Edgar Filing: MARKEL CORP

MARKEL CORPORATION

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, 2007

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 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 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. ¨

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. (check one):

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, 2007 was approximately $4,370,752,521.

The number of shares of the registrant’s Common Stock outstanding at February 21, 2008: 9,937,143.

Documents Incorporated By Reference

The portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 13, 2008, referred to in Part III.

Index and Cross References-Form 10-K

Annual Report


Item No.				Page
Part I

1.	Business			12-31,115-117

1A.	Risk Factors			29-31

1B.	Unresolved Staff Comments			NONE

2.	Properties (note 5)			47-48

3.	Legal Proceedings (note 15)			62

4.	Submission of Matters to a Vote of Security Holders			NONE

4A.	Executive Officers of the Registrant			118

Part II

5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			78,115-116

6.	Selected Financial Data			32-33

7.	Management’s Discussion & Analysis of Financial Condition and Results of Operations			79-115

7A.	Quantitative and Qualitative Disclosures About Market Risk			108-112

8.	Financial Statements and Supplementary Data

	The response to this item is submitted in Item 15 and on page 78.

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

9A.	Controls and Procedures			75-77,113

9B.	Other Information			NONE

Part III

10.	Directors, Executive Officers and Corporate Governance*			118

	Code of Conduct			117

11.	Executive Compensation*

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

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

14.	Principal Accounting Fees and Services*

* Portions of Item Number 10 and Items Number 11, 12, 13 and 14 will be incorporated by reference from the Registrant’s 2008 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

			Consolidated Balance Sheets at December 31, 2007 and 2006	34

			Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2007, 2006 and 2005	35

			Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2007, 2006 and 2005	36

			Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005	37

			Notes to Consolidated Financial Statements for the Years Ended December 31, 2007, 2006 and 2005	38-73

			Reports of Independent Registered Public Accounting Firm	74-76

		(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)

Markel Corporation & Subsidiaries

BUSINESS OVERVIEW

We market and underwrite specialty insurance products and programs to a variety of niche markets and 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. Our financial goals are to earn consistent underwriting 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 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 three 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 and more on availability, service and other value-based considerations. While specialty market exposures may have higher perceived insurance risks than their standard market counterparts, we 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. Most 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 exposed commercial properties, liability coverage for highly specialized professionals, horse mortality and other horse-related risks, yachts and other watercraft, high-value motorcycles and marine and energy 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

Our eight underwriting units are focused on three specialty market segments. We have four underwriting units that compete in the E&S market, three that compete in the Specialty Admitted market and one that competes in the London market.

The E&S market focuses on hard-to-place risks and loss exposures that admitted insurers specifically refuse to write. 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 admitted market. In 2006, the E&S market represented approximately $39 billion, or 8%, of the $499 billion United States property and casualty (P&C) industry.⁽¹⁾

(1) U.S. Surplus Lines-Market Review 2007 Special Report, A.M. Best Research (October 2007).

We are the seventh largest E&S writer in the United States as measured by direct premium writings.⁽¹⁾Our four underwriting units that write in the E&S market are: Markel Essex Excess and Surplus Lines, Markel Shand Professional/Products Liability, Markel Brokered Excess and Surplus Lines and Markel Southwest Underwriters. In 2007, we wrote $1.3 billion 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. We estimate that the Specialty Admitted market is comparable in size to the E&S market. 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.

Our three underwriting units that write in the Specialty Admitted market are: Markel Specialty Program Insurance, Markel American Specialty Personal and Commercial Lines and Markel Global Marine and Energy. In 2007, we wrote $347 million of business in our Specialty Admitted segment.

The London market, which produced approximately $45 billion of gross written premium in 2006, 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.

Gross premium written through Lloyd’s syndicates represented approximately 57% of the London market’s international insurance business⁽²⁾, making Lloyd’s the world’s second largest commercial surplus lines insurer and sixth largest reinsurer.⁽³⁾Corporate capital providers often provide a majority of a syndicate’s capacity and also often 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 2007, corporate capital providers accounted for approximately 93% of total underwriting capacity in Lloyd’s.⁽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 2007, we wrote $693 million of business in our London Insurance Market segment.

In 2007, 24% of consolidated premium writings related to foreign risks (i.e., coverage for risks located outside of the United States), of which 33% were from the United Kingdom. In 2006, 22% of our premium writings related to foreign risks, of which 36% were from the United Kingdom. In 2005, 21% of our premium writings related to foreign risks, of which 42% were from the United Kingdom.

(2) International Financial Markets in the UK, International Financial Services of London (November 2007).

(3) Lloyd’s Review 2007 Close Up, Lloyd’s.

Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

In each of these years, the United Kingdom was the only individual foreign country from which premium writings were material. Premium writings are attributed to individual countries based upon location of risk.

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 90 major 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 be excessive amounts of capital in the industry. In an attempt to utilize 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.

After a decade of soft market conditions, we believe the industry began to experience favorable conditions in late 2000 that continued through 2002. In 2003 and 2004, we continued to receive rate increases compared to prior years for most product lines; however, the rate of increase slowed and, in certain lines, rates declined. In 2005 and 2006, competition became more intense and, as a result, new and renewal business declined for many of our products due to our commitment to adequate pricing. With the exception of rate increases on catastrophe-exposed business, rates in 2007 were generally lower than in 2006. Lines of business where rates have declined include our casualty, professional liability and non-catastrophe-exposed property programs. Standard carriers are contributing to the increased competition currently seen in the marketplace, as these carriers have entered into the Specialty Admitted and E&S markets in which we write, leading to additional pricing pressure. Excess underwriting capacity resulting from profitable underwriting results and capital raised since 2005, particularly in Bermuda and London, is also contributing to the softening of the insurance market. We expect that competition in the property and casualty insurance industry will remain strong in 2008. We continue to focus on superior customer service, new product development, geographic expansion and increased marketing efforts to address softening insurance market conditions.

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 2007, our combined ratio was 88%. 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.

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Underwriting Segments

We define our underwriting segments based on the areas of the specialty insurance market in which we compete. We have four underwriting units that compete in the Excess and Surplus Lines market, three that compete in the Specialty Admitted market and one that competes in the London market. See note 18 of the notes to consolidated financial statements for additional segment reporting disclosures.

For purposes of segment reporting, the Other segment includes lines of business that have been discontinued in conjunction with an acquisition. 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)

Excess and Surplus Lines Segment

Our Excess and Surplus Lines segment reported gross premium volume of $1.3 billion, earned premiums of $1.2 billion and an underwriting profit of $205.4 million in 2007.

In the E&S market, we write business through the following underwriting units:

•

Markel Essex Excess and Surplus Lines (Glen Allen, VA)

•

Markel Shand Professional/Products Liability (Deerfield, IL)

•

Markel Brokered Excess and Surplus Lines (Red Bank, NJ)

•

Markel Southwest Underwriters (Scottsdale, AZ)

During the first quarter of 2008, we decided to combine the products previously written by Markel Re, an underwriting unit with $137 million of gross premium volume in 2007, with the products written by two of our existing underwriting units, Markel Brokered Excess and Surplus Lines and Markel Specialty Program Insurance. See Management’s Discussion & Analysis of Financial Condition and Results of Operations beginning on page 79 for further discussion regarding this decision.

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Markel Essex Excess and Surplus Lines. The Markel Essex Excess and Surplus Lines unit (Markel Essex E&S unit) focuses on the following products written predominately on a non-admitted basis: casualty, property, inland marine, ocean marine, transportation and railroad. The Markel Essex E&S unit’s contract division writes a variety of liability coverages focusing on light-to-medium casualty exposures such as artisan contractors, habitational risks, restaurants and bars, child and adult care facilities, vacant properties, office buildings and light manufacturing operations. The contract division also writes property insurance on classes of business ranging from small, single-location accounts to large, multi-state, multi-location accounts. Property coverages consist principally of fire, allied lines, including windstorm, hail and water damage, and other specialized property coverages. In addition, the Markel Essex E&S unit offers coverages for catastrophe-exposed property risks on both an excess and primary basis, including earthquake and wind, through its Essex Special Property division. These risks are typically larger and are low frequency and high severity in nature.

The Markel Essex E&S unit’s inland marine facility provides coverages for risks that include motor truck cargo, warehouseman’s legal liability, builder’s risk and contractor’s equipment. The ocean marine facility writes risks that include marinas, hull coverage, cargo and builder’s risk for yacht manufacturers. The transportation division focuses on physical damage coverage for all types of commercial vehicles such as trucks, buses and high-value automobiles. The railroad division writes all-risk property coverages on rolling stock and real property and liability coverages for shortline, regional, tourist and scenic railroads, as well as modern commuter rail and light rail.

The Markel Essex E&S unit’s business is written through two distribution channels. Business written by the contract division is primarily generated by approximately 200 professional surplus lines general agents who have limited quoting and binding authority. The Essex Special Property, inland marine, ocean marine, transportation and railroad divisions produce business on a brokerage basis through approximately 220 wholesale brokers. The Markel Essex E&S unit seeks to be a substantial underwriter for its producers in order to enhance the likelihood of receiving the most desirable underwriting opportunities. The Markel Essex E&S unit writes the majority of its business in Essex Insurance Company, which is domiciled in Delaware and is eligible to write E&S insurance in 49 states and the District of Columbia.

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Markel Shand Professional/Products Liability. The Markel Shand Professional/Products Liability unit focuses primarily on tailored coverages that offer unique solutions on a claims-made basis for highly specialized professions. These coverages include professional liability and errors and omissions for lawyers, architects and engineers, agents and brokers, investment advisors and other professions. The Markel Shand Professional/Products Liability unit also offers medical malpractice coverage for physicians and allied healthcare risks and claims-made products liability coverage focusing on start-up companies, small businesses, emerging technologies and other hard-to-place risks. In addition, the Markel Shand Professional/Products Liability unit offers not-for-profit directors’ and officers’ liability and employment practices liability coverages. The unit also provides a full array of loss prevention programs, including consultation services that can be accessed through telephone inquiry, risk management guides and self audit forms.

Business is written nationwide and is developed through approximately 350 wholesale brokers. The Markel Shand Professional/Products Liability unit has access to both admitted and surplus lines markets in all 50 states and writes the majority of its business in Evanston Insurance Company (EIC), which is domiciled in Illinois.

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Markel Brokered Excess and Surplus Lines. The Markel Brokered Excess and Surplus Lines unit focuses on the following products: primary casualty, property, excess and umbrella, environmental, taxi liability, surety reinsurance and, beginning in 2008, casualty facultative reinsurance. Primary casualty coverages target hard-to-place, mid-size and large general liability and products liability exposures. Property coverages focus on non-standard property placements and commercial multi-peril policies, as well as builders’ risk and habitational exposures. Monoline property business is placed on a participating, primary or excess of loss basis. Excess and umbrella products are written on both a lead and excess basis, primarily for commercial businesses. Environmental products offer a complete array of environmental coverages, including environmental consultants’ professional liability, contractors’ pollution liability and site specific environmental impairment liability. Taxi liability products provide auto liability coverage for small to medium-sized local cab fleets on either an admitted or non-admitted basis. Surety reinsurance is written in a broker market focusing on treaty placements for both national and regional surety underwriting companies. Casualty facultative placements, previously written by Markel Re, offer coverages that possess favorable underwriting characteristics, such as control of individual risk selection and pricing. The Markel Brokered Excess and Surplus Lines unit provides product solutions to its insureds through approximately 300 wholesale brokers and writes the majority of its business in EIC.

