited to, decisions to reposition the investment portfolio, potential sales of investments to meet cash flow needs and potential sales of investments to capitalize on favorable pricing.

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OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Risks and uncertainties are inherent in our other-than-temporary decline in fair value assessment methodology. The risks and uncertainties include, but are not limited to, incorrect or overly optimistic assumptions about the financial condition, liquidity or near-term prospects of an issuer, inadequacy of any underlying collateral, unfavorable changes in economic or social conditions and unfavorable changes in interest rates or credit ratings. Changes in any of these assumptions could result in charges to earnings in future periods.

Losses from write downs for other-than-temporary declines in the estimated fair value of investments, while potentially significant to net income, (loss), do not have an impact on our financial position. Since our investment securities are considered available-for-sale and are recorded at estimated fair value, unrealized losses on investments are already included in accumulated other comprehensive income. See note 2(b) of the notes to consolidated financial statements for further discussion of our assessment methodology for other-than-temporary declines in the estimated fair value of investments.

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Our Business

 

The following discussion and analysis should be read in conjunction with Selected Financial Data, the consolidated financial statements and related notes and the discussion under Risk Factors, “Critical Accounting Estimates” and “Safe Harbor and Cautionary Statement.”

We are a diverse financial holding company serving a variety of niche markets. Our principal business markets and underwrites specialty insurance products and programs.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 compete in three segments of the specialty insurance marketplace: the Excess and Surplus Lines, the Specialty Admitted and the London markets. We also own interests in various industrial and service 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 Excess and Surplus Lines segment writes property and casualty insurance outside of the standard market for hard-to-place risks including catastrophe-exposed property, professional liability, products liability, general liability, commercial umbrella and other coverages tailored for unique exposures. At the beginning of 2008, ourOur Excess and Surplus Lines segment wasis comprised of five underwriting units,regions, and each with product-focused specialists servicing brokers, agents and insureds across the United States from their respective underwriting unit locations. In early 2008, we decided to close the Markel Re unit. Markel Re’s excess and umbrella program, casualty facultative placements and public entity business remained within the Excess and Surplus Lines segment, while the alternative risk transfer programs were combined with the Markel Specialty unit in the Specialty Admitted segment. In March 2009, we transitioned the four underwriting units included in our Excess and Surplus Lines segment to a customer-focused regional office model as part of our “One Markel” initiative. Each regional office is responsible for serving the wholesale producers located in its region. The underwriters atOur regional teams focus on customer service and marketing, underwriting and distributing our regional offices haveinsurance solutions and provide customers easy access to and expertise in all of our product offerings and are located closer to our producers.products.

Our Specialty Admitted segment writes risks that, although unique and hard-to-place in the standard market, must remain with an admitted insurance company for marketing and regulatory reasons. Our underwriting units in this segment write specialty program insurance for well-defined niche markets, personal and commercial property and liability coverages and workers’ compensation insurance. Our Specialty Admitted segment is comprised of three underwriting units: the Markel Specialty and Markel American Specialty Personal and Commercial Lines units and, beginning in the fourth quarter ofOctober 2010, our FirstComp workers’ compensation insurance unit. Our Specialty Admitted segment included an additional underwriting unit, Markel Global Marine and Energy, until late 2008 when we decided to close that unit and place its programs into run-off.

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On October 15, 2010, we completed our acquisition of 100% of the outstanding shares of Aspen Holdings, Inc. (Aspen), a Nebraska-based privately held corporation whose FirstComp insurance group provides workers’ compensation insurance and related services, principally to small businesses, in 31 states. This acquisition will provide us with the ability to expand our insurance operations to include workers’ compensation coverage.

Our London Insurance Market segment writes specialty property, casualty, professional liability, equine, marine, energy and trade credit insurance and reinsurance on a worldwide basis. We participate in the London market through Markel International, which includes Markel Capital Limited and Markel International Insurance Company Limited (MIICL), wholly-owned subsidiaries. Markel Capital Limited is the corporate capital provider for Markel Syndicate 3000 at Lloyd’s, which is managed by Markel Syndicate Management Limited, a wholly-owned subsidiary.

For purposes of segment reporting, the Other Insurance (Discontinued Lines) segment includes lines of business that have been discontinued in conjunction with an acquisition.acquisitions. This segment also includes development on asbestos and environmental loss reserves.

A favorable insurance market is commonly referred to as a “hard market” within the insurance industry and is characterized by stricter coverage terms, higher prices and lower underwriting capacity. Periods of intense competition, which typically include broader coverage terms, lower prices and excess underwriting capacity, are referred to as a “soft market.” After a decade of soft market conditions, the insurance industry experienced favorable conditions beginning in late 2000, which continued through 2003 for most product lines. During 2004, the market began to soften and the industry began to show signs of increased competition. Since 2005, we have been in a soft insurance market and have experienced

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Markel Corporation & Subsidiaries

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

intense competition. During the current soft market cycle, we have experienced price deterioration in virtually all of our product areas due in part to an increased presence of standard insurance companies in our markets. During 2008, given the rapid deterioration in underwriting capacity as a result of the disruptions in the financial markets and losses from catastrophes, the rate of decline in prices began to slow. However, the effects of the economic environment contributed to further declines in gross premium volume in 2009 and 2010. Premiums for many of our product lines are based upon our insureds’ revenues, gross receipts or payroll, which have been negatively impacted by the depressed levels of business activity in recent years. In 2010, we continued to experience pricing pressure due in part to intense competition, which resulted in further price deterioration across many of our product lines, most notably our professional and products liability programs within the Excess and Surplus Lines segment. However, we experienced moderate price increases in several product lines during 2010, most notably those offered by Markel International.within the London Insurance Market segment. During 2011, the unfavorable pricing trends experienced in 2010 continued for some of our product lines, most notably our professional and products liability programs within the Excess and Surplus Lines segment. However, price declines stabilized for most of our product lines during 2011, and we achieved moderate price increases in several lines, most notably the marine and energy products within the London Insurance Market segment.

We routinely review the pricing of our major product lines and have pursuedwill continue to pursue price increases for most product lines in many product areas;2012; however, as a result of continued soft insurance market conditions, our targeted price increases have been met with resistance in the marketplace, particularly within the Excess and Surplus Lines segment. In general, we believe prevailing rates within the property and casualty insurance marketplace are lower than our targeted pricing levels. Whenwhen 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 for many ofmay vary when we alter our product lines, most notably within the Excess and Surplus Lines segment, has declined and, if the competitive environment does notofferings to maintain or improve could decline further in the future.underwriting profitability.

Through our wholly-owned subsidiary Markel Ventures, Inc., we own interests in various industrial and service businesses that operate outside of the specialty insurance marketplace. These businesses are viewed by management as separate and distinct from our insurance operations. Local management teams oversee the day-to-day operations of these companies, while strategic decisions are made in conjunction with members of our executive management team, principally our President and Chief Investment Officer. The financial results of those companies in which we own controlling interests have been consolidated in our financial statements. The financial results of those companies in which we hold a noncontrolling interest are accounted for under the equity method of accounting.

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OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Our strategy in making these private equity investments is similar to our strategy for purchasing equity securities. We seek to invest in profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline, at reasonable prices. We intend to own the businesses acquired for a long period of time.

Our non-insurance operations which are referred to collectively as Markel Ventures, are comprised of a diverse portfolio of companies from various industries, including manufacturers of dredging equipment, high-speed bakery equipmentindustrial and laminated furniture products and an owner and operator of manufactured housing communities.service companies. During the secondthird quarter of 2010,2011, we acquired a company that provides concierge medical and executive health services, and we acquired a company that supplies ovens and other related equipment to high-speed bread and bun bakeries. During the fourth quarter of 2011, we acquired a controlling interest in a manufacturer of food processing equipment, and we acquired a noncontrolling interest in a real estate investment fund manager. During the fourth quarter of 2010, we acquired controlling interests in a company that provides retail intelligence servicesmanufactures and a company that manages behavioral health programs.leases high-pressure trailer tubes used by industrial, chemical and distribution companies to transport gas and liquids.

For further discussion of our lines of business, principal products offered, distribution channels, competition, underwriting philosophy and our non-insurance operations, see the discussion under Business Overview beginning on page 12.

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Key Performance Indicators

We measure financial success by our ability to compound growth in book value per share at a high rate of return over a long period of time. To mitigate the effects of short-term volatility, we measure ourselves over a five-year period. We believe that growth in book value per share is the most comprehensive measure of our success because it includes all underwriting and investing results. We measure underwriting results by our underwriting profit or loss and combined ratio. We measure investing results by our total investment return. These measures are discussed in greater detail under “Results of Operations.”

Results of Operations

 

The following table presents the components of net income (loss) to shareholders.

 

  Years Ended December 31, 

(dollars in thousands)

  Years Ended December 31,   2011 2010 2009 
2010 2009 2008 

Underwriting profit

  $59,816   $86,312   $14,613  

Underwriting profit (loss)

  $(40,825 $59,816   $86,312  

Net investment income

   272,530    259,809    282,148     263,676    272,530    259,809  

Net realized investment gains (losses)

   36,362    (96,100  (407,594   35,857    36,362    (96,100

Other revenues

   185,580    89,782    79,845     351,077    185,580    89,782  

Amortization of intangible assets

   (16,824  (6,698  (5,742   (24,291  (16,824  (6,698

Other expenses

   (168,290  (80,499  (74,889   (309,046  (168,290  (80,499

Interest expense

   (73,663  (53,969  (48,210   (86,252  (73,663  (53,969

Income tax benefit (expense)

   (27,782  3,782    101,395     (41,710  (27,782  3,782  

Net income attributable to noncontrolling interests

   (936  (781  (333   (6,460  (936  (781
            

 

  

 

  

 

 

NET INCOME (LOSS) TO SHAREHOLDERS

  $266,793   $201,638   $(58,767

NET INCOME TO SHAREHOLDERS

  $142,026   $266,793   $201,638  
            

 

  

 

  

 

 

Net income to shareholders for 2011 decreased 47% compared to 2010 primarily due to a deterioration in underwriting results, which was driven by higher losses from natural catastrophes compared to 2010. Net income to shareholders for 2010 increased 32% compared to 2009 as a result of improved investment returns, which waswere partially offset by an increase in income taxes and a deterioration in underwriting results due in part to higher losses from natural catastrophes and losses associated with the adverse conditions in the residential mortgage market. The results for 2009 improved $260.4 million compared to 2008 primarily due to lower net realized investment losses, as well as better underwriting performance as a result of a benign hurricane season and increased underwriting profits from our international operations, which were offset in part by a lower income tax benefit as compared to 2008. For bothIn 2010, and 2009,

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lower write downs for other-than-temporary declines in the estimated fair value of investments contributed to improved investment returns. Net income to shareholders for 2010 included $12.2 million of write downs for other-than-temporary declines in the estimated fair value of investments compared to $90.0 million and $339.2 million in 2009 and 2008, respectively.2009. The components of net income (loss) to shareholders are discussed in further detail under “Underwriting Results,” “Investing Results,” “Non-Insurance Operations” and “Interest Expense and Income Taxes.”

Underwriting Results

Underwriting profits are a key component of our strategy to grow book value per share. 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 as a basis for evaluating our underwriting performance.

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Markel Corporation & Subsidiaries

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The following table presents selected data from our underwriting operations.

 

  Years Ended December 31,   Years Ended December 31, 

(dollars in thousands)

  2010 2009 2008   2011 2010 2009 

Gross premium volume

  $1,982,467   $1,905,893   $2,212,784    $2,291,251   $1,982,467   $1,905,893  

Net written premiums

  $1,769,118   $1,714,409   $1,968,496    $2,041,838   $1,769,118   $1,714,409  

Net retention

   89  90  89   89  89  90

Earned premiums

  $1,730,921   $1,815,835   $2,022,184    $1,979,340   $1,730,921   $1,815,835  

Losses and loss adjustment expenses

  $946,229   $992,863   $1,269,025    $1,209,986   $946,229   $992,863  

Underwriting, acquisition and insurance expenses

  $724,876   $736,660   $738,546    $810,179   $724,876   $736,660  

Underwriting profit

  $59,816   $86,312   $14,613  

Underwriting profit (loss)

  $(40,825 $59,816   $86,312  

U.S. GAAP Combined Ratios(1)

        

Excess and Surplus Lines

   96  96  92   86  96  96

Specialty Admitted

   100  99  106   109  100  99

London Insurance Market

   95  91  104   116  95  91

Other Insurance (Discontinued Lines)

   NM(2)   NM(2)   NM(2)    NM(2)   NM(2)   NM(2) 

Markel Corporation (Consolidated)

   97  95  99   102  97  95

 

(1)

The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums. A combined ratio less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss.

 

(2)

NM—Ratio is not meaningful. Further discussion of Other Insurance (Discontinued Lines) underwriting loss follows.

The 2011 combined ratio increased from 2010 due to a higher current accident year loss ratio, partially offset by more favorable development of prior years’ loss reserves and a lower expense ratio. The 2011 combined ratio included $152.4 million, or eight points, of underwriting loss related to natural catastrophes. The lower expense ratio in 2011 was primarily due to lower costs associated with our system and business process initiatives and lower profit sharing costs. The 2010 combined ratio increased from 2009 due to a higher current accident year loss ratio and a higher expense ratio, partially offset by more favorable development of prior years’ loss reserves. The 2010 combined ratio included $33.0 million, or two points, of underwriting loss on the Chilean earthquake and the Deepwater Horizon drilling rig explosion. The 2009 combined ratio decreased from 2008 due to more favorable development of prior years’ loss reserves and a lower current accident year loss ratio, which were partially offset by a higher expense ratio. The lower current accident year loss ratio in 2009 was due to a benign hurricane season in 2009. The higher expense ratios in 2010 and 2009 were primarily due to declines in earned premiums and to costs associated with the implementation of our Atlas system and business process initiative.

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Markel Corporation & Subsidiaries

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OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The 2010 expense ratio included $46 million, or three points, of costs associated with the implementation of our Atlas system and business process initiative compared to $33 million, or two points, for 2009 and $20$17.0 million, or one point, for 2008. Duringof underwriting loss related to the third quarter of 2010, in response to continuous assessments of cost, organizational effort, program complexity and enterprise risks associated with the Atlas initiative, we re-focused and simplified our implementation approach. While our ultimate objectives remain unchanged, we focused our attention on the successful delivery of the billing and collections system in October 2010 and the development and delivery of a data warehouse and agency internet functionality in 2011. We believe we can be more successful by completing these projects before proceeding with development of the remaining initiatives. Previously capitalized costs of $7.7 million were expensed during the third quarter of 2010.

Chilean earthquake. The 2010 combined ratio also included $74.7 million, or four points, of underwriting loss foron two run-off programs previously underwrittenincluded in the Excess and Surplus Lines segment that were exposed to losses associated with the adverse conditions in the residential mortgage market. The higher expense ratio in 2010 was primarily due to a decline in earned premiums and to higher costs associated with our system and business process initiatives.

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The following table summarizes, by segment, the impact of losses related to natural catastrophes on our 2011 underwriting results.

   Year Ended December 31, 2011 

(dollars in millions)

  Excess and
Surplus
Lines
   Specialty
Admitted
   London
Insurance
Market
   Consolidated 

Net losses on catastrophes:

        

Japanese earthquake and tsunami

  $—      $0.5    $47.3    $47.8  

U.S. tornadoes

   13.4     4.0     12.0     29.4  

New Zealand earthquakes

   —       —       29.0     29.0  

Thai floods

   —       —       18.5     18.5  

Hurricane Irene

   6.2     4.9     6.0     17.1  

Australian floods

   —       —       9.0     9.0  

Reinsurance costs(1)

   —       —       1.6     1.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL

  $19.6    $9.4    $123.4    $152.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

(1)

Adjustments related to estimated reinstatement premiums on reinsurance treaties that decreased net written and net earned premiums.

The estimated net losses on the natural catastrophes that occurred during 2011 represent our best estimate of losses based upon the most current information available. We have used various loss estimation techniques to develop these reserves, including reviews of modeled loss estimates that factor in third party industry loss estimates, detailed policy level reviews and direct contact with insureds and brokers. However, reported losses and information on potential losses have come in slowly given the magnitude of each of these losses. Due to the uncertainty associated with these events, we believe our loss estimates may have a high degree of volatility. While we believe our reserves for the catastrophes experienced during 2011 are adequate, we continue to closely monitor reported claims and will adjust our estimates of gross and net losses as new information becomes available.