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Markel Southwest Underwriters. Markel Southwest Underwriters (MSU) writes commercial casualty and property coverages nationwide, focusing on businesses in the western, southwestern and southeastern United States. Casualty business consists of

light-to-medium liability exposures, including general and artisan contractors, habitational risks, office buildings, light manufacturing operations and vacant properties. MSU also writes property insurance on classes of business ranging from small, single-location risks to large, multi-state, multi-location risks. Property business consists principally of fire, allied lines, including windstorm, hail and water damage, and other specialized property coverages.

Most of MSU’s business is generated by approximately 75 contracted professional wholesale general agents who have limited quoting and binding authority. MSU seeks to be a substantial underwriter for its producers in order to enhance the likelihood of receiving the most desirable underwriting opportunities. The majority of its business is written in EIC.

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Specialty Admitted Segment

Our Specialty Admitted segment reported gross premium volume of $346.6 million, earned premiums of $320.1 million and an underwriting profit of $26.9 million in 2007.

In the Specialty Admitted market, we write business through the following underwriting units:

•

Markel Specialty Program Insurance (Glen Allen, VA)

•

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

•

Markel Global Marine and Energy (Houston, TX)

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Markel Specialty Program Insurance. The Markel Specialty Program Insurance unit focuses on providing total insurance programs for businesses engaged in similar but 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 Program Insurance unit is organized into four product areas that concentrate on particular markets and customer groups. The property and casualty division writes commercial coverages for youth and recreation oriented organizations, such as children’s summer 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, auto repair garages, gas stations and convenience stores, used car dealers, moving and storage businesses, museums, art organizations, bed & breakfast inns and pool and spa maintenance operations. The agriculture division specializes in insurance coverages for horse-related risks, such as horse mortality coverage and property and liability coverages for farms, boarding, breeding and training facilities as well as outfitters and guides, hunting and fishing lodges and dude ranches. 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, limited benefit accident and medical insurance for selected private insurers, 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 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. Beginning in 2008, Markel Risk Solutions will also offer a specialty underwriting facility for alternative risk transfer. This facility, previously written by Markel Re, offers innovative solutions and quality products to buyers who commit significant financial resources to risk assumption through an alternative risk entity such as a captive insurance company, risk retention group or self-insured retention.

The majority of Markel Specialty Program Insurance business is produced by approximately 4,000 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 Program Insurance business is underwritten primarily in 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.

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Markel American Specialty Personal and Commercial Lines. The Markel American Specialty Personal and Commercial Lines unit offers its insurance products in niche markets that are often overlooked by large admitted carriers and focuses its underwriting on watercraft and commercial marine, small boat and yacht, motorcycle and all-terrain vehicle (ATV), property, motor home, special event and supplemental natural disaster coverages. The watercraft program markets personal lines insurance coverage for watercraft, older boats and high performance boats. The focus of the commercial marine program is small fishing ventures, charters and small boat rentals. The yacht program is designed for experienced owners of moderately priced yachts, and the small boat program targets newer watercraft up to 26 feet. The motorcycle and ATV programs target mature riders of touring and cruising bikes and ATV riders over age 16. The property program provides coverage for mobile homes and dwellings that do not qualify for standard homeowners coverage, as well as contents coverage for renters. The motor home program includes coverage for both personally used motor homes and motor home rental operations. The special event program offers cancellation and/or liability coverage for weddings, anniversary celebrations and other personal events. The supplemental natural disaster program offers additional living expense protection for loss due to specific named perils, including flood.

Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

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 watercraft, small boat and yacht, property, motor home and special event products through wholesale or specialty retail producers. The motorcycle program is marketed directly to the consumer using direct mail, Internet and telephone promotions, as well as relationships with various motorcycle 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.

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Markel Global Marine and Energy. The Markel Global Marine and Energy unit provides insurance specifically designed to meet the needs of businesses in the marine and energy industries. The unit began writing business in late 2006 offering two product lines: excess marine and energy liability and onshore energy property. Gross premium volume for the Markel Global Marine and Energy unit was $16.7 million for 2007.

The excess liability program offers excess casualty and bumbershoot coverages for marine and energy related businesses. The onshore energy property program covers small to mid-sized onshore energy facilities such as oil refineries, chemical manufacturers and electrical power plants. Two additional product lines are being added and will begin producing volume in 2008. The marine program will offer marine liability, brown water hull, protection and indemnity, cargo and package coverages for maritime-related businesses on a primary basis. The onshore energy casualty program will provide primary, excess and umbrella casualty coverages to small to mid-sized onshore energy facilities.

Business is produced by both wholesale and retail agents. The Markel Global Marine and Energy unit has the capability of writing business on both an admitted and non-admitted basis. Admitted business is written in MIC, while non-admitted business is written in EIC.

London Insurance Market Segment

Our London Insurance Market segment reported gross premium volume of $693.2 million, earned premiums of $640.4 million and an underwriting profit of $46.4 million in 2007.

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This segment is comprised of Markel International, which is headquartered in London, England. In addition to eight branch offices in the United Kingdom, Markel International also has offices in Spain, Canada, Singapore and Sweden. Markel International writes specialty property, casualty, professional liability and marine insurance on a direct and reinsurance basis. Business is written worldwide with approximately 20% of writings coming from the United States.

Markel International. Markel International is comprised of 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:

•

Marine and Energy

•

Non-Marine Property

•

Professional and Financial Risks

•

Retail

•

Specialty

The Marine and Energy division underwrites a portfolio of coverages for cargo, energy, hull, liability, war and specie risks. The cargo account is an international transit-based book covering many types of cargo. The energy account 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 account 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. The specie account includes coverage for fine art on exhibit and in private collections, securities, bullion, precious metals, cash in transit and jewelry.

The Non-Marine Property division writes property and liability business for a wide range of insureds, providing coverage ranging from fire to catastrophe perils such as earthquake and windstorm. Business is written in either the open market or delegated authority accounts. The open market account writes direct and facultative risks, typically for Fortune 1000 companies. Open market business is written mainly on a worldwide basis by our underwriters to London brokers, with each

Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

risk being considered on its own merits. The delegated authority account focuses mainly on small commercial insureds and is written through a network of coverholders. The delegated authority account is 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, medical malpractice and intellectual property 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 seven branch offices in England and one branch office in Scotland. In addition, coverage is provided for small to medium-sized commercial property risks on both a stand-alone and package basis. The branch offices provide insureds and brokers with direct access to decision-making underwriters who possess specialized knowledge of their local markets.

The Specialty division provides property treaty reinsurance on an excess of loss and proportional basis for per risk and catastrophe exposures. A significant portion of 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 direct coverage for a number of specialist classes including financial institutions, contingency and other special risks.

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. 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. Over the past several years, as the capital of our insurance subsidiaries has grown, we have reduced the amount of reinsurance that we purchase. As a result, our retention of gross premium volume has increased consistent with our strategy to retain more of our profitable business. 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 Standard & Poor’s (S&P) rating of “A” (excellent); (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, 2007. 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 72% of our $1.2 billion reinsurance recoverable balance.


Reinsurers	A.M. Best Rating	Reinsurance Recoverable
		(dollars in thousands)
Munich Re Group	A+	$	184,990
Swiss Re Group	A+		112,593
Fairfax Financial Group	A		108,290
Lloyd’s of London	A		99,490
XL Capital Group	A		91,376
HDI Group	A		55,990
Ace Group	A+		48,819
White Mountains Insurance Group	A-		46,220
W.R. Berkley Group	A+		44,649
Everest Re Group	A+		41,713

Reinsurance recoverable on paid and unpaid losses for ten largest reinsurers			834,130

Total reinsurance recoverable on paid and unpaid losses		$	1,151,224

Reinsurance recoverable balances for the ten largest reinsurers 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. Reinsurance needs are assessed and coverages are purchased at the operating unit level with corporate oversight. In most circumstances, the reinsurer remains responsible for all business produced prior to 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 their rating falls below an acceptable level.

See note 14 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.

Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Investments

Our business strategy recognizes the importance of both consistent underwriting profits and superior investment returns to build shareholder value. We rely on sound underwriting practices to produce investable funds while minimizing underwriting risk. Approximately three-quarters of our investable assets come from premiums paid by policyholders. Policyholder funds are invested predominately 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. 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 officers.

Total investment return includes items that impact net income, such as net investment income and realized investment gains or losses, as well as changes in unrealized holding gains or losses, which do not impact net income. Our investment portfolio produced net investment income of $306.5 million and net realized investment gains of $59.5 million in 2007. During the year ended December 31, 2007, net unrealized holding gains on the investment portfolio decreased by $114.2 million. We do not lower the quality of our investment portfolio in order to enhance or maintain yields. Our focus on long-term total investment return results in variability in the level of realized and unrealized investment gains or losses from one period to the next.

We believe the ultimate success of our investment strategy 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.

ANNUAL TAXABLE EQUIVALENT TOTAL INVESTMENT RETURNS


	Years Ended December 31,															Weighted Average Five-Year Annual Return		Weighted Average Ten-Year Annual Return
	2003			2004			2005			2006			2007			Weighted Average Five-Year Annual Return		Weighted Average Ten-Year Annual Return
Equities		31.0	%		15.2	%		(0.3	%)		25.9	%		(0.4	%)	11.8	%	10.7	%
Fixed maturities⁽¹⁾		4.5	%		4.8	%		3.9	%		5.2	%		5.6	%	4.8	%	5.8	%
Investments in affiliates		—			—			—			13.2	%		8.1	%	—		—
Total portfolio, before foreign currency effect		8.3	%		6.6	%		2.9	%		9.6	%		4.1	%	6.2	%	6.6	%
Total portfolio		10.5	%		7.9	%		1.5	%		11.2	%		4.8	%	7.0	%	7.2	%

Ending portfolio balance (in millions)	$	5,350		$	6,317		$	6,588		$	7,535		$	7,788

⁽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.

Our disciplined, value-oriented investment approach has generated solid investment results over the long term.

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 assessment 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 is regarded by S&P as having predominately 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 91% 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.

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

The following chart presents our fixed maturity portfolio, at estimated fair value, by rating category at December 31, 2007.

LOGO

Shareholder Value

Our financial goals are to earn consistent underwriting 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. We recognize that it is difficult to grow book value consistently each year, so 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. For the year ended December 31, 2007, book value per share increased 15% primarily due to net income of $405.7 million partially offset by a $74.0 million decrease in net unrealized holding gains, net of taxes. For the year ended December 31, 2006, book value per share increased 32% primarily due to net income of $392.5 million and an increase of $160.0 million in net unrealized holding gains, net of taxes. Over the past five years, we have grown book value per share at a compound annual rate of 18% to $265.26 per share.

Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

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

LOGO

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. 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, 2007, our United States insurance subsidiaries could pay up to $282.6 million during the following 12 months under the ordinary dividend regulations.

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 foreign insurance subsidiaries must comply with the United Kingdom Companies Act of 1985, which provides that dividends may only be paid out of distributable profits.

Other Regulation. In connection with our investment in First Market Bank, a thrift institution based in Richmond, VA, we became a thrift holding company under the Home Owners Loan Act. As a thrift holding company, we are subject to regulatory oversight by the Office of Thrift Supervision and to regulations regarding acquisition of control similar to those applicable to insurance holding companies.

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).

Best has assigned our United States insurance subsidiaries a group FSR of “A” (excellent). Markel Syndicate 3000 and MIICL have each been assigned an FSR of “A” (excellent) by Best.

In addition to Best, our United States insurance subsidiaries are rated “A” (high) by Fitch Ratings (Fitch), an independent rating agency. MIICL has also been assigned an FSR of “A” (high) by Fitch.