The net losses from each of these events were within our risk tolerances. However, the number of catastrophes experienced during 2011 was higher than expected. We have started to see an increase in catastrophe-exposed property rates. We will selectively accept catastrophe exposures when we believe the exposures are adequately priced for the risks incurred. We will refine and review our exposures in view of our 2011 results and seek to improve the profitability of this business. If the market in recent years. price does not support our underwriting profit targets for catastrophe-exposed risks, we will not write the business.

The 20092011 combined ratio included $35.5 million, or two points, of underwriting loss from these same two programs. The first of these programs provided coverage to financial institutions for losses on defaults by borrowers on second mortgages and home equity loans. We have been in the process of exiting this program since the first quarter of 2009. During the third quarter of 2010, we settled litigation related to this program with Guaranty Bank, the program’s largest insured, and recognized an underwriting loss of $19.9 million. The second of these programs was an errors and omissions program for mortgage servicing companies, which primarily experienced losses on the 2008 and 2007 accident years. We placed this program into run-off in the third quarter of 2010. Exposure on both programs is principally with regard to loan transactions that occurred before the end of 2008. Delinquencies and losses with regard to these loans have been greater than anticipated, resulting in greater frequency and severity of claims under both programs. Our loss reserves are based on judgments about the future performance of the underlying loans; however, continued weakness or other disruptions in the residential housing markets may result in additional loss experience and require strengthening of our loss reserves.

The 2010 combined ratio included $278.0$354.0 million of favorable development on prior years’ loss reserves compared to $278.0 million in 2010 and $235.3 million in 2009 and $163.8 million in 2008.2009. The favorable development on prior years’ loss reserves during the past three years was primarily due to loss reserve redundancies at Markel International and on our professional and products liability programs within the Excess and Surplus Lines segment. Loss reserve redundancies at Markel International were $94.8 million, $117.7 million and $108.1 million in 2011, 2010 and $58.3 million in 2010, 2009, and 2008, respectively. Loss reserve redundancies on our professional and products liability programs within the Excess and Surplus Lines segment were $87.3 million, $96.7 million and $97.5 million in 2011, 2010 and $91.32009, respectively. In 2011, the favorable development on prior years’ loss reserves also included $83.7 million inof loss reserve redundancies on various long-tail casualty lines within the Excess and Surplus Lines segment. In 2010, 2009the favorable development on prior years’ loss reserves also included $55.4 million of loss reserve redundancies on our brokerage general liability, excess and 2008, respectively.umbrella and environmental programs within the Excess and Surplus Lines segment.

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Markel Corporation & Subsidiaries

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Over the past three years, we have experienced significant redundancies in prior years’ loss reserves. The product lines that have produced these redundancies are primarily long-tail books of business that take many years to fully develop. The positive trend in these prior years’ loss reserves was partially the result of the more favorable rates and terms associated with the hard insurance market that we experienced from 2000 through 2004. Although the favorable rates and terms obtained during the hard insurance market created expectations of improved underwriting results, the full impact from this favorable environment could not be quantified when we initially established loss reserves for these years. Additionally, the positive trend in these prior years’ loss reserves was due in part to the adverse impact of softening insurance market conditions and poor economic conditions experienced in recent years not being as significant as initially anticipated. Since 2005, we have been in a soft insurance market. In 2008 and 2009, we experienced a significant economic slowdown from the recessionary environment. Given the volatile nature of our long-tail books of business, the ultimate adverse impact of the soft insurance market and unfavorable economic environment could not be quantified when we initially established loss reserves for these years. In each

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of the past three years, actual claims reporting patterns have been more favorable than we initially anticipated.

In connection with our quarterly reviews of loss reserves, the actuarial methods we used have exhibited a favorable trend for the 2003 to 20092010 accident years. This trend was observed using statistical analysis of actual loss experience for those years, particularly with regard to our long-tail books of business within the Excess and Surplus Lines and London Insurance Market segments, which developed more favorably than we had expected based upon our historical experience. As actual losses experienced on these accident years have continued to be lower than anticipated, it has become more likely that the underwriting results will prove to be better than originally estimated. Additionally, as most actuarial methods rely upon historical reporting patterns, the favorable trends experienced on earlier accident years have resulted in a re-estimation of our ultimate incurred losses on more recent accident years. When we experience loss frequency or loss severity trends that are more favorable than we initially anticipated, we often evaluate the loss experience over a period of several years in order to assess the relative credibility of loss development trends. In each of the past three years, based upon our evaluations of claims development patterns in our long-tail, and often volatile, lines of business, we gave greater credibility to the favorable trend. As a result, our actuaries reduced their estimates of ultimate losses, and management incorporated this favorable trend into its best estimate and reduced prior years’ loss reserves accordingly.

While we believe it is possible that there will be additional redundancies on prior years’ loss reserves in 2011,2012, we caution readers not to place undue reliance on this favorable trend. In 2004, we began to see a softening of the insurance market and experienced a slow down in the rate of increase in prices as a result of increased competition. Competition remained strong in 2005 and increased further from 2006 through 2010, resulting in deterioration in pricing over this period of time. Further, the ultimate impact that the financial crisis and related economic recession of 2008 and 2009 will have on our underwriting results is difficult to quantify. Redundancies on prior years’ loss reserves also will be impacted by the decline in earned premiums, which have decreased each of the past four years. Similar to the impact of the hardening of the insurance market that began in 2000, the impact on our underwriting results from the soft insurance market and adverse economic conditions cannot be fully quantified in advance.

The following discussion provides more detail by segment of the underwriting results described above. This segment-based discussion is supplemented by a summary of prior years’ loss reserve development on page 106.109.

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Excess and Surplus Lines Segment

The Excess and Surplus Lines segment’s combined ratio for 20102011 was 96%86% (including three points of underwriting loss related to natural catastrophes) compared to 96% in 2009both 2010 and 92% (including three points of losses2009. The combined ratio decreased in 2011 compared to 2010 due to more favorable development on Hurricanes Gustav and Ike) in 2008.prior years’ loss reserves. In 2010, a higher current accident year loss ratio and a higher expense ratio were offset by more favorable development of prior years’ loss reserves compared to 2009. The 2010 combined ratio included $74.7 million, or ten10 points, of underwriting loss on two run-off programs described earlier that were impacted byexposed to losses associated with the adverse conditions in the residential mortgage market in recent years.market. The 2009 combined ratio included $35.5 million, or four points, of underwriting loss from these same two programs. The combinedhigher expense ratio increased in 20092010 was primarily due to a higher expense ratio and a higher current accident year loss ratio on non-catastrophe-exposed lines of business, which were partially offset by more favorable development of prior years’ loss reserves compared to 2008. The higher expense ratios in 2010 and 2009 were primarily due to declinesdecline in earned premiums and to costs associated with the implementation of our Atlas initiative. The higher current accident year loss ratio in 2009 was due in part to higher than expected incurred losses during 2009 in certain professional liability programs, most notably our architectssystem and engineers book of business as a result of adverse economic conditions.

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OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

process initiatives.

In 2010,2011, the Excess and Surplus Lines segment’s results included $159.0$227.5 million of favorable development on prior years’ loss reserves compared to $159.0 million in 2010 and $130.8 million in 2009 and $118.8 million in 2008.2009. The redundancies on prior years’ loss reserves experienced within the Excess and Surplus Lines segment during 2011, 2010 2009 and 20082009 were primarily on our professional and products liability and casualty programs due in part to lower loss severity than originally anticipated. As the average claim severity estimates on these long-tail books of business have decreased, our actuarial estimates of the ultimate liability for unpaid losses and loss adjustment expenses were reduced, and management reduced prior years’ loss reserves accordingly. In 2010, theThe increase in favorable development on prior year’syears’ loss reserves in 2011 was primarily due to having favorable development on the two run-off programs described earlier compared to 2009unfavorable development in 2010 on these same two programs. In 2011, we resolved a significant portion of our outstanding liabilities associated with one of those programs and, as a result, reduced prior years’ loss reserves by $16.1 million. The increase in favorable development on prior years’ loss reserves in 2010 was primarily due to more favorable loss reserve development on certain long-tail casualty lines of business, most notably our brokerage general liability, excess and umbrella and environmental programs. In 2009, the increase in

The favorable development onof prior year’syears’ loss reserves comparedduring 2011 included $87.3 million of redundancies on our professional and products liability programs, of which $78.9 million was on the 2006 to 2008 was primarily due to less adverse loss reserve development at the Markel Re unit.

2010 accident years. The favorable development of prior years’ loss reserves during 2010 included $96.7 million of redundancies on our professional and products liability programs, of which $79.8 million was on the 2006 to 2009 accident years. The favorable development of prior years’ loss reserves during 2009 included $97.5 million of redundancies on our professional and products liability programs, of which $91.0 million was on the 2004 to 2008 accident years. The favorable development of prior years’ loss reserves during 2008 included $91.3 million of redundancies on our professional and products liability programs, of which $84.9 million was on the 2004 to 2007 accident years. The favorable development experienced in 2011, 2010 2009 and 20082009 on our long-tail professional and products liability books of business was primarily the result of lower loss severity than was originally anticipated. In each of the periods presented, the product lines that produced the majority of the redundancy were the specified medical, medical malpractice and products liability programs. In 2011, the average claim severity estimate on the 2006 to 2010 accident years for these product lines declined by 6% compared to 2010. In 2010, the average claim severity estimate on the 2006 to 2009 accident years for these product lines declined by 11% compared to 2009. In 2009, the average claim severity estimate on the 2004 to 2008 accident years for these product lines declined by 13% compared to 2008. As a result of these decreases in severity, our actuarial estimates of the ultimate liability for unpaid losses and loss adjustment expenses were reduced, and management reduced prior years’ loss reserves accordingly.

In 2011, we experienced $83.7 million of redundancies on various long-tail casualty lines, primarily on the 2003 to 2009 accident years. In 2010, we experienced $55.4 million of redundancies on our brokerage general liability, excess and umbrella and environmental programs on the 2003 to 2009 accident years. In 2003, as a result of previous adverse loss experience, we took significant corrective actions within our brokerage casualty operations, including the re-underwriting and re-pricing of the

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OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

ongoing business. Our brokerage casualty business includes product lines that are long-tail and volatile in nature. During 2011, actual incurred losses and loss adjustment expenses on reported claims for various long-tail casualty lines on the 2003 to 2009 accident years were $29.6 million less than we anticipated in our actuarial analyses. During 2010, actual incurred losses and loss adjustment expenses on reported claims for brokerage casualty business on the 2003 to 2009 accident years were $12.9 million less than we anticipated in our actuarial analyses. As a result, our actuaries reduced their estimates of ultimate losses in 2011 and 2010, and management assigned greater credibility to this favorable experience and reduced prior years’ loss reserves accordingly.

The favorable development of prior years’ loss reserves during 2008 included $25.6 million of redundancies at the Markel Essex Excess and Surplus Lines unit, of which $21.6 million was on the 2005 to 2007 accident years. In 2008, the favorable development on prior years’ loss reserves at the Markel Essex Excess and Surplus Lines unit was primarily within the casualty programs and resulted from better than expected case loss activity.

The adverse loss experience at the Markel Re unit during 2008 primarily resulted from higher than expected average claim frequency and severity on two general liability programs that were cancelled in the first quarter of 2007. In 2008, the Markel Re unit experienced $30.9 million of adverse development on prior years’ loss reserves, of which $27.9 million related to these two programs. This adverse development was primarily on the 2005 to 2007 accident years.

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Specialty Admitted Segment

The Specialty Admitted segment’s combined ratio for 20102011 was 100%109% (including two points of underwriting loss related to natural catastrophes) compared to 100% in 2010 and 99% in 20092009. The combined ratio increased in 2011 compared to 2010 due to a higher current accident year loss ratio, partially offset by more favorable development on prior years’ loss reserves. In addition to the impact of natural catastrophes, the higher current accident year loss ratio for 2011 was due in part to the impact of soft market conditions on pricing and 106% (includinga greater incidence of high severity losses across several divisions at the Markel Specialty unit, including higher than expected loss frequency and severity on the accident and health liability class. The increase in the current accident year loss ratio for 2011 also was attributable to the impact of the inclusion of our FirstComp workers’ compensation operations in the Specialty Admitted segment. Our workers’ compensation operations added four points and two points to the Specialty Admitted segment’s current accident year loss ratio in 2011 and 2010, respectively, and added five points of losses on Hurricanes Gustav and Ike)one point to the segment’s combined ratio in 2008.2011 and 2010, respectively. The combined ratio increased in 2010 compared to 2009 due to a higher current accident year loss ratio and higher expense ratio, partially offset by more favorable development of prior years’ loss reserves. Aside from the impact of Hurricanes Gustav and Ike, the combined ratio decreased in 2009 due to a lower current accident year loss ratio and a lower expense ratio compared to 2008. Due to corrective actions taken during late 2008 and early 2009, we did not experience the same pattern of adverse loss development on the 2009 accident year for our specialty program business as we experienced in 2008. The decrease in the expense ratio for 2009 was primarily due to our decision in the fourth quarter of 2008 to close the Markel Global Marine and Energy unit.

The Specialty Admitted segment’s results included $27.4 million and $4.7 million of favorable development on prior years’ loss reserves in 2011 and 2010, respectively, compared to adverse development of $0.3 million andin 2009. The favorable development in 2011 included $18.2 million of $16.5 millionredundancies of prior years’ loss reserves at the Markel Specialty unit, primarily on the 2006 to 2009 accident years. In 2011, the favorable development at the Markel Specialty unit was due in 2009part to lower loss severity than was originally anticipated on various property lines of business and 2008, respectively.lower loss frequency than was originally anticipated on various casualty programs. The favorable development in 2010 was primarily due to redundancies of prior years’ loss reserves at the Markel American Specialty Personal and Commercial Lines unit. The redundancies at the Markel American Specialty Personal and Commercial Lines unit during 2010 were primarily on the 2007 to 2009 accident years. In 2009, favorable development on prior years’ loss reserves at the Markel American Specialty Personal and Commercial Lines unit, primarily on the 2008 accident year, was more than offset by adverse development on prior years’ loss reserves at the Markel Specialty unit and the Markel Global Marine and Energy and Markel Specialty units. In 2008, $12.6 million of the favorable development on prior years’ loss reserves was on the 2006 and 2007 accident years. The favorable developmentunit, which we decided to close in 2008 was primarily due to better than expected case loss activity at the Markel Specialty unit.late 2008.

Beginning in the fourth quarter of 2010, the Specialty Admitted segment’s results included our FirstComp workers’ compensation operations. FirstComp produces business for certain of our insurance companies and through June 30, 2011 also acted as a managing general agent producing business for the benefit of unaffiliated insurance companies. In 2011, the Specialty Admitted segment’s results included a loss of $33.8 million from our FirstComp operations, which was consistent with our expectations. The workers’ compensation insurance market continues to be adversely impacted by high rates of unemployment, unfavorable economic conditions and a challenging pricing environment. As a result, we believe that it is likely that our FirstComp operations will produce an underwriting loss in 2011, which could approximate $30 million.

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London Insurance Market Segment

The London Insurance Market segment’s combined ratio for 20102011 was 95% compared to 91% in 2009 and 104%116% (including eight points of losses on Hurricanes Gustav and Ike) in 2008. The 2010 combined ratio included $33.0 million, or six18 points of underwriting loss onrelated to natural catastrophes) compared to 95% (including three points of underwriting loss related to natural catastrophes) in 2010 and 91% in 2009. In addition to the Chilean earthquake and the Deepwater Horizon drilling rig explosion. Excluding the effectsimpact of losses from these twonatural catastrophes, the London Insurance Market segment’s combined ratio for 2010 decreasedincreased in 2011 compared to 2009 primarily2010 due to moreless favorable development on prior years’ loss reserves. Aside from the impact of Hurricanes Gustav and Ike, theThe 2010 combined ratio decreased inincluded $17.0 million, or three points, of underwriting loss related to the Chilean earthquake.

The London Insurance Market segment’s 2011 combined ratio included $94.8 million of favorable development on prior years’ loss reserves, of which $43.4 million was on the 2008 and 2009 due to greateraccident years. This favorable development of prior years’ loss reserves occurred in a variety of programs across each of our divisions and was due in part to the adverse impact of the disruptions in the financial markets during 2008 and 2009 not being as comparedsignificant as initially anticipated. The favorable development of prior years’ loss reserves experienced in 2011 included $18.8 million of redundancies on the 2001 and prior accident years. During 2010, we completed a claims file review of significant open claims for these older accident years. In 2011, we continued to 2008.experience better than expected case loss activity on the remaining open claims, and we reduced prior years’ loss reserves accordingly.