The various rating agencies typically charge companies fees for the rating and other services they provide. During 2007, we paid rating agencies, including Best and Fitch, approximately $0.3 million for their services.

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.

Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

We may experience losses from catastrophes. Because we are a property and casualty insurance company, we frequently experience losses from man-made or natural catastrophes. Catastrophes may have a material adverse effect on operations. Catastrophes include 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.

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. 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, 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 reserves will result in additional charges.

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. 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, policy rates and forms and the form and content of financial reports.

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 subsidiaries. As a result, our cash flow and the 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.

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.

Our equity investment portfolio is concentrated, and losses in value on significant investments could adversely affect our financial results. Our equity portfolio is concentrated in particular issuers and industries. A decline in the market value of our significant investments may result in a material decrease in shareholders’ equity.

Our fixed maturity investment portfolio includes securities issued with financial guaranty insurance, and uncertainty with regard to the financial strength of the guarantors could cause the market value of these securities to decline. We have purchased fixed maturities, including municipal bonds, that were 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. Nevertheless, the market value of these securities could be adversely impacted by downgrades in the financial strength ratings of the financial guarantors or if the financial guarantors experience financial distress and are unable to meet their obligations. Such a decline in the market value of our fixed maturity portfolio may result in a material decrease in shareholders’ equity.

Associates

At December 31, 2007, we had approximately 2,000 employees, six of whom were executive officers.

As a service organization, our continued profitability and growth are dependent upon talented and enthusiastic associates who share our common value system as outlined in the “Markel Style.” We have structured incentive compensation plans and stock purchase plans to encourage associates to achieve corporate objectives and think and act like owners. Associates are offered many opportunities to become shareholders. Associates eligible to participate in our 401(k) plan receive one-third of our contribution in Markel stock and may purchase stock with their own contributions. Stock also may be acquired through a payroll deduction plan, and associates (other than executive officers and directors as precluded by the Sarbanes-Oxley Act) are given the opportunity to purchase stock through loans financed by us with a partially subsidized interest rate. Under our incentive compensation plans, associates may earn a meaningful bonus based on individual and company performance. For some of our executive officers and other members of senior management, part of that bonus consists of restricted stock unit awards. Additionally, executive officers and other members of senior management are required to hold Markel stock in amounts that represent a substantial multiple of their annual compensation. We estimate that associates, including executive officers and directors, owned more than 10% of our outstanding shares at December 31, 2007. We believe that employee stock ownership and rewarding value-added performance align associates’ interests with the interests of non-employee shareholders.

Markel Corporation & Subsidiaries

SELECTED FINANCIAL DATA (dollars in millions, except per share data) ^{(1, 2)}


	2007			2006			2005
RESULTS OF OPERATIONS
Earned premiums	$	2,117		$	2,184		$	1,938
Net investment income		306			271			242
Total operating revenues		2,483			2,519			2,200
Net income (loss)		406			393			148
Comprehensive income (loss)		337			551			64
Diluted net income (loss) per share	$	40.64		$	39.40		$	14.80


FINANCIAL POSITION
Total investments and cash and cash equivalents	$	7,788		$	7,535		$	6,588
Total assets		10,134			10,088			9,814
Unpaid losses and loss adjustment expenses		5,526			5,584			5,864
Convertible notes payable		—			—			99
Senior long-term debt		681			752			609
8.71% Junior Subordinated Debentures		—			106			141
Shareholders’ equity		2,641			2,296			1,705
Common shares outstanding (at year end, in thousands)		9,957			9,994			9,799


OPERATING PERFORMANCE MEASURES *^{(1, 2, 3)}*

OPERATING DATA
Book value per common share outstanding	$	265.26		$	229.78		$	174.04
Growth (decline) in book value per share		15	%		32	%		3	%
5-Year CAGR in book value per share ⁽⁴⁾		18	%		16	%		11	%
Closing stock price	$	491.10		$	480.10		$	317.05


RATIO ANALYSIS
U.S. GAAP combined ratio⁽⁵⁾		88	%		87	%		101	%
Investment yield ⁽⁶⁾		4	%		4	%		4	%
Taxable equivalent total investment return ⁽⁷⁾		5	%		11	%		2	%
Investment leverage ⁽⁸⁾		2.9			3.3			3.9
Debt to total capital		20	%		27	%		33	%

⁽¹⁾

Reflects our acquisitions of Gryphon Holding Inc. (January 15, 1999) and Terra Nova (Bermuda) Holdings Ltd. (March 24, 2000) using the purchase method of accounting. Terra Nova (Bermuda) Holdings Ltd. was acquired in part by the issuance of 1.8 million common shares. We also issued 2.5 million common shares with net proceeds of $408 million in 2001.

⁽²⁾	In accordance with the provisions of Statement of Financial Accounting Standards No. 142, we discontinued the amortization of goodwill as of January 1, 2002.

⁽³⁾

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.


2004			2003			2002			2001			2000			1999			1998			10-Year CAGR ⁽⁴⁾


$	2,054		$	1,864		$	1,549		$	1,207		$	939		$	437		$	333		20	%
	204			183			170			171			154			88			71		16	%
	2,262			2,092			1,770			1,397			1,094			524			426		19	%
	165			123			75			(126	)		(28	)		41			57		—
	273			222			73			(77	)		81			(40	)		68		—
$	16.41		$	12.31		$	7.53		$	(14.73	)	$	(3.99	)	$	7.20		$	10.17		—



$	6,317		$	5,350		$	4,314		$	3,591		$	3,136		$	1,625		$	1,483		19	%
	9,398			8,532			7,409			6,441			5,473			2,455			1,921		18	%
	5,482			4,930			4,367			3,700			3,037			1,344			934		19	%
	95			91			86			116			—			—			—		—
	610			522			404			265			573			168			93		—
	150			150			150			150			150			150			150		—
	1,657			1,382			1,159			1,085			752			383			425		22	%
	9,847			9,847			9,832			9,820			7,331			5,590			5,522		—





	$ 168.22			$ 140.38			$ 117.89			$ 110.50			$ 102.63			$ 68.59			$ 77.02		15	%
	20	%		19	%		7	%		8	%		50	%		(11	%)		18	%	—
	20	%		13	%		13	%		18	%		21	%		22	%		23	%	—
	$ 364.00			$ 253.51			$ 205.50			$ 179.65			$ 181.00			$ 155.00			$ 181.00		—



	96	%		99	%		103	%		124	%		114	%		101	%		98	%	—
	4	%		4	%		4	%		5	%		6	%		5	%		5	%	—
	8	%		11	%		8	%		8	%		12	%		(1	%)		9	%	—
	3.8			3.9			3.7			3.3			4.2			4.2			3.5		—
	34	%		36	%		36	%		33	%		49	%		45	%		36	%	—

⁽⁴⁾	CAGR—compound annual growth rate.

⁽⁵⁾	The U.S. GAAP combined ratio measures the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.

⁽⁶⁾	Investment yield reflects net investment income as a percentage of average invested assets.

⁽⁷⁾

Taxable equivalent total investment return includes net investment income, realized investment gains or losses, the change in market value of the investment portfolio and the effect of foreign exchange 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.

⁽⁸⁾	Investment leverage represents total invested assets divided by shareholders’ equity.

Markel Corporation & Subsidiaries

CONSOLIDATED BALANCE SHEETS


	December 31,
	2007			2006
	(dollars in thousands)
ASSETS
Investments, available-for-sale, at estimated fair value:
Fixed maturities (amortized cost of $5,318,114 in 2007 and $4,996,386 in 2006)	$	5,323,750		$	5,000,969
Equity securities (cost of $1,263,266 in 2007 and $1,059,345 in 2006)		1,854,062			1,766,273
Short-term investments (estimated fair value approximates cost)		51,552			139,499
Investments in affiliates		81,181			73,439

TOTAL INVESTMENTS		7,310,545			6,980,180

Cash and cash equivalents		477,661			555,115
Receivables		296,295			322,982
Reinsurance recoverable on unpaid losses		1,072,918			1,257,453
Reinsurance recoverable on paid losses		78,306			105,003
Deferred policy acquisition costs		202,291			218,392
Prepaid reinsurance premiums		114,711			117,889
Goodwill and intangible assets		344,911			339,717
Other assets		236,781			191,400

TOTAL ASSETS	$	10,134,419		$	10,088,131

LIABILITIES AND SHAREHOLDERS’ EQUITY
Unpaid losses and loss adjustment expenses	$	5,525,573		$	5,583,879
Unearned premiums		940,309			1,007,801
Payables to insurance companies		39,790			58,880
Senior long-term debt (estimated fair value of $706,000 in 2007 and $801,000 in 2006)		680,698			751,978
Junior Subordinated Deferrable Interest Debentures (estimated fair value of $111,000 in 2006)		—			106,379
Other liabilities		306,887			282,821

TOTAL LIABILITIES		7,493,257			7,791,738

Shareholders’ equity:
Common stock		866,362			854,561
Retained earnings		1,417,269			1,015,679
Accumulated other comprehensive income:
Net unrealized holding gains on investments, net of taxes of $208,751 in 2007 and $249,029 in 2006		388,521			462,482
Cumulative translation adjustments, net of tax benefit of $4,050 in 2007 and $6,094 in 2006		(7,523	)		(11,316	)
Net actuarial pension loss, net of tax benefit of $12,636 in 2007 and $13,469 in 2006		(23,467	)		(25,013	)

TOTAL SHAREHOLDERS’ EQUITY		2,641,162			2,296,393
Commitments and contingencies

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	10,134,419		$	10,088,131

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


	Years Ended December 31,
	2007			2006			2005
	(dollars in thousands, except per share data)
OPERATING REVENUES
Earned premiums	$	2,117,294		$	2,184,381		$	1,938,461
Net investment income		306,458			271,016			241,979
Net realized investment gains		59,504			63,608			19,708

TOTAL OPERATING REVENUES		2,483,256			2,519,005			2,200,148

OPERATING EXPENSES
Losses and loss adjustment expenses		1,096,203			1,132,579			1,299,983
Underwriting, acquisition and insurance expenses		756,699			767,853			650,323
Amortization of intangible assets		2,145			—			—

TOTAL OPERATING EXPENSES		1,855,047			1,900,432			1,950,306

OPERATING INCOME		628,209			618,573			249,842

Interest expense		56,251			65,172			63,842

INCOME BEFORE INCOME TAXES		571,958			553,401			186,000
Income tax expense		166,289			160,899			38,085

NET INCOME	$	405,669		$	392,502		$	147,915

OTHER COMPREHENSIVE INCOME (LOSS)
Net unrealized gains (losses) on investments, net of taxes:
Net holding gains (losses) arising during the period	$	(33,638	)	$	202,580		$	(61,126	)
Less reclassification adjustments for net gains included in net income		(40,323	)		(42,607	)		(13,439	)

Net unrealized gains (losses)		(73,961	)		159,973			(74,565	)
Currency translation adjustments, net of taxes		3,793			(1,680	)		(9,709	)
Change in net actuarial pension loss, net of taxes		1,546			—			—

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)		(68,622	)		158,293			(84,274	)

COMPREHENSIVE INCOME	$	337,047		$	550,795		$	63,641

NET INCOME PER SHARE
Basic	$	40.73		$	40.43		$	15.05
Diluted	$	40.64		$	39.40		$	14.80

See accompanying notes to consolidated financial statements.