The London Insurance Market segment’s 2010 combined ratio included $117.7 million of favorable development on prior years’ loss reserves, of which $76.3 million was on the 2004 to 2007 accident years. This favorable development of prior years’ loss reserves occurred in a variety of programs across each of our divisions and was due in part to the adverse impact of softening insurance market conditions since 2005 and recent poor economic conditions not being as significant as initially anticipated. During 2010, actual incurred losses and loss adjustment expenses on reported claims for the 2004 to 2007 accident years were less than we originally expected. As a result of this favorable experience, our actuarial estimates of the ultimate liability for unpaid losses and loss adjustment expenses were reduced by $29.9 million, and management reduced prior years’ loss reserves accordingly.

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MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The favorable development of prior years’ loss reserves experienced in 2010 included $33.7 million of redundancies on the 2001 and prior accident years. These redundancies predominantly related to marine and aviation liability and professional indemnity business written prior to our acquisition of Markel International in 2000. During 2010, we completed a comprehensiveThe claims file review of all significant open claims for these older accident years. The claims file reviewin 2010 highlighted better than expected case loss activity due in part to favorable claims settlements experienced in 2010. Based on the results of the claims file review, there was less uncertainty with regard to the ultimate settlement amount of the remaining open claims, and we reduced prior years’ loss reserves accordingly.

In 2010, the loss reserve redundancies in the London Insurance Market segment were partially offset by $35.0 million of adverse loss reserve development on prior years’ loss reserves in the Professional and Financial Risks division related to medical malpractice coverage for Italian hospitals. In 2005, we started writing medical malpractice coverage for Italian hospitals. This business was written until late 2008 when, as a result of higher than expected loss frequency and severity, we exited this class. During 2010, we completed a detailed review of all reported claims within the medical malpractice class, which highlighted that ultimate loss severity is expected to be greater than previously anticipated due in part to an increasingly adverse legal environment for medical malpractice insurers in Italy. As a result, our actuaries increased their estimates of ultimate losses, and management increased prior years’ loss reserves accordingly.

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MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The London Insurance Market segment’s 2009 combined ratio included $108.1 million of favorable development on prior years’ loss reserves, of which $84.5 million related to the 2003 to 2007 accident years. This favorable development on prior years’ loss reserves occurred in a variety of programs across each of our divisions, most notably the professional liability programs in the Retail and the Professional and Financial Risks divisions. During 2009, actual incurred losses and loss adjustment expenses on reported claims for the 2003 to 2007 accident years were $39.9 million less than we expected in our actuarial analyses. As a result of this favorable experience, our actuarial estimates of the ultimate liability for unpaid losses and loss adjustment expenses were reduced, and management reduced prior years’ loss reserves accordingly.

The London Insurance Market segment’s 2008 combined ratio included $58.3 million of favorable development on prior years’ loss reserves of which $36.5 million was on the professional liability programs at the Professional and Financial Risks and the Retail divisions on the 2002 to 2005 accident years. This favorable development on prior years’ loss reserves was primarily due to the favorable rates and terms associated with the London market in those years. During 2008, actual incurred losses and loss adjustment expenses on reported claims for the 2002 to 2005 accident years at the Professional and Financial Risks and the Retail divisions were $26.4 million less than we expected in our actuarial analyses. As a result of this favorable experience, our actuarial estimates of the ultimate liability for unpaid losses and loss adjustment expenses were reduced, and management reduced prior years’ loss reserves accordingly.

In 2008, the London Insurance Market segment’s results included $28.9 million of adverse development on prior years’ loss reserves within the Professional and Financial Risks division on the 2006 and 2007 accident years related to our medical malpractice coverage for Italian hospitals. During 2008, losses on reported claims for this book of business were higher than expected. In addition to increased severity on reported claims, we experienced a higher than expected incidence of newly reported claims. As a result of the increase in loss frequency and severity experienced during 2008 for this class, our actuaries increased their estimates of ultimate losses, and management increased prior years’ loss reserves accordingly. This adverse experience on the 2006 and 2007 accident years was offset by favorable development on prior years’ loss reserves in other classes on the same accident years.

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The underwriting performance for this segment may vary to a greater degree than our other segments due to Markel International’s current mix of business, which includes a high percentage of catastrophe-exposed business and higher average policy limits and lower use of reinsurance.

Results for the London Insurance Market segment for 2010 and 2009 also included the results of Elliott Special Risks (ESR), a Canadian managing general agent that we acquired in October 2009. ESR had operating revenues of $6.8 million and $4.1 million in 2010 and 2009, respectively. Operating revenues were primarily related to commission income from third party insurance entities. Operating revenues and expenses for ESR are included in other revenues and other expenses in the consolidated statement of operations and comprehensive income (loss).limits.

Other Insurance (Discontinued Lines) Segment

The majority of the losses and loss adjustment expenses and the underwriting, acquisition and insurance expenses for the Other Insurance (Discontinued Lines) segment are associated with asbestos and environmental exposures or discontinued Markel International programs, most of which were discontinued upon acquisition, or shortly thereafter. Given the insignificant amount of premium earned in the Other Insurance (Discontinued Lines) segment, we evaluate this segment’s underwriting performance in terms of dollars of underwriting profit or loss instead of its combined ratio.

The Other Insurance (Discontinued Lines) segment produced an underwriting profit of $4.7 million in 2011 compared to an underwriting loss of $3.1 million in 2010 compared toand $4.7 million in 2009. In 2009, and $28.1 million in 2008. Followingfollowing the completion of our annualactuarial review of asbestos and environmental exposures, we increased loss reserves by $10.0 million and $24.9 million in 2009 and 2008, respectively. In 2009, the increase in loss reserves for asbestos and environmental exposures by $10.0 million, which was partially offset by favorable development of loss reserves in other discontinued lines of business.

During the third quarter of each of the past three years, we completed an in-depth, actuarial review of our asbestos and environmental exposures. During our 2011 and 2010 review,reviews, we determined that no adjustment to loss reserves was necessary. During our 2009 review, we increased our estimate of the number of claims that would ultimately be closed with an indemnity payment. During our 2008 review, we noted that claims had been closed with total indemnity payments that were higher than had been anticipated, and as a result of this higher than expected average severity on closed claims, our actuaries updated their average severity assumptions for both open claims and claims incurred but not yet reported. In 2009, and 2008, our actuarial estimatesestimate of the ultimate liability for asbestos and environmental loss reserves werewas increased, and management increased prior years’ loss reserves for asbestos and environmental exposures accordingly.

Asbestos and environmental loss reserves are subject to significant uncertainty due to potential loss severity and frequency resulting from an uncertain and unfavorable legal climate. Our asbestos and environmental reserves are not discounted to present value and are forecasted to pay out over the next 50 years. We seek to establish appropriate reserve levels for asbestos and environmental exposures; however, these reserves could be subject to increases in the future. See note 8 of the notes to consolidated financial statements for further discussion of our exposures to asbestos and environmental claims.

 

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The following tables summarize the increases (decreases) in prior years’ loss reserves by segment, as discussed above.

   Year Ended December 31, 2011 

(dollars in millions)

  Excess &
Surplus
Lines
  Specialty
Admitted
  London
Insurance
Market
  Other
Insurance
(Discontinued
Lines)
  Total 

Professional/Products liability

  $(87.3 $—     $—     $—     $(87.3

Casualty

   (83.7  —      —      —      (83.7

Mortgage-related programs

   (16.1  —      —      —      (16.1

Markel International: 2002 & post

   —      —      (76.0  —      (76.0

Markel International: 2001 & prior

   —      —      (18.8  —      (18.8

Markel Specialty

   —      (18.2  —      —      (18.2

Net other prior years’ redundancy

   (40.4  (9.2  —      (4.3  (53.9
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

DECREASE

  $(227.5 $(27.4 $(94.8 $(4.3 $(354.0
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   Year Ended December 31, 2010 

(dollars in millions)

  Excess &
Surplus
Lines
  Specialty
Admitted
  London
Insurance
Market
  Other
Insurance
(Discontinued
Lines)
  Total 

Professional/Products liability

  $(96.7 $—     $—     $—     $(96.7

Brokerage casualty

   (55.4  —      —      —      (55.4

Mortgage-related programs

   29.9    —      —      —      29.9  

Markel International: medical malpractice

   —      —      35.0    —      35.0  

Markel International: 2002 & post

   —      —      (119.0  —      (119.0

Markel International: 2001 & prior

   —      —      (33.7  —      (33.7

Net other prior years’ (redundancy) deficiency

   (36.8  (4.7  —      3.4    (38.1
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

INCREASE (DECREASE)

  $(159.0 $(4.7 $(117.7 $3.4   $(278.0
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   Year Ended December 31, 2009 

(dollars in millions)

  Excess &
Surplus
Lines
  Specialty
Admitted
  London
Insurance
Market
  Other
Insurance

(Discontinued
Lines)
  Total 

Professional/Products liability

  $(97.5 $—     $—     $—     $(97.5

Markel Re

   7.4    —      —      —      7.4  

Markel International

   —      —      (108.1  —      (108.1

Asbestos exposures

   —      —      —      10.0    10.0  

Net other prior years’ (redundancy) deficiency

   (40.7  0.3    —      (6.7  (47.1
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

INCREASE (DECREASE)

  $(130.8 $0.3   $(108.1 $3.3   $(235.3
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

|  105109


Markel Corporation & Subsidiaries

 

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

The following tables summarize the increases (decreases) in prior years’ loss reserves by segment, as discussed above.

   Year Ended December 31, 2010 

(dollars in millions)

  Excess &
Surplus
Lines
  Specialty
Admitted
  London
Insurance
Market
  Other
Insurance
(Discontinued
Lines)
  Total 

Professional/Products liability

  $(96.7 $—     $—     $—     $(96.7

Brokerage casualty

   (55.4  —      —      —      (55.4

Mortgage-related programs

   29.9    —      —      —      29.9  

Markel International: medical malpractice

   —      —      35.0    —      35.0  

Markel International: 2002 & post

   —      —      (119.0  —      (119.0

Markel International: 2001 & prior

   —      —      (33.7  —      (33.7

Net other prior years’ (redundancy) deficiency

   (36.8  (4.7  —      3.4    (38.1
                     

INCREASE (DECREASE)

  $(159.0 $(4.7 $(117.7 $3.4   $(278.0
                     
   Year Ended December 31, 2009 

(dollars in millions)

  Excess &
Surplus
Lines
  Specialty
Admitted
  London
Insurance
Market
  Other
Insurance
(Discontinued
Lines)
  Total 

Professional/Products liability

  $(97.5 $—     $—     $—     $(97.5

Markel Re

   7.4    —      —      —      7.4  

Markel International:

   —      —      (108.1  —      (108.1

Asbestos exposures

   —      —      —      10.0    10.0  

Net other prior years’ (redundancy) deficiency

   (40.7  0.3    —      (6.7  (47.1
                     

INCREASE (DECREASE)

  $(130.8 $0.3   $(108.1 $3.3   $(235.3
                     
   Year Ended December 31, 2008 

(dollars in millions)

  Excess &
Surplus
Lines
  Specialty
Admitted
  London
Insurance
Market
  Other
Insurance
(Discontinued
Lines)
  Total 

Professional/Products liability

  $(91.3 $—     $—     $—     $(91.3

Markel Essex

   (25.6  —      —      —      (25.6

Markel Re

   30.9    —      —      —      30.9  

Markel Specialty

   —      (8.1  —      —      (8.1

Markel International: medical malpractice

   —      —      28.9    —      28.9  

Markel International: all other lines

   —      —      (87.2  —      (87.2

Asbestos exposures(1)

   —      —      —      24.9    24.9  

Net other prior years’ (redundancy) deficiency

   (32.8  (8.4  —      4.9    (36.3
                     

INCREASE (DECREASE)

  $(118.8 $(16.5 $(58.3 $29.8   $(163.8
                     

(1)

Asbestos exposures include related allowances for reinsurance bad debt.

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Over the past three years, we have experienced favorable development on prior years’ loss reserves ranging from 4%5% to 6%8% of beginning of year net loss reserves. In 2010,2011, we experienced favorable development of $354.0 million, or 8% of beginning of year net loss reserves, compared to $278.0 million, or 6% of beginning of year net loss reserves, compared toin 2010 and $235.3 million, or 5% of beginning of year net loss reserves, in 2009 and $163.8 million, or 4% of beginning of year net loss reserves, in 2008.2009.

It is difficult for management to predict the duration and magnitude of an existing trend and, on a relative basis, it is even more difficult to predict the emergence of factors or trends that are unknown today but may have a material impact on loss reserve development. In assessing the likelihood of whether the above favorable trends will continue and whether other trends may develop, we believe that a reasonably likely movement in prior years’ loss reserves during 20112012 would range from a deficiency of approximately 1%, or $50 million, to a redundancy of approximately 6%5%, or $275$250 million, of December 31, 20102011 net loss reserves.

Premiums

The following table summarizes gross premium volume by segment.

 

GROSS PREMIUM VOLUME  Years Ended December 31,   Years Ended December 31, 

(dollars in thousands)

  2010   2009   2008   2011   2010   2009 

Excess and Surplus Lines

  $898,409    $962,702    $1,163,992    $893,427    $898,409    $962,702  

Specialty Admitted

   375,036     301,827     355,061     572,392     375,036     301,827  

London Insurance Market

   708,968     641,226     693,138     825,301     708,968     641,226  

Other Insurance (Discontinued Lines)

   54     138     593     131     54     138  
              

 

   

 

   

 

 

TOTAL

  $1,982,467    $1,905,893    $2,212,784    $2,291,251    $1,982,467    $1,905,893  
              

 

   

 

   

 

 

Excess and Surplus Lines segment gross premium volume decreased 1% in 2011 compared to 2010. The decrease in 2011 was due to a reduction in written premiums on two specialized insurance programs, one of which was exposed to losses associated with the adverse conditions in the residential mortgage market and is now in run-off. Excluding these two programs, gross premium volume in the Excess and Surplus Lines segment increased 7% in 2011. Excess and Surplus Lines segment gross premium volume decreased 7% in 2010 compared to 2009 and decreased 17% in 2009 compared to 2008.2009. The decrease in both periods2010 was primarily the result of continued intense competition across many of our product lines and the effects of the economic environment. Premiums for many of our product lines are based upon our insureds’ revenues, gross receipts or payroll, which have beenwere negatively impacted by the depressed levels of business activity that began in 2008. In 2010, the Excess and Surplus Lines segment included $18.8 million of gross premium volume related to our settlement with Guaranty Bank.

In 2010, gross premium volume in both the Excess and Surplus Lines and Specialty Admitted segments was impacted by the transfer of certain programs from the Excess and Surplus Lines segment to the Specialty Admitted segment. This transfer had no impact on total gross premium volume and was made to better align the reporting of these programs with their distribution strategy. In 2010, the Specialty Admitted segment included approximately $25 million of gross premium volumewritten premiums on these transferred programs.

 

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MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Specialty Admitted segment gross premium volume increased 53% in 2011 compared to 2010 and increased 24% in 2010 compared to 2009. In 2011 and 2010, the Specialty Admitted segment included $226.7 million and $40.7 million, respectively, of gross premium volumewritten premiums from FirstComp. The increase in 2010 also was due to the transfer of certain programs from the Excess and Surplus Lines segment. Specialty Admitted

London Insurance Market segment gross premium volume decreased 15%increased 16% in 20092011 compared to 2008. In late 2008, we decided2010. The increase in 2011 was due in part to close the Markel Global Marine and Energy unit and place its programs into run-off,an increase in premiums written by Elliott Special Risks (ESR), which accounted for $28.1 million of the decline inwas converted during 2010 from a managing general agent operation to a risk bearing insurance division. During 2011, gross premium volume in 2009. The declinethe London Insurance Market segment also benefitted from offering higher policy limits and an improved pricing environment in gross premium volume in 2009 was also partially the result of competition across many of our product linesMarine and the effects of the economic environment.

Energy division. London Insurance Market segment gross premium volume increased 11% in 2010 compared to 2009. ThisThe increase in 2010 was due in part to our acquisition of ESR in October 2009. Foreign currency exchange rate movements did not have a significant impact on gross premium volume in 2011 or 2010. London Insurance Market segment gross premium volume decreased 7% in 2009 compared to 2008. Had currency exchange rates remained constant in 2009, gross written premiums would have decreased less than 1% compared to 2008.

The following table summarizes net written premiums by segment.

 

NET WRITTEN PREMIUMS  Years Ended December 31,   Years Ended December 31, 

(dollars in thousands)

  2010   2009 2008   2011 2010   2009 

Excess and Surplus Lines

  $797,518    $869,695   $1,028,816    $772,279   $797,518    $869,695  

Specialty Admitted

   348,634     279,266    321,109     543,213    348,634     279,266  

London Insurance Market

   622,799     566,046    617,946     726,359    622,799     566,046  

Other Insurance (Discontinued Lines)

   167     (598  625     (13  167     (598
             

 

  

 

   

 

 

TOTAL

  $1,769,118    $1,714,409   $1,968,496    $2,041,838   $1,769,118    $1,714,409  
             

 

  

 

   

 

 

Net retention of gross premium volume was 89% in both 2011 and 2010 compared to 90% in 2009 and 89% in 2008. In 2010, net written premiums in the London Insurance Market segment were reduced by $11.0 million of additional reinsurance costs resulting from the Deepwater Horizon loss.2009. As part of our underwriting philosophy, we seek to offer products with limits that do not require significant amounts of reinsurance. We purchase reinsurance in order to reduce our retention on individual risks and enable us to write policies with sufficient limits to meet policyholder needs.

The following table summarizes earned premiums by segment.

 

EARNED PREMIUMS  Years Ended December 31,   Years Ended December 31, 

(dollars in thousands)

  2010   2009 2008   2011 2010   2009 

Excess and Surplus Lines

  $809,672    $940,098   $1,089,967    $756,306   $809,672    $940,098  

Specialty Admitted

   343,574     303,897    315,764     527,293    343,574     303,897  

London Insurance Market

   577,507     572,438    615,828     695,753    577,507     572,438  

Other Insurance (Discontinued Lines)

   168     (598  625     (12  168     (598
             

 

  

 

   

 

 

TOTAL

  $1,730,921    $1,815,835   $2,022,184    $1,979,340   $1,730,921    $1,815,835  
             

 

  

 

   

 

 

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OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Excess and Surplus Lines earned premiums decreased 7% in 2011 compared to 2010 and decreased 14% in 2010 compared to 2009 and decreased 14% in 2009 compared to 2008.2009. The decrease in both periods was a result of lower gross premium volume across most of the product lines included in this segment. In 2010, the Excess and Surplus Lines segment included $18.8 million of earned premiums related to our settlement with Guaranty Bank.

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volume.

Specialty Admitted earned premiums increased 53% in 2011 compared to 2010 and increased 13% in 2010 compared to 2009. In 2011 and 2010, the Specialty Admitted segment included $200.8 million and $36.9 million, respectively, of earned premiums from FirstComp. The increase in 2010 also was due to the transfer of certain programs from the Excess and Surplus Lines segment. Specialty Admitted earned premiums decreased 4% in 2009 compared to 2008. This decrease was primarily due to lower earned premiums at the Markel Global Marine and Energy unit as a result of our decision in late 2008 to close this unit and place its programs into run-off.

London Insurance Market earned premiums increased 20% in 2011 compared to 2010 and increased 1% in 2010 compared to 2009. ThisThe increase in both periods was primarily a result of higher gross premium volume. In 2010, earned premiums in the London Insurance Market segment were reduced by $11.0 million of additional reinsurance costs resulting from the Deepwater Horizon loss. Foreign currency exchange rate movements did not have a significant impact on earned premiums in 2011 or 2010. London Insurance Market earned premiums decreased 7% in 2009 compared to 2008 due to the effects of foreign currency exchange rate movements. Had currency exchange rates remained constant in 2009, earned premiums would have decreased 1% compared to 2008.

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 believe it is important to evaluate investment performance by measuring total investment return. Total investment return includes items that impact net income, (loss), such as net investment income and realized investment gains or losses, as well as changes in unrealized gains or losses, which do not impact net income (loss).income. We focus on long-term total investment return, understanding that the level of realized and unrealized investment gains or losses may vary from one period to the next. Taxable equivalent total investment return provides a measure of investment performance that considers the yield of both taxable and tax-exempt investments on an equivalent basis.

Our investment results over the past three years were impacted by the considerable dislocation of global financial markets that began in 2008 and included the worst declines in the U.S. equity markets since the Great Depression, which were followed by significant recoveries beginning in the latter half of 2009. During 2009, and 2008, we increased our holdings of short-term investments and cash and cash equivalents and also shifted the allocation of our fixed maturity portfolio from corporate bonds to government and municipal bonds. In addition, as bonds matured, we reinvested a portion of the proceeds in short-term investments. During 2010, given the improvement in the financial markets over the latter half of 2009 and continuing into 2010, we increased our purchases of fixed maturities and equity securities and have been gradually shiftingshifted our investment portfolio’s allocation from short-term investments and cash and cash equivalents to higher yielding investment securities. At December 31, 2010, equityDuring 2011, we increased our holdings of short-term investments and cash and cash equivalents and purchased less fixed maturities compared to 2010. In the current market environment, we have chosen to take a more defensive posture, earning slightly lower investment yields in order to maintain a high level of liquidity and have flexibility in how we allocate capital. Equity securities represented 21% of our invested assets compared to 17% at both December 31, 2009.2011 and 2010. At December 31, 2010,2011, short-term investments and cash and cash equivalents represented 13%15% of our invested assets compared to 17%13% at December 31, 2009.2010.

 

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MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

The following table summarizes our investment performance.

 

  Years Ended December 31,   Years Ended December 31, 

(dollars in thousands)

  2010 2009 2008   2011 2010 2009 

Net investment income

  $272,530   $259,809   $282,148    $263,676   $272,530   $259,809  

Net realized investment gains (losses)

  $36,362   $(96,100 $(407,594  $35,857   $36,362   $(96,100

Change in net unrealized gains on investments

  $243,736   $566,670   $(507,545  $182,722   $243,736   $566,670  

Investment yield(1)

   3.8  3.8  3.8   3.6  3.8  3.8

Taxable equivalent total investment return, before foreign currency effect

   8.1  11.7  (6.9%)    6.7  8.1  11.7

Taxable equivalent total investment return(2)

   7.9  13.2  (9.6%)    6.5  7.9  13.2

Invested assets, end of year

  $8,223,796   $7,848,673   $6,892,806    $8,728,147   $8,223,796   $7,848,673  

 

(1)

Investment yield reflects net investment income as a percentage of average invested assets.

 

(2)

Taxable equivalent total investment return includes net investment income, realized investment gains or losses, the change in fair value of the investment portfolio and the effect of foreign currency exchange rate movements during the period as a percentage of average invested assets. Tax-exempt interest and dividend payments are grossed up using the U.S. corporate tax rate to reflect an equivalent taxable yield.

Investments and cash and cash equivalents (invested assets) increased 6% in 2011. The increase in the investment portfolio in 2011 was primarily due to an increase in net unrealized gains on investments of $182.7 million and cash flows from operations of $311.3 million. Invested assets increased 5% in 2010. The increase in the investment portfolio in 2010 was primarily due to an increase in net unrealized gains on investments of $243.7 million and cash flows from operations of $223.3 million. Invested assets increased 14%

Net investment income decreased 3% in 2009. The increase in the investment portfolio in 20092011, which was primarily due to an increaseadverse change in the fair value of our credit default swap. The decrease in net unrealized gains oninvestment income in 2011 also was attributable to a decline in investment yields as we increased our allocation to short-term investments of $566.7 million and cash flows from operationsand cash equivalents. The impact of $282.5 million.

lower investment yields during 2011 was partially offset by having higher invested assets in 2011 compared to 2010. Net investment income increased 5% in 2010, which was primarily due to having higher average invested assets and dividend income compared to 2009.

Net investment income decreased 8% in 2009, which was primarily due to having lower yields and average invested assets. Our investment yields declined2011 included an adverse change in 2009 as we increasedthe fair value of our allocation to short-term investments and cash and cash equivalents and short-term interest rates declined. Also, dividend income in 2009 was lower than dividend income in 2008.

credit default swap of $4.1 million. Net investment income in 2010 and 2009 included favorable changes in the fair value of our credit default swap of $1.7 million and $3.0 million, respectively. Net investment income in 2008 included an adverse change in the fair value of our credit default swap of $13.7 million. The fair value of the credit default swap was $25.2$29.3 million and $27.0$25.2 million at December 31, 20102011 and December 31, 2009,2010, respectively.

Net realized investment gains were $35.9 million and $36.4 million in 2011 and 2010, respectively, compared to net realized investment losses of $96.1 million in 2009 and net realized investment losses of $407.6 million in 2008.2009. Net realized investment gains (losses) include both gains (losses) from sales of securities and losses from write downs for other-than-temporary declines in the estimated fair value of investments. In 2010,2011, net realized investment gains included $12.2$20.2 million of write downs for other-than-temporary declines in the estimated fair value of investments compared to $12.2 million and $90.0 million in 2010 and $339.2 million in 2009, and 2008, respectively. In 2011 and 2010, net realized investment gains were primarily related to equity securities and fixed maturities that were sold because of tax planning strategies or our decision to reallocate capital to other equity securities and fixed maturities with greater potential for long-term investment returns.

 

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MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

In 2010, netNet realized investment gains in 2011 and 2010 included $0.5 million and $1.5 million, respectively, of realized losses from sales of fixed maturities and equity securities. NetIn 2009, net realized investment losses in 2009 and 2008 included $25.3 million and $142.8 million, respectively, of realized losses from sales of fixed maturities and equity securities. Proceeds received on securities sold at a loss were $18.5 million in 2011, $36.0 million in 2010 and $124.2 million in 20092009.

Approximately 87% of the gross realized losses in 2011 related to securities that had been in a continuous unrealized loss position for less than one year. Gross realized losses in 2011 included $20.2 million of write downs for other-than-temporary declines in the estimated fair value of investments. These write downs were made with respect to 18 equity securities and $329.1 million in 2008.five fixed maturities.

Approximately 84% of the gross realized losses in 2010 related to securities that had been in a continuous unrealized loss position for less than one year. Gross realized losses in 2010 included $12.2 million of write downs for other-than-temporary declines in the estimated fair value of investments. These write downs were made with respect to eight equity securities, four fixed maturities and four real estate investments.

Approximately 69% of the gross realized losses in 2009 related to securities that had been in a continuous unrealized loss position for less than one year. Gross realized losses in 2009 included $90.0 million of write downs for other-than-temporary declines in the estimated fair value of investments. These write downs were made with respect to 29 equity securities, 15 fixed maturities and two investments in affiliates.

Write downs for other-than-temporary declines in the estimated fair value of investments for 2009 included write downs related to our equity holdings in General Electric Company and United Parcel Service, Inc. of $21.0 million and $9.5 million, respectively. Given the extent to which the fair value of these equity securities was below cost and management’s belief that these securities were unlikely to recover in the near term, the decline in fair value for these securities was deemed other-than-temporary and was recognized in net income. Write downs for other-than-temporary declines in the estimated fair value of investments for 2009 also included a $20.5 million write down related to our investment in First Market Bank due to an anticipated merger with Union Bankshares Corporation that was expected to reduce the value of our investment. In the first quarter of 2010, this merger was completed and did not result in a material adjustment to net income.

Approximately 70% of the gross realized losses in 2008 relatedIn 2011, net unrealized gains on investments increased $182.7 million due to securities that had been in a continuous unrealized loss position for less than one year. Gross realized losses in 2008 included a $29.2 million loss on the sale of our equity holdings in LandAmerica Financial Group, Inc. and losses on the sales of our investments in fixed maturities issued by Lehman Brothers and Washington Mutual of $40.9 million and $32.1 million, respectively. All three of these companies filed for bankruptcy during 2008. These losses were partially offset by a $34.6 million gain in 2008 on the sale of our holdings in Anheuser-Busch Companies, Inc., which we sold as a result of this company being acquired.

Gross realized losses in 2008 also included $339.2 million of write downs for other-than-temporary declinesan increase in the estimated fair value of investments. These write downs were made with respect to 52 equity securities, two nonredeemable preferred stocks and 15our fixed maturities. Approximately 23% of the write downs in 2008 were due to the determination that we no longer had the intent to hold these securities until they fully recovered in value as we began selling a portion of the securities in order to allocate capital to other securities with greater potential for long-term investment returns. The remainder of the write downs related to securities that had other indications of other-than-temporary impairment.

The most significant write downs of equity securities during 2008 related to our investments in General Electric Company, Citigroup Inc., Bank of America Corporation and International Game Technology, for which we had write downs of $64.9 million, $37.6 million, $23.4 million and $21.7 million, respectively. The General Electric Company, Bank of America Corporation and International Game Technology securities had significant declines in fair value that we believed

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OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

were unlikely to recover in the near term. As a result, the decline in fair value for these securities was deemed other-than-temporary and was charged to earnings. During 2008, we sold a portion of our holdings in Citigroup Inc. and,maturity portfolio as a result we determined that we no longer had the intent to hold this investment until it fully recovered its value. The two nonredeemable preferred stock write downs related to our holdingsof a decline in Fannie Mae and Freddie Mac and totaled $9.0 million. The most significant write downs of fixed maturities related to our investments in Morgan Stanley and Kaupthing Bank, an Icelandic financial institution, for which we had write downs of $18.4 million and $12.1 million, respectively. During 2008, we sold a portion of our holdings in Morgan Stanley and, as a result, we determined that we no longer had the intent to hold this investment until it fully recovered its value. The write down on Kaupthing Bank was made because we believed we would not receive all interest and principal payments when due. The eight investments discussed above represent 55% of the total write down for other-than-temporary declines in the estimated fair value of investmentsrates during 2008.

2011. In 2010 and 2009, net unrealized gains on investments increased $243.7 million and $566.7 million, respectively, due to increases in the estimated fair value of both our fixed maturity and equity portfolios as a result of improved financial market conditions during the latter half of 2009 and 2010. In 2008, net unrealized gains on investments decreased $507.5 million due to a decline in the estimated fair value of both our fixed maturity and equity portfolios as a result of disruptions in the financial markets.

We complete a detailed analysis each quarter to assess whether the decline in the fair value of any investment below its cost basis is deemed other-than-temporary. At December 31, 2010,2011, we held securities with gross unrealized losses of $56.2$17.7 million, or less than 1% of our total invested assets. All securities with unrealized losses were reviewed, and we believe that there were no other securities with indications of declines in estimated fair value that were other-than-temporary at December 31, 2010.2011. However, given the volatility in the debt and equity markets, we caution readers that further declines in fair value could be significant and may result in additional other-than-temporary impairment charges in future periods. Variability in the timing of realized and unrealized gains and losses is to be expected. See note 2(b) of the notes to consolidated financial statements for further discussion of unrealized losses.

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Non-Insurance Operations (Markel Ventures)

Our non-insurance operations, which are referredwe refer to collectively as Markel Ventures, include the resultsare comprised of AMF Bakery Systems, ParkLand Ventures, Inc., Panel Specialists, Inc., Ellicott Dredge Enterprises, LLC, Solbern, Inc.a diverse portfolio of industrial and Markel Eagle Partners, LLC. In May 2010, we acquired a controlling interest in Solbern, Inc., a company based in Fairfield, New Jersey that manufacturesservice companies from various industries, including manufacturers of dredging equipment, high-speed bakery equipment, laminated furniture products and food processing equipment, an owner and we acquired a noncontrolling interest in Markel Eagle Partners, LLC,operator of manufactured housing communities, a real estate investment fund manager, based in Glen Allen, Virginia. In December 2010, we acquired controlling interests in RD Holdings, LLC (RetailData), a company that provides retail intelligence services company and Diamond Healthcare Corporation, a company that managesmanager of behavioral health programs throughout the United States. RetailData and Diamond Healthcare Corporation areprograms. In July 2011, we acquired PartnerMD, LLC, a privately held company headquartered in Richmond, Virginia. SinceVirginia that provides concierge medical and executive health services. In September 2011, we acquired Baking Technology Systems, Inc. (BAKE-TECH), a privately held company based in Tucker, Georgia that supplies ovens and other related equipment to high-speed bread and bun bakeries. In October 2011, we acquired an 83% controlling interest in WI Holdings Inc. (Weldship), a privately held company based in Bethlehem, Pennsylvania that manufactures and leases high-pressure trailer tubes used by industrial, chemical and distribution companies to transport gas and liquids.