Markel Corporation & Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


	Common		Common		Retained			Accumulated Other Comprehensive
	Shares		Stock		Earnings			Income			Total
	(in thousands)
Shareholders’ Equity at January 1, 2005	9,847		$	742,288	$	537,068		$	377,147		$	1,656,503
Net income	—			—		147,915			—			147,915
Net unrealized losses on investments, net of taxes	—			—		—			(74,565	)		(74,565	)
Currency translation adjustments, net of taxes	—			—		—			(9,709	)		(9,709	)

Comprehensive income												63,641
Issuance of common stock	1			—		—			—			—
Repurchase of common stock	(49	)		—		(15,926	)		—			(15,926	)
Restricted stock units expensed	—			1,215		—			—			1,215

Shareholders’ Equity at December 31, 2005	9,799			743,503		669,057			292,873			1,705,433
Net income	—			—		392,502			—			392,502
Net unrealized gains on investments, net of taxes	—			—		—			159,973			159,973
Currency translation adjustments, net of taxes	—			—		—			(1,680	)		(1,680	)

Comprehensive income												550,795
Repurchase of common stock	(140	)		—		(45,880	)		—			(45,880	)
Conversion of convertible notes payable	335			108,842		—			—			108,842
Restricted stock units expensed	—			1,342		—			—			1,342
Tax benefit on closed stock option plans	—			874		—			—			874
Adjustment to initially apply FASB Statement No. 158, net of taxes	—			—		—			(25,013	)		(25,013	)

Shareholders’ Equity at December 31, 2006	9,994			854,561		1,015,679			426,153			2,296,393
Net income	—			—		405,669			—			405,669
Net unrealized losses on investments, net of taxes	—			—		—			(73,961	)		(73,961	)
Currency translation adjustments, net of taxes	—			—		—			3,793			3,793
Change in net actuarial pension loss, net of taxes	—			—		—			1,546			1,546

Comprehensive income												337,047
Issuance of common stock	12			5,626		—			—			5,626
Repurchase of common stock	(49	)		—		(24,210	)		—			(24,210	)
Cumulative effect of adoption of FASB Interpretation No. 48	—			2,831		20,131			—			22,962
Restricted stock units expensed	—			2,812		—			—			2,812
Tax benefit on closed stock option plans	—			532		—			—			532

SHAREHOLDERS’ EQUITY AT DECEMBER 31, 2007	9,957		$	866,362	$	1,417,269		$	357,531		$	2,641,162

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
	2007			2006			2005
	(dollars in thousands)
OPERATING ACTIVITIES
Net income	$	405,669		$	392,502		$	147,915
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax expense (benefit)		31,935			30,561			(44,513	)
Depreciation and amortization		30,528			34,042			36,344
Net realized investment gains		(59,504	)		(63,608	)		(19,708	)
Decrease in receivables		27,088			11,531			50,274
Decrease (increase) in deferred policy acquisition costs		16,101			(6,063	)		(10,363	)
Increase in unpaid losses and loss adjustment expenses, net		102,185			170,279			370,082
Increase (decrease) in unearned premiums, net		(64,314	)		26,688			20,541
Increase (decrease) in payables to insurance companies		(19,917	)		(56,733	)		33,887
Other		38,552			(21,145	)		(41,698	)

NET CASH PROVIDED BY OPERATING ACTIVITIES		508,323			518,054			542,761

INVESTING ACTIVITIES
Proceeds from sales of fixed maturities and equity securities		1,000,148			1,557,654			1,839,065
Proceeds from maturities, calls and prepayments of fixed maturities		213,975			173,997			164,150
Cost of fixed maturities and equity securities purchased		(1,652,284	)		(2,129,756	)		(2,435,569	)
Net change in short-term investments		87,947			109,042			(126,827	)
Cost of investments in affiliates		(2,732	)		(58,703	)		(14,072	)
Acquisitions, net of cash acquired		(8,103	)		—			—
Net proceeds from sale of subsidiary		—			—			43,237
Additions to property and equipment		(14,495	)		(9,192	)		(29,498	)
Other		(1,979	)		1,715			727

NET CASH USED BY INVESTING ACTIVITIES		(377,523	)		(355,243	)		(558,787	)

FINANCING ACTIVITIES
Additions to senior long-term debt		—			145,402			—
Repayments and retirement of senior long-term debt		(73,032	)		(4,549	)		(3,603	)
Retirement of Junior Subordinated Deferrable Interest Debentures		(111,012	)		(36,421	)		(9,627	)
Repurchases of common stock		(24,210	)		(45,880	)		(15,926	)
Other		—			(5	)		—

NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		(208,254	)		58,547			(29,156	)

Increase (decrease) in cash and cash equivalents		(77,454	)		221,358			(45,182	)
Cash and cash equivalents at beginning of year		555,115			333,757			378,939

CASH AND CASH EQUIVALENTS AT END OF YEAR	$	477,661		$	555,115		$	333,757

See accompanying notes to consolidated financial statements.

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Markel Corporation markets and underwrites specialty insurance products and programs to a variety of niche markets and operates in three segments of the specialty insurance marketplace: the Excess and Surplus Lines, the Specialty Admitted and the London markets.

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. 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 for impairment and evaluating the investment portfolio for other-than-temporary declines in estimated fair value. Actual results may differ from the estimates and assumptions used in preparing the consolidated financial statements.

c) Investments. Investments, other than investments in affiliates, are considered available-for-sale and are recorded at estimated fair value, generally based on quoted market prices. The net unrealized gains or losses on investments, net of deferred income taxes, are included in accumulated other comprehensive income in shareholders’ equity. A decline in the fair value of any investment below cost that is deemed other-than-temporary is charged to earnings, resulting in a new cost basis for the security.

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 and are derived using the first-in, first-out method.

d) Investments in Affiliates. Investments in affiliates include investments in companies accounted for under the equity method of accounting. In applying the equity method, investments are recorded at cost and subsequently increased or decreased by the Company’s proportionate share of the net income or loss of the investee. The Company records its proportionate share of net income or loss of the investee in net investment income. The Company records its proportionate share of other comprehensive income or loss of the investee as a component of its other comprehensive income (loss). Dividends or other equity distributions are recorded as a reduction of the investment.

e) 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.

1. Summary of Significant Accounting Policies (continued)

f) 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.

g) 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.

h) Goodwill and Intangible Assets. Goodwill is tested for impairment at least annually. The Company completes its 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 three to five years, and are reviewed for impairment.

i) 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, three to five years for furniture and equipment and three to ten years for other).

j) 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.

k) 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.

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Summary of Significant Accounting Policies (continued)

l) 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.

m) Stock Compensation Plans. In 2006, the Company adopted Statement of Financial Accounting Standards (Statement) No. 123 (revised 2004), Share-Based Payment. Prior to the adoption of Statement No. 123 (revised 2004), the Company applied the intrinsic value recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for stock-based compensation plans. Under the fair value method principles of Statement No. 123 (revised 2004), pro forma stock-based compensation expense, net of taxes, and pro forma net income would not have differed from amounts reported in 2005.

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 $2.9 million in 2007, $1.8 million in 2006 and $1.0 million in 2005.

n) 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 tax, 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.

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).

o) Derivative Financial Instruments. Derivative instruments, including derivative instruments embedded in other contracts and 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 exchange forward contracts are 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). The ineffective portion of the change in fair value is recognized in earnings.

1. Summary of Significant Accounting Policies (continued)

p) Comprehensive Income. Comprehensive income 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 but excluded from net income, such as unrealized gains or losses on investments in fixed maturities and equity securities, foreign currency translation adjustments and changes in net actuarial pension loss.

q) Net Income Per Share. Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted net income per share is computed by dividing net income by the weighted average number of common shares and dilutive potential common shares outstanding during the year. Prior to the conversion of the Company’s convertible notes payable in December 2006, diluted net income per share reflected the application of the if-converted method as defined in Statement No. 128, Earnings Per Share.

r) Recent Accounting Pronouncements. In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157, Fair Value Measurements. Statement No. 157 establishes a framework for measuring fair value, clarifies the definition of fair value within that framework and expands disclosure requirements regarding the use of fair value measurements. Statement No. 157 became effective for the Company on January 1, 2008. The adoption of Statement No. 157 did not have a material impact on the Company’s financial position, results of operations or cash flows.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. Statement No. 159 permits entities to choose to measure specified financial instruments and certain other eligible items at fair value, with changes in fair value recognized in earnings. Statement No. 159 became effective for the Company on January 1, 2008. The Company did not elect the fair value option for assets and liabilities currently held, and therefore, the adoption of this standard did not have an impact on its financial position, results of operations or cash flows.

In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations, which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree. Statement No. 141 (revised 2007) also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of business combinations. For the Company, Statement No. 141 (revised 2007) applies prospectively to business combinations completed on or after January 1, 2009.

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, 2007

(dollars in thousands)

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value

Fixed maturities:

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

1,040,893

14,941

(3,136

)

1,052,698

Obligations of states, municipalities and political subdivisions

1,830,088

27,235

(7,000

)

1,850,323

Foreign governments

232,971

6,168

(1,680

)

237,459

Public utilities

115,617

1,599

(278

)

116,938

All other corporate bonds

2,098,545

18,720

(50,933

)

2,066,332

Total fixed maturities

5,318,114

68,663

(63,027

)

5,323,750

Equity securities:

Insurance companies, banks and trusts

556,889

372,598

(46,997

)

882,490

Industrial, miscellaneous and all other

697,377

291,208

(26,337

)

962,248

Nonredeemable preferred stocks

9,000

324

—

9,324

Total equity securities

1,263,266

664,130

(73,334

)

1,854,062

Short-term investments

51,552

—

51,552

INVESTMENTS, AVAILABLE-FOR-SALE

6,632,932

732,793

(136,361

)

7,229,364


(dollars in thousands)	December 31, 2006
(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies	$	1,125,912	$	1,381	$	(15,698	)	$	1,111,595
Obligations of states, municipalities and political subdivisions		1,638,768		32,617		(1,430	)		1,669,955
Foreign governments		177,890		1,292		(1,234	)		177,948
Public utilities		88,288		589		(657	)		88,220
Convertibles and bonds with warrants		4,922		134		—			5,056
All other corporate bonds		1,960,606		10,653		(23,064	)		1,948,195

Total fixed maturities		4,996,386		46,666		(42,083	)		5,000,969
Equity securities:
Insurance companies, banks and trusts		519,909		361,593		(3,838	)		877,664
Industrial, miscellaneous and all other		539,436		351,428		(2,255	)		888,609

Total equity securities		1,059,345		713,021		(6,093	)		1,766,273
Short-term investments		139,499		—		—			139,499

INVESTMENTS, AVAILABLE-FOR-SALE	$	6,195,230	$	759,687	$	(48,176	)	$	6,906,741

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.

(dollars in thousands)

December 31, 2007

Less than 12 months

12 months or longer

Total

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fixed maturities:

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

—

351,431

(3,136

)

351,431

(3,136

)

Obligations of states, municipalities and political subdivisions

405,652

(6,111

)

122,547

(889

)

528,199

(7,000

)

Foreign governments

16,985

(358

)

35,402

(1,322

)

52,387

(1,680

)

Public utilities

6,364

(68

)

20,824

(210

)

27,188

(278

)

All other corporate bonds

406,401

(19,803

)

864,812

(31,130

)

1,271,213

(50,933

)

Total fixed maturities

835,402

(26,340

)

1,395,016

(36,687

)

2,230,418

(63,027

)

Equity securities:

Insurance companies, banks and trusts

141,624

(46,997

)

—

141,624

(46,997

)

Industrial, miscellaneous and all other

172,966

(26,337

)

—

172,966

(26,337

)

Total equity securities

314,590

(73,334

)

—

314,590

(73,334

)

TOTAL

1,149,992

(99,674

)

1,395,016

(36,687

)

2,545,008

(136,361

)

At December 31, 2007, the Company held 469 securities with a total estimated fair value of $2.5 billion and gross unrealized losses of $136.4 million. Of the 469 securities, 266 securities had been in a continuous unrealized loss position for greater than one year and had a total estimated fair value of $1.4 billion and gross unrealized losses of $36.7 million. All 266 securities were fixed maturities where the Company expects to receive all interest and principal payments. At December 31, 2007, all securities with unrealized losses were reviewed and the Company believes that there were no indications of declines in estimated fair value that were considered to be other-than-temporary.