We consolidate our non-insurance operations on a one-month lag, the results for these two acquisitions will be reported on a one-month lag and included in our consolidated results beginning in the first quarter of 2011.

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lag. Operating revenues and expenses associated with our non-insurance operations are included in other revenues and other expenses in the consolidated statements of operationsincome and comprehensive income (loss).income. Revenues forfrom our non-insurance operations were $317.5 million, $166.5 million and $85.7 million in 2011, 2010 and $79.82009, respectively. Net income to shareholders from our non-insurance operations was $7.7 million, $4.2 million and $1.1 million in 2011, 2010 2009 and 2008,2009, respectively. Revenues forand net income to shareholders from our non-insurance operations increased in 2011 compared to 2010 primarily due to our acquisitions of RD Holdings, LLC and Diamond Healthcare Corporation in late 2010. Revenues and net income to shareholders from our non-insurance operations increased in 2010 compared to 2009 primarily due to our acquisitions of Ellicott Dredge Enterprises, LLC and Panel Specialists, Inc. in late 2009. We anticipate that revenues for our non-insurance operations will exceed $250 million in 2011.

Interest Expense and Income Taxes

Interest expense was $86.3 million in 2011 compared to $73.7 million in 2010 compared toand $54.0 million in 2009 and $48.22009. The increase in interest expense in 2011 compared to 2010 was due in part to our $250 million issuance of 5.35% unsecured senior notes in 2008.June 2011. The increasesincrease in interest expense in 2010 compared to 2009 and in 2009 compared to 2008 werewas primarily due to our issuance of $350 million issuance of 7.125% unsecured senior notes in September 2009.

The effective tax rate was 22% in 2011, which differs from the statutory tax rate of 35% primarily as a result of tax-exempt investment income. The effective tax rate was 9% in 2010, which included tax benefits associated with our foreign operations. Before considering the tax benefits related to foreign operations, the effective tax rate in 2010 was 22%, which differs from the statutory tax rate of 35% primarily as a result of tax-exempt investment income. The effective tax rate in 2010 included an 11% income tax benefit related to foreign operations as a result of a change in our plans regarding the amount of earnings considered permanentlyindefinitely reinvested in foreign subsidiaries. The income tax benefit in 2009 was 2% of income before income taxes, which included tax benefits associated with our foreign operations. Before considering the tax benefits related to foreign operations, the effective tax rate in 2009 was 19%, which differs from the statutory tax rate of 35% primarily as a result of tax-exempt investment income. The effective tax rate in 2009 included a 17% income tax benefit that resulted from a one-time tax benefit related to a change in United Kingdom tax law that became effective in the third quarter of 2009. The income tax benefit in 2008 was 63% of loss before income taxes. The rate of tax benefit was higher than that obtained by applying the statutory rate of 35% to loss before income taxes due to the additional tax benefits associated with favorable permanent differences, principally tax-exempt investment income and tax credits recognized during 2008. As a result of the tax attributes related to our foreign operations, our effective tax rate may vary in the future.

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OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

With few exceptions, we are no longer subject to income tax examination by tax authorities for years ended before January 1, 2007.2008. See note 7 of the notes to consolidated financial statements for a discussion of factors affecting the realization of our gross deferred tax assets and unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in our income tax returns.

Comprehensive Income (Loss) Toto Shareholders

Comprehensive income to shareholders was $251.9 million, $430.6 million and $591.0 million in 2011, 2010 comparedand 2009, respectively. Comprehensive income to comprehensiveshareholders for 2011 included an increase in net unrealized gains on investments, net of taxes, of $123.4 million and net income to shareholders of $591.0 million in 2009 and comprehensive loss to shareholders of $403.3 million in 2008.$142.0 million. Comprehensive income to shareholders for 2010 included an increase in net unrealized gains on investments, net of taxes, of $163.5 million and net income to shareholders of $266.8 million. Comprehensive income to shareholders for 2009 included an increase in net unrealized gains on investments, net of taxes, of $374.4 million and net income to shareholders of $201.6 million. Comprehensive loss to shareholders for 2008 included a decrease in net unrealized gains on investments, net of taxes, of $329.9 million and net loss to shareholders of $58.8 million.

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MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Claims Andand Reserves

 

We maintain reserves for specific claims incurred and reported, reserves for claims incurred but not reported and reserves for uncollectible reinsurance. Our ultimate liability may be greater or less than current reserves. In the insurance industry, there is always the risk that reserves may prove inadequate. We continually monitor reserves using new information on reported claims and a variety of statistical techniques. Anticipated inflation is reflected implicitly in the reserving process through analysis of cost trends and the review of historical development. We do not discount our reserves for losses and loss adjustment expenses to reflect estimated present value.

The first line of the following table shows our net reserves for losses and loss adjustment expenses adjusted for commutations, foreign currency movements and other items. This adjustment is accomplished by revising the reserves for losses and loss adjustment expenses as originally estimated at the end of each year and all prior years for reserves either reassumed from reinsurers or ceded back to cedents through reinsurance commutation agreements. Adjustments also are made for the effects of changes in foreign currency rates since the reserves for losses and loss adjustment expenses were originally estimated. Net reserves for losses and loss adjustment expenses of acquired insurance companies are included in the year of acquisition.

The upper portion of the table shows the cumulative amount paid with respect to the previously recorded reserves as of the end of each succeeding year. The lower portion of the table shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year, including cumulative payments made since the end of the respective year. For example, the liability for losses and loss adjustment expenses at the end of 20052006 for 20052006 and all prior years, adjusted for commutations, foreign currency movements and other items, was originally estimated to be $4,182.2$4,283.0 million. Five years later, as of December 31, 2010,2011, this amount was re-estimated to be $3,574.1$3,444.3 million, of which $2,243.3$2,201.5 million had been paid, leaving a reserve of $1,330.8$1,242.8 million for losses and loss adjustment expenses for 20052006 and prior years remaining unpaid as of December 31, 2010.2011.

 

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The following table represents the development of reserves for losses and loss adjustment expenses for the period 20002001 through 2010.2011.

 

(dollars in millions)

  2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010   2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 

Net reserves, end of year, adjusted for commutations, foreign currency movements and other

  $2,144.8    2,481.1    2,952.5    3,412.5    3,824.1    4,182.2    4,282.3    4,332.3    4,550.6    4,535.6    4,600.3    $2,482.1    2,955.8    3,415.2    3,826.0    4,183.4    4,283.0    4,331.7    4,548.0    4,530.9    4,592.8    4,607.8  
                                    

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Paid (cumulative) as of:

                        

One year later

   607.7    647.7    702.1    679.6    717.2    799.5    783.8    727.6    759.5    796.1      647.7    702.1    679.6    717.2    799.5    783.8    727.6    759.5    796.1    898.3   

Two years later

   1,030.3    1,169.7    1,214.1    1,194.1    1,256.5    1,375.4    1,312.1    1,270.8    1,364.8       1,169.7    1,214.1    1,194.1    1,256.5    1,375.4    1,312.1    1,270.8    1,364.8    1,417.0    

Three years later

   1,410.8    1,536.2    1,615.7    1,597.8    1,667.4    1,752.4    1,689.6    1,686.3        1,536.2    1,615.7    1,597.8    1,667.4    1,752.4    1,689.6    1,686.3    1,841.0     

Four years later

   1,646.3    1,840.2    1,932.5    1,914.7    1,932.9    2,018.2    1,994.1         1,840.2    1,932.5    1,914.7    1,932.9    2,018.2    1,994.1    1,983.9      

Five years later

   1,867.7    2,065.6    2,171.6    2,105.6    2,114.0    2,243.3          2,065.6    2,171.6    2,105.6    2,114.0    2,243.3    2,201.5       

Six years later

   2,027.2    2,252.0    2,317.7    2,235.8    2,293.2           2,252.0    2,317.7    2,235.8    2,293.2    2,406.5        

Seven years later

   2,164.3    2,359.3    2,418.7    2,382.1            2,359.3    2,418.7    2,382.1    2,418.4         

Eight years later

   2,238.7    2,432.4    2,537.0             2,432.4    2,537.0    2,487.4          

Nine years later

   2,293.0    2,515.1              2,515.1    2,624.5           

Ten years later

   2,362.7               2,580.1            

Reserves re-estimated as of:

                        

One year later

   2,282.3    2,612.7    3,081.1    3,446.4    3,773.5    4,049.9    4,085.0    4,168.5    4,315.2    4,257.6      2,613.7    3,084.3    3,449.1    3,775.4    4,051.0    4,085.7    4,167.9    4,312.7    4,252.8    4,238.8   

Two years later

   2,396.2    2,793.9    3,265.4    3,467.0    3,618.8    3,899.5    3,946.0    3,933.1    4,078.4       2,794.9    3,268.7    3,469.7    3,620.8    3,900.7    3,946.7    3,932.5    4,075.8    3,909.6    

Three years later

   2,573.5    3,037.3    3,340.6    3,402.5    3,534.3    3,795.7    3,758.7    3,718.7        3,038.2    3,343.9    3,405.2    3,536.2    3,796.8    3,759.4    3,718.2    3,811.1     

Four years later

   2,772.7    3,155.9    3,327.9    3,398.8    3,506.3    3,686.1    3,598.0         3,156.9    3,331.1    3,401.5    3,508.3    3,687.2    3,598.7    3,516.9      

Five years later

   2,861.5    3,163.6    3,360.6    3,419.1    3,460.0    3,574.1          3,164.6    3,363.8    3,421.7    3,462.0    3,575.2    3,444.3       

Six years later

   2,871.6    3,199.0    3,401.8    3,394.9    3,377.9           3,200.0    3,405.0    3,397.6    3,379.8    3,460.8        

Seven years later

   2,903.2    3,247.2    3,404.0    3,338.9            3,248.2    3,407.2    3,341.6    3,296.6         

Eight years later

   2,947.6    3,254.6    3,372.9             3,255.5    3,376.1    3,288.3          

Nine years later

   2,954.7    3,224.3              3,225.2    3,340.4           

Ten years later

   2,940.9               3,191.4            

Net cumulative redundancy (deficiency)

  $(796.1  (743.2  (420.4  73.6    446.2    608.1    684.3    613.6    472.2    278.0     $(709.3  (384.6  126.9    529.4    722.6    838.7    814.8    736.9    621.3    354.0   
                                  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Cumulative %

   (37%)   (30%)   (14%)   2  12  15  16  14  10  6    (29%)   (13%)   4  14  17  20  19  16  14  8 

Gross reserves, end of year, adjusted for commutations, foreign currency movements and other

  $2,991.4    3,717.3    4,350.3    4,796.7    5,222.9    5,987.3    5,420.7    5,310.0    5,553.2    5,393.3    5,398.4    $3,707.8    4,339.8    4,786.3    5,211.9    5,975.3    5,408.0    5,296.2    5,536.8    5,375.0    5,377.1    5,398.9  

Reinsurance recoverable, adjusted for commutations, foreign currency movements and other

   846.6    1,236.2    1,397.8    1,384.2    1,398.8    1,805.1    1,138.4    977.7    1,002.6    857.7    798.1     1,225.7    1,384.0    1,371.1    1,385.9    1,791.9    1,125.0    964.5    988.8    844.1    784.3    791.1  
                                    

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net reserves, end of year, adjusted for commutations, foreign currency movements and other

  $2,144.8    2,481.1    2,952.5    3,412.5    3,824.1    4,182.2    4,282.3    4,332.3    4,550.6    4,535.6    4,600.3    $2,482.1    2,955.8    3,415.2    3,826.0    4,183.4    4,283.0    4,331.7    4,548.0    4,530.9    4,592.8    4,607.8  
                                    

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Gross re-estimated reserves

   4,463.8    4,908.4    4,858.3    4,661.2    4,605.8    5,194.4    4,608.9    4,601.7    4,998.9    5,081.9      4,851.7    4,801.2    4,584.6    4,495.1    5,043.9    4,404.0    4,336.6    4,671.9    4,674.3    4,983.6   

Re-estimated recoverable

   1,522.9    1,684.1    1,485.4    1,322.3    1,227.9    1,620.3    1,010.9    883.0    920.5    824.3      1,660.3    1,460.8    1,296.3    1,198.5    1,583.1    959.7    819.7    860.8    764.7    744.8   
                                  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Net re-estimated reserves

  $2,940.9    3,224.3    3,372.9    3,338.9    3,377.9    3,574.1    3,598.0    3,718.7    4,078.4    4,257.6     $3,191.4    3,340.4    3,288.3    3,296.6    3,460.8    3,444.3    3,516.9    3,811.1    3,909.6    4,238.8   
                                  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Gross cumulative redundancy (deficiency)

  $(1,472.4  (1,191.1  (508.0  135.5    617.1    792.9    811.8    708.3    554.3    311.4     $(1,143.9  (461.4  201.7    716.8    931.4    1,004.0    959.6    864.9    700.7    393.5   
                                  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

|  115117


Markel Corporation & Subsidiaries

 

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Net cumulative redundancy (deficiency) represents the change in the estimate from the original balance sheet date to the date of the current estimate. For example, the liability for losses and loss adjustment expenses developed a $608.1an $838.7 million redundancy from December 31, 20052006 to December 31, 2010.2011. Conditions and trends that have affected the development of loss reserves in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on the table. Gross cumulative redundancy (deficiency) is presented before deductions for reinsurance. Gross deficiencies and redundancies may be significantly more or less than net deficiencies and redundancies due to the nature and extent of applicable reinsurance. The net and gross cumulative redundancies as of December 31, 20102011 for 20092010 and prior years were primarily due to redundancies that developed during 20102011 at Markel International and on our professional and products liability and casualty programs within the Excess and Surplus Lines segment on the 2003 to 20092010 accident years. See “Underwriting Results” for further discussion of changes in prior years’ loss reserves.

See note 8 of the notes to consolidated financial statements and the discussion under “Critical Accounting Estimates” for a discussion of estimates and assumptions related to the reserves for losses and loss adjustment expenses.

Liquidity Andand Capital Resources

 

We seek to maintain prudent levels of liquidity and financial leverage for the protection of our policyholders, creditors and shareholders. Our target capital structure includes approximately 30% debt. Our debt to total capital ratio was 27% at December 31, 2011 and 24% at December 31, 2010 and 26% at December 31, 2009.2010. From time to time, our debt to total capital ratio may increase due to business opportunities that may be financed in the short term with debt. Alternatively, our debt to total capital ratio may fall below our target capital structure, which provides us with additional borrowing capacity to respond quickly when future opportunities arise.

At December 31, 2010,2011, our holding company (Markel Corporation) held $885.6$1,158.7 million of invested assets, which approximated 1215 times annual interest expense of the holding company, compared to $1,020.9$885.6 million of invested assets at December 31, 2009.2010. In order to maintain prudent levels of liquidity, we seek to maintain invested assets at Markel Corporation of at least two times annual interest expense. The excess liquidity at Markel Corporation is available to increase capital at our insurance subsidiaries, complete acquisitions, repurchase shares of our common stock or retire debt.

In October 2010, we completed our acquisition of Aspen. Total consideration for this acquisition was $135.6 million.Aspen Holdings, Inc. (Aspen). As part of the consideration outstanding options to purchase shares of Aspen’s common stock were converted into options to purchase 58,116 shares of our common stock at an average exercise price of $225.94 per share. These options had a fair value atfor this acquisition, of $6.7 million, net of taxes. Aspen shareholders also received contingent value rights that may result in the payment of additional cash consideration depending, among other things, upon the development of FirstComp’s loss reserves and loss sensitive profit commissions over time. Based on current expectations, we believe that it is unlikely that any contingent consideration will be paid related to the contingent value rights.

In November 2010, ourOur Board of Directors has approved the repurchase of up to $200 million of common stock under a share repurchase program (the Program). Under the Program, we may repurchase outstanding shares of common stock from time to time, primarily through open-market transactions. The Program has no expiration date but may be terminated by the Board of Directors at any time.

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This repurchase program replaced a previous repurchase program that had been approved by the Board of Directors in August 2005. As of December 31, 2010,2011, we had repurchased 7,956118,056 shares of our common stock at a cost of $2.8$44.6 million under the Program.

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Our insurance operations collect premiums and pay claims, reinsurance costs and operating expenses. Premiums collected and positive cash flows from the insurance operations are invested primarily in short-term investments and long-term fixed maturities. Short-term investments held by our insurance subsidiaries provide liquidity for projected claims, reinsurance costs and operating expenses. As a holding company, Markel Corporation receives cash from its subsidiaries as reimbursement for operating and other administrative expenses it incurs. The reimbursements are made within the guidelines of various management agreements between the holding company and its subsidiaries.