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. Investments (continued)


(dollars in thousands)	December 31, 2006
	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies	$	220,397	$	(979	)	$	660,736	$	(14,719	)	$	881,133	$	(15,698	)
Obligations of states, municipalities and political subdivisions		47,119		(255	)		172,027		(1,175	)		219,146		(1,430	)
Foreign governments		59,843		(653	)		29,224		(581	)		89,067		(1,234	)
Public utilities		28,164		(197	)		14,321		(460	)		42,485		(657	)
All other corporate bonds		805,556		(9,879	)		530,891		(13,185	)		1,336,447		(23,064	)

Total fixed maturities		1,161,079		(11,963	)		1,407,199		(30,120	)		2,568,278		(42,083	)
Equity securities:
Insurance companies, banks and trusts		7,120		(1,154	)		36,731		(2,684	)		43,851		(3,838	)
Industrial, miscellaneous and all other		4,511		(86	)		30,710		(2,169	)		35,221		(2,255	)

Total equity securities		11,631		(1,240	)		67,441		(4,853	)		79,072		(6,093	)

TOTAL	$	1,172,710	$	(13,203	)	$	1,474,640	$	(34,973	)	$	2,647,350	$	(48,176	)

At December 31, 2006, the Company held 503 securities with a total estimated fair value of $2.6 billion and gross unrealized losses of $48.2 million. Of the 503 securities, 322 securities had been in a continuous unrealized loss position for greater than one year and had a total estimated fair value of $1.5 billion and gross unrealized losses of $35.0 million.

c) The amortized cost and estimated fair value of fixed maturities at December 31, 2007 are shown below by contractual maturity.


(dollars in thousands)	Amortized Cost		Estimated Fair Value
Due in one year or less	$	230,508	$	229,852
Due after one year through five years		1,304,799		1,307,081
Due after five years through ten years		1,744,688		1,732,260
Due after ten years		2,038,119		2,054,557

TOTAL	$	5,318,114	$	5,323,750

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 4.5 years.

2. Investments (continued)

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


(dollars in thousands)	Years Ended December 31,
(dollars in thousands)	2007			2006			2005
Interest:
Municipal bonds (tax-exempt)	$	73,942		$	68,521		$	59,994
Taxable bonds		179,372			160,890			152,059
Short-term investments, including overnight deposits		27,630			24,899			16,342
Dividends on equity securities		33,902			25,892			22,330
Income from investments in affiliates		5,069			5,439			—
Change in fair value of credit default swap		(3,115	)		—			—
Other		(601	)		(5,526	)		(199	)

		316,199			280,115			250,526
Less investment expenses		9,741			9,099			8,547

NET INVESTMENT INCOME	$	306,458		$	271,016		$	241,979

e) The following table presents realized investment gains (losses) and the change in unrealized holding gains.


	Years Ended December 31,
(dollars in thousands)	2007			2006			2005
Realized gains:
Sales of fixed maturities	$	7,143		$	18,077		$	15,954
Sales of equity securities		82,306			69,497			21,664
Other		2,102			—			—

		91,551			87,574			37,618

Realized losses:
Sales of fixed maturities		(7,057	)		(13,728	)		(16,475	)
Sales of equity securities		(516	)		(3,795	)		(467	)
Other-than-temporary impairments		(19,841	)		(4,501	)		—
Other		(4,633	)		(1,942	)		(968	)

		(32,047	)		(23,966	)		(17,910	)

NET REALIZED INVESTMENT GAINS	$	59,504		$	63,608		$	19,708

Change in unrealized holding gains:
Fixed maturities	$	1,053		$	(22,549	)	$	(63,528	)
Equity securities		(116,132	)		268,662			(51,189	)

NET INCREASE (DECREASE)	$	(115,079	)	$	246,113		$	(114,717	)

f) At December 31, 2007 and 2006, the Company had $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. These invested assets and the related liabilities are included on the Company’s consolidated balance sheet. 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 $39.0 million and $38.5 million on deposit with state regulatory authorities at December 31, 2007 and 2006, respectively.

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. Investments (continued)

Invested assets with a carrying value of $6.0 million and $8.3 million at December 31, 2007 and 2006, 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 $92.7 million and $106.2 million at December 31, 2007 and 2006, 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 $29.7 million and $47.1 million at December 31, 2007 and 2006, respectively, were held in trust for the benefit of MIICL’s United States surplus lines policyholders.

Invested assets with a carrying value of $39.0 million and $34.2 million at December 31, 2007 and 2006, respectively, were held in trust for the benefit of MIICL’s Canadian cedents.

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 $31.0 million and $36.6 million at December 31, 2007 and 2006, respectively, as collateral against these letters of credit.

The Company had deposited $302.2 million and $401.2 million of invested assets with Lloyd’s to support its underwriting activities at December 31, 2007 and 2006, respectively. In addition, the Company had invested assets with a carrying value of $983.0 million and $945.4 million at December 31, 2007 and 2006, respectively, held in trust for the benefit of syndicate policyholders.

In accordance with the terms of its credit default swap agreement, the Company had $53.2 million of invested assets on deposit at December 31, 2007.

g) At December 31, 2007, the only investment in any one issuer that exceeded 10% of shareholders’ equity, excluding investments in U.S. Treasury securities and obligations of U.S. government agencies, was the Company’s investment in Berkshire Hathaway Inc., which had a fair value of $291.2 million.

3. Receivables

The following table presents the components of receivables.


	December 31,
(dollars in thousands)	2007		2006
Amounts receivable from agents, brokers and insureds	$	237,017	$	267,530
Less allowance for doubtful receivables		7,508		6,637

		229,509		260,893
Employee stock loans receivable (see note 12)		18,229		16,245
Recoverable from Marsh, Inc.		15,255		20,474
Other		33,302		25,370

RECEIVABLES	$	296,295	$	322,982

Amounts receivable from agents, brokers and insureds included $23.6 million and $56.1 million of accrued premium income at December 31, 2007 and 2006, respectively. Accrued premium income represents the difference between estimated cumulative ultimate gross written premiums and cumulative billed premiums. This timing difference arises because producers have obligated the Company to provide coverage but have not yet reported final policy information.

3. Receivables (continued)

The recoverable from Marsh, Inc. relates to the 2002 settlement of a reinsurance dispute. As a result of the settlement, Marsh, Inc. agreed to pay 57% of future claims from the program involved in the dispute. The receivable from Marsh, Inc. was reduced $1.1 million and $11.4 million during 2007 and 2006, respectively, as a result of a decrease in the estimated loss reserves for the program that gave rise to the reinsurance dispute. Marsh, Inc. is a wholly-owned subsidiary of Marsh & McLennan Companies, Inc.

4. Deferred Policy Acquisition Costs

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


	Years Ended December 31,
(dollars in thousands)	2007			2006			2005
Balance, beginning of year	$	218,392		$	212,329		$	204,579
Policy acquisition costs of sold subsidiary		—			—			(2,613	)
Policy acquisition costs deferred		501,702			538,640			485,258
Amortization of policy acquisition costs		(517,803	)		(532,577	)		(474,895	)

DEFERRED POLICY ACQUISITION COSTS	$	202,291		$	218,392		$	212,329

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


	Years Ended December 31,
(dollars in thousands)	2007		2006		2005
Amortization of policy acquisition costs	$	517,803	$	532,577	$	474,895
Other operating expenses		238,896		235,276		175,428

UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES	$	756,699	$	767,853	$	650,323

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,
(dollars in thousands)	2007		2006
Land	$	18,262	$	18,262
Leasehold improvements		35,360		30,171
Furniture and equipment		67,569		58,620
Other		1,898		1,798

		123,089		108,851
Less accumulated depreciation and amortization		72,563		62,884

PROPERTY AND EQUIPMENT	$	50,526	$	45,967

Depreciation and amortization expense of property and equipment was $10.3 million, $9.8 million and $10.1 million for the years ended December 31, 2007, 2006 and 2005, respectively.

The Company does not own any material properties as it leases substantially all of its facilities and certain furniture and equipment under operating leases with remaining terms up to approximately 13 years.

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Property and Equipment (continued)

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, 2007.


Years Ending December 31,	(dollars in thousands)
2008	$	16,384
2009		16,185
2010		16,018
2011		12,348
2012		9,926
2013 and thereafter		43,252

TOTAL	$	114,113

Total rental expense for the years ended December 31, 2007, 2006 and 2005 was approximately $18.5 million, $15.5 million and $13.2 million, respectively.

6. Goodwill and Intangible Assets

The following table presents the components of goodwill and intangible assets.


(dollars in thousands)	Goodwill			Intangible Assets			Total
January 1, 2007	$	339,717		$	—		$	339,717
Adjustment for adoption of FASB Interpretation No. 48 (see note 7)		(9,388	)		—			(9,388	)
Acquisitions		1,887			14,840			16,727
Amortization		—			(2,145	)		(2,145	)

December 31, 2007	$	332,216		$	12,695		$	344,911

Goodwill is 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 was no indication of goodwill impairment during 2007 or 2006.

The carrying amounts of goodwill by reporting unit at December 31, 2007 were as follows: Excess and Surplus Lines, $81.8 million; Specialty Admitted, $1.9 million; and London Insurance Market, $248.5 million. The carrying amounts of goodwill by reporting unit at December 31, 2006 were as follows: Excess and Surplus Lines, $81.8 million, and London Insurance Market, $257.9 million.

On April 2, 2007, the Company acquired a wholesale insurance broker that markets and underwrites social services insurance programs for a combination of cash and common stock. In connection with this acquisition, the Company recognized goodwill of $1.9 million and intangible assets of $8.8 million. Results attributable to this acquisition are included in the Specialty Admitted segment.

On June 15, 2007, the Company acquired a managing general agent that markets and underwrites errors and omissions insurance products. In connection with this acquisition, the Company recognized intangible assets of $6.0 million. Results attributable to this acquisition are included in the Excess and Surplus Lines segment.

7. Income Taxes

Income before income taxes includes the following components.


(dollars in thousands)	Years Ended December 31,
(dollars in thousands)	2007		2006		2005
Domestic	$	436,392	$	466,750	$	245,190
Foreign		135,566		86,651		(59,190	)

INCOME BEFORE INCOME TAXES	$	571,958	$	553,401	$	186,000

Income tax expense includes the following components.


	Years Ended December 31,
(dollars in thousands)	2007			2006			2005
Current:
Federal–domestic operations	$	130,624		$	130,180		$	81,892
Federal–foreign operations		3,730			158			706

Total current tax expense		134,354			130,338			82,598

Deferred:
Federal–domestic operations		(1,984	)		6,741			(15,180	)
Federal–foreign operations		39,331			(1,930	)		(8,720	)
Foreign–foreign operations		(5,412	)		25,750			(20,613	)

Total deferred tax expense (benefit)		31,935			30,561			(44,513	)

INCOME TAX EXPENSE	$	166,289		$	160,899		$	38,085

In 2007, income tax expense included interest and penalties of $3.8 million. At December 31, 2007 and 2006, other liabilities on the consolidated balance sheets included $7.1 million and $3.3 million, respectively, for potential payment of interest and penalties.