The holding company has historically relied upon dividends from its domestic subsidiaries to meet debt service obligations. Under the insurance laws of the various states in which our domestic insurance subsidiaries are incorporated, an insurer is restricted in the amount of dividends it may pay without prior approval of regulatory authorities. At December 31, 2010,2011, our domestic insurance subsidiaries could pay dividends of $197.0$222.2 million during the following twelve months under these laws.

There are also regulatory restrictions on the amount of dividends that our foreign insurance subsidiaries may pay. We must provide 14 days advance notice to the Financial Services Authority before receiving dividends from MIICL. In addition, our foreign insurance subsidiaries must comply with the United Kingdom Companies Act of 2006, which provides that dividends may only be paid out of profits available for that purpose. At December 31, 2011, earnings of our foreign subsidiaries are considered reinvested indefinitely. At December 31, 2011, cash and cash equivalents and short-term investments of $332.5 million were held by our foreign subsidiaries and will not be made available for distributions to the holding company. We do not expect the amount of cash and cash equivalents and short-term investments that are considered reinvested indefinitely to have a material effect on our liquidity or capital resources.

Net cash provided by operating activities decreased towas $311.3 million, $223.3 million in 2010 fromand $282.5 million in 20092011, 2010 and $397.0 million2009. The increase in 2008.2011 compared to 2010 was due to higher cash flows from underwriting activities in the Specialty Admitted segment. The decrease in 2010 compared to 2009 was due to lower cash flows from underwriting activities in the Excess and Surplus Lines segment and the receipt, in 2009, of $33.6 million related to our 2008 federal income tax refund. The decrease in 2009 compared to 2008 was due to lower cash flows from underwriting activities in the Excess and Surplus Lines segment, which was partially offset by the receipt of our 2008 federal income tax refund and lower income tax payments in 2009 compared to 2008.

Net cash used by investing activities was $474.3 million, $283.3 million and $333.7 million in 2011, 2010 and $152.0 million2009, respectively. During 2011, we increased our holdings of short-term investments and cash and cash equivalents and purchased less fixed maturities compared to 2010. In the current market environment, we have chosen to take a more defensive posture, earning slightly lower investment yields in 2010, 2009order to maintain a high level of liquidity and 2008, respectively.have flexibility in how we allocate capital. We also are planning for increased claims settlement activity resulting from the higher than expected amount of catastrophe losses incurred during 2011. During 2010, given the improvement in the financial markets over the latter half of 2009 and continuing into 2010, we increased our purchases of fixed maturities and equity securities and have been gradually shiftingshifted our investment portfolio’s allocation from short-term investments and cash and cash equivalents to higher yielding investment securities. Net cash used by investing activities included $120.1 million, $214.2 million $154.9 million and $10.1$154.9 million of cash, net of cash acquired, used to complete acquisitions in 2011, 2010 2009 and 2008,2009, respectively. See note 21 of the notes to consolidated financial statements for a discussion of acquisitions.

Invested assets increased to $8.2 billion at December 31, 2010 from $7.8 billion at December 31, 2009. Net unrealized gains on investments, net of taxes, were $581.3 million at December 31, 2010 compared to $417.8 million at December 31, 2009. The increase in net unrealized gains on investments, net of taxes, in 2010 was primarily due to an increase in the estimated fair value of both our fixed maturity and equity portfolios as a result of continued recovery following the disruptions in the financial markets during 2008 and the first half of 2009. Equity securities were $1.7 billion, or 21% of invested assets, at December 31, 2010 compared to $1.3 billion, or 17% of invested assets, at December 31, 2009. See note 2(i) of the notes to consolidated financial statements for a discussion of restricted assets.

 

|  117119


Markel Corporation & Subsidiaries

 

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Invested assets increased to $8.7 billion at December 31, 2011 from $8.2 billion at December 31, 2010. Net unrealized gains on investments, net of taxes, were $704.7 million at December 31, 2011 compared to $581.3 million at December 31, 2010. The increase in net unrealized gains on investments, net of taxes, in 2011 was primarily due to an increase in the estimated fair value of our fixed maturity portfolio as a result of a decline in interest rates during 2011. Equity securities were $1.9 billion, or 21% of invested assets, at December 31, 2011 compared to $1.7 billion, or 21% of invested assets, at December 31, 2010. See note 2(h) of the notes to consolidated financial statements for a discussion of restricted assets.

Net cash provided by financing activities was $194.6 million in 2011 compared to net cash used by financing activities wasof $45.6 million in 2010 compared toand net cash provided by financing activities of $251.6 million in 20092009. During 2011, we received net proceeds of $247.9 million associated with the issuance of $250 million of 5.35% unsecured senior notes due June 1, 2021, which will be used for general corporate purposes, including acquisitions, and net cashmay be used by financing activitiesto repay other of $58.3 million in 2008.our outstanding debt. During 2011 and 2010, cash of $42.9 million and $45.2 million, respectively, was used to repurchase shares of our common stock. During 2009, we received net proceeds of $347.2 million associated with the issuance of $350 million of 7.125% unsecured senior notes due September 30, 2019, and we repaid $150 million of borrowings that were outstanding under our $375 million revolving credit facility. During 2008, we borrowed $100 million under our revolving credit facility, repaid $93.1 million on our 7.00% unsecured senior notes, which matured May 15, 2008, and used cash of $60.6 million to repurchase shares of our common stock.

Reinsurance recoverable on paid and unpaid losses was $0.9 billion at December 31, 2010 compared to $1.0 billion at December 31, 2009. The decrease in 2010 was due in part to a reduction in the reinsurance recoverable on unpaid losses related to favorable development on prior years’ loss reserves. Reinsurance recoverable on paid and unpaid losses at December 31, 2010 included $41.3 million of estimated reinsurance recoverables related to the Deepwater Horizon drilling rig explosion in April 2010.

In recent years, we have completed numerous reinsurance commutations, which involve the termination of ceded or assumed reinsurance contracts. Our commutation strategy related to ceded reinsurance contracts is to reduce credit exposure and eliminate administrative expenses associated with the run-off of reinsurance placed with certain reinsurers. Our commutation strategy related to assumed reinsurance contracts is to reduce our loss exposure to long-tailed liabilities assumed under reinsurance agreements entered into prior to our acquisition of Markel International. We will continue to pursue commutations when we believe they meet our objectives.

We have credit risk to the extent any of our reinsurers are unwilling or unable to meet their obligations under our reinsurance agreements. We attempt to minimize credit exposure to reinsurers through adherence to internal reinsurance guidelines. We monitor changes in the financial conditions of our reinsurers, and we assess our concentration of credit risk on a regular basis. At December 31, 2010,2011, our reinsurance recoverable balance for the ten largest reinsurers was $692.5$642.8 million, representing 68%72% of our consolidated balance, before considering allowances for bad debts. Of the amounts due from theAll of our ten largest reinsurers 95% was due from reinsurerswere rated “A” or better by A.M. Best. We are the beneficiary of letters of credit, trust accounts and funds withheld in the aggregate amount of $247.3$223.2 million at December 31, 2010,2011, collateralizing reinsurance recoverable balances due from our ten largest reinsurers. See note 13 of the notes to consolidated financial statements for further discussion of reinsurance recoverables and exposures. While we believe that reinsurance recoverable balances are collectible, deterioration in reinsurers’ ability to pay or collection disputes could adversely affect our operating cash flows, financial position and results of operation.

 

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The following table reconciles case reserves and IBNR reserves, by segment, to unpaid losses and loss adjustment expenses reported on our consolidated balance sheets.

 

(dollars in thousands)

  Excess &
Surplus
Lines
   Specialty
Admitted
   London
Insurance
Market
   Other
Insurance
(Discontinued
Lines)
   Consolidated   Excess &
Surplus
Lines
   Specialty
Admitted
   London
Insurance
Market
   Other
Insurance
(Discontinued
Lines)
   Consolidated 

December 31, 2011

          

Case reserves

  $639,302     237,114     989,981     279,066    $2,145,463  

IBNR reserves

   1,595,916     480,528     991,914     185,048     3,253,406  
  

 

   

 

   

 

   

 

   

 

 

TOTAL

  $2,235,218     717,642     1,981,895     464,114    $5,398,869  
  

 

   

 

   

 

   

 

   

 

 

December 31, 2010

                    

Case reserves

  $706,624     201,403     903,015     297,401    $2,108,443    $706,624     201,403     903,015     297,401    $2,108,443  

IBNR reserves

   1,736,363     427,372     917,384     208,844     3,289,963     1,736,363     427,372     917,384     208,844     3,289,963  
                      

 

   

 

   

 

   

 

   

 

 

TOTAL

  $2,442,987     628,775     1,820,399     506,245    $5,398,406    $2,442,987     628,775     1,820,399     506,245    $5,398,406  
                      

 

   

 

   

 

   

 

   

 

 

December 31, 2009

          

Case reserves

  $744,965     116,862     948,756     337,295    $2,147,878  

IBNR reserves

   1,875,154     266,958     906,258     230,848     3,279,218  
                    

TOTAL

  $2,620,119     383,820     1,855,014     568,143    $5,427,096  
                    

Unpaid losses and loss adjustment expenses were $5.4 billion at both December 31, 2010 decreased 1% compared2011 and 2010. The decrease in the Excess and Surplus Lines segment’s loss reserves in 2011 was primarily due to 2009 due in part to experiencing $278.0 million ofhaving more favorable development onof prior years’ loss reserves. The increase in the Specialty AdmittedLondon Insurance Market segment’s loss reserves in 20102011 was primarily due to the acquisition of Aspen.having higher losses from natural catastrophes. See note 8 of the notes to consolidated financial statements and “Critical Accounting Estimates” for a discussion of estimates and assumptions related to unpaid losses and loss adjustment expenses.

The following table summarizes our contractual cash payment obligations at December 31, 2010.2011.

 

  Payments Due by Period(1)   Payments Due by Period(1) 

(dollars in thousands)

  Total   Less than 1
year
   1-3 years   4-5 years   More than
5 years
   Total   Less than 1
year
   1-3 years   4-5 years   More than
5 years
 

Senior long-term debt and other debt(2)

  $1,025,597     7,264     258,613     23,468     736,252    $2,436,154     96,192     425,709     161,790     1,752,463  

Operating leases

   115,834     17,689     33,581     30,211     34,353     131,428     21,460     42,277     32,503     35,188  

Unpaid losses and loss adjustment expenses (estimated)

   5,398,406     1,267,253     1,702,948     968,163     1,460,042     5,398,869     1,268,650     1,696,023     968,898     1,465,298  
                      

 

   

 

   

 

   

 

   

 

 

TOTAL

  $6,539,837     1,292,206     1,995,142     1,021,842     2,230,647    $7,966,451     1,386,302     2,164,009     1,163,191     3,252,949  
                      

 

   

 

   

 

   

 

   

 

 

 

(1)

See notes 8, 9 and 14 of the notes to consolidated financial statements for further discussion of these obligations.

(2)

Amounts include interest.

Senior long-term debt and other debt, excluding unamortized discount, was $1.0$1.3 billion and $974.1 million$1.0 billion at December 31, 20102011 and 2009,2010, respectively. On June 9, 2010,September 23, 2011, we entered into a newan amended and restated revolving credit facility, which provides $270$150 million of capacity for working capital and other general corporate purposes. The capacity of the revolving credit facility may be increased to $300 million subject to certain terms and conditions. This facility replaced our previous $375$270 million revolving credit facility and expires in June 2013.September 2015. We had no borrowings outstanding related to revolving credit facilities during 2010.2011.

We were in compliance with all covenants contained in our revolving credit facility at December 31, 2010.2011. To the extent that we are not in compliance with our covenants, our access to the credit facility could be restricted. While we believe this to be unlikely, the inability to access the credit facility could adversely affect our liquidity. See note 9 of the notes to consolidated financial statements for further discussion of our revolving credit facility.

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Markel Corporation & Subsidiaries

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Reserves for unpaid losses and loss adjustment expenses represent future contractual obligations associated with insurance and reinsurance contracts issued to our policyholders. Information presented in the table of contractual cash payment obligations is an estimate of our future payment of claims as of

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Markel Corporation & Subsidiaries

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

December 31, 2010.2011. Payment patterns for losses and loss adjustment expenses were generally based upon paid development factors over the past 10 years for each of our insurance subsidiaries. Each claim is settled individually based upon its merits and certain claims may take years to settle, especially if legal action is involved. The actual cash payments for settled claims will vary, possibly significantly, from the estimates shown in the preceding table.

At December 31, 2010,2011, we had unrecognized tax benefits of $24.6$19.6 million related to uncertain tax positions. Due to the high degree of uncertainty regarding the timing of potential future cash flows associated with our unrecognized tax benefits, we are unable to make a reasonably reliable estimate of the amount and period in which any liabilities might be paid. See note 7 of the notes to consolidated financial statements for further discussion of our expectations regarding changes in unrecognized tax benefits during 2011.2012.

At December 31, 2010,2011, we had $1.6$1.8 billion of invested assets held in trust or on deposit for the benefit of policyholders, reinsurers or banks in the event of a default on our obligations. These invested assets and the related liabilities are included on our consolidated balance sheet. See note 2(i)2(h) of the notes to consolidated financial statements for further discussion of restrictions over our invested assets.

Our insurance operations require capital to support premium writings, and we remain committed to maintaining adequate capital and surplus at each of our insurance subsidiaries. The National Association of Insurance Commissioners (NAIC) developed a model law and risk-based capital formula designed to help regulators identify domestic property and casualty insurers that may be inadequately capitalized. Under the NAIC’s requirements, a domestic insurer must maintain total capital and surplus above a calculated threshold or face varying levels of regulatory action. At December 31, 2010,2011, the capital and surplus of each of our domestic insurance subsidiaries was above the minimum regulatory thresholds.

Capital adequacy of our international insurance subsidiaries is regulated by the Financial Services Authority. At December 31, 2010,2011, the capital and surplus of each of our international insurance subsidiaries was above the minimum regulatory thresholds.

We have access to various capital sources, including dividends from certain of our insurance 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.

Market Risk Disclosures

 

Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in equity prices, interest rates, foreign currency exchange rates and commodity prices. Our consolidated balance sheets include assets and liabilities with estimated fair values that are subject to market risk. Historically, our primary market risks have been equity price risk associated with investments in equity securities, interest rate risk associated with investments in fixed maturities and foreign currency exchange rate risk associated with our international operations. We have no material commodity risk.

 

120122  |


 

 

 

Credit risk is the potential loss resulting from adverse changes in an issuer’s ability to repay its debt obligations. Beginning in 2008 and continuing through the first half of 2009, there were significant disruptions in the financial markets. These market disruptions resulted in a lack of liquidity within the credit markets, which increased credit risk in the financial markets and resulted in the widening of credit spreads. Net unrealized investment gains on fixed maturities were $174.2 million at December 31, 2010 compared to net unrealized investment gains on fixed maturities of $150.4 million at December 31, 2009 and net unrealized investment losses on fixed maturities of $129.8 million at December 31, 2008. The favorable change in the estimated fair value of our fixed maturity portfolio during both 2010 and 2009 was due in part to decreased credit risk as the financial markets improved and credit spreads narrowed during the latter half of 2009 and into 2010.

During the latter half of 2010, credit spreads on our municipal bond holdings widened, reflecting generalGeneral concern exists about the growing number of municipalities experiencing financial difficulties in light of the adverse economic conditions experienced over the past several years. We manage the exposure to credit risk in our municipal bond portfolio by investing in high quality securities and by diversifying our holdings, which are typically either general obligation or revenue bonds related to essential products and services.

We monitor our portfolio to ensure that credit risk does not exceed prudent levels. We have consistently invested in high credit quality, investment grade securities. Our fixed maturity portfolio has an average rating of “AA,” with approximately 93%95% rated “A” or better by at least one nationally recognized rating organization. Our policy is to invest in investment grade securities and to minimize investments in fixed maturities that are unrated or rated below investment grade. At December 31, 2010, approximately 2%2011, less than 1% of our fixed maturity portfolio was unrated or rated below investment grade. Our fixed maturity portfolio includes securities issued with financial guaranty insurance. We purchase fixed maturities based on our assessment of the credit quality of the underlying assets without regard to insurance.