In general, the Company is not subject to state income taxation; therefore, state income tax expense is not material to the consolidated financial statements.

The Company made net income tax payments of $137.8 million, $145.6 million and $65.9 million in 2007, 2006 and 2005, respectively. Current income taxes payable were $5.9 million and $12.2 million at December 31, 2007 and 2006, respectively, and were included in other liabilities on the consolidated balance sheets.

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


	Years Ended December 31,
	2007		2006		2005
United States corporate tax rate	35	%	35	%	35	%
Tax-exempt investment income	(5	)	(5	)	(12	)
Sale of subsidiary	—		—		(4	)
Tax reserve adjustment	—		—		1
Other	(1	)	(1	)	—

EFFECTIVE TAX RATE	29	%	29	%	20	%

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. Income Taxes (continued)

Substantially all of the Company’s continuing international operations are taxed directly or indirectly by both the United States and United Kingdom. However, subject to certain limitations, the United States allows a credit against its tax for any United Kingdom tax generated by Markel International. As a result of differences between the United States and United Kingdom tax systems, distinct deferred tax assets and deferred tax liabilities exist in each of these jurisdictions.

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


(dollars in thousands)	December 31,
(dollars in thousands)	2007			2006
Assets:
Differences between financial reporting and tax bases	$	128,158		$	108,674
Unpaid losses and loss adjustment expenses not yet deductible for income tax purposes		135,343			138,152
Unearned premiums recognized for income tax purposes		49,080			54,826
Net operating loss carry forwards		122,470			150,982
Domestic asset on foreign tax losses		—			25,658
Domestic asset on future foreign taxable items		77,323			65,232

Total gross deferred tax assets		512,374			543,524
Less valuation allowance		(6,607	)		(43,899	)

Total gross deferred tax assets, net of allowance		505,767			499,625

Liabilities:
Differences between financial reporting and tax bases		94,259			78,973
Unpaid losses and loss adjustment expenses deductible for income tax purposes in excess of financial statement purposes		—			23
Deferred policy acquisition costs		60,263			67,541
Accumulated other comprehensive income		192,065			229,466
Domestic liability on foreign tax losses		18,894			—
Domestic liability on future foreign deductible items		37,901			29,348
Domestic liability on undistributed earnings of foreign subsidiaries		23,281			27,129
Other		—			28,024

Total gross deferred tax liabilities		426,663			460,504

NET DEFERRED TAX ASSET	$	79,104		$	39,121

Net deferred tax asset—foreign		102,676			106,990
Net deferred tax liability —domestic		(23,572	)		(67,869	)

NET DEFERRED TAX ASSET	$	79,104		$	39,121

The net deferred tax asset at December 31, 2007 and 2006 is included in other assets on the consolidated balance sheets.

7. Income Taxes (continued)

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of adopting FIN 48, retained earnings increased $20.1 million; goodwill decreased $9.4 million, primarily related to the Company’s acquisition of Markel International; and common stock increased $2.8 million related to closed stock option plans and other capital transactions.

Upon acquiring Markel International, the Company established a $45.8 million valuation allowance, substantially all of which related to pre-acquisition losses at Markel Capital. A valuation allowance was considered necessary due to the uncertainty of realizing a future tax benefit on these losses. Since the acquisition, the valuation allowance was reduced $3.2 million as deferred tax assets established at that time were realized. Additionally, upon adoption of FIN 48, the valuation allowance and the corresponding deferred tax asset related to Markel Capital’s net operating loss carryforwards were both decreased by $37.5 million. These reductions were offset in part by an increase of $1.5 million resulting from management’s determination in 2004 that it was more likely than not that some of the Company’s post-acquisition losses for its Bermuda-based subsidiary would not be realized.

At December 31, 2007, the Company had net operating losses of $296 million attributable to its foreign operations. Approximately $175 million of these losses can be carried forward indefinitely to offset the future taxable income of the respective operations, while remaining losses of $121 million expire between the years 2018 and 2026. The Company estimates that it will realize $332.9 million of the gross deferred tax assets, including net operating losses, recorded at December 31, 2007 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 $133.1 million of gross deferred tax assets, net of the valuation allowance, by generating future taxable income and by using prudent and feasible tax planning strategies if future taxable income is not sufficient. While management believes the valuation allowance at December 31, 2007 is adequate, changes in management’s estimate of future taxable income to be generated by its foreign subsidiaries or changes in the Company’s ability to use tax planning strategies could result in an increase in the valuation allowance through a charge to earnings.

At December 31, 2007, the Company had unrecognized tax benefits of $48.4 million. If recognized, $8.0 million of these tax benefits would decrease the annual effective tax rate, $38.4 million would decrease goodwill and $2.0 million would decrease deferred tax assets in the year those benefits are realized. The Company does not currently anticipate any significant changes in unrecognized tax benefits during 2008.

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


(dollars in thousands)	Year Ended December 31, 2007
Unrecognized Tax Benefits, Beginning of Year	$	45,757
Increases based upon tax positions taken during the current year		1,432
Increases for tax positions taken in prior years		1,835
Decreases for tax positions taken in prior years		(489	)
Settlement with taxing authorities		(164	)

UNRECOGNIZED TAX BENEFITS, END OF YEAR	$	48,371

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. Income Taxes (continued)

Provisions for United States income taxes on undistributed earnings of foreign subsidiaries are made only on those amounts in excess of the funds that are considered to be permanently reinvested. Pre-acquisition earnings of the Company’s foreign subsidiaries are considered permanently reinvested 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, 2004. In November 2007, the Internal Revenue Service completed its examination of the Company’s 2005 federal income tax return. No material adjustments were made to the Company’s consolidated financial statements as a result of this examination.

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.


(dollars in thousands)	Years Ended December 31,
(dollars in thousands)	2007			2006			2005
NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES, BEGINNING OF YEAR	$	4,326,426		$	4,039,377		$	3,841,091
Foreign currency movements, commutations, dispositions and other		40,656			172,492			(142,974	)

ADJUSTED NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES, BEGINNING OF YEAR		4,367,082			4,211,869			3,698,117
Incurred losses and loss adjustment expenses:
Current year		1,293,529			1,264,918			1,350,568
Prior years		(197,326	)		(132,339	)		(50,585	)

TOTAL INCURRED LOSSES AND LOSS ADJUSTMENT EXPENSES		1,096,203			1,132,579			1,299,983

Payments:
Current year		226,861			208,310			227,288
Prior years		783,795			799,519			717,157

TOTAL PAYMENTS		1,010,656			1,007,829			944,445

Foreign exchange adjustment		1,166			1,207			(28	)
Change in recoverable from Marsh, Inc. (see note 3)		(1,140	)		(11,400	)		(14,250	)

NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES, END OF YEAR		4,452,655			4,326,426			4,039,377

Reinsurance recoverable on unpaid losses		1,072,918			1,257,453			1,824,300

GROSS RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES, END OF YEAR	$	5,525,573		$	5,583,879		$	5,863,677

8. Unpaid Losses and Loss Adjustment Expenses (continued)

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, acquisitions and dispositions. In 2007, the increase in beginning of year net reserves for losses and loss adjustment expenses was primarily due to an unfavorable movement of $49.6 million in the foreign currency rate of exchange between the United States Dollar and the United Kingdom Sterling, offset in part by an $8.9 million decrease related to the completion of several reinsurance commutations. In 2006, the increase in beginning of year net reserves for losses and loss adjustment expenses was primarily due to an unfavorable movement of $101.9 million in the foreign currency rate of exchange between the United States Dollar and the United Kingdom Sterling and a $51.8 million increase related to the completion of several reinsurance commutations. In 2005, the reduction to the beginning of year net reserves for losses and loss adjustment expenses was primarily due to a favorable movement of $103.1 million in the foreign currency rate of exchange between the United States Dollar and the United Kingdom Sterling and a $45.2 million decrease related to the sale of Corifrance.

In 2007, incurred losses and loss adjustment expenses included $197.3 million of favorable development on prior years’ loss reserves, which was primarily due to $166.6 million of loss reserve redundancies experienced at the Markel Shand Professional/Products Liability unit and Markel International as a result of the favorable insurance market conditions experienced in recent years. The favorable development on prior years’ loss reserves in 2007 was partially offset by $34.0 million of adverse development on prior years’ loss reserves on asbestos and environmental exposures.

This year’s review of asbestos and environmental loss reserves was completed during the third quarter of 2007. During the 2007 review, the Company noted higher than expected settlements on existing claims, which resulted in an increase in the Company’s estimate of ultimate loss reserves for asbestos and environmental exposures. During the 2006 and 2005 reviews, the Company noted an increase in the severity of losses on reported claims, which resulted in an increase in the Company’s estimate of ultimate loss reserves for asbestos and environmental exposures and related reinsurance bad debt. The increases in the allowance for potentially uncollectible reinsurance were required to provide for potential collection disputes with reinsurers and to increase reserves for financially weak or insolvent reinsurers.

In 2006, incurred losses and loss adjustment expenses included $132.3 million of favorable development on prior years’ loss reserves, which was primarily due to $182.1 million of loss reserve redundancies experienced at the Markel Shand Professional/Products Liability unit as a result of the favorable insurance market conditions experienced in recent years. This favorable development on prior years’ loss reserves was partially offset by $61.1 million of adverse loss reserve development on Hurricanes Katrina, Rita and Wilma (the 2005 Hurricanes). During 2006, losses on the 2005 Hurricanes were primarily concentrated in the contract property and delegated authority books of business included in the Excess and Surplus Lines and London Insurance Market segments. The Company also recognized $16.7 million of adverse development on prior years’ loss reserves on asbestos and environmental exposures and related reinsurance bad debt in 2006.

Current year incurred losses and loss adjustment expenses for 2005 included $188.7 million of net losses on the 2005 Hurricanes. Prior years’ incurred losses and loss adjustment expenses reflected favorable development in 2005 of $50.6 million, which was primarily due to $126.4 million of loss reserve redundancies experienced at the Markel Shand Professional/Products Liability and Markel Specialty Program Insurance units as a result of the favorable insurance market conditions experienced during 2002 to 2004. In 2005, the favorable development on prior years’ loss reserves was partially offset by $31.3 million of loss reserve development on asbestos and environmental exposures and related reinsurance bad debt and $35.4 million of adverse development at the Markel Brokered Excess and Surplus Lines unit.

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8. Unpaid Losses and Loss Adjustment Expenses (continued)

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, not to increase written premiums. 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.

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 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.

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. There is no precise method, however, 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.

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.


(dollars in thousands)	Years Ended December 31,
(dollars in thousands)	2007			2006		2005
NET RESERVES FOR A&E LOSSES AND LOSS ADJUSTMENT EXPENSES, BEGINNING OF YEAR	$	214,439		$	211,283	$	243,196
Commutations and other		(14,454	)		13,399		(43,749	)

ADJUSTED NET RESERVES FOR A&E LOSSES AND LOSS ADJUSTMENT EXPENSES, BEGINNING OF YEAR		199,985			224,682		199,447
Incurred losses and loss adjustment expenses		33,254			17,237		22,099
Payments		11,585			27,480		10,263

NET RESERVES FOR A&E LOSSES AND LOSS ADJUSTMENT EXPENSES, END OF YEAR		221,654			214,439		211,283

Reinsurance recoverable on unpaid losses		123,483			145,524		184,480

GROSS RESERVES FOR A&E LOSSES AND LOSS ADJUSTMENT EXPENSES, END OF YEAR	$	345,137		$	359,963	$	395,763

Incurred losses and loss adjustment expenses for 2007, 2006 and 2005 were primarily due to adverse development of asbestos-related reserves. At December 31, 2007, asbestos-related reserves were $256.9 million and $153.3 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 $120.0 million and $101.7 million, respectively, at December 31, 2007. Inception-to-date net paid losses and loss adjustment expenses for A&E related exposures totaled $326.4 million at December 31, 2007, which includes $51.2 million of litigation-related expense.

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, 2007 are adequate.

9. Convertible Notes Payable

During 2001, the Company issued $408.0 million principal amount at maturity, $112.9 million net proceeds, of Liquid Yield Option^™Notes (LYONs). The LYONs were zero coupon senior notes issued at a price of $283.19 per LYON, representing a yield to maturity of 4.25%, with a stated maturity of June 5, 2031. Until their conversion in December 2006, the Company used the effective yield method to recognize the accretion of the discount from the issue price to the face amount of the LYONs at maturity. In 2006 and 2005, the accretion of the discount was included in interest expense. Upon conversion of the LYONs, the Company issued approximately 335,000 shares of common stock.

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

10. Senior Long-Term Debt

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


(dollars in thousands)	December 31,
(dollars in thousands)	2007		2006
7.20% unsecured senior notes, due August 15, 2007, interest payable semi-annually, net of unamortized discount of $373 in 2006	$	—	$	72,659
7.00% unsecured senior notes, due May 15, 2008, interest payable semi-annually, net of unamortized discount of $371 in 2007 and $1,261 in 2006		92,679		91,789
6.80% unsecured senior notes, due February 15, 2013, interest payable semi-annually, net of unamortized discount of $1,389 in 2007 and $ 1,658 in 2006		245,276		245,007
7.35% unsecured senior notes, due August 15, 2034, interest payable semi-annually, net of unamortized discount of $2,821 in 2007 and $ 2,927 in 2006		197,179		197,073
7.50% unsecured senior debentures, due August 22, 2046, interest payable quarterly, net of unamortized discount of $4,436 in 2007 and $ 4,550 in 2006		145,564		145,450

SENIOR LONG-TERM DEBT	$	680,698	$	751,978

On August 15, 2007, the 7.20% unsecured senior notes matured and were repaid for $73.0 million.

On August 22, 2006, the Company issued $150 million of 7.50% unsecured senior debentures due August 22, 2046. Net proceeds to the Company were $145.4 million and a portion was used to retire the Junior Subordinated Deferrable Interest Debentures on January 2, 2007.

The Company maintains a revolving credit facility that provides $375 million of capacity for working capital and other general corporate purposes and expires December 2010. The Company may select from two interest rate options for balances outstanding under the facility and pays a commitment fee (0.125% at December 31, 2007) on the unused portion of the facility based on the Company’s debt to total capital ratio as calculated under the agreement. At both December 31, 2007 and 2006, the Company had no borrowings outstanding under the revolving credit facility.

At December 31, 2007, 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 such events are unlikely, the inability to access the credit facility could adversely affect the Company’s liquidity.

The Company’s unsecured senior notes are not redeemable; however, the Company’s 7.50% unsecured senior debentures are redeemable by the Company at any time after August 22, 2011. None of the Company’s senior long-term debt is subject to any sinking fund requirements.

The estimated fair value based on quoted market prices of the Company’s senior long-term debt was approximately $706 million and $801 million at December 31, 2007 and 2006, respectively.

10. Senior Long-Term Debt (continued)

The following table summarizes the future principal payments due at maturity on senior long-term debt as of December 31, 2007.


Years Ending December 31,	(dollars in thousands)
2008	$	93,050
2009		—
2010		—
2011		—
2012		—
2013 and thereafter		596,665

TOTAL PRINCIPAL PAYMENTS	$	689,715
Less unamortized discount		(9,017	)

SENIOR LONG-TERM DEBT	$	680,698

The Company paid $55.1 million, $46.7 million and $44.5 million in interest on its senior long-term debt during the years ended December 31, 2007, 2006 and 2005, respectively.

11. Junior Subordinated Deferrable Interest Debentures (8.71% Junior Subordinated Debentures)

On January 8, 1997, the Company arranged the sale of $150 million of Company-Obligated Mandatorily Redeemable Preferred Capital Securities (8.71% Capital Securities) issued under an Amended and Restated Declaration of Trust dated January 13, 1997 by Markel Capital Trust I (the Trust), a statutory business trust sponsored and wholly-owned by the Company. Proceeds from the sale of the 8.71% Capital Securities were used to purchase the Company’s 8.71% Junior Subordinated Debentures due January 1, 2046, issued to the Trust under an indenture dated January 13, 1997. The 8.71% Junior Subordinated Debentures were the sole assets of the Trust. In 2006, the Company repurchased $34.7 million principal amount of its 8.71% Junior Subordinated Debentures. The Company redeemed the remaining outstanding 8.71% Junior Subordinated Debentures for $111.0 million on January 2, 2007.

The Company paid $10.6 million and $12.8 million in interest on the 8.71% Junior Subordinated Debentures during the years ended December 31, 2006 and 2005, respectively. The estimated fair value based on quoted market prices of the 8.71% Junior Subordinated Debentures was approximately $111 million at December 31, 2006.

12. Shareholders’ Equity

a) The Company had 50,000,000 shares of no par value common stock authorized of which 9,956,743 shares and 9,994,263 shares were issued and outstanding at December 31, 2007 and 2006, 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, 2007 or 2006.

In August 2005, the Company’s Board of Directors 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. In 2007, the Company repurchased 49,500 shares of common stock at a cost of $24.2 million under the Program. Since the Program’s inception, the Company has repurchased 208,700 shares of common stock at a cost of $76.4 million.

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

12. Shareholders’ Equity (continued)

b) Net income per share is determined by dividing net income by the applicable weighted average shares outstanding.


(in thousands, except per share amounts)	Years Ended December 31,
(in thousands, except per share amounts)	2007		2006		2005
Net income as reported	$	405,669	$	392,502	$	147,915
Interest expense, net of tax, on convertible notes payable		—		2,489		2,648

Adjusted net income	$	405,669	$	394,991	$	150,563

Basic common shares outstanding		9,961		9,709		9,827
Dilutive effect of convertible notes payable		—		303		335
Other dilutive potential common shares		20		12		9

Diluted shares outstanding		9,981		10,024		10,171

Basic net income per share	$	40.73	$	40.43	$	15.05

Diluted net income per share	$	40.64	$	39.40	$	14.80

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

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 initially authorized 100,000 shares for purchase under this plan, of which 13,198 shares were available for purchase at December 31, 2006. In 2007, the Company authorized an additional 100,000 shares for purchase. At December 31, 2007, 89,977 shares were available for purchase under the plan. At December 31, 2007 and 2006, loans outstanding under the plan, which are included in receivables on the consolidated balance sheets, totaled $18.2 million and $16.2 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 does not authorize grants of stock options. 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, 2007, there were 150,000 shares reserved for issuance under the Omnibus Incentive Plan. As of December 31, 2007, 6,250 Restricted Stock Units, as defined by the Omnibus Incentive Plan, have been awarded to the Company’s non-employee directors. The Company has also provided for performance-based Restricted Stock Unit awards to certain associates and executive officers. Under the terms of these awards, as of December 31, 2007, 28,170 Restricted Stock Units have been awarded to certain associates and executive officers based upon meeting performance conditions determined by a subcommittee of the Compensation Committee. Awards granted to non-employee directors

12. Shareholders’ Equity (continued)

generally vest ratably over a five-year period from the date of grant, while awards granted to certain associates and executive officers 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.

The following table summarizes nonvested Restricted Stock Unit awards.


	Number of Units		Weighted Average Grant-Date Fair Value
Nonvested units at January 1, 2007	20,458		$	312.23
Granted	9,674			492.30
Vested	(1,000	)		255.99

Nonvested units at December 31, 2007	29,132		$	373.96

The fair value of Restricted Stock Units is determined based on the closing price of the Company’s common shares on the grant date. The weighted average grant-date fair value of Restricted Stock Units awarded in 2007, 2006 and 2005 was $492.30, $324.00 and $366.69, respectively. As of December 31, 2007, unrecognized compensation cost related to nonvested Restricted Stock Units was $5.3 million, which is expected to be recognized over a weighted average period of 3.3 years. The fair value of Restricted Stock Units vested during 2007, 2006 and 2005 was $0.3 million, $0.4 million and $0.3 million, respectively.

e) In connection with the acquisition of Markel International, the Company provided for the conversion of options under Markel International’s Octavian Stock Option Plan (Octavian Plan) into options to purchase the Company’s common shares. The Octavian Plan provided for the issuance of options to members of management of Octavian (now Markel Syndicate Management) based on profit commissions receivable by Markel Syndicate Management for the 1997 to 2000 years of account at Lloyd’s. At December 31, 2007 and 2006, 254 options and 444 options, respectively, were outstanding and exercisable under the Octavian Plan. The outstanding options have a nominal exercise price, and no further options are available for issuance under the Octavian Plan. Options expire seven years from the date of issue.

The Company’s weighted average remaining contractual life for stock options outstanding under the Octavian Plan was 2.4 years at December 31, 2007.

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

13. Other Comprehensive Income (Loss)

Other comprehensive income (loss) includes net holding gains (losses) on investments arising during the period less reclassification adjustments for net gains included in net income. Other comprehensive income (loss) also includes foreign currency translation adjustments and changes in net actuarial pension loss. The related tax expense (benefit) on net holding gains (losses) on investments arising during the period was $(18.6) million, $109.1 million and $(32.9) million for 2007, 2006 and 2005, respectively. The related tax expense on the reclassification adjustments for net gains included in net income was $21.7 million, $22.9 million and $7.2 million for 2007, 2006 and 2005, respectively. The related tax expense (benefit) on foreign currency translation adjustments was $2.0 million, $(0.9) million and $(5.2) million for 2007, 2006 and 2005, respectively. The related tax expense on the change in net actuarial pension loss was $0.8 million for 2007.

14. 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, 2007 and 2006, balances recoverable from the Company’s ten largest reinsurers, by group, represented approximately 72% and 71%, respectively, of the reinsurance recoverable on paid and unpaid losses. At December 31, 2007, the Company’s largest reinsurance balance was due from the Munich Re Group and represented 16% of the reinsurance recoverable on paid and unpaid losses.

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.

14. Reinsurance (continued)

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


	Years Ended December 31,
(dollars in thousands)	2007		2006		2005
REINSURANCE ALLOWANCE, BEGINNING OF YEAR	$	184,995	$	194,337	$	177,441
Additions:
Charged to expense		—		214		29,978
Charged to other accounts		92		15,700		2,657

TOTAL REINSURANCE ALLOWANCE ADDITIONS		92		15,914		32,635

Deductions		17,622		25,256		15,739

REINSURANCE ALLOWANCE, END OF YEAR	$	167,465	$	184,995	$	194,337

The amount charged to expense in 2005 was primarily due to the deterioration in the financial condition of certain reinsurers, most of whom no longer participate in treaties with the Company.

Management believes the Company’s reinsurance allowance for doubtful accounts is adequate at December 31, 2007; however, the deterioration in the credit quality of existing reinsurers or disputes over reinsurance agreements could result in additional charges.