Our fixed maturity portfolio includes securities issued by foreign governments. General concern exists about the financial difficulties facing certain European countries in light of the adverse economic conditions experienced over the past several years. We monitor developments in foreign countries, currencies and issuers that could pose risks to our fixed maturity portfolio, including ratings downgrades, political and financial changes and the widening of credit spreads. We believe that our fixed maturity portfolio is highly diversified and is comprised of high quality securities.

We obtain information from news services, rating agencies and various financial market participants to assess potential negative impacts on a country or company’s financial risk profile. We analyze concentrations within our fixed maturity portfolio by country, currency and issuer, which allows us to assess our level of diversification with respect to these exposures, reduce troubled exposures should they occur and mitigate any future financial distress that these exposures could cause. The following tables present the estimated fair values of foreign exposures included in our fixed maturity portfolio.

   December 31, 2011 

(dollars in thousands)

  Sovereign   Non-Sovereign
Financial
Institutions
   Non-Sovereign
Non-Financial
Institutions
   Total 

European exposures:

        

Portugal, Ireland, Italy, Greece and Spain

  $13,763    $37,645    $2,502    $53,910  

Eurozone (excluding Portugal, Ireland, Italy, Greece and Spain)

   153,487     183,223     136,710     473,420  

Supranationals

   —       136,777     —       136,777  

Other European exposures (excluding Eurozone)

   6,405     41,532     72,307     120,244  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total European exposures

   173,655     399,177     211,519     784,351  

All other foreign (non-European) exposures

   443,159     82,976     80,812     606,947  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total foreign exposures

  $616,814    $482,153    $292,331    $1,391,298  
  

 

 

   

 

 

   

 

 

   

 

 

 

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Markel Corporation & Subsidiaries

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

   December 31, 2010 

(dollars in thousands)

  Sovereign   Non-Sovereign
Financial
Institutions
   Non-Sovereign
Non-Financial
Institutions
   Total 

European exposures:

        

Portugal, Ireland, Italy, Greece and Spain

  $44,119    $37,935    $2,685    $84,739  

Eurozone (excluding Portugal, Ireland, Italy, Greece and Spain)

   118,655     154,613     152,413     425,681  

Supranationals

   —       140,749     —       140,749  

Other European exposures (excluding Eurozone)

   6,604     35,630     71,772     114,006  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total European exposures

   169,378     368,927     226,870     765,175  

All other foreign (non-European) exposures

   306,352     101,148     93,238     500,738  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total foreign exposures

  $475,730    $470,075    $320,108    $1,265,913  
  

 

 

   

 

 

   

 

 

   

 

 

 

The estimated fair value of our investment portfolio at December 31, 20102011 was $8.2$8.7 billion, 79% of which was invested in fixed maturities, short-term investments and cash and cash equivalents and 21% of which was invested in equity securities. At December 31, 2009,2010, the estimated fair value of our investment portfolio was $7.8$8.2 billion, 82%79% of which was invested in fixed maturities, short-term investments and cash and cash equivalents and 18%21% of which was invested in equity securities and investments in affiliates.securities.

Our fixed maturities, equity securities and short-term investments are recorded at fair value, which is measured based upon quoted prices in active markets, if available. We determine fair value for these investments after considering various sources of information, including information provided by a third party pricing service. The pricing service provides prices for substantially all of our fixed maturities and equity securities. In determining fair value, we generally do not adjust the prices obtained from the pricing service. We obtain 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. We validate prices provided by the pricing service by reviewing prices from other pricing sources and analyzing pricing data in certain instances. At December 31, 2010, we did not hold material investments in auction rate securities, loans held for sale or mortgage-backed securities backed by subprime or Alt-A collateral.

|  121


Markel Corporation & Subsidiaries

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Equity Price Risk

We invest a portion of shareholder funds in equity securities, which have historically produced higher long-term returns relative to fixed maturities. We seek to invest in profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline, at reasonable prices. We intend to hold these investments over the long term and focus on long-term total investment return, understanding that the level of unrealized gains or losses on investments may vary from one period to the next. The changes in the estimated fair value of the equity portfolio are presented as a component of shareholders’ equity in accumulated other comprehensive income, net of taxes. See note 2(a) of the notes to consolidated financial statements for disclosure of gross unrealized gains and losses by investment category.

At December 31, 2010,2011, our equity portfolio was concentrated in terms of the number of issuers and industries. Such concentrations can lead to higher levels of price volatility. At December 31, 2010,2011, our ten largest equity holdings represented $941.9$955.5 million, or 55%51%, of the equity portfolio. Investments in the property and casualty insurance industry represented $413.4$397.3 million, or 24%21%, of our equity portfolio at December 31, 2010.2011. Our investments in the property and casualty insurance industry

124  |


included a $230.1$221.2 million investment in the common stock of Berkshire Hathaway Inc., a company whose subsidiaries engage in a number of diverse business activities in addition to insurance. We have investment guidelines that set limits on the amount of equity securities our insurance subsidiaries can hold.

The following table summarizes our equity price risk and shows the effect of a hypothetical 35% increase or decrease in market prices as of December 31, 20102011 and 2009.2010. The selected hypothetical changes do not indicate what could be the potential best or worst case scenarios.

 

(dollars in millions)

  Estimated
Fair Value
   Hypothetical
Price Change
   Estimated
Fair Value after

Hypothetical
Change in Prices
   Estimated
Hypothetical
Percentage Increase
(Decrease) in
Shareholders’ Equity
 

As of December 31, 2010

        

Equity Securities

  $1,722     35% increase    $2,325     12.5
     35% decrease     1,119     (12.5

As of December 31, 2009

        

Equity Securities

  $1,350     35% increase    $1,822     10.5
     35% decrease     877     (11.0

122  |


(dollars in millions)

  Estimated
Fair Value
   Hypothetical
Price Change
  Estimated
Fair Value after
Hypothetical
Change in Prices
   Estimated
Hypothetical
Percentage Increase
(Decrease) in
Shareholders’ Equity
 

As of December 31, 2011

        

Equity Securities

  $1,874    35% increase  $2,530     13.0
    35% decrease   1,218     (13.0

As of December 31, 2010

        

Equity Securities

  $1,722    35% increase  $2,325     12.5
    35% decrease   1,119     (12.5

Interest Rate Risk

Our fixed maturity investments and borrowings are subject to interest rate risk. Increases and decreases in interest rates typically result in decreases and increases, respectively, in the fair value of these financial instruments.

Approximately two-thirdsThe majority of our investable assets come from premiums paid by policyholders. These funds are invested predominantly in high quality corporate, government and municipal bonds with relatively short durations. The fixed maturity portfolio, including short-term investments and cash and cash equivalents, has an average duration of 3.53.3 years and an average rating of “AA.” See note 2(c) of the notes to consolidated financial statements for disclosure of contractual maturity dates of our fixed maturity portfolio. The changes in the estimated fair value of the fixed maturity portfolio are presented as a component of shareholders’ equity in accumulated other comprehensive income, net of taxes.

We work to manage the impact of interest rate fluctuations on our fixed maturity portfolio. The effective duration of the fixed maturity portfolio is managed with consideration given to the estimated duration of our liabilities. We have investment guidelines that limit the maximum duration and maturity of the fixed maturity portfolio.

We use a commercially available model to estimate the effect of interest rate risk on the fair values of our fixed maturity portfolio and borrowings. The model estimates the impact of interest rate changes on a wide range of factors including duration, prepayment, put options and call options. Fair values are estimated based on the net present value of cash flows, using a representative set of possible future interest rate scenarios. The model requires that numerous assumptions be made about the future. To the extent that any of the assumptions are invalid, incorrect estimates could result. The usefulness of a single point-in-time model is limited, as it is unable to accurately incorporate the full complexity of market interactions.

 

|  123125


Markel Corporation & Subsidiaries

 

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

The following table summarizes our interest rate risk and shows the effect of hypothetical changes in interest rates as of December 31, 20102011 and 2009.2010. The selected hypothetical changes do not indicate what could be the potential best or worst case scenarios.

 

(dollars in millions)

  Estimated
Fair  Value
   Hypothetical
Change in

Interest Rates
(bp=basis points)
   Estimated
Fair  Value after
Hypothetical Change
in Interest Rates
   Hypothetical Percentage
Increase (Decrease) in
   Estimated
Fair  Value
   Hypothetical
Change in

Interest Rates
(bp=basis points)
   Estimated
Fair  Value after
Hypothetical Change
in Interest Rates
   Hypothetical Percentage
Increase (Decrease) in
 
  Fair Value of
Fixed Maturities
 Shareholders’
Equity
    Fair Value of
Fixed Maturities
 Shareholders’
Equity
 

FIXED MATURITY

INVESTMENTS

                  

As of December 31, 2011

         

Total Fixed Maturity Investments(1)

  $6,854     200 bp decrease            $7,370             7.5  10.4
     100 bp decrease     7,114             3.8    5.3  
     100 bp  increase     6,581             (4.0  (5.5
     200 bp  increase     6,305             (8.0  (11.0

As of December 31, 2010

                  

Total Fixed Maturity Investments(1)

  $6,502     200 bp decrease            $7,077             8.8  12.1  $6,502     200 bp decrease            $7,077             8.8  12.1
     100 bp decrease     6,798             4.6    6.2       100 bp decrease     6,798             4.6    6.2  
     100 bp  increase     6,197             (4.7  (6.4     100 bp  increase     6,197             (4.7  (6.4
     200 bp  increase     5,905             (9.2  (12.6     200 bp  increase     5,905             (9.2  (12.6

As of December 31, 2009

         

Total Fixed Maturity Investments(1)

  $6,455     200 bp decrease            $6,982             8.2  11.3

LIABILITIES(2)

         

As of December 31, 2011

         

Borrowings

  $1,391     200 bp decrease            $1,551             
     100 bp decrease     6,728             4.2    5.9       100 bp decrease     1,466             
     100 bp  increase     6,172             (4.4  (6.1     100 bp  increase     1,323             
     200 bp  increase     5,898             (8.6  (12.1     200 bp  increase     1,262             

LIABILITIES(2)

         

As of December 31, 2010

                  

Borrowings

  $1,086     200 bp decrease            $1,214               $1,086     200 bp decrease            $1,214             
     100 bp decrease     1,148                  100 bp decrease     1,148             
     100 bp  increase     1,022                  100 bp  increase     1,022             
     200 bp  increase     962                  200 bp  increase     962             

As of December 31, 2009

         

Borrowings

  $1,011     200 bp decrease            $1,148             
     100 bp decrease     1,078             
     100 bp  increase     946             
     200 bp  increase     886             

 

(1)

Includes short-term investments and cash and cash equivalents.

 

(2)

Changes in estimated fair value have no impact on shareholders’ equity.

 

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Foreign Currency Exchange Rate Risk

We have foreign currency exchange rate risk associated with our assets and liabilities. We manage this risk primarily by matching assets and liabilities in each foreign currency as closely as possible. To assist with the matching of assets and liabilities in foreign currencies, we periodically purchase foreign currency forward contracts and we purchase or sell foreign currencies in the open market. Our forward contracts are generally designated as specific hedges for financial reporting purposes. As such, realized and unrealized gains and losses on these hedges are recorded as currency translation adjustments and are part of other comprehensive income (loss).income. Our contracts generally have maturities of three months.

At December 31, 2011 and 2010, approximately 88% and 2009, approximately 89% and 87%, respectively, of our invested assets were denominated in United States Dollars. At those dates, the largest foreign currency exposure was United Kingdom Sterling. If Sterling assets and liabilities had been mismatched by 10% and the United States Dollar/United Kingdom Sterling exchange rate increased by 25%, shareholders’ equity at December 31, 20102011 and 20092010 would have changed by approximately $10.8$10.5 million and $14.3$10.8 million, respectively. If Sterling assets and liabilities had been mismatched by 10% and the United States Dollar/United Kingdom Sterling exchange rate decreased by 25%, shareholders’ equity at December 31, 20102011 and 20092010 would have changed by approximately $8.8$8.6 million and $11.7$8.8 million, respectively. The selected hypothetical changes do not indicate what could be the potential best or worst case scenarios.

Impact of Inflation

 

Property and casualty insurance premiums are established before the amount of losses and loss adjustment expenses, or the extent to which inflation may affect such expenses, is known. Consequently, in establishing premiums, we attempt to anticipate the potential impact of inflation. We also consider inflation in the determination and review of reserves for losses and loss adjustment expenses since portions of these reserves are expected to be paid over extended periods of time. The importance of continually reviewing reserves is even more pronounced in periods of extreme inflation.

 

|  125127


Markel Corporation & Subsidiaries

 

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Controls and Procedures

 

As of December 31, 2010,2011, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15 (Disclosure Controls). This evaluation was conducted under the supervision and with the participation of our management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO).

Our management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based upon our controls evaluation, the CEO and CFO concluded that effective Disclosure Controls were in place to ensure that the information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we carried out an evaluation, under the supervision and with the participation of our management, including the CEO and the CFO, of the effectiveness of our internal control over financial reporting as of December 31, 2010.2011. See Management’s Report on Internal Control over Financial Reporting and our independent registered public accounting firm’s attestation report on the effectiveness of our internal control over financial reporting beginning on page 85.

During the fourth quarter of 2010, we completed the implementation of a new billing and collections system that provides a single billing and collections solution for our wholesale insurance operations.87.

There were no other changes in our internal control over financial reporting during the fourth quarter of 20102011 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Safe Harbor and Cautionary Statement

 

This report contains statements concerning or incorporating our expectations, assumptions, plans, objectives, future financial or operating performance and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

There are risks and uncertainties that may cause actual results to differ materially from predicted results in forward-looking statements. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Additional factors that could cause actual results to differ from those predicted are set forth under Risk Factors or are included in the items listed below:

 

our anticipated premium volume is based on current knowledge and assumes no significant man-made or natural catastrophes, no significant changes in products or personnel and no adverse changes in market conditions;

 

we offer insurance coverage against terrorist acts in connection with some of our programs, and in other instances we are legally required in certain instances to offer terrorism insurance andinsurance; in both circumstances, we actively manage our exposure; however,exposure, but if there is a covered terrorist attack, we could sustain material losses;

 

the impact of the events of September 11, 2001 will depend on the resolution of on-going insurance coverage litigation and arbitrations;

 

the frequency and severity of catastrophic events (including earthquakes and weather-related catastrophes) is unpredictable and, in the case of weather-related catastrophes, may be exacerbated if, as many forecast, conditions in the oceans and atmosphere result in increased hurricane or other adverse weather-related activity;

 

changing legal and social trends and inherent uncertainties (including but not limited to those uncertainties associated with our asbestos and environmental reserves) in the loss estimation process can adversely impact the adequacy of loss reserves and the allowance for reinsurance recoverables;

 

we have exposure to losses associated with the adverse conditions in the residential mortgage market, principally with respect to loan transactions that occurred before the end of 2008; our loss reserves are based on judgments about the future performance of the underlying loans; however, continued weakness or other disruptions in the residential housing markets may result in additional loss experience and require strengthening of our loss reserves;

adverse developments in insurance coverage litigation or other legal or administrative proceedings could result in material increases in our estimates of loss reserves;

 

the loss estimation process may become more uncertain if we experience a period of rising inflation;

 

the costs and availability of reinsurance may impact our ability to write certain lines of business;

 

industry and economic conditions can affect the ability and/or willingness of reinsurers to pay balances due;

 

after the commutation of ceded reinsurance contracts, any subsequent adverse development in the re-assumed loss reserves will result in a charge to earnings;

 

regulatory actions can impede our ability to charge adequate rates and efficiently allocate capital;

 

|  127129


Markel Corporation & Subsidiaries

 

MANAGEMENT’S DISCUSSION & ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

economic conditions, actual or potential defaults in sovereign debt obligations, volatility in interest and foreign currency exchange rates and changes in market value of concentrated investments can have a significant impact on the fair value of fixed maturities and equity securities, as well as the carrying value of other assets and liabilities, and this impact may be heightened by market volatility;

 

economic conditions, changes in government support for education, healthcare and infrastructure projects and foreign currency exchange rates, among other factors, may adversely affect the markets served by our non-insurance operations and negatively impact their revenues and profitability;

 

we have substantial investments in municipal bonds (approximately $2.8$2.9 billion at December 31, 2010)2011) and, although no more than 10% of our municipal bond portfolio is tied to any one state, widespread defaults could adversely affect our results of operations and financial condition;

 

we cannot predict the extent and duration of the current economic slowdown; the effects of government actions to address the U.S. federal deficit and debt ceiling issues; the continuing effects of government intervention into the markets to address the financial crisis of 2008 and 2009 (including, among other things, financial stability and recovery initiatives; changes in tax policy; and the effects of the Dodd-Frank Wall Street Reform and Consumer Protection Act and regulations adopted thereunder); the outcome of economic and currency concerns in the Eurozone; and their combined impact on our industry, business and investment portfolio;

 

we cannot predict the impact of U.S. health care reform legislation and regulations under that legislation on our business;

 

our Atlas systembusiness is dependent upon the successful functioning and security of our computer systems; if our information technology systems fail or suffer a security breach, our business process initiative may take longer to implement and cost more than we anticipate and may not achieve all of its objectives;or reputation could be adversely impacted;

 

we have recently completed a number of acquisitions and may engage in additional acquisition activity in the future, which may increase operational and control risks for a period of time;

 

loss of services of any executive officers could impact our operations; and

 

adverse changes in our assigned financial strength or debt ratings could impact our ability to attract and retain business or obtain capital.