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


(dollars in thousands)	Years Ended December 31,
	2007						2006						2005
	Written			Earned			Written			Earned			Written			Earned
Direct	$	2,164,035		$	2,248,385		$	2,365,802		$	2,374,250		$	2,252,730		$	2,272,038
Assumed		194,904			184,037			170,428			165,889			148,604			132,848
Ceded		(311,177	)		(315,128	)		(341,285	)		(355,758	)		(428,740	)		(466,425	)

Net Premiums	$	2,047,762		$	2,117,294		$	2,194,945		$	2,184,381		$	1,972,594		$	1,938,461

Incurred losses and loss adjustment expenses were net of reinsurance recoverables (ceded incurred losses and loss adjustment expenses) of $98.0 million, $67.0 million and $616.5 million for the years ended December 31, 2007, 2006 and 2005, respectively. Ceded incurred losses and loss adjustment expenses in 2005 included ceded losses on the 2005 Hurricanes of $567.9 million.

The percentage of assumed earned premiums to net earned premiums for the years ended December 31, 2007, 2006 and 2005 was approximately 9%, 8% and 7%, respectively.

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

15. Contingencies

The Company’s estimates of losses from the 2005 Hurricanes assume that flood exclusions in its property policies will generally apply to flood damage in the New Orleans area following Hurricane Katrina. Beginning in late November 2006, Louisiana state and federal trial courts ruled in a number of cases (most of which the Company was not a party to) that flood damage following the New Orleans area levee breaches may not be excluded from coverage under policies similar to those the Company has written. The initial federal court ruling was appealed to the United States Court of Appeals for the Fifth Circuit, and that court overturned the trial court ruling, holding that flood exclusions in the policies under consideration unambiguously excluded coverage. While this ruling is favorable to the Company’s position and is binding on federal trial courts in the Fifth Circuit (Louisiana, Mississippi and Texas) where much of the Katrina-related litigation is taking place, there is also pending litigation in state courts, which are not bound by the Fifth Circuit’s ruling. If there is an adverse ruling by the Louisiana Supreme Court holding that flood damage is covered under the Company’s policies, losses associated with Hurricane Katrina could increase. Given the significant uncertainties involved, the Company cannot quantify the potential adverse impact of any such rulings at this time, but it could be material.

Other contingencies arise in the normal conduct 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.

16. 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.

17. 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.


(dollars in thousands)	Years Ended December 31,
(dollars in thousands)	2007		2006		2005
Net income	$	287,520	$	339,662	$	209,645

Statutory capital and surplus	$	1,283,860	$	1,376,836	$	1,147,519

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, 2007, the Company’s domestic insurance subsidiaries could pay up to $282.6 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 holding 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.

17. Statutory Financial Information (continued)

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 and policyholders’ surplus.


(dollars in thousands)	Years Ended December 31,
(dollars in thousands)	2007⁽¹⁾		2006		2005
Net income	$	64,535	$	51,343	$	13,490

Policyholders’ surplus	$	329,155	$	312,073	$	284,032

⁽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 1985, which provides that dividends may only be paid out of distributable profits.

18. 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.

All investing activities are included in the Investing segment. For purposes of segment reporting, the Other segment includes lines of business that have been discontinued in conjunction with an acquisition.

The Company considers many factors, including the nature of the underwriting units’ insurance products, production sources, distribution strategies and regulatory environment in determining how to aggregate operating segments.

For 2007, 24% of the Company’s gross written premiums related to foreign risks, of which 33% were from the United Kingdom. For 2006, 22% of the Company’s gross written premiums related to foreign risks, of which 36% were from the United Kingdom. For 2005, 21% of the Company’s gross written premiums related to foreign risks, of which 42% were from the United Kingdom. In each of these years, the United Kingdom was the only individual foreign country from which gross written premiums were material. Gross written premiums are attributed to individual countries based upon location of risk.

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 or net income 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.

The Company does not allocate assets to the Excess and Surplus Lines, Specialty Admitted and London Insurance Market operating segments for management reporting purposes. Total invested assets and the related net investment income 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.

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

18. Segment Reporting Disclosures (continued)

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

(dollars in thousands)

Year Ended December 31, 2007

Excess and
Surplus Lines

Specialty
Admitted

London
Insurance
Market

Investing

Other

Consolidated

Gross premium volume

1,316,691

346,647

693,197

—

2,404

2,358,939

Net written premiums

1,121,373

322,461

601,976

—

1,952

2,047,762

Earned premiums

1,154,773

320,144

640,425

—

1,952

2,117,294

Losses and loss adjustment expenses

539,910

177,970

354,968

—

23,355

1,096,203

Amortization of policy acquisition costs

281,466

77,646

158,691

—

517,803

Other operating expenses

127,980

37,641

80,396

—

(7,121

)

238,896

Underwriting profit (loss)

205,417

26,887

46,370

—

(14,282

)

264,392

Net investment income

—

306,458

—

306,458

Net realized investment gains

—

59,504

—

59,504

Segment profit (loss)

205,417

26,887

46,370

365,962

(14,282

)

630,354

Amortization of intangible assets

2,145

Interest expense

56,251

Income before income taxes

571,958

U.S. GAAP combined ratio ⁽¹⁾

—

⁽²⁾


(dollars in thousands)	Year Ended December 31, 2006
(dollars in thousands)	Excess and Surplus Lines			Specialty Admitted			London Insurance Market			Investing		Other			Consolidated
Gross premium volume	$	1,465,725		$	340,483		$	729,160		$	—	$	862		$	2,536,230
Net written premiums		1,228,797			322,466			643,485			—		197			2,194,945
Earned premiums		1,242,184			317,401			624,599			—		197			2,184,381
Losses and loss adjustment expenses		538,943			180,556			391,395			—		21,685			1,132,579
Amortization of policy acquisition costs		308,518			76,153			147,906			—		—			532,577
Other operating expenses		115,408			32,596			85,322			—		1,950			235,276

Underwriting profit (loss)		279,315			28,096			(24	)		—		(23,438	)		283,949

Net investment income		—			—			—			271,016		—			271,016
Net realized investment gains		—			—			—			63,608		—			63,608

Segment profit (loss)	$	279,315		$	28,096		$	(24	)	$	334,624	$	(23,438	)	$	618,573

Interest expense																65,172

Income Before Income Taxes															$	553,401

U.S. GAAP combined ratio ⁽¹⁾		78	%		91	%		100	%		—		NM	⁽²⁾		87	%

⁽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.

18. Segment Reporting Disclosures (continued)


(dollars in thousands)	Year Ended December 31, 2005
(dollars in thousands)	Excess and Surplus Lines			Specialty Admitted			London Insurance Market			Investing		Other			Consolidated
Gross premium volume	$	1,439,744		$	318,717		$	640,986		$	—	$	1,887		$	2,401,334
Net written premiums		1,160,948			299,665			510,836			—		1,145			1,972,594
Earned premiums		1,138,525			291,273			507,518			—		1,145			1,938,461
Losses and loss adjustment expenses		674,926			147,590			443,964			—		33,503			1,299,983
Amortization of policy acquisition costs		271,707			70,683			132,505			—		—			474,895
Other operating expenses		95,712			22,739			60,540			—		(3,563	)		175,428

Underwriting profit (loss)		96,180			50,261			(129,491	)		—		(28,795	)		(11,845	)

Net investment income		—			—			—			241,979		—			241,979
Net realized investment gains		—			—			—			19,708		—			19,708

Segment profit (loss)	$	96,180		$	50,261		$	(129,491	)	$	261,687	$	(28,795	)	$	249,842

Interest expense																63,842

Income Before Income Taxes															$	186,000

U.S. GAAP combined ratio⁽¹⁾		92	%		83	%		126	%		—		NM	⁽²⁾		101	%

⁽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
December 31, 2007
Excess and Surplus Lines	$	111,075	$	536,791	$	2,614,817
Specialty Admitted		35,512		156,235		299,623
London Insurance Market		55,704		247,283		1,966,698
Other		—		—		644,435

TOTAL	$	202,291	$	940,309	$	5,525,573

December 31, 2006
Excess and Surplus Lines	$	124,762	$	580,608	$	2,568,967
Specialty Admitted		34,123		150,741		264,923
London Insurance Market		59,507		276,452		2,051,440
Other		—		—		698,549

TOTAL	$	218,392	$	1,007,801	$	5,583,879

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

18. Segment Reporting Disclosures (continued)

c) The following table reconciles segment assets to the Company’s consolidated balance sheets.


(dollars in thousands)	December 31,
(dollars in thousands)	2007		2006		2005
Segment Assets:
Investing	$	7,788,206	$	7,535,295	$	6,588,222
Other		2,346,213		2,552,836		3,225,876

TOTAL ASSETS	$	10,134,419	$	10,088,131	$	9,814,098

d) The following table summarizes segment earned premiums by major product grouping.


(dollars in thousands)	Property		Casualty		Professional/ Products Liability		Other		Consolidated
Year Ended December 31, 2007
Excess and Surplus Lines	$	168,461	$	372,148	$	356,822	$	257,342	$	1,154,773
Specialty Admitted		134,780		136,972		—		48,392		320,144
London Insurance Market		205,257		64,330		257,366		113,472		640,425
Other		—		—		—		1,952		1,952

EARNED PREMIUMS	$	508,498	$	573,450	$	614,188	$	421,158	$	2,117,294

Year Ended December 31, 2006
Excess and Surplus Lines	$	204,257	$	404,861	$	368,160	$	264,906	$	1,242,184
Specialty Admitted		127,725		137,755		—		51,921		317,401
London Insurance Market		218,493		61,344		242,257		102,505		624,599
Other		—		—		—		197		197

EARNED PREMIUMS	$	550,475	$	603,960	$	610,417	$	419,529	$	2,184,381

Year Ended December 31, 2005
Excess and Surplus Lines	$	146,811	$	423,799	$	386,097	$	181,818	$	1,138,525
Specialty Admitted		122,329		126,893		—		42,051		291,273
London Insurance Market		144,986		54,621		236,405		71,506		507,518
Other		—		—		—		1,145		1,145

EARNED PREMIUMS	$	414,126	$	605,313	$	622,502	$	296,520	$	1,938,461

The Company does not manage products at this level of aggregation. The Company offers over 90 major product lines and manages these products in logical groupings within each underwriting unit.

19. Employee Benefit Plans

a) The Company maintains a defined contribution plan for its United States employees, the Markel Corporation Retirement Savings Plan, in accordance with Section 401(k) of the Internal Revenue Code. The Company 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 $11.5 million, $10.3 million and $9.5 million in 2007, 2006 and 2005, respectively.

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. The Company uses December 31 as the measurement date for the Terra Nova Pension Plan.

The Company adopted the recognition and disclosure provisions of Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, as of December 31, 2006. Statement No. 158 requires an employer to recognize the funded status of defined benefit and other postretirement plans as an asset or liability on the consolidated balance sheet. Funded status represents the difference between the fair value of plan assets and the projected benefit obligation. Changes in the net actuarial pension loss, net of taxes, are required to be recognized through other comprehensive income (loss) in the year in which the changes occur.

Upon the adoption of Statement No. 158, the Company recorded a net actuarial pension loss, net of taxes, of $25.0 million as a component of other comprehensive income for the year ended December 31, 2006. The Company has since determined that the net actuarial pension loss recognized upon adoption should have been presented as a direct change to accumulated other comprehensive income at December 31, 2006 and not as a component of other comprehensive income for the year ended December 31, 2006. The accompanying consolidated statements of income and comprehensive income and changes in shareholders’ equity for the year ended December 31, 2006 have been modified to reflect this revised presentation.

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

19. Employee Benefit Plans (continued)

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.


(dollars in thousands)		Years Ended December 31,
(dollars in thousands)		2007