Our premium volume, underwriting and investment results and results from our non-insurance operations have been and will continue to be potentially materially affected by these factors. By making forward-looking statements, we do not intend to become obligated to publicly update or revise any such statements whether as a result of new information, future events or other changes. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as at their dates.

 

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OTHER INFORMATION

Performance Graph

 

The following graph compares the cumulative total return (based on share price) on our common stock with the cumulative total return of companies included in the S&P 500 Index and the Dow Jones Property & Casualty Insurance Companies Index. This information is not necessarily indicative of future results.

 

  Years Ended December 31,   Years Ended December 31, 
  2005(1)   2006   2007   2008   2009   2010   2006(1)   2007   2008   2009   2010   2011 

Markel Corporation

   100     151     155     94     107     119     100     102     62     71     79     86  

S&P 500

   100     116     122     77     97     112     100     105     66     84     97     99  

Dow Jones Property & Casualty Insurance

   100     114     104     78     85     102     100     91     69     75     89     93  

 

(1)

$100 invested on December 31, 20052006 in our common stock or the listed index. Includes reinvestment of dividends.

Market and Dividend Information

 

Our common stock trades on the New York Stock Exchange under the symbol MKL. The number of shareholders of record as of February 16, 201110, 2012 was approximately 450.400. The total number of shareholders, including those holding shares in street name or in brokerage accounts, is estimated to be in excess of 60,000.50,000. Our current strategy is to retain earnings and, consequently, we have not paid and do not expect to pay a cash dividend on our common stock.

High and low common stock prices as reported on the New York Stock Exchange composite tape for 20102011 were $392.55$430.26 and $320.71,$337.50, respectively. See note 22 of the notes to consolidated financial statements for additional common stock price information.

 

|  129131


Markel Corporation & Subsidiaries

 

OTHER INFORMATION (continued)

 

Common Stock Repurchases

 

The following table summarizes our common stock repurchases for the quarter ended December 31, 2010.2011.

Issuer Purchases of Equity Securities

 

   (a)   (b)   (c)   (d) 

Period

  Total
Number of
Shares
Purchased
   Average
Price
Paid per
Share
   Total
Numbers of
Shares
Purchased as
Part
of Publicly
Announced
Plans
or Programs
   Approximate
Dollar
Value of
Shares that
May Yet Be
Purchased
Under
the Plans or
Programs(1)
(in thousands)
 

October 1, 2010 through October 31, 2010

   —       —       —      $21,346  

November 1, 2010 through November 30, 2010

   2,225    $351.97     2,225    $199,217  

December 1, 2010 through December 31, 2010

   5,731    $351.03     5,731    $197,205  
                    

Total

   7,956    $351.30     7,956    $197,205  
                    
   (a)   (b)   (c)   (d) 

Period

  Total
Number of
Shares
Purchased
   Average
Price
Paid per
Share
   Total
Numbers of
Shares
Purchased as
Part

of Publicly
Announced
Plans

or Programs
   Approximate
Dollar

Value  of
Shares that
May Yet Be
Purchased
Under

the Plans or
Programs(1)
(in thousands)
 

October 1, 2011 through October 31, 2011

   25,339    $351.16     25,339    $155,419  

November 1, 2011 through November 30, 2011

   —       —       —      $155,419  

December 1, 2011 through December 31, 2011

   —       —       —      $155,419  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   25,339    $351.16     25,339    $155,419  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

The Board of Directors approved the repurchase of up to $200 million of our common stock pursuant to a share repurchase program publicly announced on December 1, 2010 (the Program). Under the Program, we may repurchase outstanding shares of our common stock from time to time, primarily through open-market transactions. The Program has no expiration date but may be terminated by the Board of Directors at any time. This repurchase program replaced a previous repurchase program that was publicly announced on August 22, 2005.

 

130132  |


      

 

 

Available Information and Shareholder Relations

 

This document represents Markel Corporation’s Annual Report and Form 10-K, which is filed with the Securities and Exchange Commission.

Information about Markel Corporation, including exhibits filed as part of this Form 10-K, may be obtained by writing Mr. Bruce Kay, Investor Relations, at the address of the corporate offices listed below, or by calling (800) 446-6671.

We make available free of charge on or through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. Our website address is www.markelcorp.com.

Transfer Agent

 

American Stock Transfer & Trust Co., LLC, Operations Center, 6201 15th Avenue, Brooklyn, NY 11219 (800) 937-5449

(718) 921-8124

Code of Conduct

 

We have adopted a code of business conduct and ethics (Code of Conduct) which is applicable to all directors and associates, including executive officers. We have posted the Code of Conduct on our website at www.markelcorp.com. We intend to satisfy applicable disclosure requirements regarding amendments to, or waivers from, provisions of our Code of Conduct by posting such information on our website. Shareholders may obtain printed copies of the Code of Conduct by writing Mr. Bruce Kay, Investor Relations, at the address of the corporate offices listed below, or by calling (800) 446-6671.

Annual Shareholders’ Meeting

 

Shareholders of Markel Corporation are invited to attend the Annual Meeting to be held at Richmond CenterStage, 600 East Grace Street, Richmond, Virginia at 4:30 p.m., May 9, 2011.14, 2012.

Corporate Offices

 

Markel Corporation, 4521 Highwoods Parkway, Glen Allen, Virginia 23060-6148 (804) 747-0136 (800) 446-6671

 

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Markel Corporation & Subsidiaries

 

 

Executive Officers

 

Alan I. Kirshner

Chairman of the Board and Chief Executive Officer since 1986. Director since 1978. Age 75.76.

Anthony F. Markel

Vice Chairman since May 2008. President and Chief Operating Officer from March 1992 to May 2008. Director since 1978. Age 69.70.

Steven A. Markel

Vice Chairman since March 1992. Director since 1978. Age 62.63.

F. Michael Crowley

President and Co-Chief Operating Officer since May 2010. President, Markel Specialty from February 2009 to May 2010. President of Willis HRH North America from October 2008 to January 2009. President of Hilb Rogal &Hobbs Company from September 2005 to October 2008. Age 59.60.

Thomas S. Gayner

President and Chief Investment Officer since May 2010. Chief Investment Officer since January 2001. President, Markel-Gayner Asset Management Corporation, a subsidiary, since December 1990. Director from 1998 to 2004. Age 49.50.

Richard R. Whitt, III

President and Co-Chief Operating Officer since May 2010. Senior Vice President and Chief Financial Officer from May 2005 to May 2010. Age 47.48.

Gerard Albanese, Jr.

Executive Vice President and Chief Underwriting Officer since May 2010. Chief Underwriting Officer fromsince January 2009 to May 2010.2009. President and Chief Operating Officer, Markel International Limited, a subsidiary, from September 2003 to August 2008. Age 58.59.

Britton L. Glisson

Chief Administrative Officer since February 2009. President, Markel Insurance Company, a subsidiary, from October 1996 to March 2009. Age 54.

John K. Latham

President, Wholesale Operations since November 2010. Managing Director, Wholesale Regional Operations from January 2010 to November 2010. President, Markel Southeast since November 2008. Senior Vice President, Business Development from January 2007 to May 2009. Chief Information Officer from February 2004 to January 2007. Age 64.55.

Anne G. Waleski

Vice President and Chief Financial Officer and Treasurer since May 2010. Treasurer from August 2003 to May 2010.November 2011. Age 44.45.

 

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Index to Exhibits

 

3(i)Amended and Restated Articles of Incorporation as amended (3(i))(3.1)a

 

3(ii)Bylaws, as amended (3.1)b

 

4(i)
4.1Form of Amended and Restated Credit Agreement dated as of June 9, 2010September 23, 2011 among Markel Corporation, the lenders party thereto and SunTrust Bank, as Administrative Agent (4(i))(4.1)c
4.2Indenture dated as of June 5, 2001 between Markel Corporation and The Chase Manhattan Bank, as Trustee (4.1)d
4.3Form of Second Supplemental Indenture dated as of February 25, 2003 between Markel Corporation and JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as Trustee (4.1)e
4.4Form of Third Supplemental Indenture dated as of August 13, 2004 between Markel Corporation and JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as Trustee (4.1)f
4.5Form of Fourth Supplemental Indenture dated as of August 22, 2006 between Markel Corporation and J.P. Morgan Trust Company, National Association (as successor to The Chase Manhattan Bank), as Trustee (4.2)g
4.6Form of Fifth Supplemental Indenture dated as of September 22, 2009 between Markel Corporation and The Bank of New York Mellon (as successor to The Chase Manhattan Bank), as Trustee (4.2)h
4.7Form of Sixth Supplemental Indenture dated as of June 1, 2011 between Markel Corporation and The Bank of New York Mellon (as successor to The Chase Manhattan Bank), as Trustee (4.2)i

The registrant hereby agrees to furnish to the Securities and Exchange Commission a copy of all instruments defining the rights of holders of long-term debt of the registrant andregistrant’s subsidiaries shown on the Consolidated Balance Sheet of the registrant at December 31, 2010,2011, and the respective Notes thereto, included in this Annual Report on Form10-K.Form 10-K.

Management Contracts or Compensatory Plans required to be filed (Items 10.1–10.20)10.19)

 

10.1  Form of Amended and Restated Employment Agreement with Alan I. Kirshner (10.2)dj
10.2  Form of Amended and Restated Employment Agreement with Steven A. Markel (10.3)dj
10.3  Form of Amended and Restated Employment Agreement with Anthony F. Markel (10.4)dj
10.4  Form of Executive Employment Agreement with F. Michael Crowley, Thomas S. Gayner, Richard R. Whitt, III, Gerard Albanese, Jr., Britton L. Glisson John K. Latham and Anne G. Waleski (10.5)dj
10.5  Schedule of Base Annual Salaries for Executive Officers (10.1)e(10.2)c
10.6  Markel Corporation Executive Bonus Plan (10.3)fk
10.7  Description of Awards Under Executive Bonus Plan**
10.8  Employee Stock Purchase and Bonus Plan (10.9)dj
10.9  Markel Corporation Omnibus Incentive Plan (Appendix B)gl
10.10  Form of Restricted Stock Award Agreement for Directors (10.1)hm
10.11  Form of Restricted Stock Unit Award for Executive Officers (10.1)in
10.12  Form of 2009 Restricted Stock Unit 2006 Supplemental Award Agreement for Executive Officers (10.1)j(10.2)o
10.13  Form of Restricted Stock Unit Award Agreement for F. Michael Crowley (10.1)kExecutive Officers (revised 2010) (10.2)p
10.14Form of 2009 Restricted Stock Unit Award Agreement for Executive Officers (10.2)k
10.15Form of 2010 Restricted Stock Unit Award Agreement for Executive Officers (10.2)l
10.16  Form of Amended and Restated May 2010 Restricted Stock Unit Award Agreement for Executive Officers (10.1)mq
10.1710.15  May 2010 Restricted Stock Units Deferral Election Form (10.2)mq
10.1810.16  Description of Permitted Acceleration of Vesting Date of Restricted Stock Units by Up to Thirty Days (10.2)hm
10.1910.17Form of May 2011 Restricted Stock Unit Award Agreement for Anne Waleski (10.1)a
10.18  Description of Non-Employee Director Compensation**Compensation (10.1)c
10.2010.19  Aspen Holdings, Inc. Amended and Restated 2008 Stock Option Plan (99.1)nr
21  Certain Subsidiaries of Markel Corporation**
23  Consent of independent registered public accounting firm to incorporation by reference of certain reports into the Registrant’s Registration Statements on Forms S-8 and S-3**
31.1  Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/ 15d-14(a)**
31.2  Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/ 15d-14(a)**
32.1  Certification of Principal Executive Officer furnished Pursuant to 18 U.S.C. Section 1350**
32.2  Certification of Principal Financial Officer furnished Pursuant to 18 U.S.C. Section 1350**
101  The following consolidated financial statements from Markel Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010,2011, filed on February 28, 2011,2012, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of OperationsIncome and Comprehensive Income, (Loss), (iii) Consolidated Statements of Changes in Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements, tagged as blocks of text.Statements.**

 

**filed with this report
a.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 10-Q for the quarter ended March 31, 2000.8-K filed on May 13, 2011.
b.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 8-K filed on November 18, 2011.
c.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 10-Q for the quarter ended September 30, 2011.
d.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 8-K filed on June 5, 2001.
e.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 8-K filed on February 25, 2003.
f.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 8-K filed on August 11, 2004.
g.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 8-K filed on August 17, 2006.
h.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 8-K filed on September 21, 2009.
i.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 8-K filed on May 14,31, 2011.
j.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 10-K for the year ended December 31, 2008.
k.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 8-K filed on May 27, 2005.
l.Incorporated by reference from the Appendix shown in parentheses filed with the Commission in the Registrant’s Proxy Statement and Definitive 14A filed April 2, 2003.
m.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 10-Q for the quarter ended September 30, 2008.
n.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 8-K filed on March 3, 2008.
o.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 10-Q for the quarter ended March 31, 2009.
p.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 10-Q for the quarter ended March 31, 2010.
c.q.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 10-Q for the quarter ended June 30, 2010.
d.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 10-K for the year ended December 31, 2008.
e.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 10-Q for the quarter ended September 30, 2010.
f.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 8-K filed on May 27, 2005.
g.Incorporated by reference from the Appendix shown in parentheses filed with the Commission in the Registrant’s Proxy Statement and Definitive 14A filed April 2, 2003.
h.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 10-Q for the quarter ended September 30, 2008.
i.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 8-K filed on March 3, 2008.
j.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 8-K filed on July 24, 2006.
k.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 10-Q for the quarter ended March 31, 2009.
l.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 10-Q for the quarter ended March 31, 2010.
m.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 10-Q for the quarter ended June 30, 2010.
n.r.Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s Registration Statement on Form S-8 (Reg. No. 333-170047).


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

MARKEL CORPORATION
By: 

/s/ Steven A. Markel

 Steven A. Markel
 Vice Chairman
 February 28, 20112012

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signatures

  

Title

Date

/s/ Alan I. Kirshner,*

  Chief Executive Officer and Chairman of the Board of DirectorsFebruary 28, 2011
Alan I. Kirshner  

/s/ Anthony F. Markel,*

  DirectorFebruary 28, 2011
Anthony F. Markel  

/s/ Steven A. Markel,*

  DirectorFebruary 28, 2011
Steven A. Markel  

/s/ Anne G. Waleski,*

  Vice President and Chief Financial Officer and Treasurer (Principal Financial Officer)February 28, 2011
Anne G. Waleski  Financial Officer)

/s/ Nora N. Crouch,*

  Controller and Chief Accounting Officer (Principal Accounting Officer)February 28, 2011
Nora N. Crouch  Accounting Officer)

/s/ J. Alfred Broaddus, Jr.,*

  DirectorFebruary 28, 2011
J. Alfred Broaddus, Jr.  

/s/ Douglas C. Eby,*

  DirectorFebruary 28, 2011
Douglas C. Eby  

/s/ Stewart M. Kasen,*

  DirectorFebruary 28, 2011
Stewart M. Kasen  

/s/ Lemuel E. Lewis,*

  DirectorFebruary 28, 2011
Lemuel E. Lewis  

/s/ Darrell D. Martin,*

  DirectorFebruary 28, 2011
Darrell D. Martin  

/s/ Jay M. Weinberg,*

  DirectorFebruary 28, 2011
Jay M. Weinberg  

/s/ Debora J. Wilson,*

  DirectorFebruary 28, 2011
Debora J. Wilson  

*Signed as of February 28, 2012